Accounting Fundamentals - Desklib

This article covers Accounting Fundamentals, Break-even analysis, Management accounting techniques, importance of management accounting and limitations of break-even analysis. It also includes solved questions related to break-even analysis and management accounting.

Accounting
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) Discuss the limitations of break-even analysis...................................................................................5
QUESTION 2.................................................................................................................................................6
(a) Discuss the importance of management accounting, and how it differs from what financial
accounting provides................................................................................................................................6
(b) Discuss three techniques by which the management accountant can achieve the objectives of
management accounting.........................................................................................................................7
REFERENCES................................................................................................................................................8

INTRODUCTION
Accounting is a circle or way of approaching the collecting, summarizing, analyzing and
presenting of cash transfer information. To comprehend the real definition and essential basics of
accountancy, one must first grasp the multiple parts of bookkeeping. Accounting's main goal is
to keep track of all of a company's financial activities. Accountancy, often referred as auditing, is
the process of identifying and recording transactions.
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) Discuss the limitations of break-even analysis
Break-even theory is the review of a company's benefits and expenditures in relationship to
its overall sales, with the goal of determining the quantity at which the company's income and
expenses will be equivalent. The break-even point (BEP) is the moment where sales revenue
matches overall cost and net earnings equals zero. This is sometimes referred to as the "neither,
no-loss" point. These are mentioned limitations of break even analysis such as:
 Whenever break-even knowledge is based on accounting information, as is often the case,
it may be subject to a variety of restrictions. For instance, assumed costs are ignored,
amortization calculations are incorrect, and overheads are improperly allocated. As a
result, break-even assessment is only sound and relevant if the business in question keeps
a competent accounting system and employs suitable managerial accounting processes
and technologies. The numbers must be accurate and reliable. Unless the break-even
analysis is documented information, it should be modified to account for the differences
in labor and materials prices.
 The nature of break-even analysis is static. It is predicated on the premise that there is a
predetermined link between income and expenses on the one side, and inputs from the
other. Nevertheless, expenditures and revenues may fluctuate over time, rendering an
estimate long term average inaccurate. As a result, break-even assessment is more
beneficial in situations that are reasonably stable and sluggish as opposed to
circumstances that are exceedingly unstable, unpredictable, and quickly shifting.
 The output in a given time may not be the sole driver of costs in that quarter.
Maintenance costs, for instance, may be the outcome of making an assessment or a
planning for future production, making it impossible to assign them to a specific period
of time.
 In a break-even analysis, it's extremely challenging to account for selling costs. Since
variations in marketing prices are a source, not an effect, of seasonal fluctuations and
sales, this is the case. Furthermore, the link among production and marketing
expenditures is inherently variable throughout time, making projections from the present
into the foreseeable erroneous.

QUESTION 2
(a) Discuss the importance of management accounting, and how it differs from what financial
accounting provides.
The providing of financial as well as non financial judgment knowledge to administrators is
known as management accounting. In management accounting, or managerial accounting,
administrators utilize bookkeeping data to better understand one when making decisions in their
businesses, allowing them to manage and govern more effectively.
Proper planning: Proper planning is not only for present era strategies, but also for the creation of
proposals in the coming. Info concerning the usefulness and alternate occurrences of multiple
methods is required. Management accounting offered all information through controlling
accountancy fare supply allocation with long- and short goals. Makes a long-term budget plan.
Effective management control: Supervision is essential to ensure that all of the organization's
operations were carried out in accordance with the plan. Compared with predefined certification
and the construction of Liability Centers can be used to effectively control actual works. In major
corporations, managing management can be achieved directly.
Management Accounting Financial Accounting
Data and information used and presented by
this accounting framework may be financial or
non-financial.
Financial accounting system always use and
provide financial data and information.
Internal stakeholders such as managers,
owners, board members are the users of
management accounting data.
Financial accounting provides its data for the
use of external stakeholders such as
shareholders, government, investors,
competitors, etc.
Managerial accounting do not follow any
specific formulas or formats in preparing and
recording the data.
Financial accounting is abide with legal
compliances to follow a pre-described format
for presentation of data and information.

(b) Discuss three techniques by which the management accountant can achieve the objectives of
management accounting.
Marginal analysis: The primary focus of margin analysis is on the cumulative purposes of
improving production. Among the most significant and essential approaches in financial
management is margin analysis. It comprises determining the ideal sales mix for the company's
items by calculating the initial investment.
Constraint analysis: The assessment of a corporation's assembly lines uncovers stock solutions,
the inefficiency they cause, and their effect on the corporation's potential to deliver sales and
profits.
Capital budgeting: Capital budgeting is the process of analysing information in order to make the
critical actions about operating expenses. Managerial accountants use capital budgeting analysis
to compute the present value (NPV) and internal rate of return (IRR) to assist managers in
making new investment decision.

REFERENCES
Books and Journal
Gidea, M. and Katz, Y., 2018. Topological data analysis of financial time series: Landscapes of
crashes. Physica A: Statistical Mechanics and its Applications. 491. pp.820-834.
King, R. and Clarkson, P., 2015. Management control system design, ownership, and
performance in professional service organisations. Accounting, Organizations and
Society. 45. pp.24-39.
Mistry, V., Sharma, U. and Low, M., 2014. Management accountants' perception of their role in
accounting for sustainable development: An exploratory study. Pacific Accounting
Review. 26(1/2). pp.112-133.
Thomas, T. F., 2016. Motivating revisions of management accounting systems: An examination
of organizational goals and accounting feedback. Accounting, Organizations and
Society. 53. pp.1-16.