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The cost structure of an organization is its mix of fixed and variable costs. How can CVP analysis be used to evaluate decisions that affect the cost structure of an organization? In your organization, does management lean toward choosing fixed or variable costs when considering change? Why?
Part 2 Comment on these two post in 100 Word Count regarding the same question above!
Cost Volume Profit CVP analysis is the study of the effects of changes in cost and volume on a company’s profit. Cost Volume Profit analysis is important for profit planning. It is an important factor product mix, maximizing use of production facilities, and settling selling prices. The cost structure of an organization is its mix of fixed and variable cost, and with CVP income statements classifies cost as variable or fixed, and computes a contribution margin. CVP analysis can be used by an organization to make decisions that affect cost structures by assisting with making informed decisions about the products and services it sells. In fact, Cost Volume Profit plays a large part in managerial accounting than in financial accounting. Reason being is because Cost Volume Profit analysis focuses on helping managers with the task that are specific to running a business and making smart cost effective moves. In comparison financial accounting focuses more on painting a certain picture for those outside of the company such as investors and banks,so decisions can be render in regards to the financial health of the organization.
With the company I am currently employed with I am not exactly certain as to what the management lean towards but I would assume that it would lean more towards that both it depends on what line of business it impacts and if its product driven or its something to do with mortgages, or home in the foreclosure inventory that must be maintained and accounted for regulatory purposes.
Cost Volume Profit Analysis is a method of cost accounting that’s designed to looks at the impact of varying levels of cost and volume on operating profit. The cost volume profit analysis also determines break even point for sales volumes and cost structures. There are several components that makes up the cost volume analysis. The activity level is the total number of units sold. The next component is price per unit that can change period to period based on the mixture of products and services. The third component is variable cost per unit which is basically the amount of direct materials and sales commission associated with the unit sale. The final component is total fixed cost which measures the cost of the business within in a period.
Most companies used this method to see how many units they need to sell to break even to cover all cost or reach a minimum profit margin which is helpful for management to make better decisions about the business. In my line of work as a consultant, I once worked as an accountant for Cummins. Cummins sold or distributed multiple products such as engines and generators to their clients. I would say this organization use the cost profit analysis to establish the number of costs of each of their products to generate profit.