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Critically evaluate the findings in the above journal gathering research from both established and also relevant contemporary literature in this specific area. Your review of literature should aim to substantiate and support or refute your views that have been developed and expressed.

Secondary Research Level HE5 - It is expected that the Reference List will contain between ten and fifteen sources. As a MINIMUM the Reference List should include two refereed academic journals and three academic books

 This piece of work shows evidence of wider research with reference to a number of differing academic viewpoints. The essay has recognised relevantly and discussed in detail, all the required external environmental factors which affect the new accounting standard.  Several reasoned and logical arguments have been developed well and supported by a wide range of appropriately researched literature. Reference to two or more academic models is clear, relevant and informative. Presentation is of a high standard, and in the appropriate essay style.  The high number of appropriate sources has been referenced accurately and to a high standard.

 A clear and informative piece of work with evidence of wider research and discussion. The essay has correctly recognised and discussed all the required external environmental factors which affect the new accounting standard.  Some reasoned arguments have been developed and supported by a good number of sources.  Reference to two academic models is clear.  Presentation is of a good standard, in the appropriate essay style.  A good number of appropriate sources have been referenced well, with most complying with the Harvard style.

Purposes of “Cost, Volume Profit Behavior”

The presence of different parts or divisions can be seen in the accounting and financial operations of the business organizations. Management Accounting is considered as one of them. Management accounting helps the managers of the companies to use the financial information in the proper way in order to get assistance in the decision-making process (Kaplan and Atkinson 2015). Managers use different tools of management accounting and Cost-Volume-Profit Analysis (CVP Analysis) can be considered as one of them.

The managers of the business organizations use the technique of CVP Analysis in order to determine the effects of change in costs and volume on the operating income as well as net income of the companies (Hilton and Platt 2013). In the recent years, many ongoing debates can be seen on the suitability of management accounting practices within small and medium sized business organizations. One of such debates can be seen related to the concern of the management accounting practitioners for the best practice in the application of CVP Analysis including break even (Drury 2013). The main aim of this essay is the analysis of different aspects of CVP Analysis. More specifically, this essay undertakes a review of both the early and contemporary literatures on this particular topic. This essay also shed light on some specific aspects like the purpose of CVP Analysis along with its relevance and benefits.   

Purposes of “Cost, Volume Profit Behavior”

It can be seen from the above discussion that the application of CVP Analysis helps the managers of the business organizations in determining the effects of change in cost and volume on income and net income. In this context, it needs to be mentioned that the organizations have certain purposes behind the use of CVP Analysis and one major aspect of this essay is to take into consideration all of these purposes behind the use of CVP Analysis in the business organizations. Many business organizations all over the world and many management accounting professionals use the technique of CVP Analysis in order to make effective business decisions about the products and services they sell (Nas 2016). In this particular aspect,

CVP Analysis is considered as more purposeful in management accounting as compared to financial accounting. Another major purpose behind the use of CVP Analysis is to provide major assistance to the managers of the companies with the tasks of carrying on the business operations in daily basis. More specifically, the managers of the organizations become able in making cost effective moves in the daily business operations (Garvey, Book and Covert 2016). Effective forecast of the organizational profit can be considered as another major purpose behind the use of CVP Analysis. With the use of the technique of CVP Analysis, the organizational managers become able in establishing relationship between the costs and profits as this plays an effective role in the success of the companies (Garvey, Book and Covert 2016).

Relevance and Benefits of Cost-Volume-Profit Analysis

One crucial purpose behind the use of CVP Analysis is to establish flexible budget in the organizations that helps in indicating organizational costs in various level of business activity. In this context, it needs to be mentioned that sales and variable costs have a tendency to vary with the output volume (Warren, Reeve and Duchac 2013). For this reason, the organizations are required to consider the budget of the volume in the initial stage with the aim to establish budget for the sales and variable costs.

