AVN Plc Decision Making

Question: AVN Plc. has designed and assembled electronic devices since January 2014. Recently you are appointed as the management accountant as the board of directors are concerned that its operational managers may not be fully aware of the importance of understanding the cost incurred by the business and the effect that has on their operations and decision making. In addition the operational managers need to be aware of the implications of their pricing policy when trying to increase the volume of sales. You are required to analyse the above matters and submit a report in a group of two learners, which will be used as a discussion paper for future financial planning, decision making and controlling. Analyse the importance of cost volume profit, in decision making. Discuss the benefits of preparing budgets for the company and suggest the types of budgets to be prepared, to forecast future performance of the company. Answer: Introduction In the hypercompetitive markets that exist today, it is imperative that not only the underlying product should be superior as compared to rivals, but it should also be available at competitive prices. Since the prices need to be competitive and simultaneously the businesses need to maximise their shareholders returns, hence it becomes essential that pricing decisions are taken in a scientific manner and additionally principles of cost management along with prudent planning and forecasting must be deployed (Brealey, Myers Allen, 2008). In this background, this report aims to discuss the importance of cost-volume profit analysis with regards to decision making at AVN Plc which is into designing and assembling of electronic devices. Additionally the importance of the budget for the company is also discussed along with recommending the types of budget the company should prepare. Cost-Volume=Profit (CVP) Analysis CVP analysis aims to understand the cost structure of the underlying product or service with regards to variable and fixed cost. This is imperative so as to understand the impact of volume on the overall cost structure of the product/service and estimate the break even quantity. Clearly CVP analysis is of utmost importance for AVN Plc since the decision regarding whether to accept orders of assembling a particular product or not would essentially depend on the CVP analysis. Further the competitive price quotation that the company should provide while maintaining its pre-determined profit level would also be dynamic and hence would frequently require CVP analysis (Ross, Westerfield Jordan, 2013). Additionally in the event of taking decision regarding whether a new electronic circuit should be designed or not, it is imperative to carry a CVP analysis and estimate a break even quantity based on the expected cost structure and thereby decide if the company would be able to sell the requ isite number of units or not. Besides this, since the given company is into assembling, hence it would require various components which would require the company to make a decision with regards to whether an underlying component should be manufactured in-house or outsourced to a third party. Again the decision making in such cases would require the CVP analysis so as to make rational decisions which would maximise the shareholders returns (Damodaran, 2008). Importance of Budgeting The various benefits of preparing budget for the company are briefly discussed below. It helps in preparing a financial roadmap for the company going forward since budget would typically reflect the expected revenue to be generated and the expected expenses to be incurred. Further the various expected shortfalls and their quantum can also be estimated and timely arrangements to bridge the same may be taken before hand so as to enhance the overall performance (Brigham Ehrhardt, 2013). It acts as a means of internal control since through budgets the company would be able to keep a check on frivolous spending and would aim to spend money in a prudent fashion in accordance to the planned budget. Further any deviations in this regard would be deliberated and hence this would ensure that money is not wasted (Ross, Westerfield Jordan, 2013). It would help in accessing the performance of key departments as through budgets, targets are provided to the various departments especially design, production and sales and thus this would enhance the accountability of the respective departments and the key executives manning them. Further this could also serve as a means to allocate performance incentives to key employees (Brealey, Myers Allen, 2008). Various types of budget the company should prepare are as follows (Brigham Ehrhardt, 2013). Master Budget This would typically reflect the estimated overall net position for the company for a specified period usually a financial year. Operational Budget This would only reflect the net revenues and operational costs associated with the core business i.e. designing and assembling. Non-operational costs and revenues are not included in this. Cash Budget This would tend to reflect on the expected cash inflow and outflow from the company on a everyday basis which would enable to estimate any cash shortfalls and thus provide time to the company to make suitable alternative arrangements. Conclusion It is apparent from the above discussion that prudent decision making involves extensive usage of CVP. Additionally the practice of making budgets tends to have a plethora of merits which would enhance the overall performance of the company. As a result, it is imperative that the senior managers of the company should familiarise themselves to the CVP analysis and the various facets of budgeting so as to be able to make prudent decisions. In this context, due to lack of requisite financial acumen and familiarity of the companys key executives, providing requisite training to key employees regarding the key facets of CVP analysis and budgeting along with their usage may be the way forward. References Brealey, R, Myers, S Allen, F 2008, Principles of Corporate Finance, 9th edition, McGraw Hill Publications, New York Brigham, E.F. Ehrhardt, M.C. 2013. Financial Management: Theory Practice, 14th edn., South-Western College Publications, New York Damodaran, A 2008, Corporate Finance, Wiley Publications Pvt. Ltd, London Ross, S., Westerfield, R. Jordan, B. 2013. Essentials Corporate Finance, 8th edn., McGraw-Hill/Irwin Publications, New York