Accounting: Break Even Analysis and Management Accounting Techniques

This article discusses break even analysis in accounting, including its limitations, and the importance of management accounting. It also explores the differences between management accounting and financial accounting, and three techniques that aid management accountants in attaining management accounting objectives.

ACCOUNTING

Table of Contents
ACCOUNTING...............................................................................................................................1
Question 1........................................................................................................................................3
a) Calculation of break even point both in units and revenue.....................................................3
b) Calculation of Profit made on sale of 75000 units..................................................................3
c) Calculation of new profit figure..............................................................................................3
d) Limitations of break even analysis.........................................................................................3
Question 2........................................................................................................................................4
Discussion of importance of management accounting................................................................4
Difference between management accounting and financial accounting.....................................5
Discussion of three techniques which aids management accountant in attaining management
accounting objectives..................................................................................................................6
REFERENCES................................................................................................................................8

Question 1
a) Calculation of break even point both in units and revenue
Break even point (in units) = Total Fixed cost / Contribution margin per unit
= 350000 / 5*
= 70000 Units
*Contribution margin per unit = Sales price per unit – variable cost per unit = 11 – 6 = 5
Break even point (in revenue) = Total fixed cost / Contribution margin per unit * sales price per
unit = 350000 / 5 * 11 = 70000 * 11 = 770000.
b) Calculation of Profit made on sale of 75000 units
Sales 825000 (75000 * 11)
Less:
Variable cost 450000 (75000 * 6)
Contribution margin 375000
Less:
Fixed cost 350000
Profit 25000
c) Calculation of new profit figure
Sales 1040000 (80000 * 13)
Less:
Variable cost 560000 (80000 * 7)
Contribution 480000
Less:
Fixed cost 350000 + 10000 = 360000
Profit 120000

d) Limitations of break even analysis
Despite being the most popular and widely used technique of management accounting, break-
even analysis is affected from many limitations that must be kept in mind by management
accountant to be able to carry out their role with great effectiveness and result oriented manner.
Some of these limitations pertaining to break-even analysis are as follows:
1. Break-even analysis technique is based upon the assumption that overall expenses and
costs associated with the production process and operations of the business could be
easily bifurcated into variable and fixed components. But in reality, it is not that easy to
divide overall expenses and costs into fixed and variable category. Accordingly, this
technique losses it validity in cases where it is not possible to divide costs into such
categories.
2. Break-even analysis just provide for the figure of output or sales at which the business
will be able to break-even, however there is no provision of probability that whether the
business will be to achieve or not (Erokhin and et.al., 2019). Also, it is obvious that
demand in the market could never be stable all the time and accordingly, if there found
the between break-even point and demand in the market, the break-even point just
become an ambition rather than releasing results that has been predicted during analytical
stage in the beginning.
3. Under break-even analysis, it is also been assumed that fixed costs always remains the
same at all the level of production activity. However, reality is far away from this
assumption and there are many instances in real world where it can be seen that whenever
the level of production activity changes, there is simultaneous change in fixed costs has
been experienced.
4. The benefits that could be generated from break-even analysis are largely dependent upon
the accuracy of cost data, as if the analyst is dealing with fluctuating and vague data, then
break-even analysis would be a useful and advantageous tool in the accountant's
analytical tool kit.

