AN APPROACH TO COST—VOLUME—PROFIT ANALYSIS UNDER UNCERTAINTY*

Abstract

ABSTRACT Cost‐Volume‐Profit analysis is a tool of cost accountants aiding in the choice of an optimal course of action in the solution of a managerial problem. C‐V‐P is a limited analysis since all the needs of management in determining the optimal strategy are not fulfilled. Factors pertinent to the choice of the optimal strategy under uncertainty are variables, although traditional C‐V‐P treats these factors as constants. Hence, an approach to C‐V‐P where pertinent factors necessary for decision making are considered as variables is more desirable than traditional C‐V‐P. By introducing uncertainty, it is also beneficial to broaden C‐V‐P to fulfill the following desire of management. Should management choose a course of action based only on its own estimates of the decision parameters or is it advisable to postpone a terminal decision until additional research into the decision parameters is accomplished? Broadened C‐V‐P solves this problem with the aid of Bayesian Decision Theory for the choice of the optimal course of action in the face of uncertainty.

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