Profit Analysis Is a Financial Accounting Methodology

¶ … Profit analysis is a financial accounting methodology that has myriad uses in the manufacturing industry and other sectors like the restaurant, energy, and banking industry (Brugger, 2013). It helps in business management. Some of the specific uses of cost volume profit analysis include goal setting, pricing strategy, operational efficiency, and marketing strategies (Brugger, 2013).

Cost profit volume (CVP) analysis is principally used to position management to se more informed, data driven, and realistic business goals (Brugger, 2013). Setting realistic business goals calls for integration of short and mid term objectives with annual objectives. By using CVP the goals are deemed tangible as opposed to being treated as wish-lists (Brugger, 2013). This is because the goals can be tied to specific data.

Companies engage in marketing with a view to attaining profitability. Companies must therefore know the costs that are associated with production of goods and the volume necessary to make the company to break-even (Brugger, 2013). Business enterprises must be in a position to adjust matrices like the volume of goods produced to determine changes that come along with such an action before such actions are implemented. This is integral in deciding if a particular marketing strategy is worthwhile (Brugger, 2013). If upon doing a CVP analysis it is realized that a 10% increase in sales volume can offset the costs incurred in marketing, a strategy can be instituted that stipulates what should be done to make it successful.

Cost volume profit analysis can also be used to enhance operational efficiencies. It can help management in locating areas of potential efficiency improvement (Brugger, 2013). When a company realizes that hard costs are an inordinate amount of overall costs, it is likely to secure lower cost vendors. This has a direct bearing on the profit if things remain equal. The same concept can also be applied to volume (Brugger, 2013). With the CVP analysis, operation managers can determine how an increase in efficiency impacts bottom line profit.

Finally, CVP analysis can be used in pricing strategies since it gives management a chance to adjust specific areas of business to help determine the impact of changes like discounted pricing on profit (Brugger, 2013). Downward adjustment of revenue figures with a clear understanding of the costs and existing volumes helps management to know the impact of a pricing discount before it is implemented. Understanding the impact of pricing discount before it is implemented puts a company in a position to make more informed choices (Brugger, 2013). In this way the management will appreciate that an increase in volume does not necessarily warrant price decrease. This cannot be realized without cost profit volume analysis.