Cost Volume Profit Analysis and Costing for the 21st Centur

Cost Volume Profit Analysis and Costing for the 21st Centur...

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1 Running head: COST VOLUME PROFIT ANALYSIS Cost Volume Profit Analysis and Costing for the 21 st Century Trident University International (TUI) ACC501, Module 2, Case
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2 COST VOLUME PROFIT ANALYSIS Cost Volume Profit Analysis and Costing for the 21 st Century Throughout the history of mankind, accounting has always been used for decision- making, resource allocation, and operational control. From the times of the Egyptian Pharaohs, to the European sea voyages to the East Indies, and into the rapid industrialization of the late 19 th century, accounting information was the managerial tool of choice for operational control. However, in order for companies and businesses to remain relevant and to add value, cost and performance measures must be designed and systematically evaluated to reduce the often unnoticed mismatch between strategic goals and operational tactics (Krishan & Gunasekaran, 2005). In order to further discuss cost volume profit analysis, a working definition is needed. Cost Volume Profit (CVP) analysis is one of the most powerful tools that managers have at their command. It helps them understand the interrelationship between cost, volume, and profit in an organization by focusing on interactions among five elements which are prices of products, volume or level of activity, per unit variable cost, total fixed cost, and mix of product sold. CVP analysis is a vital tool in many business decisions because it helps managers understand the interrelationships among cost, volume, and profit. CVP analysis can aid in business decisions such as what products to manufacture or sell, what pricing policy to follow, what marketing strategy to employ, and what type of productive facilities to acquire ( http://www.accountingformanagement.com/cost_volume_profit.htm , ND). Costing is an exercise in approximation. It is both a science and an art form. It is fairly simple to isolate, track, and trace direct costs, while it is sometimes difficult to keep accurate records of indirect costs. Therefore, it is safe to say that all costing models involve some sort of
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