Question 2
Discussion of importance of management accounting
Management accounting is quite different form of accounting which aids managers in carrying
out their decision making activity with great efficiency and effectiveness. It involves
comparatively long term decision making by utilizing and focusing on forecasting related
activities. Some of the most important factors associated with management accounting that are
enhancing its adoption in real life business activity are as follows:
1. Planning for business operations with future perspective: With the help of non-financial
and financial information that has been presented in a regular interval that is, weekly,
monthly, quarterly or half-yearly allows for budgeting, forecasting and conducting in-
depth analysis for future business operations. Accordingly, management accounting
provide for planning tools that assists management in planning for the future activities of
the business.
2. Aids management in making future decisions for the business: With the help of analytical
tools, forecasting techniques and charts creation that is being facilitated through
management accounting are widely used by management of the company is making
decisions related to the company's current and future affairs (Nielsen, 2018).
3. Identification of signs at early stage that can cause problems to the business: With the
provision of financial and non-financial financial information on regular basis,
management accounting informs management of those products that are not performing
well in the market as management accountant can easily identify the signs of non-
performing products at the earliest possible stage.
4. Aids in strategic management of the company: The nature and frequency with which the
management accounting information are provided to the management, the management
of the company can easily decide upon whether to continue with the current sales strategy
or there are requirements of modifying the same to reach at the desired goals. As there
are no regulation by any kind of law over management accounting, the management has
retained the power to decide on what areas they are required to perform more analysis
and investigations in order to develop the right and effective strategies for their company.

Difference between management accounting and financial accounting
Financial accounting aims to disclose all the relevant financial information of the company to its
users such as creditors and investors in order to allow them to make an informed decisions
(Zakirova and et.al., 2020). However, management accounting is different from financial
accounting on the ground that it does not provide for any information to external parties of the
business and just restricted its provision to the management of the company and thus,
management accounting information is confidential in nature which is meant for enhancing the
efficiency and effectiveness of the operations of the business.
Financial accounting has been made compulsory by the regulatory bodies while management
accounting is not necessarily required to be performed and thus is largely dependent on the
desire of the management of the company.
Financial accounting is done on the basis of historical data of the business and accordingly, the
results of the past performance of the business are indicated in the financial statements of the
company produced through financial accounting techniques (Azudin and Mansor, 2018). On the
contrary, management accounting is done for the future perspectives of the business and thus is
highly future oriented in nature.
Data and information generated through financial accounting are highly precise and 100%
verifiable but both the financial and non-financial information provided by management
accounting can never be 100% precise due to its development was based on prediction and
forecasting which can never be 100% perfect.
Discussion of three techniques which aids management accountant in attaining management
accounting objectives
In an attempt to achieve the goals of the management accounting, management accountant
largely relied upon the following techniques:
Forecasting and trend analysis: These techniques are highly useful in analysing the trends and
patterns of the cost of the products along with the identification of unusual variances causing
difference in the actual and forecasted values. With these techniques, both deviations and reasons
for the occurrence of such deviations can be identified easily and at earliest possible stage.
Product costing and Inventory valuation: This technique involves determination and analysis of
the actually incurred costs of the company associated with the inventory and company's product
as well (Kostyukova and et.al., 2018). The technique provides for allocation and calculation of

overhead expenses along with the detailed assessment of the direct cost of the products that has
been sold.
Capital budgeting: This technique aids management accountant in making decision related to the
capital expenditures of the company by analysing each and every alternative available. This
technique allows for calculating net present value and internal rate of return of each and every
alternative to aid manager in deciding upon where to invest in order to enhance the profitability
of the business.

REFERENCES
Kostyukova, E. I. and et.al., 2018. Improvement cost management system for management
accounting. Research Journal of Pharmaceutical, Biological and Chemical
Sciences. 9(2). pp.775-779.
Azudin, A. and Mansor, N., 2018. Management accounting practices of SMEs: The impact of
organizational DNA, business potential and operational technology. Asia Pacific
Management Review. 23(3). pp.222-226.
Zakirova, A. and et.al., 2020. Analytical support of management accounting in managing
sustainable development of agricultural organizations. In E3S Web of Conferences (Vol.
164, p. 10008). EDP Sciences.
Nielsen, S., 2018. Reflections on the applicability of business analytics for management
accounting–and future perspectives for the accountant. Journal of Accounting &
Organizational Change.
Erokhin, V. and et.al., 2019. Management accounting change as a sustainable economic
development strategy during pre-recession and recession periods: evidence from
Russia. Sustainability. 11(11). p.3139.