Accounting Fundamentals: Break-even analysis and Management Accounting

This article covers break-even analysis and management accounting. It explains how to calculate break-even point, profit, and discusses the limitations of break-even analysis. It also discusses the importance of management accounting and how it differs from financial accounting. Additionally, it explores techniques for achieving management accounting objectives. The article includes references to relevant books and journals.

Fundamentals

Contents
Contents...........................................................................................................................................2
QUESTION 1- Kerrigan Ltd makes and sells product A. The current selling price is £11 and the
total of variable costs per unit is £6. The fixed costs of production are £350,000 and the company
currently sells 75,000 units..............................................................................................................1
(a) Calculate the break-even point (in units and revenues) of product A for Kerrigan Ltd........1
(b) Calculate the profit made on sales of 75,000 units................................................................1
(c) The company will make an advertising campaign costs £10,000 and will improve the
product specifications, which will increase the variable cost per unit by £1. This is expected to
allow the company to increase the selling price to £13 and the sales is expected to be 80,000
unites. Calculate the new profit figure for the improved product................................................1
(d) Discuss the limitations of break-even analysis......................................................................2
QUESTION 2..................................................................................................................................3
(a) Discuss the importance of management accounting, and how it differs from what financial
accounting provides.....................................................................................................................3
(b) Discuss three techniques by which the management accountant can achieve the objectives
of management accounting..........................................................................................................4
REFERENCES................................................................................................................................6

QUESTION 1- Kerrigan Ltd makes and sells product A. The current selling
price is £11 and the total of variable costs per unit is £6. The fixed costs of
production are £350,000 and the company currently sells 75,000 units.
(a) Calculate the break-even point (in units and revenues) of product A for Kerrigan Ltd.
Answer (a)
Break even point - units
 Units = fixed cost / (Revenue per unit or the selling price - Variable cost per unit)
 350,000/(11-6) = 350,000/5=70,000 units
Break even point - revenue
 Revenue = fixed cost/contribution margin
 To get the contribution margin: selling price-variable cost = 11-6= 5
 350,000/5=70,000 revenue
(b) Calculate the profit made on sales of 75,000 units.
Answer (b)
75,000 units x 11 selling price = 825,000 (profit before deduction of fixed cost)
Profit with deduction of fixed cost
Fixed Cost = 350,000
825,000-350,000 = 475,000
(c) The company will make an advertising campaign costs £10,000 and will improve the product
specifications, which will increase the variable cost per unit by £1. This is expected to
allow the company to increase the selling price to £13 and the sales is expected to be
80,000 unites. Calculate the new profit figure for the improved product.
Answer (c)

80,000 (units) x 13 (selling price) = 1,040,000 without deduction of fixed cost
With deduction not fixed cost
Fixes cost becomes 360,000 because it there was an additional 10,000 cost from advertising
campaign from 350,000+10,000=360,000
1,040,000 - 360,000 (fixed cost) = 680,000
(d) Discuss the limitations of break-even analysis.
Answer (d) The word "break-even point" refers to a measuring instrument employed during
financial reporting, commerce, and economy to define the position at which overall income
and expenses are equal. There are a number of limitations of this concept and thus they are
elaborated in a detailed manner below-
 Unrealistic expectations- Commodities do not sell at the identical cost at varying
production rates.
 Selling is uncertain to match production.
 The majority of companies offer multiple products.
 Instead of being a decision-making instrument, this is a preparatory assistance.
 The breakeven position is marked by assuming both income and expenses would remain
constant regardless of production.
 It is not really a realistic concept since it implies that selling and output would stay
constant at all times (Chaffer and Webb, 2017).
 Another of the drawbacks of a breakeven concept computation is that it only applies to a
specific brand, which makes it difficult for a corporation with multiple goods.
 The assumption that selling prices stay unchanged at all units of production is unrealistic.
 Generating break-even graphs and calculating the breakeven line takes a bit of effort.
 When an organisation calculates a goal using the breakeven level calculation, it may
establish an objective that is excessively large, causing pressure.

