• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

Economists and accountants have diametrically opposite views of cost-volume profit (CVP) behaviour but only accountant's have a CVP model that is appropriate for assisting management with decision making

Extracts from this document...


[TYPE THE COMPANY NAME] BEA2003- Management Accounting Economists and accountants have diametrically opposite views of cost-volume profit (CVP) behaviour but only accountant's have a CVP model that is appropriate for assisting management with decision making Ryan Bebbington Word Count 1796 Economists and accountants have diametrically opposite views of cost-volume profit (CVP) behaviour but only accountant's have a CVP model that is appropriate for assisting management with decision making Cost volume profit analysis looks into the relationship between a firms fixed and variable costs and total revenues across a varying level of production. The model will give a predicted level of profit at a given level of production. There are many ways that CVP analysis can be useful for decision making, it is important to distinguish between the different applications of the Economists and Accountants interpretations, as well as other factors involved in decision making. CVP analysis is used in management decisions when forecasting production levels. To use this model effectively, Management will look at different scenarios of output, prices and costs, and see where the model predicts the firm's revenues will cover its total costs. This point is known as the breakeven point. Management can investigate the effects of price increases, changing costs from fixed to variable such as salaries to commission based pay. Managers can also investigate the outcomes from decisions such as making components in house or buying in, retaining or replacing equipment and marketing decisions. ...read more.


The Accountant's interpretation of the fixed cost curve is different to the Economist's view because it meets the Y axis at a higher point, which indicates that the Accountants believe that firms are committed to a higher minimum level of fixed costs. This is because although a firm may reduce its fixed costs to a lower level, as in the Economist's interpretation, the firm can only do this by redundancies and shutting down plants. As the Accountants model only represents a relevant range, the fixed costs cannot be reduced to this level in the short run, when this interpretation is extended outside of the relevant range, a stepped fixed cost and total function will be seen, as in figure 3. The other difference is that the revenue function is linear. This is because in the short run, firms cannot change the price of their products easily; it may also be because of firms competing on non-price, rather than price competition. As Accountants make no attempt to extend the revenue function outside of the relevant range, there is no need to model the firm's decrease in product price to increase demand. The Accountant's interpretation of the Cost Volume Profit model is more appropriate for Management decisions, as management decisions are not concerned with long term information. This is because the Board of Directors will be making the firms long term decisions. ...read more.


If management are not aware of the assumptions made in the data, then they will be unable to draw relevant conclusions from the information. The assumptions i are that all other variables remain constant; there is a constant sales mix, total costs and revenues are linear functions of output, profits are calculated using variable costing, the analysis only applies to the relevant range, costs can be divided into fixed and variable elements, it only applies to the short term, and fixed costs do not change. In conclusion, the Accountant's interpretation of the CVP analysis, as shown by the underlying assumptions, will allow managers to develop a more relevant understanding of the information, so that it can be used more effectively in decision making. If managers tried to use the economists CVP graph, the cost of gathering and interpreting the data would be high, as well as making the information more difficult to understand and less reliable. In the real world, the Accountant's model may be considered too simplistic, as it relies on many assumptions and conditions, which are often not met. This is why it important to understand that the Accountant's CVP model may not be applicable. For the CVP analysis to be effective, managers must be aware of the limitations of the model, otherwise they will be unprepared for any deviations from the outputs of the model. i Drury C. 2004. Management and Cost accounting 6th edition P263-286 ?? ?? ?? ?? Candidate Number: 018255 Management Accounting BEA2003 Ryan Bebbington ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Accounting section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Accounting essays

  1. Working Capital Management

    Total CA 345,666,033 381,776,727 Current Liabilities Liabilities 209,601,377 243,166,035 33,564,658 Provisions 5,422,757 10,226,112 4,803,355 Total CL 215,024,134 253,392,147 Net Working Capital 130,641,899 128,384,580 Change in WC -2,257,319 Source: Annual reports of VEL Interpretation: Net working capital has decreased by Rs.

  2. Case study Pedro Nuts! The use of absorption costing has allowed Knock to explain ...

    due to absorption costing incorporating OAR; it allows profits to be higher. We know from the extract that Pedro operates an Italian bar and restaurant which suggests his business sells more than one product, therefore with the use of the absorption costing procedure it assists in both Knock and Pedro

  1. Fraud - Financial Investigation & The Role of a Forensic Accountant

    However, any loss to fraud, be it $1 or $1 billion is the result of criminal activity. Using the figures from the 2006 report, and applying them to the 2006 Gross Domestic Product of the United States, the ACFE estimated that this would equate to approximately $652 billion in fraud losses in the US, which is a truly astonishing figure.

  2. An Analysis Of harmonization issues of accounting standards

    And we have chosen 42 companies which are listed and issuing simultaneously A-shares and B-shares in Shenzhen Stock Exchange in which, the financial statements of Shennandian B (900 946) has been prepared based on HK GAAP, and it has to be removed, that is why the final number of the companies is 41.

  1. Information for decision making

    Task 2 Easy Jet case study: EasyJet has secured its position as 'Europe's leading low cost airline carrier' since 2002, boasting strong financial stability as well as significant increases in passengers, aircraft and destinations annually not to mention a distinct drop in seat prices to ensure cost advantages over competitors.

  2. Compare the impact of the activity-based costing model and the traditional based costing model ...

    After reviewing the miscasting of the product cost, Plastim decides to use an ABC system. Direct costs are easy to combine with the product, so the ABC system focuses on the assignment of indirect costs to department, processes, products or other cost objects.

  1. The use of Standard Costing as a control tool in a new era

    a product or service, which is seen by many as the first step to scientifically setting price. Once a standard cost is determined, businesses can easily apply a mark-up to that cost, which can help forecast the potential profit on each unit.

  2. Capital budgeting: advantages and limitations

    It is difficult to distinguish between projects of different size when initial investment amounts are vastly divergent. 1. It over-emphasizes short run profitability. 2.4. Net Present Value (NPV) The Net Present Value is defined as the different between the present value of the cost inflows and the present value of the cash outflows.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work