KEY CONCEPT EXERCISE WEEK 4

PART B

Inrecentyears,thewiderangeofaccountingapplicationisexpanding,alongwiththe
increasingneedofeconomicmarket.
Asiswellknown,accountingisakeyaspectofbusiness.Accountingisconcernedwith
providingbothfinancialandnonfinancialinformationthatwillhelpdecisionmakersto
make good decisions. An understanding of accounting therefore requires an
understanding of the decision making process and an awareness of the users of
accountinginformation(Anonymous2010).
Purposeoffinancialaccounting
Themainpurposeoffinancialaccountingistorecordandsummarizealltransactions
madeoveraparticularperiodoftime(usuallyayear)andtoarrangethesefactsintoa
financialstatementthatcanbecommunicatedandanalyzed(Anonymous2012).This
informationplaysanimportantroleforshareholders,whowanttoknowhowthebusiness
isperformingandwhetheritmakesprofitorloss.Thefinancialaccountingisalsoof
interesttootherexternaluserswhoareinterestedinorganizationsperformance,suchas
creditors,banks,potentialinvestors,customers,taxinspectorsandemployees.
Purposeofmanagementaccounting
Incontrast,managementaccountingisusedforinternalcontrol,forexample:planning,
forecasting, performance measurement and decisionmaking (Anonymous 2010) . In
other words, management accounting provides information for people inside the
organization,e.g.managers,tohelpthemcontrolthebusinessandmakedecisionsforthe
future.
CostVolumeProfitAnalysis
CVP analysis is a systematic approach of examining the relationship between the
changesinvolume,cost,revenueandprofit(Anonymous2012).ThisleadsthatCVP
modelanalyzes theevolutionoftotalrevenue,totalcosts andoperatingprofitas are
changesinproductionlevels(inthegeneraleconomicactivity),thesellingprice,theunit
variablecostand/orfixedcostsofaproduct(SorinandCarmen,2010).
Thisanalysisismostlyusedtoplanthefutureproductionandsalesactivates,whichwill
enablethefirmtomaximizeitsprofitandtodeterminethebreakevenpointandthe
marginofsafety.Thisinformationisimportanttoensurethesurvivalofthefirminthe

shortrunandalsointhelongrun.BEPrepresentstheminimumunitsthatthecompany
hastosellbeforeitincurslosses.BEPisanogainnolosssituationwherethetotal
revenueisequaltototalcosts.Marginofsafetyshowsthemaximumunitsthatcanbe
reducedbeforethecompanywillincuraloss(Anonymous2012)
LimitationofCVP
CVP is a short run, marginal analysis: it assumes that unit variable costs and unit
revenuesareconstant,whichisappropriateforsmalldeviationsfromcurrentproduction
andsales,andassumesaneatdivisionbetweenfixedcostsandvariablecosts,thoughin
thelongrunallcostsarevariable.
Forlongertermanalysisthatconsiderstheentirelifecycleofaproduct,onetherefore
oftenprefersactivitybasedcostingorthroughputaccounting.
Onthesamevain,CVPignoresthecurvilinearnatureoftotalrevenueandtotalcost
schedules.Moreoveritassumesthatchangesinvolumehavenoeffectontheelasticityof
thedemand(Guidry,HorriganandCraycraft,1998)

Mypersonaladvise
Accordingto (Gould,2015) ,CVPisatoolthatwillhelpthemanagertotakeany
strategic decision, which will enhance on the performance and the stability of any
business.Moreoveritgivesaclearpredicationofthefutureaction,whichiscrucialin
determiningacooperationvalue.Thereforeheshouldpayhermoreinordertoimplement
suchtoolforhimtotakeeffectivedecisionsregardingbusinessgrowthandexpansion

Bibliography
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