QUESTION 2
(a) Discuss the importance of management accounting, and how it differs from what financial
accounting provides.
Answer (a)
Statistical data was needed by administration for tasks such as planned, supervision,
coordinating, motivating, organising, and employment. The numerical method must not only be
linked to the ancient and modern, but also with the prospective. In all of those sectors,
managerial accountancy must serve a critical responsibility (Ejiogu and Ejiogu, 2018).
Employees at all stages of administration are trying to ensure that the organisation as a whole
performs well. As a result, every tier of administration requires data on the productivity of
personnel in the particular sector so that they could enhance it if necessary. Managerial
accountancy is the only way to meet the needs of lower stages of government. Whether there is
an increasing volume of manufacturing, modernisation, or new technology advancements, it is
necessary to maintain the corporate organisation. In addition to maintain an appropriate level of
governance in a company, administration must establish standards for each sort of behaviour.
Difference between management accounting and Financial accounting
1. Systems- Financial accountancy is exclusively concerned with making an income, not
with the whole operation of the organisation. Management accountancy, on the other
hand, searches for barrier activities and investigates alternative methods for improving
profitability by reducing slowdown difficulties.
2. Reporting focus- The goal of fiscal accountancy is to provide financial information that
can be communicated with inner and exterior parties, as well as the broader population.
Management accountancy is concerned with internal monitoring of performance
information (Fleischer, 2021).
3. Aggregation- Fiscal accountancy examines the overall company, whereas management
accountant provides additional comprehensive information. Management accountancy is
concerned with specific reporting such as earnings by item, line of products, client, and
geographical location.

4. Efficiency- Fiscal accountancy is used to evaluate on a company's effectiveness and
growth. Management accountancy provides information on what is generating an issue as
well as how to resolve it.
5. Timing- Finance accounts must be submitted at the end of each reporting year, although
management accounts may well be given quite often to offer executives with timely
insights.
6. Proven information- To verify that finance data is accurate, a high degree of expertise is
required. For documentation, fiscal accountancy depends on reliable statistics, but
management accountancy typically works with estimations rather than proved realities.
7. Standards- There really is no system of regulations for compiling management
accountancy data for corporate usage. Finance accountancy, on either extreme, should
adhere to a variety of bookkeeping principles (Gamage, 2016).
8. Time period- Fiscal accountancy is chronologically oriented since it examines finance
outcomes which have already previously accomplished. Prediction is a feature of
management accountancy that focuses to the prospective.
(b) Discuss three techniques by which the management accountant can achieve the objectives of
management accounting.
Answer (b)
Different techniques on management accountants
 Financial Preparation: Finance preparation is the process of determining in ahead
which finance operations are required for a company to fulfil its core goals. It entails
identifying the company's shorter and longer fiscal goals, establishing fiscal management,
and creating a finance method to meet those goals. The importance of fiscal strategies in
achieving the highest possible yield on invested money cannot be overstated. Economic
plans can regulate the sum of money necessary, the suppliers of finances, the calculation
and balance of payments, the usage of loan and stock financing, and the assessment of the
optimal quantity of funding in different securities, among other things (Hrasky and Jones,
2016).
 Financial Statement Assessment: The purpose of the research is to assess the
importance and interpretation of the company's financial information in order to

anticipate potential income, the capacity to repay current borrowing obligations
deadlines, and the viability of a solid distribution payout. Comparing fiscal accounts,
market analysis, assets and liabilities, and profitability ratios are some of the tools used in
this type of study. This study yields a representation of the data that could benefit
company leaders, shareholders, and debtors.
 Standard costing: It is the process of establishing conventional expenses under very
effective system parameters, comparing real expenses to the benchmark, calculating and
analysing variability to determine the causes, identify the responsible party, and consider
taking corrective intervention so that negative situations don't occur afterwards. This
element is required for price management.
 Budgetary control: It is a technique used by managerial accountants to organize and
regulate the company's multiple tasks. Budgetary management is a critical tool for
steering corporate activities in the right path, i.e., achieving an acceptable yield on
investments (Hyndman and McKillop, 2019).

REFERENCES
Books and journals
Chaffer, C. and Webb, J., 2017. An evaluation of competency development in accounting
trainees. Accounting Education. 26(5-6). pp.431-458.
Ejiogu, A. R. and Ejiogu, C., 2018. Translation in the “contact zone” between accounting and
human resource management. Accounting, Auditing & Accountability Journal.
Fleischer, N. I., 2021. KIT-Studium und Lehre-Lehrstuhl für Management Accounting-
Abschlussarbeiten-abgeschlossene Arbeiten.
Gamage, P., 2016. Big Data: are accounting educators ready?. Journal of Accounting and
Management Information Systems. 15(3). pp.588-604.
Hrasky, S. and Jones, M., 2016, December. Lake Pedder: Accounting, environmental decision-
making, nature and impression management. In Accounting forum (Vol. 40, No. 4, pp.
285-299). No longer published by Elsevier.
Hyndman, N. and McKillop, D., 2019. Accounting for the Public Sector at a Time of Crisis.