Accounting Fundamentals: Techniques, Importance, and Limitations

This report covers the basics of accounting, including the importance of management accounting, techniques used by management accountants, and limitations of breakeven analysis. It includes a calculation of the break-even point for a product, a discussion of the differences between financial and management accounting, and techniques used by management accountants to achieve their objectives.

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 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 referred to as the procedure of the data entry as well as recording,
analysing, summarising and reporting. These data relate to the financial transactions of
corporations and businesses. Operations of the business enterprise over the accounting period
which is the key to prepare the financial statements. The organization makes use of the accounts
in order to make decisions relating to cost assessment and planning. This report will deal with
the management accounting, its importance and how it varies from financial accounting. Further
it will include techniques of management accounting and limitations of breakeven analysis.
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 breakeven analysis.
The breakeven point is something which represents that the volume of the production where
the total cost is equivalent to the total sales revenues which results in the no loss and no profit
situation. There are many assumptions to this analysis which includes that the cost may be
separated into variable and fixed and components. Secondly, fixed cost shall remain constant at
all the output volumes. The limitations to the breakeven analysis includes the following-

 One of the limitation to the break- even analysis is that there is an assumption that just
one of the product is produced or that the product mix shall remain unchanged is very
difficult to find it in practice. this assumption has made the analysis difficult to put in
practice as it is not possible for the organization top make the product mix unchanged.
 Another limitation is that it depends only on the reliable data which means the accuracy
of the breakeven analysis is solely dependent upon the accuracy of data and if there is
wrong calculation or fluctuating cost, the breakeven analysis turns out to be the non-
useful tool (Jahangir, Nagayev and Saiti, 2020).
QUESTION 2
a. Discuss the importance of management accounting, and how it differs from what financial
accounting provides.
Management accounting can be referr3ed to as the practice which involves identification,
measuring, interpreting, analysing and communicating the financial information to the managers
so that the organizational goals are achieved. This varies from the financial accounting as the
intended aim of the managerial accounting is mainly to assist the users internal to company so
that well informed decisions are taken of business.
The importance of this is that it helps in raising profitability. The management accounting
plays an important role in the enhancement of profits of firm as it makes the company cost
conscious and also assist in the prevention of the extra expenses. Moreover, it also sets the
quality standards which must be met by the companies when producing their products so that
sales is enhanced, thereafter profits will be increased (Birt, and Arbez, 2019).
Difference:
Basis Financial accounting Management accounting
Reports It mainly summarises the reports for
the financial position of the
company.
It prepares the detailed and
complete report on the various
information such as cost, budget,
etc.
Time frame These are generally prepared at the
end of financial year.
It is prepared in accordance with
the requirements and needs of
company (Tovbin, 2018).

b. Discuss three techniques by which the management accountant can achieve the objectives of
management accounting.
The techniques which may be used by the management accountant so that the aims of te4
accounting can be achieved includes the following-
 Funds flow statement: A management accountant makes use of this technique so that it
can analyse changes in financial position of the business between two of the dates. It
mainly informs as to from where the funds are being coming in business and how it may
be used in organization. It also helps in making the financial analysis and control,
comparative studies and future guidance.
 Cash flow statement: It is an essential technique for companies as it provides the detailed
information as to what are the cash outflows and inflows. The cash flow statement is an
essential tool of the cash control as it concludes the sources of the cash inflow and makes
use of cash outflows so that liquidity analysis can be done.
 Revaluation accounting: The management accountant with the help of this technique can
assure the preservation and maintenance of capital of company. It also brings in the
account any impact of the price changes on preparing the financial statement
(Sledgianowski, Gomaa and Tan, 2017).

CONCLUSION
It is concluded from this report that there are different types of accounting which may be
used by companies, of which the foremost important is management and financial accounting.
The former helps in assisting the decisions of the company as it assess in planning, controlling
and analysing the finances of the company. There are carried techniques which may be used by
management accountant such as revaluation accounting, cash flow and fund flow statement and
many others.

REFERENCES
Books and Journals
Birta, L.G. and Arbez, G., 2019. Modelling and Simulation Fundamentals. In Modelling and
Simulation (pp. 19-53). Springer, Cham.
Dutta, S. and Patatoukas, P.N., 2017. Identifying conditional conservatism in financial
accounting data: theory and evidence. The Accounting Review. 92(4). pp.191-216.
Jahangir, S.R., Nagayev, R. and Saiti, B., 2020. Waqf Fundamentals, Principles, and Modern
Applications. In Challenges and Impacts of Religious Endowments on Global
Economics and Finance (pp. 1-22). IGI Global.
Sledgianowski, D., Gomaa, M. and Tan, C., 2017. Toward integration of Big Data, technology
and information systems competencies into the accounting curriculum. Journal of
Accounting Education. 38. pp.81-93.