Analysis of Projects, Proposals, and Special Situations
Accountants need to be equipped with various tools and techniques in order to cope with short-term and long-term decisions. Cost–volume–profit (CVP) analysis is an extremely useful tool for accountants. When used in conjunction with any spreadsheet program, it can help accountants choose a wise decision by simulating a variety of what-if scenarios. Analysis of short-term, special decisions typically requires such simple concepts as contribution margin and relevant costs. Long-term investment decisions, commonly called capital budgeting, however, require not only a good understanding of the time value concept and its application but also a working knowledge of how to analyze and evaluate investment proposals.
This chapter covers the tools and guidelines that facilitate various short-term, nonroutine decisions as well as long-term investment decisions. Specifically:
Cost–Volume–Profit and Breakeven Analysis
What are variable and fixed costs?
Not all costs behave in the same way. Certain costs, called variable costs, vary in proportion to change in activity. Other costs that do not change, regardless of the volume, are called fixed costs.
Why analyze cost behavior?
An understanding of costs by ...