I agree with the author’s statement that cost-volume-profit is an essential instrument in predicting and in management control of processes and their associated costs. Because of the methods and techniques used in solving problems, management can assess the patterns associated with their business costs. Further, as posited by the authors, these techniques and methods illustrate the association between an organization’s overall income, its sales, costs, the amount of goods that it can produce and profits that it can generate. I think that without the analysis, business enterprises may find it difficult to evaluate their break-even levels and have effective profit projections in the future. The relationship established among these entities; cost, volume and profit offers a model or approach on the economic activity and one that can be utilized by organizations to have short-term projections in evaluating and analyzing their business processes and how to make relevant decisions.
Further, organizations seek to know the relationship between the amounts of products sold in relation to the total revenues that are equivalent to the total costs. Such knowledge and information can only be realized through the cost-volume-profit analysis. For instance, the break-even level is the point at which incomes from revenues cater for all operating expenses, and ensures that organizations work hard to achieve attain the minimum operation level where they do not have any negative results. Therefore, when entities understand that they must operate within certain minimums, they need to analyze their performance using these techniques and methods. Therefore, organizations that seek to make positive decisions in the operations and project future profitability cannot ignore the cost-volume-profit analysis model. While the framework may have its inadequacies, it allows an organization to make critical assumptions that are fundamental to its effective performance. Imperatively, the cost-volume-profit analysis is a framework that is essential for businesses since it offers critical overview of how the management of an organization can carry out its functions and activities. Again, it allows such entities to make future decisions and project their performance in both short and long-term ways.
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The model allows businesses to calculate their profits based on the sales and total revenues.
The cost-volume-profit model makes several assumptions to work effectively in any environment. If such assumptions lack in some situations, then organizations may not be in a position to have clear and effective projections and make informed decisions and choices. The authors postulate that for the model to work effective, and avoid giving wrong results, all the listed assumptions must be present. The lack of one of these assumptions may lead to inaccurate results. For instance, the assumption that all revenue and costs should be aggregated and compared without considering the time value of money is critical to the success of the process. In fact, in most organizations, cost-volume-profit analysis does not involve money value but values are estimated and projected based on established standards and accounting principles. The cost-volume-profit is a necessary tool that helps organizations to project their revenues and costs such that any aggregation that takes into account the time value of money may not project accurate results since the value of money can either appreciate or depreciate. The estimation of these revenues should be based on relevant processes that are well established by necessary standards accepted by all auditing firms and practitioners. It follows that these assumptions are not only critical but also guiding standards and processes that firms use to make decisions and project their overall growth and performance in their industry.
