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ЭКОНОМИЧЕСКИЕ НАУКИ
COST-VOLUME-PROFIT ANALYSIS: COST REDUCTION ALTERNATIVES BASED ON THE BREAKEVEN POINT Birca A.G. Email: [email protected]
Birca Aliona Georgievna - doctor of economic science, assistant professor DEPARTMENT OF ACCOUNTING AND ECONOMIC ANALYSIS, ACADEMY OF ECONOMIC STUDIES OF MOLDOVA, CHISINAU, REPUBLIC OF MOLDOVA ALEXANDRUIOAN CUZA UNIVERSITY OFIASI, ROMANIA
Abstract: the best management decisions are based on the most appropriate methods for processing financial and accounting information. Under these circumstances, accounting has a particularly important task in determining costs. A special contribution has the relevant range in which the total fixed costs, along with the variable costs per unit remain constant. The essential problem of the CVP analysis lies in the reality of establishing the reference units and in selecting the most appropriate method for determining the break-even point. Although the use of costs is one of the assumptions of the cost-volume-profit analysis, the managerial decisions are taken into consideration when calculating the break-even point. Researchers in the field are currently proposing different methods of breakeven point calculation. Choosing the appropriate one is based on the nature of economic and market conditions.
Keywords: cost-volume-profit analyis, breakevenpoint unit, contribution margin approach.
АНАЛИЗ ЗАТРАТЫ - ОБЪЕМ - ПРИБЫЛЬ: АЛЬТЕРНАТИВЫ ДЛЯ СНИЖЕНИЯ ЗАТРАТ НА ОСНОВЕ ПОРОГА РЕНТАБЕЛЬНОСТИ
Быркэ А.Г.
Быркэ Алёна Георгиевна — доктор экономических наук, доцент, кафедра бухгалтерского учета и экономического анализа, Молдавская экономическая академия, г. Кишинёв, Молдавская Республика Университет им. Александра Иоана Куза, г. Яссы, Румыния
Аннотация: самые лучшие управленческие решения основаны на наиболее подходящей финансовой и бухгалтерской информации. В этих условиях бухгалтерский учёт несет особо важную задачу при определении расходов. Большое значение имеет диапазон релевантности, где постоянные издержки остаются неизменными и переменные единичные издержки остаются также неизменными. Основная проблема в анализе Затраты - Объем - Прибыль заключается в реальности определения эталонных единиц и при выборе наиболее подходящего метода для определения порога рентабельности. Несмотря на то, что расходы являются одним из компонентов в анализе затраты - объем - прибыль, управленческие решения принимаются на основе порога рентабельности. Исследователи в этой области предлагают различные методы для определения порога рентабельности. Выбор осуществляется в соответствии с видом экономической деятельности и рыночных условий.
Ключевые слова: анализ затраты - объем - прибыль, порог рентабельности, метод маржинальной прибыли.
UDC: 334.012.6
Introduction
Some costs are increasing as the volume of activity increases, while others are not affected by changes in volume of activity. Managers should be informed about how costs are affected by changes in volume of activity. Cost-volume-profit analysis is an essential tool in planning and decision making, focusing on the interrelationships between costs, units sold and price. Considering that it brings together all the entity's financial information, it often has become a valuable tool in revealing and finding solutions to the economic problems faced by the entity.
The benchmark in cost-volume-profit represent the costs. Afterwards, we continued research through different approaches of researchers in determining the breakeven poind. We believe that CVP
method isappropriate when management needs to know how many units must be sold in order to obtain a certain level of net profit.
Assumptions of the cost-volume-profit analyis
Cost-volume-profit analysis (CVP) includes the following assumptions:
1) managers must determine the costs and / or variable costs,
2) changing the volume is the only factor affecting total costs, contributing to the increase of variable and mixedcosts. Fixed costs do not change. Analyzing these assumptions for the CVP analysis, we argue that in practice, these conditions arenot strictly met. Most entities operate with mixed costs so that managers consider CVP analysis as approximate, but not exact [7, p. 930].
