Learn what is first needed in business to maximize net profit.
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Career in audit and consulting
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What does “effective inventory management” mean?
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Effective sales force management

“Application of the CVP interconnection accounting model beyond the acceptable and relevant range or over long time periods.”
The CVP interconnection accounting model is a convenient model for making decisions on enterprise management within the acceptable range of the “Volume of production (purchase of goods) driver and its sales” driver. Spreading the logic of the accounting model beyond the acceptable range without changing the revenue function from product sales and the enterprise total cost function is an error, since these functions are non-linear over a wider range of changes in driver values. At the same time, in a real enterprise, in the short-term intervals (week, month, quarter, year), as a rule, the volume of production (purchase of goods) and its sales do not change over a wide range, for example, from zero to maximum production (trade, logistics power). In short-term time intervals, fluctuations in the volume of production (purchase of goods) and its sales, as a rule, occur in an acceptable range. Therefore, the interrelation accounting model “Enterprise Costs – Production Volume (Product Purchases) and Sales – Profit” is a tool for planning, monitoring and improving the financial results of an enterprise in future short-term periods of economic activity (week, month, quarter, year).
To increase the reliability of the accounting model of the relationship “Costs of an enterprise – Production volume (goods procurement) and its sales – Profit” in future short-term periods of activity (week, month, quarter, year) it is necessary to use the production volume forecast (goods procurement) and its sales , forecast of the structure of sales of products, plan the price of sales of products, the forecast of the total costs of the enterprise.
To predict the value of net profit in the future short-term activity using the CVP interconnection accounting model, a linear function of revenue from product sales and a linear function of enterprise variable costs are used, which include the predicted driver value “Volume of production (purchase of goods) and its sales. ” In this case, it is assumed that the linear law of the function of revenue from sales of products and the linear law of the function of variable costs of the enterprise will not change in the future short-term period.
If in the future short-term period the law of the function of the proceeds from sales of products changes and / or the law of the function of variable costs of an enterprise changes, then the forecast of the company’s net profit contains an increased error.
The reasons for changing the law of the function of revenue from sales of products and the law of the function of variable costs of an enterprise may be:
(1) the output of the predicted value of the driver beyond the acceptable range of the volume of production (purchase of goods) and its sale;
(2) over long periods of time there will be a change in the price of sales of products under the influence of changing macroeconomic factors;
(3) over long time intervals, a change in the value of an enterprise’s costs will occur under the influence of changing macroeconomic factors.
How to be in these cases? The CVP interconnection accounting model will give an increased error in the net profit forecast, but it is undesirable to abandon forecasting the company’s net profit and setting a target for this highest economic indicator of the company’s business.
In these cases, it is necessary to prepare high-quality initial data for the accounting CVP-model for each next future short-term period of economic activity:
(1) an accurate (with a permissible error) forecast of revenue from sales of products, including a plan for the sale price of a unit of production and a forecast for the volume of production (purchases of goods) and its sales;
(2) an accurate (with a permissible error) forecast of the company’s total costs, including a plan for the company’s fixed costs and a forecast for the company’s variable costs.

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