To manage companies, there are various methods of calculating financial data. Cost-Volume-Profit (CVP) is an analysis of the behavior of costs and revenues in order to draw relationships between them (South University, 2022). This paper will review CVP analysis using the example of the real company. The sample shows the mechanism of applying CVP analysis in the practice and the importance of such data for decision-making process.
CVP Analysis and Break-Even on the Example of Transtrek
Timely CVP analysis can save the company from wrong financial and management decisions that will cause economic losses. A case study of the Indonesian outreach company Transtrek supports this idea (Estiasih et al., 2019). The organization wanted to develop human capabilities in resource management. The company was engaged in staff development by creating events for staffs’ skill optimization (Estiasih et al., 2019). However, the company did not pay attention to expenses, focusing solely on income.
The data collection method was a literature study using observations, interviews, and documents related to cost, volume, and profit analysis. Transtrek had no budget and did not classify costs based on cost behavior (Estiasih et al., 2019). The result of the contribution margin showed 41.5%, which means that the organization could cover fixed costs and generate income. The break-even analysis showed that sales volume was IDR 223 million, so management could cover all fixed and variable loads. The margin result showed 24.09%, which means that the management in the implementation of sales should not reduce 24.09% of the planned sales for the company to reach the break-even point (Estiasih et al., 2019). This means that the decision to invest would be undesirable for the organization.
The data obtained after the analysis show that investing would be undesirable for the organization. Therefore, Transtrek should refrain from investing in external training, as CVP analysis has shown that such investment will increase risk. The decision to invest at this stage is a dangerous one. In the current conditions, non-intervention is the best strategy to make the company’s work economically feasible.
In my opinion, the CVP analysis helped Transtrek identify weaknesses, find the break-even point, and determine how the expanses affect the company’s profit. Fixed costs, such as salary and office rent, remain the same regardless the production level. Variable costs are expenses for production, such as commissions and labor; they change depending on production volume. At the same time, variable costs in state per unit basis do not change and stay constant across all production level. At a constant level of production, variable and fixed costs can be constant. With an increase in production, variable costs rice, fixed costs remain constant, but in terms per unit of goods, variable costs decrease or remain constant, fixed costs decrease. CVP help to calculate how changes in output can reduce average fixed costs or find an optimal level of variable costs.
Responsibility Centers
A responsibility center is a functional business unit with its own goals and objectives, dedicated staff, policies and procedures, and financial reports. It is used to hold managers specifically accountable for income received, expenses incurred, and/or funds invested (Warren et al., 2019). The cost center is responsible for implementing certain costs; a typical cost center is the cleaning department. The profit center is responsible for income and expenses that result in profit or loss. The investment center is responsible for the return on invested funds. I prefer to work in an organization with a decentralized system, as it would allow me to be more involved in decision-making. My preferred option is to work in an investment center, which gives me more opportunities to manufacture new products.
Conclusion
Cost–volume–profit analysis is the main tool for calculating possible investment paths to multiply the company’s income. This analysis must be carried out on an ongoing basis to understand how changes in operating activities affect the level of company’s income at the current moment. Ignoring this method can lead to incorrect financial and management decisions due to ignorance of the real business feasibility.
References
Estiasih, S. P., Prihatiningsih, E., & Kartiono, H. (2019). Cek plagiasi turnitin profit planning model using the Cost-Volume-Profit analysis approach (Case Study in CV Transtrek Indonesia Batu Malang). Web.
South University. (2022). Cost-Volume-Profit relationship [Video].
Warren, C., Jones, J. P., & Tayler, W. B. (2019). Financial and managerial accounting (15th ed.). Boston: Cengage.