Business Finance: Evaluation of C/ unit, BEP, MOS, Contribution, Absorption Costing, Marginal Costing, Standard Costing System, Variance Analysis, Budget Report

This report covers the evaluation of C/ unit, BEP, MOS, contribution, absorption costing, marginal costing, standard costing system, variance analysis, and budget report in business finance. It explains the importance and significance of contribution in business decision making, and how standard costing system and variance analysis play a vital role in controlling costs. The report also includes calculations of MPV, MUV, LRV, LEV & FOEV, and a budget report for Apparel Plc.

BUSINESS
FINANCE

Contents
Introduction.........................................................................................................................................2
Main Body............................................................................................................................................3
Part- A..................................................................................................................................................3
(a) Evaluation of C/ unit; BEP, MOS..........................................................................................3
(b) Importance of contributions along with the suggestion of how it is significant for taking
decisions in firm-...............................................................................................................................4
(c) Compute the amount of profit by absorption costing and marginal costing..................................5
PART B................................................................................................................................................6
(a) Importance of standard costing system and variance analysis................................................6
(b) Calculation of MPV, MUV, LRV, LEV & FOEV:................................................................7
© Preparation of Budget-..................................................................................................................8
CONCLUSION..................................................................................................................................10
References..........................................................................................................................................11

Introduction
Business finance means the money which is obtained by the company owners to meet
their requirements. These needs include starting up of a business enterprise, acquiring finance
to purchase the capital assets, obtaining funds for the smooth functioning of operational
activities etc (Granz, Henn and Lutz, 2020. Availing funds helps the business in dealing with
the contingencies smoothly without hurdles in the operations of a business. Absorption
costing and marginal costing are the important mechanism that a business avails to calculate
the profit by considering the fixed and variable factors) ( Shiratori, 2019). Standard costing
system is a reliable ground on which a company can depend to reduce and control the costs.
Variance analysis acts as the controlling tool as it guides the management to opt for the best
solution. This report looks into the various aspects of marginal costing and absorption costing
along with the evaluations. It also highlights the importance and significance of contribution
in the business decision making process. Furthermore, it also represents the benefits of both
the analysis i.e., standard and variance. In addition to this, it contains the calculations of the
various items that are included in variance analysis and preparation of budget for Apparel
Plc. By considering the standard cost card.
Main Body
Part- A
(a) Evaluation of C/ unit; BEP, MOS

Analysis-
The calculated MOS is 65 % and the budgeted sales is 40000 units. Thus, it can be
clearly interpreted that actual sales will be more than 60% which is obviously less than the
budgeted one.
(b) Importance of contributions along with the suggestion of how it is significant for taking
decisions in firm-
 Contribution can be defined as the per unit basis. It reflects the increment in the
money that takes place for each product or the unit sold. It represents this after
subtracting the variable part of the business’s cost.
 Its importance for the organization is that it helps the business to segregate the fixed
cost and profit elements arriving from the product sales. It is also used to determine
the range of the product in terms of selling price, the profit levels that are expected
from the sales, distributions and commission agents, amount of the commission that is
paid to the members involved in the sales team.
 The contribution shows that part of the product’s sales revenue which in not utilized
by the variable costs, and thus in short it can be said that it contributes in covering the
fixed cost of a business (Julien, 2018).
 low contribution margin is present the business enterprise that use labour intensive
methods of production and the expenses are few & fixed. Whereas, high contribution
margin exists in the industries because they use capital intensive method of
production and so the expenses have higher fixed costs.
Below listed points gives clear understanding on how the contribution is helpful in
making business decisions-
 It helps the firm in selecting the most production. Suppose, there is company that has
crayons manufacturing machine, and it has the potential to produce pencil colour as
well as the wax colour) (Seidl and et.al., 2020). So, the management must choose the
appropriate option out of the two.
 If the contribution margin for the pencil colour higher than that of wax crayons, then
the preference shall be given to product with the higher profitability. Such decision-

making is most often used in a business firm that produces diversified portfolio of
products.
 A business uses this for the purpose of investment and analysing decision. As the firm
can keep eye on the contribution margin of a product that has high performance in
comparison to other products to examine the dependency of the companies.
 Firm can make good use of the contribution as it is applicable at all the levels of
production, business segments and manufacturing. A value can be determined for the
entire company, for a particular firm, for individual products. Thus, in this way, it
helps the business decision making.
(c) Compute the amount of profit by absorption costing and marginal costing

