Financial Reporting and Management Accounting Information
Financial reporting (FR) that is expressed with the help of financial statements provides crucial information on a company’s performance, and other data that is of consequence for a company’s performance and, therefore, stakeholders are expressed with the help of management accounting (MA) (Weißenberger & Angelkort 2011). Nowadays, MA can hardly be regarded as extra information, even though it is not required by the law as the financial statements are; instead, it is a vital part of analyzing the company’s performance that is necessary to ensure meeting the goals of a business, to exert control, assess the performance, and define issues (Weißenberger & Angelkort 2011; Atrill & McLaney 2013). Therefore, it may be suggested that the accountant of my friend is offering a valid approach, not just trying to increase her fee.
CVP: Benefits and Issues
The cost-volume-profit (CVP) analysis or contribution analysis that is being offered to my friend provides information on the relationships between a company’s costs and volume of production and the profit generated. It features as the bottom part of the formula that is used to define the break-even point (BEP) of a business (the point after which the company brings profit instead of simply covering or not covering the expenses), and it can be defined as the sales revenue minus costs per unit (Atrill & McLaney 2013a). CVP is a relatively simplified tool, and the issues of CVP are mostly its limitations. It is rather theoretical and does not take into account the variations in the cost-volume-revenue relationships, and the specifics of a multi-product business can cause trouble with this kind of analysis. These limitations are carried into BEP analysis (that is very popular among accountants) and complemented by its drawback: the neglect of the stepped fixed costs (Atrill & McLaney 2013a). Still, as pointed out by Atrill and McLaney (2013), the limitations are relatively insignificant for a small business like that of my friend.
CVP is used to study, predict, and control the way the revenues, costs, and profits adjust and evolve especially with relation to the changes in volume (Busan & Dina 2009). It is admittedly simpler than some of the advanced MA techniques (for example, activity-based costing), but it is also less time- and effort-consuming (Atrill & McLaney 2013; Atrill & McLaney 2013b). In other words, it is a valid tool that can bring important information.
Advice
Having explained the advantages, disadvantages, and uses of CVP, I would mention my opinion to my friend. I believe that MA is not just a way of making the friend pay higher fees: it seems obvious that FR is insufficient for business management. As for CVP, it can be useful depending on the situation. Since my friend is pointing out that the profits of his business are not satisfactory, CVP can help in defining BEP and the contributions made to costs and profits by the company’s products and their correlation with the volume; as a result, the possible changes in the resource allocation that can improve the situation can be predicted (Atrill & McLaney 2013).
Reference List
Atrill, P & McLaney, E 2013, Accounting and finance for non-specialists, 8th edn, Pearson Learning Solutions, New York.
Atrill, P & McLaney, E 2013a, Accounting and finance for non-Specialists PowerPoints on the Web: Chapter 7.
Atrill, P & McLaney, E 2013b, Accounting and finance for non-Specialists PowerPoints on the Web: Chapter 8.
Busan, G, & Dina, I 2009, ‘Using cost-volume-profit analysis in decision-making’, Annals Of The University Of Petrosani Economics, vol. 9, no. 3, pp. 103-106.
Weißenberger, B & Angelkort, H 2011, ‘Integration of financial and management accounting systems: The mediating influence of a consistent financial language on controllership effectiveness’, Management Accounting Research, vol. 22, no. 3, pp. 160-180.