Accounting Fundamentals: Break-even Analysis, Management Accounting Techniques

This report covers the importance of management accounting, techniques to achieve its objectives, limitations of breakeven analysis, and break-even analysis of product A for Kerrigan Ltd.

Fundamentals

Contents
INTRODUCTION...........................................................................................................................3
QUESTION 1..................................................................................................................................3
(a) Calculate the break-even point (in units and revenues) of product A for Kerrigan Ltd........3
(b) Calculate the profit made on sales of 75,000 units................................................................4
(c) Calculate the new profit figure for the improved product......................................................4
(d) Limitations of the breakeven analysis....................................................................................4
QUESTION 2..................................................................................................................................5
a. Discuss the importance of management accounting, and how it differs from what financial
accounting provides.....................................................................................................................5
b. Discuss three techniques by which the management accountant can achieve the objectives
of management accounting..........................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
Accounting can be defined as the process or cycle which includes summarising, recording,
analysing and also reporting the fata relating to the financial transaction. It involves the system
of making record and summarising the financial and business transactions and also involves
analysing, reporting and verifying the results also. It is essential to the business to maintain the
accounts of the firm so that it can get to know about the financial health of the organization. This
report discusses about the management accounting, importance of it and how it is distinguishable
from financial accounting. Further it will include limitation of breakeven analysis and techniques
of management accounting.
QUESTION 1
(a) Calculate the break-even point (in units and revenues) of product A for Kerrigan Ltd.
Given information
Selling price 11
Variable cost per unit 6
Fixed cost 350,000
Selling units 75000 units
Break even in units = Fixed cost / sales price – variable cost
= 350,000 / 11 – 6
= 350,000 / 5
= 70,000 Units
Break even in revenues = Fixed cost / Contribution margin ratio
= 350,000 / 375000/825000
= 350000 / 45%
= £777777.77
Contribution margin ratio = contribution / sales
= 5*75000 / 11*75000
= 375000 / 825000
= 45%

(b) Calculate the profit made on sales of 75,000 units
Particulars Amount
Sales 75000*11 825000
Less: Variables 75000*6 450000
Contribution 375000
Less: Fixed cost 350000
Profit 25000
(c) Calculate the new profit figure for the improved product.
New given information
Selling price 13
Variable cost per unit 7
Fixed cost 350,000
Selling units 80000 units
Advertising cost 10000
Particulars Amount
Sales 80000*13 10,40,000
Less: Variables 80000*7 560,000
Contribution 480,000
Less: Fixed cost 350000
Profit 130,000
(d) Limitations of the breakeven analysis.
It mainly tells the firm about how many of their units of the products are being sold so that
the variable and fixed cost of the production can be covered. It is considered as the measure of
margin of safety as it is used mainly from stock and the options trading to the corporate
budgeting for the varied projects. It is considered as an important aspect of business plan as it
assist in the determining cost structure and number of units which are required to be sold os that

profit can be made and cost is covered. It is mainly the no profit or the loss situation of company.
Its limitation includes the following-
 Although the breakeven analysis may tell the company when they will breakeven, it does
not give the insight of how it is likely to happen. Moreover, there is instability in the
demand so when there is gap in market, the breakeven point cannot predict the demand so
it is its biggest limitation that no demand can be predicted with the help of this.
 Another limitation is that there is another assumption that the sales and production
quantities are equivalent and there shall be no change in the closing and opening stock of
the finished product. This assumption holds no good in practice as the sales and
production quantities cannot be equal, and there may be variation in the quantities of both
(Caylor, Chambers and Mutlu, 2021).
QUESTION 2
a. Discuss the importance of management accounting, and how it differs from what financial
accounting provides.
The management accounting generally encompasses various facets of the accounting which
is aimed at bringing improvement in the quality of information which is delivered to the
management regarding the operation metrics. The management accountant makes use of the
information which is relating to sales and cost revenue of the product or service. The importance
of management accounting includes that it provides reliability. This accounting system adds the
reliability to the decision of management by assessing them with the genuine information. It
makes use of the proper scientific techniques and tools so that analysis can be done so that
managers can be assisted in proper management of operations (Ramachandran, and Kakani,
2020).
Basis Financial accounting Management accounting
Publishing and
auditing
These accounts are required to be
audited and published by the
statutory auditors only.
These are made only for internal
use so it is neither audited nor
published by any of the statutory
auditor.
Objective The main purpose of preparing the
financial accounting is that it
Its main purpose is to assist
management in planning and also

provides the financial information of
the company to outsiders (Wang and
et. al., 2018).
decision making by giving them
the detailed information on varied
matters.
b. Discuss three techniques by which the management accountant can achieve the objectives of
management accounting.
There are various techniques to the management accounting which may be used by the
accountant so that its objectives are accomplished. These include the following-
 Graphical and Statistical techniques: The management accountant makes use of various
statistical and the graphical techniques so that information can be made more of
meaningful and its presentation can help the managers in the decision making for
company. These techniques may be used by making use of chart of sales, master chart,
etc.
 Communicating: The failure and success of management is mainly dependent on fact as
to whether the adequate information is provided to management of company at the right
time and in the right form so that enable the management accountant to carry out the
functions of the planning, decision making and controlling in an effective manner.
 Ratio analysis: This technique is used by management accountant in discharging the
basic functions of the forecasting, coordination, planning, control and communication. It
also paves a way for the effective control of the business operations by undertaking the
appraisal of the monetary and physical targets (Dutta and Patatoukas, 2017).

CONCLUSION
It is concluded from this report that accounting plays an important role in the business as it
helps in providing information about the financial health of the company. There are many types
of accounting of which the management accounting helps in bringing improvement in the quality
of the information which is delivered to the management about the business operations. There
are various techniques to it which assist the accountant in achieving the objectives which
includes graphical and statistical techniques, ratio analysis and communicating.

REFERENCES
Books and Journals
Caylor, M.L., Chambers, D.J. and Mutlu, S., 2021. Financial reporting uniformity: Its relation to
comparability and its impact on financial statement users. Available at SSRN 3221183.
Ramachandran, N. and Kakani, R.K., 2020. Financial Accounting For Management|. McGraw-
Hill Education.
Tovbin, Y.K., 2018. Small Systems and Fundamentals of Thermodynamics. CRC Press.
Wang and et. al., 2018. Near-road air pollutant measurements: accounting for inter-site
variability using emission factors. Environmental science & technology. 52(16).
pp.9495-9504.