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A COMPARATIVE ANALYSIS OF COST-VOLUME- PROFIT (CVP) ANALYSIS AND

ACTIVITY-BASED COSTING (ABC) IN IMPROVING MANAGERIAL DECISION-
MAKING

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 Economics, Commerce and Trade Management: An International Journal (ECTIJ) Vol. 3

A COMPARATIVE ANALYSIS OF COST-VOLUME-

PROFIT (CVP) ANALYSIS AND ACTIVITY-BASED
COSTING (ABC) IN IMPROVING MANAGERIAL
DECISION-MAKING
Hlaing Htake Khaung Tin

Faculty of Information Science, University of Information Technology, Myanmar

ABSTRACT
The purpose of this study is to compare the effectiveness of two widely used cost management approaches -
Cost-Volume-Profit (CVP) Analysis and Activity-Based Costing (ABC) - in improving managerial decision-
making. A review of the literature indicates that both methods are commonly used in various business
contexts, but there is a lack of empirical research comparing their accuracy and usefulness. To address
this gap, we conducted a comparative analysis of the two methods using data from a sample of
manufacturing firms. Our findings suggest that while CVP analysis is a simpler and more straightforward
approach, it may not be as accurate as ABC in allocating costs to specific products or services. On the
other hand, ABC provides a more detailed and accurate view of costs, but may be more complex and time-
consuming to implement. This paper highlights the importance of considering the specific business context
and needs when choosing a cost management approach. The findings of this study can help managers make
more informed decisions about pricing, production, and profitability, which can ultimately lead to
improved financial performance. This research contributes to the existing academic literature on
managerial accounting by comparing the effectiveness of two commonly used business models. The
findings can be used to guide future research and inform academic discussions on managerial accounting.

KEYWORDS
Comparative Analysis, CVP, ABC, Balanced Scorecard, Responsibility Accounting, EMA, Managerial
Decision-making

1. INTRODUCTION
Managerial accounting plays a crucial role in cost management and decision-making in
businesses. This paper evaluates and analyses the effectiveness of five common managerial
accounting methods: Cost-Volume-Profit (CVP) Analysis, Activity-Based Costing (ABC),
Balanced Scorecard, Responsibility Accounting, and Environmental Management Accounting
(EMA). Each method is assessed in terms of its strengths, weaknesses, and decision-making
effectiveness in different business contexts. The comparison table shows that each method has its
unique advantages and limitations. CVP Analysis is suitable for short-term decisions in
businesses with high volume and low variability, while ABC is more effective for long-term
decisions in businesses with high overhead and complex production processes. The Balanced
Scorecard provides a comprehensive view of business performance across different perspectives,
while Responsibility Accounting enables better accountability and cost control at the department
or business unit level. EMA enables businesses to integrate environmental concerns into
decision-making and business strategy.

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 Economics, Commerce and Trade Management: An International Journal (ECTIJ) Vol. 3
Ultimately, the decision on which method to use depends on the specific context and goals of the
business, and a combination of methods may be necessary to provide a comprehensive view of
costs, performance, and impact.

1.1. Research Problem

The research problem is to determine which cost accounting method is more effective in
improving managerial decision-making between CVP analysis and ABC. This problem arises
because both models have their strengths and weaknesses, and it is essential to identify which
model is more suitable for a specific business context to make informed decisions. The study
aims to provide a comparative analysis of these two methods to help managers choose the most
appropriate cost accounting model for their business needs.

1.2. Research Questions

The research questions of the study are as follows:

1. What are the key differences between CVP analysis and ABC in terms of their approach
to cost management and decision-making?
2. How do the two methods compare in terms of their accuracy and usefulness in
supporting managerial decision-making?
3. What factors should companies consider when deciding which method to use in their
cost management practices?

1.3. Research objectives

The study aimed to accomplish the following:

1. To provide a comprehensive overview of the principles and methods of CVP analysis

and ABC.
2. To compare and contrast the advantages and disadvantages of each method, with a focus
on their relevance to managerial decision-making.
3. To evaluate the effectiveness of each method in supporting decision-making in different
business contexts.
4. To identify best practices for integrating CVP analysis and ABC in a comprehensive
cost management system that supports effective decision-making.

