The Budget And The Cost Of Volume And Utility 2

The budget and the cost of volume and utility 2

Introduction

In today’s businesses, it is essential to make the most of every idea, option and investment. To achieve this, many organizations, from large companies to new companies and small businesses, use cost-benefit analysis to help make important decisions. The use of a cost-benefit analysis can help teams identify the greatest and best return of an investment depending on the cost, resources and risk involved.

The model includes the analysis of the sale price, fixed costs, variable costs, the amount of goods sold and how it affects the benefit of the business. Our goal is to describe the CVU or ‘equilibrium analysis’ broadly.

Developing

The objective of a company is to obtain profits and the profits depend on a large number of factors, among which the cost of manufacturing and the sales volume stand out. These factors are largely interdependent. The sales volume depends on the volume of production, which in turn is related to the costs that are affected by the volume of production, the combination of products, the internal efficiency of the business, the production method used, among other factors. The CVU helps management to discover the relationship between cost and income to generate profits and helps determine the balance point for different sales volumes and cost structures.

With the balance analysis information, management can better understand the general performance and determine which units should sell to achieve an adequate equilibrium or reach a certain level of profits.

The model helps to determine at what level all relevant costs are recovered and there are no profits or losses, which is commonly called a balance point. It is that point where the sales volume is equal to total expenses (both fixed and variable). Therefore, the CVU analysis helps those responsible for decision making to understand the effect of a change in sales volume, price and variable cost in the benefit of an entity, while considering that the fixed cost is immutable. Represents a useful tool when the company is trying to determine the level of sales to achieve an objective income.

The key factors involved in their practice include the income derived from the sales prices charged for goods and services, the fixed and variable cost, the volume of sales, the mix of products, the speed and quality of production, and the resulting profits. Understanding the interrelationships of the key variables in the CVU analysis can help us in planning and in carrying out controls, as well as in the evaluation of critical decisions of any organization.

The analysis provides a clear and simple understanding of the level of sales that are required for a business to reach the balance point (without profits, without losses), the level of sales required to achieve the objective benefit. In addition, it helps management to understand the different costs at different levels of production / sales volume and those responsible for making decisions to forecast costs and profits due to change in volume. The model helps companies analyze during recession times the comparative effects of closing a company or continuing with losses, since it clearly branches the live and indirect cost. The effects of changes in fixed and variable costs help the administration decide the optimal level of production.

 However, the model also has limitations. The model assumes that the fixed cost is constant, which is not always the case, beyond a certain level, the fixed cost also changes. It is assumed that the variable cost varies proportionally, which does not happen in reality. Cost volume gains analysis assumes that costs are fixed or variable, however, in reality, some costs are semi-fija.

Conclusions

No business can accurately decide its expected level of sales volume. These decisions are generally based on past estimates and market studies regarding the demand for products offered by the company. The CVU analysis helps companies to determine how much they need to sell to reach the balance point, that is, without profits or losses. The model emphasizes the volume of sales because in the short term most estimates, such as the sale price, the cost of the material, as well as salaries can be estimated with a good level of precision.

Companies of all sizes must administer their finances evaluating the costs of their processes against the expected benefits of the action through a detailed analysis of costs and benefits. However, to accurately measure finance and monitor business spending, it needs CVU to obtain greater visibility of the project details to ensure that you are only spending money on the most essential commercial decisions.

References

• Molina de Paredes, Olga Rosa. The budget and the cost-volume relationship.
• Management tools for small and medium enterprises. Management vision, [S.l.], n. 1 p. 11-19, Nov. 2010. ISSN 2477-9547.