Week 4 Learning Team Reflection: Cost Volume Profit

1095 words - 5 pages

Week 4 Learning Team Reflection
Bassam Abukhodair, Michael Dobs, Dhavanika Patel, Jeffrey Smith
University of Phoenix
ACC/561 - Professor Cathleen Davis
Due: October 21, 2013

Week 4 Learning Team Reflection
Whereas Wiley eloquently states that Cost-Volume-Profit (CVP) is the examination of numbers and values or more specifically the study of the effects of changes in costs and volume on a company's profits, it is at its most basic level so much more; it is essentially the study of relationships. It explores the production of a particular item along with its associated costs and production volumes and evaluates the relationship shared with a company’s ultimate goal; profit. Within ...view middle of the document...

CVP Income Statement
For decision-making purposes a company will incorporate an internal CVP income statement. The statement uses equation variables to provide contribution margins for each item. For checks and balances, a company’s traditional income statement and CVP income statement will both yield the same net income. The benefit the CVP income statement offers a company is that it separates and classifies the cost associated with individual items.
Break-Even Analysis
The break-even analysis is extremely useful to business in that it determines the sales required to make a profit. Knowledge of the break-even point is useful to management when it decides whether to introduce new product lines, change sales prices on established products, or enter new market areas (Wiley, 2013). To calculate the break-even point, management first needs to calculate the contribution margin. This margin can be used to determine the production costs and calculate a selling price while considering variable cost. The break-even point is calculated by dividing the fixed cost into the contribution margin. If the break-even level is outside of acceptable limits, the manager may decide to adjust prices accordingly.
For example, a company needs to sell 10,000 units to break-even but only has the capacity to produce 8,000 units. It can adjust prices to achieve a break-even point for a lower volume. The break-even analysis becomes a great tool for managers, specifically of smaller businesses, to make critical decisions.
Full-Absorption Costing
Absorption costing is a managerial accounting tool that lumps production and service costs regardless of fixed or variable. This costing method is used to affect a business’s income statements. Businesses that use the absorption costing systems are looking to recover lost costs over a long run. With the emphasis on total costs the absorption costing method provides accounting management poor data for decision-making.
The cost of absorption is the value of how much money is spent on any given item that the company is producing. It is total cost of production and maintaining this item. It is a method that the company used to figure out the total cost of production including the variable cost and the fixed cost of an item produced.
CVP: The Adjustable Analysis
One of the CVP analysis’ greatest attributes is in its flexibility...

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