Costing and Profitability Analysis Relationship between Cost of Production and Sales Volume: The cost of production and volume of sales are the inter-dependent determinants of profit. The analysis of cost behavior in relation to the changing volume of sales and its impact on profit is very important to determine the break even level of a firm. The level at which total revenue equals total costs, is said to be the break even level where there is no-profit or no-loss. Sales beyond break-even volume bring in profits. Generally production is preceded by the process of demand forecasting, to decide on the volume of production, the produce of which will be absorbed by the market. Pricing and promotions come at a later stage. Costing is done to predict the costs of production and resultant profits at various levels of activity. Download this comprehensive power-point presentation on Break-Even Analysis. Cost Volume Profit or CVP Analysis: CVP analysis or Cost-Volume-Profit analysis helps a firm to study the interrelationship between these three factors and their effect on clean profit. The process also includes an analysis about the external factors that affect the volume of production, such as market demand, competitor threat and internal factors such as availability of infrastructure, capital and labor force. This CVP analysis is a boon to the managers to locate the bottlenecks that hinder the productivity and find a way out, by adjusting either the levels of activity or controlling the cost.   Picture Courtesy : The Power of Break-Even Analysis Pricing: Pricing is the most important factor that makes your product competitive. The costs of production can be classified into fixed costs, variable costs and semi variable costs. Fixed costs remain constant and tend to be unaffected by the changes in volume of output; whereas variable costs vary directly with the volume of output and semi-variable as the name implies are partly fixed and partly variable. Cost accountants of the modern era fully support variable costing for the purpose of cost accounting, listing its merits as follows: Variable costing talks about contribution margin, which is the excess of sales over variable costs. If this is going to be high, sufficient enough to cover the fixed costs, then profit is assured for the firm. It is a key factor to determine the percentage of profit. Variable costing assigns only those costs to a product that varies directly with the changing levels of production, which is helpful in making a distinction of profit made from sales and those resulting from changes in production and inventory. Segregating the costs into fixed and variable is done for the purpose of providing information to reflect cost-volume-profit relationships and to facilitate management decision-making and control. Some applications of variable costing that facilitates management decision making: Profit planning: By increasing the volume of sales or decreasing the selling price of the product. Performance evaluation of profit centres:Like, sales division, marketing department, product line etc., Decide on product priorities: In view of market potential and profit potential Make or Buy Decisions: Depending on the production capacity and sales demand. Budgeting: Flexible budgeting and cost control are possible by variable costing technique and the striking feature is the treatment given to fixed costs, where it is treated as a period cost and not apportioned among all the departments and products that enable the firm to understand the movement of profits in the same direction as that of the sales. Although considered to be a controversial technique and weighed against the conventional methods of costing such as absorption costing, it is believed that it is to stay and exist as the next step in the evolutionary method of cost accounting....

Criticism Makes You Stronger and Sharper “Flattery is telling the other person precisely what he thinks about himself.” –Dale Carnegie “Criticism may not be agreeable, but it is necessary.”-Winston Churchill Critics are always feared for their barbed tongue and piercing comments. If you look at popular figures and celebrities, they tend to give much importance to these comments as they are real tools for self improvement and personal enhancement. Criticism helps improve knowledge, helps all the parties involved and helps one to learn and react to the actions of others. It is also a no-cost source of research that promotes a team spirit as well as a certain broad-mindedness / open mindedness of the human resources of an organization. It is a non-monetary tool of motivation. It helps in achieving organizational goals and objectives, also helps in realizing hidden mistakes, and tackles various bottlenecks. No doubt, it is a mixed blessing! Despite its benefits, it renders the following costs, which are the dark side of the coin: 1. It paves the way to enmity and hostility amongst those who frame policies and those who implement them. 2. It may lead to industrial dispute. It creates an unpleasant, undisciplined atmosphere in an organization. 3. It may result in unhealthy conflicts in an organization, undermining its human resources base. 4. It could also kill the spirit of initiative. 5. A superior may feel hurt or insulted when his subordinates / peers pinpoint his short-comings. Criticism can be made more positive on the following premises: 1. Do not perceive it as something bad or a shortcoming. If you feel it is unworthy of you, turn a deaf ear to it. 2. Give some time for the dust to settle down when someone is rude in his criticism as, with time, its impact will be diluted. 3. If you are criticized unfairly defend yourself and stand by your conviction. 4. Perceive it as a source of potential help in making wise decisions. 5. Do not arm the critic by counter attacking. That blows into a vendetta at times. 6. Do not raise your voice above the voice of critic – let him go ahead and be mild and amicable with him. Criticism is like the proverbial double-edged sword, and so can easily be made more effective as a potential business management tool by selecting leading and conductive spots where critics can come together and draw their views verbally / non-verbally, publicly or anonymously. Perceive critics as a vital source to help solve and implement solutions for the problems raised. Explore the critic’s view fully and freely, providing all sorts of ways in which critics can express their deliberations without...

Product Forecasting – An Analogy What is Product Forecasting: It is the science of predicting the degree of success a new product will enjoy in the marketplace. Forecasting is said to be the first and foremost step in the planning process. One of the requirements for effective long-term planning by managers is to assess the changes in technology and environmental conditions that could affect the firm. This is termed as environmental scanning which facilitates the firm to benchmark its performance as against the top industry standards. Technological forecasting involves anticipating development of new products and processes and the time taken for such kind of innovations to be accepted and absorbed in the market. External Environmental Scanning: Environmental forecasts focus on factors such as population growth, availability of resources, social and political trends that may affect the firm’s future. Business firms become more informative on, The percentage of market share for existing products of the firm Future demand for its product range Decline in sales proportions Consumer feedback about product performance Customer satisfaction Sales team performance level Pitfalls in marketing strategies Need for new product development Unidentified customer needs and so on  All predictive activity is subject to error, but technological and environmental forecasting is particularly different because they often involve assessing ideas and relationship that do not exist at the time the analysis is being performed. These forecasts are best suited for predicting performance a year or two in the future. Plan of Future Course of Action: Based on forecasting, the firm decides the future course of action. Sales forecasts help the firm to decide on the volume of production for the next few months and aid in aggregate capacity planning. Labor productivity is a crucial factor in determining the success of a business environment, especially a production environment. Manpower planning is purely based on production forecasts where in, the labor hour productivity is also taken into consideration. Forecasting Techniques: In the absence of empirical data, the forecasts must be based on expert opinions. Techniques like Delphi method can be used for this purpose. A group of experts is asked to assess a particular situation, presented with the judgments of others in the group, and then asked to reevaluate their individual positions based on what they have heard. The process continues until a consensus is arrived or until it is apparent that there will be no consensus. This helps the firm to consolidate its position with respect to specific problem situations. The Delphi method has been successfully used to forecast the nature and timing of technological change. Techniques like Delphi and Brain storming also help in the process of identification of bottlenecks, the current business trend, the firm’s future prospects, range of estimates for the desired breakthroughs etc. Although the pattern of a business cycle or a product cycle for the most part, follows a fairly predictable pattern, the firm cannot overlook probabilities, upon which the firm has to capitalize on. The firm has to become alert and employ some innovations at that point of time, when the market becomes saturated. Or else, the rate of growth declines and the firm has to decide whether to continue with the operations which calls for additional investment or close down the...