ACC202AssignmentsWeek 2 - Discussion 1

When setting up a business, the business owner has to come up with critical decisions that define the organization and its operations. Every decision deals with analyzing available information, coming up with relevant assumptions and finally selecting appropriate course of action. Concepts of cost, volume, profitability, marketing, budgeting and financing are critical for startups if they are to survive in competitive business environment. Scholars believe that proposing an universal lifecycle model for firms is not easy, indeed, there is no large consensus about the number and typology of stages (Phelps et al, 2007; Salamzadeh, 2015). Nonetheless, it is important that startups be provided with tools necessary for a startup in the form that it is most useful for the entire lifecycle of the startup. During the stages of intention and actual startup, higher degree of financial, technical and managerial resources is required by the startup (2016). As the startup enters into the expansion phase (2016), then it becomes necessary to implement planned activities, manage the enterprise, and perform control in line with strategy.

Understanding cost behavior enables decision makers to predict profits as sales and production changes (Warren 2018). Cost-volume-profit (CVP) analysis studies the behavior and relationship among these elements as changes occur in the units sold, the selling price, the variable cost per unit, or the fixed costs of a product (Horngren 2012). CVP analysis provides a basis for altering cost structures and making investment decisions in line with operations. However for startups, the output of CVP analysis needs to be contextualized so as to give relevant information in line with the needs and scale of the startup. As such the equations that have long been used to determine the breakeven period and margin of safety get a modern reinterpretation; that is to come up with performance indicators for decision alternatives. The assumptions used by the business while performing CVP analysis allow the business to simulate cost under different markets and business conditions. Further, it enhances the business owner understand their business better as it includes information on competitive market prices, market characteristics and risk.

With this information, it becomes possible for the business owner to now make concrete their assumptions into what will be the business’ plan. This essentially involves developing budgetary estimates, in line with the operation plans and strategic plans. Budgets enable a company’s managers to measure actual performance against predicted performance. Organization can develop either be static or flexible budgets. The former is based on planned output levels and the latter is based on the actual output of the budgeted process, during the budgeted time. Flexible budgeting is a control feature for startup management and it allows the business owner to avoid the pitfalls of having misleading information from static budgeting. By applying flexible budgets, the organization adjusts its initial budget for errors in estimates of volume. This allows for study of variance within the income statements to provide better data for decision-making and monitoring activities. Variance allows organizations to focus their efforts to the underperforming elements of the Income statements and come up with improved techniques that deal with the challenges. Consistent flexible budgeting also allows the organization to control its fiscal position and avoid cashflow problems that would result during operations. The multi-disciplinary approach to teaching CVP and flexible budgeting and variance will allow startups to navigate through startup establishment by providing a link between the theoretical knowledge and the requirements of the market for startups. It is similar to feeding a newborn with the appropriate diet. Such a comprehensive approach allows for improved survival rate among startups. More importantly, we show students the importance of these key practical yet very relevant management-accounting tools, all done in one integrative setting instead of teaching those concepts separately (Machuga & Smith. 2013).

Horngren, Charles T., et al. Cost Accounting: a Managerial Emphasis. Pearson India Education, 2012.

Machuga, Susan, and Carl Smith. “A Case Method Approach of Teaching How Cost-Volume-Profit Analysis Is Connected to the Flexible Budgeting Process and Variance Analysis.” Journal of Accounting and Finance, vol. 13, no. 6, 2013, digitalcommons.www.na-businesspress.com/JAF/MachugaS_Web13_6_.pdf.

Passaro, Renato & Rippa, Pierluigi & Quinto, Ivana & Thomas, Antonio. (2016). The start-up lifecycle: an interpretative framework proposal.

Warren, Carl S. “Chapter 11:Cost-Volume-Profit Analysis.” Survey of Accounting, 8th ed. Centage, www.cengage.com.