Accounting: CVP Method and ABC Systems

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Dear student,

It is essential to choose the right CVP method equation, contribution margin, or graphical. If you pick the wrong one, your analysis will be faulty. Do you agree? If so, why? If not, why not?

It is essential to choose right CVP method equation, contribution margin or the graphical way of presenting the CVP analysis. If not, the inferences from the analysis will lead to the wrong conclusions.
The basic CVP equation:
Sales-variable cost= contribution margin
Contribution margin-fixed costs=net profit/loss
The amount of contribution margin is the amount available for absorbing the overhead. If the contribution is less than the fixed costs, the organization will incur loss.
For example, the company has sales of 10000 units, selling price per unit being $10 per unit and variable cost per unit $5 per unit and the fixed costs is $ $20000.
As per CVP equation,
$100000-$50000=$50000 is contribution
$50000-20000=$30000 is the profit.
If wrong equation is used, for example, instead of subtracting fixed costs from the contribution to find out profit, if the fixed costs are added to contribution, it will give the misleading picture about the profit of $70000.
Therefore, it is essential to use correct CVP equation.

3. What is ABC? Why are more organizations adopting ABC systems? List at least three reasons for this change. What are advantages and disadvantages of ABC?

Meaning:

Activity-Based Costing ...