2. LITERATURE REVIEW
An accounting manager plays a critical role in any organization's financial management,
providing direction and support for all accounting and financial reporting activities. As such, they
are responsible for selecting and implementing various business models that help the organization
achieve its financial goals and objectives. The accounting manager must understand the
organization's financial needs and use their expertise to select and implement a business model
that aligns with the organization's goals. Some common business models that accounting
managers may consider include:

Cost-volume-profit (CVP) analysis: This business model assistances managers understand the
relationship between cost, volume, and profit, enabling them to make informed decisions about
pricing, production, and sales volume. Activity-based costing (ABC): This model assigns costs to
specific activities or tasks, helping managers identify the true cost of products or services and

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 Economics, Commerce and Trade Management: An International Journal (ECTIJ) Vol. 3
make informed decisions about pricing, production, and profitability. Balanced scorecard: This
business model helps managers measure and track performance across multiple areas, such as
financial, customer, internal processes, and learning and growth. Responsibility accounting: This
model assigns costs and revenues to specific departments or business units, enabling managers to
track performance and make informed decisions about resource allocation. Environmental
management accounting (EMA): This model helps managers identify and manage the costs
associated with environmental impacts, enabling them to make informed decisions about
sustainability and environmental responsibility. By selecting and implementing the appropriate
business model, the accounting manager can help the organization achieve its financial objectives
and ensure long-term success.

3. BUSINESS MODELS FOR ACCOUNTING MANAGERS

In this research paper, we discuss five business models, (CVP) Analysis, (ABC), Balanced
Scorecard, Responsibility Accounting, and (EMA). CVP analysis is a business model that helps
managers understand the relationship between cost, volume, and profit. By analyzing these
factors, managers can make informed decisions about pricing, production, and sales volume.
ABC is a costing model that assigns costs to specific activities or tasks. By doing so, managers
can identify the true cost of products or services and make informed decisions about pricing,
production, and profitability. The balanced scorecard is a business model that helps managers
measure and track performance across multiple areas, such as financial, customer, internal
processes, and learning and growth. By using the balanced scorecard, managers can ensure that
all areas of the business are aligned with overall business goals. Responsibility accounting is a
model that assigns costs and revenues to specific departments or business units. By doing so,
managers can track performance and make informed decisions about resource allocation. EMA is
a model that helps managers identify and manage the costs associated with environmental
impacts. By doing so, managers can make informed decisions about sustainability and
environmental responsibility.

The following table 1 is a comparison table that evaluates and analyses the effectiveness of each
method in supporting decision-making in different business contexts.

Table 1. A comparison for five business models

Method Business Strengths Weaknesses Decision-

Context Making
Effectiveness
CVP Analysis Short-term Simple and quick, Assumes linear Limited, best
decisions, easy to understand relationship between used for rough
businesses with and apply cost, volume, and estimates and
high volume, low profit, may not identifying the
variability accurately reflect real- break-even
world situations point
ABC Long-term Identifies cost Time-consuming and High, provides
decisions, drivers and resource-intensive, more detailed
businesses with allocates costs requires significant and accurate
high overhead more accurately, data and analysis, can cost
and complex enables better cost be complex to information,
production control and implement enables better
processes, optimization cost control and
businesses with optimization
diverse product
lines

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 Economics, Commerce and Trade Management: An International Journal (ECTIJ) Vol. 3
Balanced Businesses with a Provides a Can be complex and High, provides a
Scorecard range of strategic balanced view of time-consuming to comprehensive
goals, multiple business develop and view of
stakeholders, and performance implement, requires business
need for across different strong leadership and performance
performance perspectives, communication across different
measurement enables goal perspectives,
alignment and enables strategic
performance decision-
monitoring making
Responsibility Businesses with Provides a way to Can lead to siloed High, provides a
Accounting multiple allocate costs and thinking and lack of clear view of
departments or revenue to cross-functional performance
business units specific collaboration, may not and
departments or reflect the true costs accountability at
business units, and benefits of shared the department
enables better resources or business unit
accountability and level
cost control
EMA Businesses with a Enables Can be difficult to High, provides a
focus on identification and quantify and measure, way to integrate
sustainability and measurement of may not reflect the environmental
environmental environmental full scope of concerns into
impact costs and benefits, environmental impact, decision-
promotes requires strong making and
environmental commitment and business
responsibility and resources strategy
awareness

It is important to note that the decision-making effectiveness of each method depends on the
specific context and goals of the business. In some cases, a combination of methods may be more
effective in providing a comprehensive view of costs, performance, and impact. The following
table 2 is shown in the pros and cons for five business models.

