This will help mananagement to understand how sensitive the organization is to changes in the sales mix. Such information is helpful when determining future strategy and spending decisions.
The sensitivity analysis can also help is determining the ideal degree of operating leverage. In general, the greater the leverage the greater the sensitivity of the organization to change. Understanding the effect that operating leverage has on the business is one of the key benefits to CVP analysis.
One of the potential problems with CVP analysis is that it implies future performance based on either past trends or on assumptions. The market may not react as expected changes in the marketing mix, price or other variables. The sensitivity analysis can mitigate some of this effect, but the risk still exists that the market will not react in the manner that was modelled using CVP.
Another potential problem is that CVP analysis is mostly useful along product lines, and is difficult to apply across the organization. It is reasonable to use CVP for a simple case such as that of my friend, but it is more difficult to apply CVP to a more complex organization. CVP analysis is also weak in that it does not fully appreciate the complexity of cost drivers. This may lead management to make decisions without fully understanding their inputs. Some of the other assumptions also make CVP restrictive - assuming variable costs vary directly...
Management Accounting The objective of this study is to discuss and evaluate the purpose and effectiveness of strategic management accounting for modern businesses. The answer should be supported with at least one business currently in operation on the London Stock Exchange, discussing the ways in which strategic management accounting can support the business in managing the current challenges it faces. Strategic Management Accounting is addressed in the work of Cheong (nd) who
Accounting Several terms and definitions are valuable to understand financial statements. In the United States, financial statements of public corporations are produced in accordance with the U.S. Generally Accepted Accounting Principles. These principles govern how the information for financial statements is compiled and presented. The purpose of these principles is so that all stakeholders can easily understand the statements and make comparisons across both time and across different companies, because the
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