In this day and age, it seems that the notion of value costing is important for the organizations in order for them to keep up with any competitors they may have and it could possibly help them gain an advantage over any competitors they may have, as well as stay relevant within the sectors that they are established. The value costing is also significant to understand the effectiveness of a business or the operation of an organization. The concept of value costing includes all types of cost, which affect the organizational process. In one respect, it can be explained as costing, which charges all the costs, which are incurred while the business is in operation. In the current environment, the effectiveness in the managerial decision is important, which can be achieved from the value costing. In the 21st century, all the organizations want to expand their business and capture the opportunities (Baggaley and Maskell, 2003). The notion of value costing for the 21st century organizations is vital in that it provides the information necessary for businesses to know whether or not they are gaining a profit based on the numbers/ figures that they are or are not bringing in. The various costing methods also play an important role because it allows those in charge vital to understand the profitability from the various projects, which enables the Management to make decisions in the manner they feel is most appropriate, in order for them to achieve a profit.
Now, do I agree with the notion of value costing for the 21st Century organizations? Yes, I do agree with the notion of value costing for the 21 Century organizations for the simple fact that it has worked for others in the past and it still works for many today. Earlier it was defined that value costing is the analysis of different divisions or business units of a firm on the basis of their opportunity cost and economic rent. What this means is that within each business each department is responsible for their own bookkeeping and when it is necessary they get together and discuss how well they are doing within their departments. So, in a way each department is self-governed. When individuals are held responsible for their actions as well as having to carry the responsibility of others will generally make them want to perform and turn a profit to the best of their ability.
These types of situations are just as appropriate for the application of some of the “tried and true” costing methods of the 20th Century as they are for the 21st Century because what it all boils down to profit, gross profit. From my own definition gross profit is the total you get by deducting the amount of cost of sales from sales. Contribution margin on the other hand is determined by deducting all variable expenses from sales. Another way to put it is to take a restaurant meal for example: Gross profit margin=price charged for meal by operator less cost of meal ingredients. Profit contribution=that gross profit less (ordinarily) direct overheads such as wages, rent, business rates etc. A business with more than one "outlet" would then have two or more "outlets" contributing towards the admin overheads (and hopefully) overall profit for the entire business, this is industry specific, because without a profit then your business will cease to exist.
Is CVP analysis still relevant in the 21st Century business organization? I believe so, because as stated earlier, what it all comes down to is a profit and keeping your business/ organization afloat. CVP analysis is one of the most powerful tools that managers have at their beckon call. It helps them to understand the relationships between all three factions; cost, volume and profit and it is with this understanding that managers can decide how to continue conducting their business. They decide what to manufacture, buy, sell or even what price to sell at. According to authors, Yunker and Yunker, ‘CVP assumes the following: Constant sales price; constant per unit; Constant total ; constant sales mix; Units sold equal units produced’ (Yunker and Yunker, 2003). Looking at the aforementioned statement then in the end when you consider all these factors and place each within its’ proper context then you will agree that CVP analysis is still relevant in the 21st Century.
Bibliography
(n.a.) (2011) Cost Volume Profit Relationship, Accounting for Management Retrieved from:
Baggaley, B. and B. Maskell. 2003. Value stream management for lean companies, Part I. Journal of Cost Management (March/April): 23-27.
Yunker, J. A. and P. J. Yunker. 2003. Stochastic CVP analysis as a gateway to decision-making under uncertainty. Journal of Accounting Education 21(4): 339-365.