To the organizational managements, one major purpose behind the use of CVP Analysis is performance evaluation of different business units with the aim to implement organizational control. For the review of the achieved profits and incurred costs, there is a necessity for the evaluation of the effects of change in costs and volume; and the application of CVP Analysis helps the managers in this work. It can be seen that the organizational managers have to consider the implementation of pricing policies (Schofield 2018). In this aspect, CVP Analysis helps the organizational managers in formulating the pricing policy of their products and services by taking into consideration the impacts of different price structures on both costs and profits All the management accounting practitioners are well aware of the fact that the pricing policy plays an integral part to stabilize and fix the cost volumes, especially at the time of economic depression. Lastly, another major purpose of the use of CVP Analysis is to know the amount of overhead costs that need to be charged to the products and services at different level of operation (Mishan 2015). These are the major purpose behind the use of CVP Analysis.

Relevance and Benefits of Cost-Volume-Profit Analysis

It needs to be mentioned that the process of CVP Analysis has some major relevance in the operations of the modern day businesses as they have to go through complex business procedures. The use of CVP Analysis helps the modern day businesses to get the most profitable combination of fixed cost, variable cost, selling price and sales volume. Under the process of CVP Analysis, in case the reduction of the fixed costs can be done by greater amount, there is a scope to increase the profit with the help in the reduction of contribution margin (Weygandt, Kimmel and Kieso 2015). More commonly, it can be seen that the major way for improving the organizational profit is the increase of the total contribution margin figure.

Sometimes, one major way to make this happen is the reduction in the fixed costs and thereby to increase the volume. Under the process of CVP Analysis, the size of the unit contribution margin is a major relevant aspect in the modern day businesses.  For example, greater units of contribution margin leads to the increased ability of the business organizations of spending in order to increase the sales unit. Thus, it can be seen from the above discussion that the aspect of contribution margin under CVP Analysis holds the key to many decisions in the modern day companies (Banker and Byzalov 2014). Thus, it can be said that CVP Analysis has major relevance in the modern day businesses.

After the discussion of relevance, it needs to be mentioned that the modern day businesses can become beneficial from the use of CVP Analysis. CVP Analysis helps the modern day businesses in the decision making process. CVP Analysis makes the organizational managers beneficial by making them able in answering the specific realistic questions required for the analysis of business (Perini and Rosasco 2013).

Determination of the break-even point is a major concern for the organizations and CVP Analysis helps the managers of the companies in projecting how the production and future spending will contribute towards the success or failure of the businesses. For example, the managers of the companies can twist the company spending and increase production with the aim to increase profitability when they know the break-even point of their business (Perini and Rosasco 2013).

After this, with the use of CVP Analysis, the managers of the modern day businesses become able in getting a detailed picture of the activities of the businesses starting from required cost for production to the required number of products need to be produced (Perini and Rosasco 2013). This aspect helps the managers in the determination of the future condition in case there is any change in variable costs (Morgenstern 2014).

The managers of modern day businesses become able in controlling the costs of the companies from the acquired data from CVP Analysis. In this aspect, the managers of the companies can set up cost standards as metrics with the aim to evaluate the performance of various business aspects. At the same time, it needs to be mentioned that the use of CVP Analysis helps the organizational managers in setting sales strategies with the aim to maximize the sales of the products or services with the aim to increase the organizational profitability (Ye et al. 2013). These are the major benefits that the modern day businesses can avail from CVP Analysis.

Evaluation of Early and Contemporary Academic Literature

The above discussion indicates towards the relevance, purposes and benefits of CVP Analysis in the businesses of modern day. In this context, it is required to be mentioned that there is an ongoing debate among the management accounting practitioners related to the best practice in CVP Analysis in small and medium-sized enterprises (SMEs). The validity of this particular debate can be explained by the analysis of relevant literatures on the same filed.