Other researchers include in the category of assumptions of the CVP analysis the following:
- Both costs and revenues are linear throughout the relevant range of activity;
- Costs can be classified accurately as either fixed or variable and remain constant in the relevant range of activity;
- All units produced are sold;
- The selling prices and costs are assumed to be known with certainty [5, p. 604].
The relevant range is within the limits when total fixed costs remain constant, along with the variable costs per unit. In order to estimate the costs, managers must know the relevant range because:
- total "fixed"costs can differ from one relevant range to another;
- variable costs per unit can differ together with the change in relevant intervals [7, p. 929].
The components of costs
Accounting theory provides three different types of costs: variable costs, fixed costs, mixed costs. Total variable costs are those that increase or decrease in direct proportion to increases or decreases in the volume of activity and are divided into thecost of goods, or number of units sold or services provided. Total variable costs fluctuate with changes in volume, but the variablecost per unit remains constant. Variable costs can be also called marginal cost of one unit of product and include: direct costs of materials, direct personnel costs, indirect variable costs, variable selling costs, general variable costs. Total fixed costs, unlikevariable costs donot change depending on the volume of units sold or services provided and include: indirect fixed costs, total fixed cost of selling, general fixed costs. The size of fixed costs remains constant and do not change with the oscillation in the volume of activity and are shown (amortized) in the profit and loss statement. Total fixed cost does not change, but the fixed cost per unit is inversely proportional to the number of units. Total fixed costs remain constant, but the fixed costs per unit are inversely proportional to volume. Costs that include both fixed and variable components are called mixed cost and literature are also called absorbent costs [7], [5]. The costs described above, production, marketing and administrative costs refers to the entity as a whole.
Breakevenpoint unit
Breakeven point is one of the key elements of the cost-volume-profit analysis along with costs. The reporting unit known as the volume in the formula for determining the breakeven point is the first step in determining breakeven point. For example, in manufactiring firms, such as Procter & Gamble, the determination of a unit is very simple: a piece of soap. Service firms however face difficulties, Southwest Airlines considerunit the number of passenger mile traveled in one direction, Walt Disney Company'sAnimal Kingdom counts the number of visitor-days [5, p. 591]. The unit cost of inventories, according to the marginal cost, is determined by dividing the variable cost of units to the number of units produced. The unit cost of inventory, according to the absorption of costs is determined by dividing the total costs for the products on the number of units produced. Therefore, inventory valuesat the beginning and end of a period are different in terms of the marginal costs and absorption. This affects the profit in the income statement. The profit calculated by marginal cost methodology differs from profit calculated by the principles of cost absorption [1, p. 142].
Criteria for determining the breakeven point
The breakeven point of a firm in units sold is where profit is zero and represents the starting point in the CVPanalysis. Virtually all entities want to know the breakeven point: the point at which total cost and total revenue are equal. Sales below breakeven point make losses and sales exceeding it, respectively, bring profit. There are many techniques for determining the breakeven point: 1) considering the income statement approach, 2) the contribution margin approach.
1. Sales revenue — Total costs = Operating income
2. Sales revenue — (Variable costs+Fixed costs) = Operating income
3. (Price X number of units) — (Variable costs X number of units) — Total foxed costs =
The income statement approachis the simplest method [7, 930] and is determined by the below givenrelations:
The contribution margin approachis a quick calculation of the breakeven point. The contribution margin reflects sales revenue minus variable costs and express the excess of sales revenue over variable costs. It is called the contribution margin because the excess sales revenue over variable costs contributes to covering fixed coasts and then to providing operating income [7, 931]. Therefore, the marginal cost of a product is the additional cost of producing an additional unit of that product. The concept of contribution margin ratio symbolizes the essence of the use of the variable costs mechanism [1, 140]. Companies use contribution margin ratio to compute the breakeven point: the contribution margin ratioand sales revenue.