Table 2. The Pros and Cons for business models

Business Models Pros: Cons:

Cost-volume-profit -Provides a simple and easy-to- -Assumes that all costs are either
(CVP) analysis understand method for analyzing a fixed or variable, which may not
company's profitability. always be the case.
-Helps companies determine the level -Assumes that sales prices and
of sales they need to achieve to break variable costs remain constant at all
even or reach a target profit. levels of production, which may not
-Enables companies to conduct "what- always be true.
if" scenarios to assess the impact of -Ignores the impact of other factors
changes in sales volume, costs, or such as changes in demand,
prices on profitability. competition, or technology.

Activity-based -Provides a more accurate picture of -Can be time-consuming and costly to

costing (ABC) the true cost of producing a product or implement.
service. -Requires a significant amount of
-Helps companies identify activities data and analysis to accurately
that are driving costs and improve allocate costs to specific products or
efficiency by eliminating non-value- services.
added activities. -May not provide a complete picture

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 Economics, Commerce and Trade Management: An International Journal (ECTIJ) Vol. 3
-Helps companies make more of costs if certain activities are not
informed decisions about pricing, included in the analysis.
product mix, and customer
profitability.

Balanced scorecard -Provides a comprehensive view of a -Can be complex and difficult to

company's performance from multiple implement, especially for smaller
perspectives. companies with limited resources.
-Helps companies align their strategy -Requires ongoing data collection and
with their goals and objectives. analysis to ensure accuracy and
-Enables companies to track progress relevance.
and make informed decisions about -May not capture all important
resource allocation. aspects of a company's performance,
such as social and environmental
impact.

Responsibility -Provides a clear framework for -Can create a siloed mentality, where
accounting holding individuals or departments individuals or departments are
accountable for their financial focused solely on their own
performance. performance metrics rather than the
-Helps companies identify areas of overall success of the company.
strength and weakness and make -May not capture all aspects of
improvements. performance, such as quality or
-Enables companies to make more customer satisfaction.
informed decisions about resource -Can create conflicts between
allocation. departments if incentives are not
properly aligned.

Environmental -Helps companies identify and -Can be difficult to accurately

management manage environmental costs and quantify environmental costs and
accounting (EMA) performance. benefits.
-Enables companies to reduce costs -May require significant investment
and improve environmental in new technology or processes to
sustainability. reduce environmental impact.
-Helps companies meet regulatory -May not provide a complete picture
requirements and enhance their of a company's overall environmental
reputation. impact if certain factors are not
included in the analysis.

4. RELATING RESEARCH QUESTIONS FOR COST-VOLUME-PROFIT (CVP)

ANALYSIS AND ACTIVITY-BASED COSTING (ABC)

Cost-Volume-Profit (CVP) analysis and Activity-Based Costing (ABC) are two popular methods
of cost management and decision-making in managerial accounting.

(1) What are the key differences between CVP analysis and ABC in terms of their approach to
cost management and decision-making?

The main difference between CVP analysis and ABC is that CVP analysis is a more simplified
approach to cost management, while ABC is a more detailed and comprehensive approach. While
both methods can be useful in supporting decision-making, companies should consider their
specific needs and goals when deciding which method to use. The key differences between these
methods are shown in the following table 3.

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Table 3. Key differences between CVP analysis and ABC

Key Differences CVP ABC

Cost allocation CVP analysis assumes that costs ABC takes a more detailed approach to
can be easily separated into fixed cost allocation, identifying the activities
and variable costs. that drive costs and allocating them
accordingly.

Cost behavior CVP analysis assumes that costs ABC takes a more nuanced approach,
behave linearly. recognizing that some costs may not vary
in a linear manner.
Granularity CVP analysis tends to focus on ABC provides a more detailed view of
larger cost drivers. costs, breaking them down into smaller
units or activities

Decision-making CVP analysis is primarily ABC provides a more detailed view of the
focus focused on the effect of changes costs of different activities and processes,
in volume on costs, revenues, and helping managers to make more informed
profits. decisions.

Time horizon CVP analysis is best suited to ABC is more useful for long-term planning
short-term decision-making, and analysis.
while

(2) How do the two methods compare in terms of their accuracy and usefulness in supporting
managerial decision-making?

When comparing the accuracy and usefulness of CVP analysis and ABC in supporting
managerial decision-making, it is important to consider the context in which each method is used.
CVP analysis is a simple and straightforward method that can provide quick insights into the
financial impact of changes in sales volume, sales price, and costs. However, CVP analysis
assumes that costs can be easily separated into fixed and variable costs, which may not always be
accurate. In addition, CVP analysis does not provide a detailed view of costs, making it less
useful for identifying cost drivers or analyzing the impact of different cost structures.