  CIMA (Chartered Institute of Management Accounting), in the volume 9, issue 4 of their management accounting article, has conducted a research on the different management accounting practices in the small and medium sized organization in United Kingdom (UK). One of the objectives of this research was to understand which particular management accounting tools are used by the SMEs (citeseerx.ist.psu.edu 2018).

According to the findings of CIMA, there are three specific management accounting tools that the chosen SMEs consider as the most reliable source of accounting information; they are informal CVP Analysis, product or service cost for pricing and/or profitability analysis and working capital measurement. In this case, the informal CVP Analysis is the break-even analysis. As per the findings, except some small firms, all medium-sized firms use CVP Analysis for decision making and this is because as the small companies do not have any influence over the variables (citeseerx.ist.psu.edu 2018). The finding of the research also states that the companies with high financially constrained have the tendency to use management accounting tools like.

CVP Analysis. In addition, the findings of the research also show that the SMEs must be able in the prediction of costs and revenues in order to apply the management accounting tools like CVP Analysis. Thus, the unpredictability of the costs and revenues makes CVP Analysis infeasible (citeseerx.ist.psu.edu 2018). Hence, the study shows that SMEs largely use CVP Analysis for acquiring information to make effective decisions.

According to Banker et al. (2013), incorporation of cost stickiness has a major impact on the process of CVP Analysis. For this reason, in the current sales level in the SMEs, decrease in earnings can be seen when there is a decrease in sales in the current level as compared to the previous level (Banker et al. 2013). Hence, cost stickiness has highly diverse impact on the SMEs. This particular aspect indicates towards the need to bring important revisions in the major CVP benchmarks. For this reason, some of the SMEs face difficulties in using CVP Analysis (Banker et al. 2013).

As cited by Georgiev (2014), the small and medium sized hotels in Bulgaria use the technique of CVP Analysis in all the aspects of management accounting and this aspect clearly signifies the importance of CVP Analysis in management accounting. However, as per Georgiev (2014), in the management accounting planning stage, the managements of the SMEs most of the time overlook the critical break-even point in CVP Analysis and it remains misjudged. This particular aspect puts restriction on the SMEs to use CVP Analysis in critical volume planning in the short-time horizon. According to Georgiev (2014), the managements of the hotels in Bulgaria uses three major aspects in the planning stage of CVP Analysis they are the CVP-based sensitivity analysis of operating income, the need to reach the volume of activity to the desired level of profit and decision-making process in production mix (Georgiev 2014).

However, according to Abdullahi et al. (2017), there is not any significant relationship between the knowledge of the management about CVP Analysis as a management accounting tool and the small businesses of Kano(Abdullahi et al. 2017). In details, the findings of the research indicates towards the fact that there is not any major difference between the awareness and application of CVP Analysis as most of the SMEs have the tendency to apply CVP analysis in the course of their business ignorantly. As opined by Abdullahi et al. (2017), most of the time, the managements of these companies do not know the fact that their managerial decisions are part of CVP analysis. However, there is not any scope to ignore the fact that the application of CVP analysis provides major benefits to the SMEs in their decision making process. For this reason, all the SMEs are needed to take into consideration the implementation and use of CVP Analysis (Abdullahi et al. 2017).

According to Ihemeje, Okereafor and Ogungbangb (2015), the quantity of a particular manufactured product and the sale value of the product has positive impact on the profit made on that particular product. It implies that there is a major relation between profit and cost of production. For this reason, as suggested by Ihemeje, Okereafor and Ogungbangb (2015), all the manufacturing SMEs should adopt CVP Analysis in this decision making process. According to Ihemeje, Okereafor and Ogungbangb (2015), the adoption of CVP Analysis provides the SMEs with major assistance that operate in highly competitive environment. The same study indicates towards the fact that the managements of SMEs in the manufacturing industry need to adopt both the graphical and algebraic approaches of CVP Analysis for the purpose of better decision making (Ihemeje, Okereafor and Ogungbangb 2015).  