Hansen Mowen, Guan (2009) propose a model for determining the breakeven point based on units sold. Substitutions in the computation start from formula (3), determining a new formula (8) required to managers.
The contribution margin ratio differs from the mechanism of rapid treatment of the contribution margin. In this way, the breakeven sales are determined by reporting the fixed cost rate of contribution margin.
4. Contribution margin = Sales revenue — Variable costs
5. Operating income = Contribution margin — Fixed cost
6. Contribution margin ratio = Contribution margin/Sales revenue
7. Breaceven sales = Fixed cost / Contribution margin ratio
8. Breakeven number of units = Fixed cost / Contribution margin ratio
Accounting managers often use the concept of contribution margin, stating the following clauses: how big are the amounts available for payment of general expenses of the entity at different levels of production and sales, contributions per unit are constant, and at different levels of production and sales, profit per unit varies [1, 142].
Managers use CVP analysis not only to establish the required breakeven point, neccessary for sales management, but alos for other purposes. Being awar of the contribution margin of each product can generate higher profits by emphasizing the upper level and the lower level of each product. This is why many companies prefer sales commissions mechanism based on contribution margins of products sold.
There is a number of researchers who argue that managers are more interested in the sales level needed to earn a target profit than in the breakeven point, wnen setting the price of products or services. The target profit is an objective, necessary to achieve, the manager related to the operating income resulting from the deduction of variable and fixed costs of revenues. Managers of new business ventures are also interested in profits that can expect to earn [7, 933].
The role of income tax in determining the breakeven point becomes invalid, because taxes paid on zero income are zero. However, when the company needs to know how many units to sell to earn a particular net income, some additional consideration is needed. net income is operating income after income taxes and that our targeted income figure was expressed in before-tax terms [5, 594].
Conclusion
CVP analysis is part of the methods used in making management decisions. Various categories of costs give to the method an accounting aspect. In fact, CVP analysis shows that accounting is the leading provider of information in management decisions. The essential problem in the CVP analysis lies in the reality establishing the reference units and in selecting the most appropriate method for determining the breakeven point. Finally we wish to state that there is no the most efficient method for calculating the breakeven point, but it must be adjusted according to the actual situation in the firm.
On the other hand, despite the fact that cost-volume-profit analysis is one of the key elements of accounting and control management, the actual situation on the product market is different. If until recently, prices were determined based on market costs, new market conditions impose new restrictions namely by the fact that the price is determined by the market and the cost becomes a measure to be adjusted by price. In fact, new market conditions create new opportunities for development of target costs and profits.
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ПЕРСПЕКТИВЫ РАЗВИТИЯ АГРОПРОМЫШЛЕННОГО КОМПЛЕКСА КАЗАХСТАНА НА ОСНОВЕ ИНТЕГРАЦИИ И КООПЕРАЦИИ Наренова А.Н.1, Байтиленова Е.С.2 Email: [email protected]
'Наренова Айман Нурмагамбетовна — кандидат экономических наук, доцент; 2Байтиленова Ериккуль Серикхановна — кандидат экономических наук, доцент, кафедра менеджмента, Таразский государственный университет им. М.Х. Дулати, г. Тараз, Республика Казахстан
Аннотация: в статье рассматриваются перспективы создания условий для производства и реализации конкурентоспособной продукции в агропромышленном комплексе Республики Казахстан, международный опыт создания эффективных механизмов движения к устойчивому развитию общества, разработки и внедрения индикаторов устойчивого развития при формировании и выборе приоритетов, а также стратегия его достижения. Также рассмотрена инновационная деятельность, связанная с трансформацией идей в новый или усовершенствованный продукт, внедренный на рынок, новый или усовершенствованный технологический процесс, использованный в практической деятельности, новый подход к социальным услугам.