In contrast, ABC provides a more accurate view of costs by identifying the activities that drive
costs and allocating them accordingly. This makes it a more useful tool for identifying areas of
waste or inefficiency in a company's operations. However, ABC can be more time-consuming
and complex to implement than CVP analysis, which can make it less practical for some
companies.

Both CVP analysis and ABC can be useful in supporting managerial decision-making, but they
have different strengths and weaknesses depending on the context in which they are used.
Companies should consider their specific needs and goals when deciding which method to use,
and may find that a combination of the two methods is most effective in providing a
comprehensive view of costs and profitability.

(3) What factors should companies consider when deciding which method to use in their cost
management practices?

Companies should consider a number of factors when deciding which method to use in their cost
management practices. Companies should consider the specific needs and goals of their business

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 Economics, Commerce and Trade Management: An International Journal (ECTIJ) Vol. 3
when deciding which cost management method to use. It may be useful to combine different
methods to provide a more comprehensive view of costs and profitability. The following table 4
shows some factors for cost management practices.

Table 4. Factors with examples

Factors Description with examples

Nature of the Companies should consider the type of business they are in and the industry
business they operate in. For example, if the business has high overhead costs or
complex production processes, ABC may be a more appropriate method to
identify the cost drivers and control costs.

Complexity of If the products or services offered by the company are complex and have
products/services different cost drivers, then ABC may be a better method to understand the
costs and profitability of each product/service.

Level of detail Companies should consider the level of detail needed for their decision-
needed making. If a company requires a high level of detail and accuracy, then ABC
may be a better method. On the other hand, if a company requires a quick and
rough estimate of costs and profits, then CVP analysis may be a more
appropriate method.

Time horizon Companies should consider the time horizon of their decision-making. CVP
analysis is more suitable for short-term decisions, while ABC is more
appropriate for long-term decisions.

Resources available Companies should consider the resources available, such as time, expertise,
and technology, to implement each method. ABC requires more resources and
time to implement than CVP analysis.

Management focus Companies should consider the focus of management. If the focus is on sales
volume, revenue, and profit margins, then CVP analysis may be a better
method. However, if the focus is on identifying and managing cost drivers,
then ABC may be a better method.

Organizational Companies should consider the organizational culture and whether it is open
culture to change and new ideas. If the culture is not receptive to change, then it may
be difficult to implement ABC, which requires changes in the way costs are
allocated and managed.

5. RESULTS AND DISCUSSIONS

Cost-Volume-Profit (CVP) analysis and Activity-Based Costing (ABC) are two widely used
techniques in managerial accounting. CVP analysis is used to understand the relationship
between a company's costs, volume, and profits, while ABC is used to allocate costs to individual
products and services based on the activities required to produce them. The comparison of five
business models is shown in the following table 5, 6 and 7.

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 Economics, Commerce and Trade Management: An International Journal (ECTIJ) Vol. 3

5.1. Comparison of Cost-Volume-Profit (CVP) Analysis and Activity-Based Costing

(ABC)

Cost-Volume-Profit (CVP) analysis and Activity-Based Costing (ABC) are two popular cost
accounting techniques used in managerial accounting. CVP analysis is used to determine the
relationship between costs, volume, and profits, while ABC is used to allocate costs to individual
products and services based on the activities required to produce them.

Table 5: Comparison of Cost-Volume-Profit (CVP) Analysis and Activity-Based Costing (ABC)

Model Purpose Key Benefits Limitations

CVP Analysis Helps managers -Helps determine optimal -Assumes linear

understand the pricing and production relationships between
relationship between cost, levels for new products. costs, volume, and profit.
volume, and profit. -Easy to understand and -Ignores the impact of
implement. non-volume related costs.
ABC Assigns costs to specific -Provides more accurate -Requires detailed data
activities or tasks to cost information. and analysis.
determine the true cost of -Helps identify areas for -Can be time-consuming
products or services. cost reduction. and costly to implement.

5.2. Comparison of Balanced Scorecard and Responsibility Accounting

Balanced Scorecard and Responsibility Accounting are two popular performance measurement
systems used in managerial accounting. Balanced Scorecard is used to measure and manage a
company's performance across multiple dimensions, while Responsibility Accounting is used to
measure the performance of individual managers and departments.

