Financial_Management

According to research Cost-volume-profit (CVP) analysis is a technique that examines changes in profits in response to changes in sales volumes, costs, and prices. Accountants often perform CVP analysis to plan future levels of operating activity and provide information about: _ Which products or services to emphasize _ The volume of sales needed to achieve a targeted level of profit _ The amount of revenue required to avoid losses _ Whether to increase fixed costs _ How much to budget for discretionary expenditures _ Whether fixed costs expose the organization to an unacceptable level of risk Cost-Volume-Profit Analysis www.wiley.com/college/sc/eldenburg/ch There are five components of CVP analysis ; (a) volume or level of activity, (b) unit selling prices, (c) variable cost per unit, (d) total fixed costs, and (e) sales mix. The COST–VOLUME–PROFIT (C–V–P) analysis is the analysis of the cost evolution models, which points out the relations between cost, production volume and profit. The C–V–P analysis is a useful forecasting as well as managerial control tool. The method includes a set of problem solving techniques and procedures, based on understanding the characteristics of company costs evolution models. The techniques express the relations between income, sales structure, costs, production volume and profits and include breakeven point analysis and profit forecasting procedures. These relations provide a general economic activity model, which may be used by managers to make short-term forecasts, to assess company performance and to analyze decision-making alternatives. anale.feaa.uaic.ro/anale/resurse/01_C. USE OF THE COST/VOLUME/PROFIT ANALYSIS TO ESTIMATE EARNINGS Dorina BUDUGAN*, Iuliana GEORGESCU** DocShare http://www.docshare.com/doc/172509/The-strengths-and-weaknesses-of-the-tradition http://www.accountingformanagement.com/zero_based_budgeting.htm Accounting For Management Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in government and not for profit sectors of the economy. Under zero based budgeting managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather than last year's budget. Zero based budgeting approach requires considerable documentation. In addition to all of the schedules in the usual master budget, the manager must prepare a series of decision packages in which all of the activities of the department are ranked according to their relative importance and the cost of each activity is identified. Higher level managers can then review the decision packages and cut back in those areas that appear to be less critical or whose costs do not appear to be justified. Zero based budgeting is a good idea. The only issue is the frequency with which a ZBB review is carried out. Under zero based budgeting (ZBB) ,the review is performed every year. Critics of such type of budgeting charge that properly executed zero based budgeting is too time consuming and too costly to justify on an annual basis. In addition, it is argued that annual reviews soon become mathematical and that the whole purpose of zero based budgeting is then lost. Whether or not a company should use annual reviews is a matter of judgment. In some situations, annual zero based reviews may be justified; in other situations they may not because of the time and cost involved. However, most managers would at least agree that on occasion zero based reviews can be very helpful. Advantages | benefits of zero based budgeting process: 1. Efficient allocation of resources, as it is based on needs and benefits. 2. Drives managers to find cost effective ways to improve operations. 3. Detects inflated budgets. 4. Municipal planning departments are exempt from this budgeting practice. 5. Useful for service departments where the output is difficult to identify. 6. Increases staff motivation by providing greater initiative and responsibility in decision-making. 7. Increases communication and coordination within the organization. 8. Identifies and eliminates wasteful and obsolete operations. 9. Identifies opportunities for outsourcing. 10. Forces cost centers to identify their mission and their relationship to overall goals. Disadvantages | Limitations of zero based budgeting method. 1. Difficult to define decision units and decision packages, as it is time-consuming and exhaustive. 2. Forced to justify every detail related to expenditure. The research and development (R&D) department is threatened whereas the production department benefits. 3. Necessary to train managers. Zero based budgeting (ZBB) must be clearly understood by managers at various levels to be successfully implemented. Difficult to administer and communicate the budgeting because more managers are involved in the process. 4. In a large organization, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details. 5. Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results. Budgeting in an organization, also known as the annual planning process, is designed to provide managers with a blueprint for operating the company. The budget shows what the company intends to spend in order to generate revenues, what the projected revenues are and the profit the company will earn if it achieves its revenue goals. Even within companies where the budgeting system has been in place for a number of years, the process is not completely efficient. The traditional approach to budgeting is a blend of top-down and bottom-up budgeting methods. Top-down means top management sets goals for the year and communicates them down the chain of command. In bottom-up budgeting, department managers prepare budgets for the business segment they are responsible for and send the budget up to top management for consolidation into a company-wide budget or plan. Read more: The Disadvantages of the Traditional Approach to Budgeting | eHow.com http://www.ehow.com/info_8120294_disadvantages-traditional-approach-budgeting.html#ixzz1KvksvoKQ The conventional budgeting process does have one major disadvantage. Managers tend to prepare new budget requests by adding an incremental amount to their previous year's budget requests, rather than re-evaluating the need for things already included. Zero-base budgeting (ZBB), in contrast, enables the organization to look at its activities and priorities a fresh. Zero-base budgeting assumes that the previous year's budget is not a valid base from which to work. It forces department managers to thoroughly examine their operations and justify their departments activities based on their direct to the achievement of organizational goals. http://www.strategic-control.24xls.com/en209 Zero-base Budgets Read more: The Disadvantages of the Traditional Approach to Budgeting | eHow.com http://www.ehow.com/info_8120294_disadvantages-traditional-approach-budgeting.html#ixzz1Kvkc5SIt http://professorfrazier.com/614_chapters.htm Payment in capitation vs fee for service [edit] Capitation payments Under a capitation system, healthcare service providers (physicians) are paid a set amount for each enrolled person assigned to that physician or group of physicians, whether or not that person seeks care, per period of time. The amount of remuneration is based on the average expected health care utilization of that patient (more remuneration for patients with medical history). Other factors considered include age, race, sex, type of employment, and geographical location. The capitation system provides certainty to both providers (doctors, hospitals) and payers (insurance companies) as to the financial aspects of care delivery. The providers assume the risk of more patients than expected falling sick and needing care. [edit] Fee for service payments As the name implies, fee for service payments are made based on invoices for services delivered. In this system, neither the healthcare provider nor the payer have any certainty as to medical costs. The risk of cost overruns caused by more people than expected needing healthcare is assumed by the payer (insurance company) and not the providers. [edit] Fee For Service in the healthcare debate Some critics believe that the fee for service system provides healthcare providers (doctors, hospitals) incentives to do unnecessary medial procedures. They argue that since providers get paid more for delivering more services, rather than for outcomes, they tend to run tests and procedures that may not otherwise be necessary. This drives up the cost of healthcare. Read more: Capitation vs Fee For Service - Difference and Comparison | Diffen http://www.diffen.com/difference/Capitation_vs_Fee_For_Service#ixzz1L8znAW00