As, it is seen from the above evaluation, the profit attained using both kind of costing method
is 4920 and 4200 respectively. This interprets that the absorption costing has the higher
profit. This costing method causes the business enterprise profit level to appear better than it
actually is in that particular financial year. The reason behind it is that all the fixed costs are
not subtracted from the income until and unless all of the organization’s produced goods are
sold.
PART B
(a) Importance of standard costing system and variance analysis
Advantages of SCS
 The first & primary advantage of standard costing system is that it sets the structure
for the comparison of actual performance. The variances are then measured and the
corrective measures are taken to control and measure the performance in an
organization ( Sadiq and et.al., 2021.
 The standard costing system given in the case has helped the Apparel Plc. To reduce
and control the unnecessary costs.
 This can be used as a motivating tool, because in the system of this kind an incentive
can be given wherein the variances are minimized.
 It is considered to be the most reliable base for determining the performance and
controlling the costs.
Benefits of variance analysis
 It is the efficient management activity that a management performs. (Hui, Manaf and
Shakri, 2019). This method assists the firm to have lower differences from the
planned budgets.

 Variance analysis is said to be controlling mechanism as it helps in examining the
important deviation that occurs between the actual and planned performance. It helps
Apparel Plc. to understand the causes for the deviations and look for the best
measures to overcome them. (Tett, 2019).
 It aids in assigning the responsibilities in the departments wherever required. Like, if
the labour efficiency variance and acquisition of raw material cost difference is found
unfavourable then a firm can expand the command on these departments to work
efficiently and effectively.
(b) Calculation of MPV, MUV, LRV, LEV & FOEV:
SCC
Details Q Price / Standard Quantity
Direct Material 4 kg 4 40000 kg
Direct labour 3 kg 9 30000 kg
Variable Overheads 2 kg 3 20000 kg
Marginal Cost card
Details Q Price Per unit Quantity
Direct Material 5 kg 6 50000 kg
Direct labour 3 kg 10 30000 kg
Variable Overheads 3 kg 4 30000 kg
Fixed Overhead given = 20000
Actual fixed overheads = 15000
This shows that there is no effect on the working capability of labours.

 For the calculation of Fixed overheads expenditure variance
Standard
hrs.
S. P S.C A.H A. R A.C Budgeted
hrs.
Budgeted
price
Budgeted
cost
10000 2 20000 10000 1.5 15000 10000 2 20000
So, Fixed overhead expenditure variance can be derived as= (Budgeted cost – Actual
cost)
Therefore FOEV = (20000 – 15000)
FOEV= 5000.
© Create a Budge report-
For Direct Material
Material Required Quantity
Direct Material @4 Kg per unit 40000kg
Quantity to be produced 40000kg
Rate 4
Total Cost 160000kg
Labour Budget Cost
Units to be produced 10000
Standard Hours 3
Total Standard hours 30000
Rate 9
Wages to be paid 27000
Variable Overhead Cost
Units to be produced 10000
Quantity 2kg
Total Quantity 20000
Rate Price 3
Total Cost 60000

Fixed Overhead Cost
Units to be produced 10000
Budgeted fixed overhead 20000
Budgeted Rate 2
Budgeted Hours 1 hour /unit

CONCLUSION
It is very clear from the above report that, how contribution, BEP, margin of safety
and number of units when desired profit is evaluated. Moreover, the above-mentioned details
on the absorption costing and marginal costing clarification on determination of fiscal goals
by using these two methods. It has also given the clear understanding importance and
significance on contribution in an organization. Standard costing system and variance
analysis plays a very vital role in a company as they are the matrix that provides the base for
finding out the deviations and taking corrective measures against them. With this we can
calculate the budgeted variances and overheads. A variance is interlinked with both that is the
standard as well as the actual against which it is evaluated.

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