A friend has asked you for some advice: ‘My small business now makes a profit; I am only too aware of this, as I now face a big tax bill each year, when my tax accountant has prepared my annual accounts. However, I don't feel much better off personally, so this is not quite what I had expected when I took the risk of resigning my job and setting up my own firm. The accountant is now trying to persuade me to pay her even higher fees, by letting her prepare monthly “management accounts” for me. She says that I would also benefit from something called CVP analysis on my various product lines. I know that you are now doing an MSc. What does she mean here, and is this likely to be worth my paying her for?’
In formulating your Key Concept Exercise, consider the following questions:
What is the difference between financial reporting and management accounting?
What are the benefits and potential problems associated with cost-volume-profit (CVP) analysis?
What advice would you give your friend?
In an approximately 500-word response, address the following issues/questions:
Outline the difference between financial reporting and management accounting information and explain the benefits and potential problems associated with cost-volume-profit (CVP) analysis. How might the technique that you have discussed assist your friend in the effective management of his business resources? What advice would you give him?