Discussion: Write an analytical summary of your learning outcomes from chapters 5 and 6.

150 words for Coursemate response required for below post:

Analytical summary of chapter 5 and 6

Chapter 5: Cost behaviour pattern

This chapter is all about cost behaviour patterns. There are 4 major methods of cost analysis(Saylor Academy, n.d.-a).

1. Account Analysis: In account analysis, costs are divided into three types.

· Variable: These are the costs which change as per the activity. E.g., If the quantity of production increases, raw material required to produce the product increases. Here raw material cost is variable.

· Fixed: Costs in this category do not vary with production activities. Consider production warehouse rent. Even if working hours increase to meet additional demand for the product, rent of the production warehouse will remain the same for the leased duration. Fixed costs are further divided into committed fixed costs and discretionary fixed costs

· Mixed: These costs comprise of fixed and variable cost components. Consider paying out to a sales representative on payroll of a company who also get intensives over sales they make. These sales representatives will get their salary as well as commission every month. Though the salary is fixed, commission will change every month as per the sales target they achieve.

2. Hi-Low Method: Hi-Low method uses estimated costs from several earlier reporting periods and estimates current variable and fixed costs.

3. Scattergraph Method: Scattergraph method uses entire data values and not only around highest and lowest levels of changes in activity. So results projected by Scattergraph method are more accurate.

4. Regression Analysis: Regression analysis uses multiple predefined mathematical equations to find best possible values. This analysis is known to give more accurate results and is widely accepted.

Multiple tools are available for these analyses and even applications like excel can go to a great deal to help analytics to assist in the process.

Chapter 6 discusses Cost-Volume-Profit analysis, popularly known as CVP analysis, and how they are interrelated and how the analysis can help decide a company’s strategy for production, operations and sales. 

CVP analysis differs for single product versus multi product or service companies as their cost centres and revenue models differ from each other in various ways.

Like cost behaviour pattern analysis, several tools are available to perform CVP analysis. Even Excel helps in CVP analysis.

To understand the CVP analysis and how it helps managers to take costing related decisions, let’s consider an example where a company produces an instrument being sold at $250/unit. Unit variable cost is $150 and total fixed expenditure is $50,000. Now the company wants to decide on incentives to be given to sales representatives. CVP will help here to get a grip on the company's financials.

Let's say management thinks a profit of $30,000 is where they can start incentives for the sales team. So, the profit target for the sales team is $30,000. Let us calculate how many units, sales team needs to sell to achieve this.

Each unit is sold for $250 and $150 is variable cost. So, remaining $100 ($250 - $150) contributes to cover fixed cost, which is $50,000. So, the company needs to sell 500 units ($50,000, total fixed cost / $100, contribution by every unit sold) to reach break- even point. After the sale of 500 units, every unit sold will contribute $100 towards profit of the company. So to earn a profit of $30,000, sales people need to sell 300 units ( $30,000, required profit / $100, contribution towards profit by each unit sold)  of the product.

So, in total, the sales team must sell 800 units (500 units to reach breakeven + 300 units to make intended profit) to make a profit of $ 30,000.

This is how CVP analysis gives clear ideas on business financials for break even point, total sale, unit price etc. Now the manager knows exactly what his sales numbers should be to meet management’s expectations of profit level of $30,000. Similarly, he can plan for many other queries like, what happens if company decides on adding mode models? What should be the production plan for the new product? If a company is opting for external commercial borrowing, depending on the company's earnings what interest rate company should go for? Is there any scope for optimizing production processes to lower production cost? 

Such and many more queries can be answered efficiently using cost behaviour patterns, CVP and other analytical methods.

References:

Saylor Academy. (n.d.-a). How Do Organizations Identify Cost Behavior Patterns? Retrieved February 16, 2021, from  https://saylordotorg.github.io/text_managerial-accounting/s09-how-do-organizations-identify-.html  

Saylor Academy. (n.d.-b). How Is Cost-Volume-Profit Analysis Used for Decision Making? Retrieved February 16, 2021, from  https://saylordotorg.github.io/text_managerial-accounting/s10-how-is-cost-volume-profit-anal.html