Financial and Managerial Accounting

Question: Discuss about the Financial and Managerial Accounting. Answer: Introduction: The essay will have comparison and contrast among cost-volume-profit (CVP) analysis, break-even (BEP) analysis and contribution margin (CM) analysis. The above three component are the three major areas in managerial or management accounting. Cost Volume Profit (CVP) Analysis is a simplified model in the managerial accounting. In CVP analysis, there is a critical part involved where, the total cost is equal to total revenue, and the total cost includes both fixed cost and variable cost. CVP analysis can define as the effect of output volume on the net profit, expense, and sales (Horngren et al., 2013). CVP analysis is useful for evaluating the targeted sales in units as well as in pounds. CVP analysis has a certain assumption, which is used in the evaluation of break-even analysis. The assumptions include firstly, the product mix ratio will be constant if the company sells more than one type of product. Secondly, the total cost will be categorized into fixed and variable cost. Fourthly, all the produced units should be sold. Fifthly, in a certain range of activity, the behavior of cost and revenue will be continuous. Sixthly, the factor affecting costs in the only reason for changes in the activity. Seventhly, under the CVP analysis sales price, variable price, and fixed price will be constant. Eighthly, under this inventory level at the beginning and the end is not important. Lastly, the productivity and efficiency regarding sales will not change. The cost drivers are the measures of output regarding resources and activities. It is very much necessary to have cost drivers in the organization. For evaluating cost behavior, the cost is based on the volume (Kaplan and Atkinson 2015). Cost driver of the variable cost does not change with the total cost. An example of variable cost is the cost of direct material, direct labor, software license and sales commission. Cost driver of the fixed cost changes with the total cost but within a specific range. Examples of fixed cost are real estate tax, computer equipment depreciation, rents, and space. The basic formula for CVP analysis is [PX = VX + FC+ Profit] Where, P = Price per unit; V = Variable cost per unit; X = Total number of unit produced or sold and FC = Fixed cost. Break-even (BEP) analysis is the point where at the level of sales, revenue will be equal to sales. Break-even Analysis is a useful tool in evaluating the level of production and in the target of the sales mix. BEP analysis will have a close look at the level of fixed cost which will be related to the profit earned by each and every department for sold and produced the unit. The company with low fixed cost will have low BEP. BEP is utilized for determining the relationship among profitability and product lines (Needles et al., 2013). In simple words, BEP is calculated for knowing the minimum level of the unit needs to be produced for covering the expense of the product. Under this fixed cost do not change with the change in level. Variable cost will change with the change in a level of production, or it is directly proportion to sales and production. Break-even is very useful in taking a decision like expansion, operations. Break-even point is measuring point for determining the marg in of safety by comparing the revenue with the units sold for covering fixed and variable cost regarding sales. BEP has certain assumptions which include firstly, the fixed cost will be constant, and do not change with the level of production. Secondly, the average variable cost will be constant, in the range of linearity. Thirdly, it further assumes that produced quantity will be equal to sold quantity. Finally, the sales mix is assumed to be constant where multi products are produced. On the basis of above assumption formula of BEP will be given as, either, BEP (units) = Fixed Cost / (Selling price p.u. Variable cost p.u.) or as, BEP (units) = Fixed cost / (Contribution Margin p.u.). Contribution Margin (CM) Analysis is the part of accounting principal which is helpful in evaluating the profitability of the company or the product. CM examines the margin of residual after subtracting variable expense from selling expense. CM will be excluding all variable expenses form revenue. The analysis will be evaluating offerings for the targeted acquisition which will be part of the diligence process (Warren et al., 2013). Contribution Margin per minute is also called throughout per minute. Contribution Margin will be considered as the fraction of sales that will be contributing the offsets of fixed cost. Contribution Margin is the each sale unit which is added to profit for giving the slope of the profit line. Contribution Margin is depicted regarding margin. Contribution Margin will be calculated in three forms: ratio, per unit and total. Formula of the Contribution margin is given as, Contribution Margin = Sales Variable cost. However, by contrasting all the BEP Analysis, Contribution Margin and CVP Analysis, it can be said that the cost volume profit (CVP) analysis is a simplified model in the managing accounting. On the other hand, the BEP Analysis is a part of managerial accounting and financial accounting and the contribution margin (CM) analysis is a part of the accounting principal. In case of the Cost Volume Profit Analysis, the entire sales price, variable price and the fixed price will be constant but for the BEP Analysis, the fixed cost is only constant. On the contrary, in case of contribution margin, there is no effect on the fixed cost. The product mix ratio will be constant for Cost Volume Profit analysis, the sales mix will be constant for BEP analysis and the contribution margin has no effect. In case of Cost Volume Profit (CVP) Analysis, the variable cost does not change with total cost but for BEP analysis the variable cost changes with total cost and with level of production. On the othe r hand, for the contribution margin the variable cost changes with total cost and with level of production. Fixed cost changes with total cost in case of CVP analysis and fixed cost remains constant with the level of production and with the total cost in case of BEP analysis. Nevertheless, in case of contribution margin, it has no effect on the fixed cost. CVP analysis can be defined as the effect of output volume on the net profit, expense and sales. BEP is calculated for knowing the minimum level of the unit needs to be produced for covering the expense of the product. However, the Contribution Margin is depicted regarding the margin. On the overall, it has been observed that BEP Analysis, CVP Analysis, and Contribution Margin are an essential part of maintaining the accounts as well as for measuring the performance of the product as well as the company. Reference list Horngren, C.T., Sundem, G.L., Schatzberg, J.O. and Burgstahler, D., 2013.Introduction to management accounting. Pearson Higher Ed. Kaplan, R.S. and Atkinson, A.A., 2015.Advanced management accounting. PHI Learning. Needles, B.E., Powers, M. and Crosson, S.V., 2013.Financial and managerial accounting. Nelson Education. Warren, C.S., Reeve, J.M. and Duchac, J., 2013.Financial managerial accounting. Cengage Learning.