Class, cost volume profit is the study of the effects of changes in costs and volume on a company’s profits. These analysis requires the organization that all the company’s costs, including manufacturing, selling, and administrative costs, be identified as variable or fixed. This type of system is important step towards profit planning according to the chapter and can be useful for managers making short-term financial decisions. If we look further down this chapter we learning that when operating a business a decision-maker or managerial accountant needs to consider how four different factors affect net income such as the Volume or Activity level, sales price, the sales volume, variable and fixed costs.
Melissa, why is volume or activity level so important for CVP?
CVP analysis has certain underlying assumptions. It assumes behavior of both costs and revenues is linear throughout the relevant range, costs can be classified accurately as either variable or fixed, changes in activity are the only factors that affect costs , all units produced are sold, and when more than one type of product is sold, the sales mix will remain constant.
What is listed on the CVP Income Statement?
Melissa, have you ever had a performance review that contained budgetary elements?
Just as creating and sticking to a budget is beneficial for individuals, there are many benefits for a company. The budget is a control device. It requires all levels of management to plan ahead and formalize goals on a recurring basis. A budget provides definite objectives for evaluating performance at each level of responsibility, and it creates an early warning system for potential problems .
Let’s look at how budgets affect performance reviews. When I worked in management at a large restaurant, we performed annual performance reviews for employees. There, it was difficult to come with an objective set of criteria to evaluate because the employees were not directly involved with the accounting process. By contrast, in a manufacturing setting, managers and line workers would be heavily involved, and they would know on a daily, weekly and or monthly basis if they were meeting goals.
All, how does involvement, or lack thereof, affect moral and motivation?
Melissa, aside from the cash budget, what are some of the multitude of different budgets that comprise the Master Budget?
The cash budget is similar to the statement of cash flows. It shows the beginning and ending cash balances. There are 3 sections- cash receipts , cash disbursements, and financing. Sound familiar? it is a breakdown of where cash came in and where cash went out. The difference here is that a budget is expected cash inflows, expected cash outflows and expected borrowing and repayments. Preparing and following a cash budget contributes to more effective cash management. It shows managers the need for additional financing before actual need arises and it indicates when excess cash will be available.
All, please show a sample cash budget. Use a business that is familiar to you!
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