Conclusion

The above discussion sheds light on different aspects of CVP Analysis. It can be observed from the above discussion that the managements of the companies use CVP Analysis for different purposes such as to make effective business decisions, to provide assistance to the managers in the business activities, to establish flexible budget and many others. At the same time, the above discussion also proves the relevance of CVP Analysis in the modern businesses by discussion about the aspects of contribution margin and break-even point.

It shows that the use of CVP Analysis helps the modern day business organizations in obtaining the profitable combination of fixed cost, variable cost, selling price and sales volume. It can be observed from the above discussion that the managements of the companies have the option to make their businesses most profitable by using the contribution margin under CVP Analysis. At the same time, the major benefits of the use of CVP Analysis in the modern businesses can be seen from the above discussion; such as assistance in decision making process by delivering the required financial information, getting the whole picture of the business activities and many others.

It can be observed from the literature review portion of the above discussion that most of the auditors and management accounting practitioners consider the use of CVP Analysis in the SMEs as provides them with all the aids to make effective business decisions. The research report of CIMA shows both for and against findings for the use of CVP Analysis. However, most of the literatures show the positive aspect of the use of CVP Analysis. Hence, based on the above discussion, it can be concluded that all the SMEs are needed to use CVP Analysis for their businesses in the presence of the fact that it provides them with major assistance in decision making and in running the business operations.

References

Abdullahi, S.R., Sulaimon, B.A., Mukhtar, I.S. and Musa, M.H., 2017. Cost-Volume-Profit Analysis as a Management Tool for Decision Making In Small Business Enterprise within Bayero University, Kano.

Banker, R.D. and Byzalov, D., 2014. Asymmetric cost behavior. Journal of Management Accounting Research, 26(2), pp.43-79.

Banker, R.D., Basu, S., Byzalov, D. and Chen, J., 2013. Asymmetries in Cost-Volume-Profit relation: Cost stickiness and conditional conservatism.

CIMA., 2018. Management Accounting Practices of (UK) Small-Medium-Sized Enterprises (SMEs). Dr Michael Lucas and Professor Malcolm Prowle Open University Mr Glynn Lowth Nottingham Trent University Volume 9 | Issue 4 Improving SME performance through Management Accounting Education. [online] Available at: https://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.698.8591&rep=rep1&type=pdf [Accessed 2 Nov. 2018].

DRURY, C.M., 2013. Management and cost accounting. Springer.

Garvey, P.R., Book, S.A. and Covert, R.P., 2016. Probability methods for cost uncertainty analysis: A systems engineering perspective. Chapman and Hall/CRC.

Georgiev, D., 2014. Application of ‘Cost-Volume-Profit’Analysis in the Hotel Industry Based on Survey Data of High-Ranking Hotels in the North-East Region of Bulgaria.

Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business environment. McGraw-Hill Education.

Ihemeje, J.C., Okereafor, G. and Ogungbangb, B.M., 2015. Cost-volume-profit analysis and decision making in the manufacturing industries of Nigeria. Journal of International Business Research and Marketing, 1(1), pp.7-15.

Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.

Mishan, E.J., 2015. Elements of Cost-Benefit Analysis (Routledge Revivals). Routledge.

Morgenstern, R.D., 2014. Economic analyses at EPA: assessing regulatory impact. Routledge.

Nas, T.F., 2016. Cost-benefit analysis: Theory and application. Lexington Books.

Perini, K. and Rosasco, P., 2013. Cost–benefit analysis for green façades and living wall systems. Building and Environment, 70, pp.110-121.

Schofield, J.A., 2018. Cost-benefit analysis in urban & regional planning (Vol. 20). Routledge.

Warren, C., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.

Ye, Y., Cochrane, K., Bianchi, G., Willmann, R., Majkowski, J., Tandstad, M. and Carocci, F., 2013. Rebuilding global fisheries: the World Summit Goal, costs and benefits. Fish and Fisheries, 14(2), pp.174-185.

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