Cost-Volume-Profit Analysis (CVP) [WLOs: 1, 2, 3] [CLOs: 1, 2, 3, 5]
Prior to beginning work on this discussion, please read the article A Case Method Approach of Teaching How Cost-Volume-Profit Analysis is connected to the Flexible Budgeting Process and Variance Analysis (Links to an external site.).
The authors, Machuga and Smith (2013), present in the article a multidisciplinary case-method approach to help students who want to start a successful business understand the steps necessary to achieve their desired profits using cost-volume-profit (CVP) analysis. The case-method emphasizes on the importance of CVP analysis and how it ties directly into the planning and control processes any management must take to start a potentially successful business.
After reading the aforementioned Machuga and Smith article, in an initial post of at least 200 words, discuss how cost-volume-profit (CVP) analysis and flexible budgeting can enable students to understand the different stages involved in starting up a business, projecting out results, and monitoring business performance (Machuga & Smith. 2013).
Guided Response: Review several of your peers’ posts. In a minimum post of at least 100 words, respond to at least two of your peers’ posts in a substantive manner. Provide information that they may have missed or may not have considered in regard to how CVP analysis directly ties into the planning and control processes management must take to start a potentially successful business. Do you agree with your peers’ findings? Why or why not?
You are encouraged to post your required replies earlier in the week to promote more meaningful and interactive discourse in this discussion forum.
Post by classmate 1
This week’s discussion is very interesting. Many of us have once thought of a starting or running a business, (which is why I am pursuing my Bachelors in Business Management) and in the scenario presented in the reading provides glimpse of the requirements to start, manage, and predict.
According to our textbook, “Cost-volume-profit (CVP) analysis is the examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits” (Warren. 2018). Cost-Volume-Profit analysis is a method to figure out how a business can be profitable with its service or sales. Achieving consistent profitability is how a business can be sustainable.
The scenario from the text describes a startup business of selling milk shakes at a resort in Hawaii. The approach of CVP analysis requires one to be as detailed as possible as its presented in the data from the text. One of the details that caught my eye is that initially the prediction is that 3,135 milk shakes (1,254 small/1,881 large) have to sale monthly to break even. Dividing total milk shakes by 30, I estimate that 105 shakes need to sell daily. This can be useful for any startup business to implement control measure to analyze if their business is meeting minimal requirements to be sustainable. To counteract this strict requirement to be sustainable a flexible budget is key.
A flexible budget is adjusting business financial predictions based on changing costs and revenue. The Flexible budget allows them to understand the reason-planned results differ from actual results in terms of activity variances versus revenues and spending variances. In this case, imagine the milk shake business oversells small size shakes. The business need to re-evaluate its predictions to breakeven.
Warren, C.S. (2018). Survey of accounting (8th ed.). Retrieved from http://www.cengage.com
Post by classmate 2
Good Morning Class,
Before we can describe how CVP is beneficial to students, we must first understand what CVP analysis is. According to the textbook, it “is the examination of the relationships among selling prices, sales and production volume, costs, expenses, and profits. Cost-volume-profit analysis is useful for managerial decision making” (Warren, C.S. 2018). It is essential that CVP analysis and flexible budgeting used is used for all aspects of business. This is because CVP analysis allows a company to identify their fixed and variable costs. These fixed costs can be things like leases of building space, business insurance, LLC costs (if applicable), and overhead. These fixed costs are likely going to remain constant. The variable costs will include things such as materials and employee pay. These kind of costs are likely be different every month, or every time period that the company bases its information off of. Once you have your fixed and variable costs, then you can take this information and create your flexible budget. Creating a flexible budget is of the utmost importance because this will allow your business to make changes to the budget as needed to best continue to operate. If a hard budget is made, then it will require much more time and effort in order to change any information. This will end up costing more and making it so the company makes less profit. CVP analysis is important to understand because it breaks down fixed and variable costs into simple to understand equations.
Warren, C.S. (2018). Survey of accounting (8th ed.). http://www.cengage.com