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The idea of value costing is very much related to the 21st century business organizations. The concept is appreciable in a way that it focuses on addressing issues which are of more importance. As for example, suggesting the production of those products which are of high value and possess the ability to capture market.
Today the most important role of the management accountants is regarded as the identification and elimination of those activities which do not play any role in adding value to a product (Drucker, 1992). This is what value costing is all about. In other words, the idea of value costing enables the organizations to produce what has value. Without value costing a contrasting set of approaches prevail. As for example, the objective of an organization is to promote value addition at every stage of production, whereas in fact the plans are overrun by the non-value adding activities, which ultimately results in reduced or below planned efficiency levels and consequently decreased profitability (Gupta & Gunasekaran, 2005).
The importance of value costing nowadays is such that ignorance of it may result in a sudden collapse of a business enterprise. Producing goods that are not profitable today and carrying on their production with a belief that breakeven will be crossed in future is not considered a good option in the present times. Apart from the benefits associated with the Cost Volume Profit analysis and the related techniques to identify the most optimum production plan out of a whole lot, a proactive planning and decision making tool is also required. This requirement is fulfilled by the value costing approach (Johnson & Kaplan, 1987).
“Tried and true” costing methods or the “traditional management control systems” of the past century, as for instance budgetary controls, pricing tools and tools for making make or buy decisions are still considered appropriate in the financial and cost accounting circles. But those cost controlling techniques which are solely based on the cost related information are losing their popularity in today’s altogether new economic settings, primarily because of their inherent limitations of being reactive rather than proactive (Ferrara, 1995).
While taking into consideration the fact that the new era’s tools and techniques are aimed at identifying the issues and presenting the optimum solutions in a proactive way, the importance of traditional controlling measures have still got their own worth. Notwithstanding the fact of their being reactive in nature, these tools are still regarded as useful as they were before. As for instance, these tools and techniques are still required to justify contracts and to present a criteria for long term and cross sectional comparisons and evaluation (Hotler, 2002).
Cost Volume Profit analysis is relevant for decision making in the 21st century business entities. The major reason which supports its relevance is the analysis which can be carried out using this tool while observing the variations in the profitability due to changes in cost and volume and the way these identified variations will affect the overall profitability of the organization. Moreover, CVP analysis is also regarded as a convenient way to present information which proves essential in decision making processes.
The CVP analysis enables an organization to set targets in short run to attain a specified target. The accuracy with which the analysis reveals the profitability of a production plan is in itself evident of the fact that the relevance of this decision making tool is undoubtedly there in the 21st century. Although an in-depth analysis of the situation requires other tools than CVP model, but the ability to predict the units to be produced and sold in order to reach at the breakeven point and/or make profits beyond that makes this model extremely viable for using in this century.
References
Drucker, P. (1992). Be Data Literate – know what to know. In P. Drucker, & S. M. Young (Ed.), Readings in Management Accounting (3rd Edition ed.). New York: Prentice-Hall.
Ferrara, W. L. (1995). Cost/Management accounting: the 21st century paradigm. Management Accounting , 30-36.
Gupta, K. M., & Gunasekaran, A. (2005). Costing in new enterprise environment: A challenge for managerial accounting researchers and practitioners. Managerial Auditing Journal , 337-353.
Hotler, D. (2002). 21st century management and the quest for excellence: is there anything, new under the sun? Super Vision , 63 (10), 3-8.
Johnson, H., & Kaplan, R. (1987). Relevance Lost: The Rise and Fall of Management Accounting. Boston: HBS Press.
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