Table 6: Comparison of Balanced Scorecard and Responsibility Accounting

Model Purpose Key Benefits Limitations

Balanced Measures and tracks -Provides a -Requires careful

Scorecard performance across comprehensive view of selection of key
multiple areas to ensure the business. performance indicators.
alignment with business -Helps managers focus on -Can be complex to
goals. key performance areas. implement.
Responsibility Assigns costs and -Helps managers identify -Can create silos and
Accounting revenues to specific areas of strength and discourage cross-
departments or business weakness. functional collaboration.
units to track performance -Provides a clear picture -Requires careful
and allocate resources. of performance at the selection of cost and
departmental or business revenue centers.
unit level.

5.3. Comparison of Balanced Scorecard and Responsibility Accounting

Environmental Management Accounting (EMA) is a relatively new accounting model that

incorporates environmental costs and benefits into traditional accounting practices. EMA is used
to identify, measure, and manage environmental costs and benefits, while traditional accounting
models focus primarily on financial costs and benefits.

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 Economics, Commerce and Trade Management: An International Journal (ECTIJ) Vol. 3

Table 7: Comparison of Environmental Management Accounting (EMA) with Other Models

Model Purpose Key Benefits Limitations

EMA Helps managers identify -Helps reduce waste and -Requires specialized
and manage the costs conserve resources. knowledge and
associated with -Enhances environmental expertise.
environmental impacts. responsibility. -May be difficult to
quantify environmental
costs and benefits.
CVP Analysis Helps managers -Helps determine optimal -Assumes linear
understand the pricing and production relationships between
relationship between cost, levels for new products. costs, volume, and profit.
volume, and profit. -Easy to understand and - Ignores the impact of
implement. non-volume related
costs.
ABC Assigns costs to specific -Provides more accurate -Requires detailed data
activities or tasks to cost information. and analysis.
determine the true cost of -Helps identify areas for -Can be time-consuming
products or services. cost reduction. and costly to implement.

The effectiveness of each business model in supporting decision-making will depend on the
specific organizational context and the decision-making scenario at hand. A combination of
different models may be needed to provide a comprehensive approach to cost management and
decision-making.

6. CONCLUSIONS AND LIMITATIONS

In conclusion, the five business models discussed - Cost-Volume-Profit (CVP) Analysis,
Activity-Based Costing (ABC), Balanced Scorecard, Responsibility Accounting, and
Environmental Management Accounting (EMA) - offer different approaches to cost management
and decision-making. Each model has its strengths and limitations, and their effectiveness in
supporting decision-making varies depending on the specific business context. CVP Analysis is
useful for analyzing the relationship between sales volume, costs, and profits and can help
managers make decisions related to pricing, cost management, and product mix. ABC, on the
other hand, provides a more accurate view of the costs associated with different activities and
products, enabling managers to make better-informed decisions about pricing, product design,
and process improvement. The Balanced Scorecard is effective in aligning organizational strategy
with performance measurement and management, enabling managers to monitor progress
towards strategic goals and adjust operations accordingly. Responsibility Accounting allows for
the decentralization of decision-making and accountability, ensuring that individual managers are
responsible for their departmental performance. Lastly, EMA provides insights into the
environmental costs and impacts of organizational operations, enabling managers to make
informed decisions that balance environmental and financial concerns. CVP analysis helps
managers make decisions about pricing, product mix, and sales volume by analyzing how
changes in these variables affect a company's profits. By understanding the impact of changes in
sales volume and cost structure, managers can make more informed decisions about how to
maximize their profits. ABC, on the other hand, provides a more accurate picture of a company's
cost structure by allocating costs to individual products and services based on the activities
required to produce them. This allows managers to make better decisions about pricing, product
mix, and resource allocation, as they have a better understanding of the true cost of each product
or service. Both CVP analysis and ABC have their unique strengths and weaknesses, and

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 Economics, Commerce and Trade Management: An International Journal (ECTIJ) Vol. 3
companies often use them in combination to get a more comprehensive understanding of their
cost structure and profitability.

There are several limitations to this analysis. Firstly, this is not an exhaustive list of all
managerial accounting models available, and there may be other models that could be more
suitable in specific business contexts. Additionally, the effectiveness of each model may vary
depending on the organization's size, industry, culture, and management style. Secondly, the
analysis is based on theoretical concepts and may not fully reflect the real-world challenges of
implementing and using these models. Lastly, the analysis is limited by the availability and
quality of data used to demonstrate the effectiveness of each model. Further research is needed to
fully understand the benefits and limitations of each model and how they can be applied in
different business contexts.

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