Cost Profit Volume Analysis as a Catalyst for Management Planning, Control, and Decsion Making of Manufacturing Company

 Cost Profit Volume Analysis as a Catalyst for Management Planning, Control, and Decsion Making of Manufacturing Company

Cost Profit Volume Analysis as a Catalyst for Management Planning, Control, and Decsion Making of Manufacturing Company

 

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Chapter one on Cost Profit Volume Analysis as a Catalyst for Management Planning, Control, and Decsion Making of Manufacturing Company

INTRODUCTION

BACKGROUND TO THE STUDY

The success of a business is generally attributable in great measure of the ability of its management personal to cope with probable conditions of the future. Short range as well as long-term plans must be made accomplished through sound management evaluation and good decisions. Management has been defined as a process of planning, controlling, organizing, directing and coordinating the affair of an organization. This process demand decision making at every stage. Where there is a problem and choice of action not just to the satisfactory of management but for the optimal goods of the firm.  This optimal choice provides solution to the problem. The data provided must be used in reaching or deciding an end. In reaching this end, there is a powerful tool for planning and decision making that is required which is cost volume profit analysis. Cost volume profit analysis (CVPA) is a systematic method of examining the relationship between change in activity and change in total sales revenue, expenses and net profit. “Some industries today are encountering problems raised by expansion through increased sales and the introduction of new products. Many on the other hand are facing problem of contraction due to the introduction of substitute materials, products. Whenever is the case, it is vitally important that management should be in a clear position to plan for these changing levels of activity”, In order to solve the problem created by the above situation profit planning, cost and decision making require an understanding of the characteristics of costs and their behaviour at different operating levels. One of the most important tools develop by accountants to assist management in meeting the challenges is the cost volume-profit-analysis (C.V.P) otherwise known as the behaviour analysis.

Cost volume profit analysis is a management tool used when the problems of CVP implications arise in the firm, the problem includes to make or buy decisions, product appraisal, add or drop decisions product planning and promotional mix, distribution channels and profit planning decisions. Cost volume profit analysis serves as an indispensable aspect of management decision making because it enables Managers of this manufacturing companies to estimate future revenues, costs, and profits to help them plan and monitor operations. They also use cost-volume-profit (CVP) analysis to identify the levels of operating activity needed to avoid losses, achieve targeted profits, plan future operations, and monitor organizational performance. Managers also analyze operational risk as they choose an appropriate cost structure.

The researcher notices that, the output of a firm is restricted to the current operating capacity in the short run. This input can be increase other cannot, but it takes time to expand the capacity of plant and machinery. This output is limited in the short run because plant facilities cannot be expanded which enable a firm to take time to reduce it capacity. A firm must operate on a relatively constant stock of production resources because most of the costs and prices of a firm product will have already been determined, and the major area of uncertainty will be the sale volume. The researcher also notices that, profitability will therefore be most sensitive to sale volume in the short run. Hence, cost volume profit analysis thus highlights the effects of changes in sale volume on the level of profit in the short run. CVP Analysis is also one of the tools that could be applied to identify organization targets of opportunity or potential areas of weakness by matching the organization breakeven.

Though organizational management have a goal of maximizing their wealth, however, given that no obvious, single course of action leads to fulfillment of that goal, managers must choose a specific course of action and develop plans and controls to pursue that course. Because planning is future oriented, uncertainty exists and information helps reduce that uncertainty. Controlling is making actual performance align with plans, and information is necessary in that process. Much of the information manager’s use to plan and control reflects relationships among product cost, selling prices, and sales volumes. Research in the field of CVP Analysis up-to-date, has been mainly preoccupied with the accounting systems of large manufacturing and merchandizing companies, while studies of organizations in the service sector was directed specifically at non-profit organizations in the public sector, At this stage, there are few empirical data and analyses on the reliance of CVP analysis in manufacturing companies. In all business enterprise, the implementation of cost volume profit analysis is very important and can never be over emphasized and to achieve this goal, target and objectives, it is beckoned on the decision of the managers. It is the contention that the researcher therefore seeks to investigate the reliance of cost volume profit analysis as an aid in effective management decision making in a manufacturing industry.

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STATEMENT OF THE PROBLEM

The major problem encountered by manufacturing industries when cost-volume-profit analysis stands as a basis for decision making is managerial inefficiency and this includes ignorance of this concept i.e. inability of the management to employ it in their decision making and also not knowing the importance of cost volume-profit analysis .i.e. most manufacturing industries are not relevant in their decision making process. Secondly, most manufacturing industries in Nigeria do not determine the extent to which cost-volume profit analysis affect their various decisions. Thirdly, manufacturing industries are also faced with the problem of how to make use of the available scare resources in order to achieve the objective of profit maximization. Fourthly, another major problem manufacturing industries in Nigeriaencountered, is when the application of cost volume-profit analysis techniques are meant to apply, they don’t apply it in their enhancement of managerial efficiency of manufacturing industries. Despite that, the information provided by the accountant in the company should be sufficient for decision making to determine the estimate to produce. The accountant/production manager must know the inflation rate with respect of the company’s capital investments as regards the profitability structure of the variable component that are being incurred. The problem now is whether the company know what cost they are incurred in order for them to produce the estimated value which they are setting for themselves. It would be difficult to imagine any organization achieving and sustaining effectiveness without cost volume profit analysis. Finally, the economy is not the same today as it has been in the past decade. The exchange rate of naira to foreign currencies and the price fixed for manufacturing goods and services greatly affect the profits to be made on the part of the manufacturers. If prices are not well fixed compared with the sale needed and cost incurred, it will pose a problem hence. It is against this backdrop that this research tends to argues that cost volume profit analysis serves as effective tool in management decision making of manufacturing companies.

 

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