Managing Finance and Cost in Business: A Case Study

This case study explores the importance of managing finance and cost in business. It covers topics such as calculating break-even point and margin of safety, income using absorption and marginal costing, understanding different types of cost and their relevance in pricing decision, calculating variances, and preparing budgets for operational control.

CASE STUDY

TABLE OF CONTENTS
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Calculation of break- even point and margin of safety...............................................................3
Income using absorption and marginal costing...........................................................................4
PART B............................................................................................................................................6
Understanding of different types of cost and there relevance in pricing decision......................6
Calculation of all variance..........................................................................................................7
Preparation of budget to control operation..................................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Managing the finance is the most important thing for the company and its success. This is
majorly because of the fact that if the money will be manages and allocated in proper manner
then this will increase the profitability of the company to a great extent (Klopotan, Zoroja and
Meško, 2018). Hence, the present report will start by calculating the BEP in order to know the
profitability of the company. Further, the income on basis of both marginal and absorption
costing will be calculated. Also in next part the different types of cost and their relevance over
the pricing decision will be highlighted. Further the different types of variance will be calculated
and after that budget for operational control will be made.
PART A
Calculation of break- even point and margin of safety
The break- even point is referred to as the point wherein the total cost or the expenses and the
total sales are equal. This point can also be referred to as the point wherein the company faces a
no profit no loss situation. This is a simplest form through which the company can facilitate the
fact that revenue from a product has the ability to cover all the cost of producing the goods and
services. The margin of safety is the difference between the actual or the budgeted sales with the
level of breakeven sales.
Particulars Formula Figures (in £)
Selling price per unit 24
Variable cost per unit 18
contribution per unit
Selling price per unit - variable cost
per unit 6
Budgeted fixed cost 800000
BEP (in units) Fixed cost / contribution per unit 133333
BEP (in £) BEP units * SPU 3200000
Actual sales 3360000
BEP sales 3200000
Margin of safety Actual sales - BEP sales 160000
BEP as a % of Budgeted sales 3200000/3360000*100 95%

Margin of safety as % of budgeted
sales 160000/3360000*100 5%
From the above calculation of BEP it can be interpreted that BEP that is the point where the
company will have no profit no loss situation is at point where the sales is 133333. At this point
of unit the sales is 320000. Also, the margin of safety is 5 % of the sales that is 160000.
Income using absorption and marginal costing
Marginal costing- this is a costing method or technique in which the variable cost that is the cost
incurred is charges to the unit of cost and the fixed cost is written off to the time period against
the contribution.
Absorption costing- this is a costing method in which all the direct manufacturing cost are
assigned to the unit of goods being produced. This can also be referred to as the finished goods
and services which includes all the cost of direct material (Adhikary and Kutsuna, 2016).
Profitability statement as per marginal and absorption costing method is enumerated below:
Given that
Particulars Figures (in £)
Selling price per unit 15
Direct material cost per unit 4
Direct labour cost per unit 3
Variable overhead cost per
unit 2
Fixed overhead 12000
Particulars Figures (in units)
Budgeted production and
sales 5000
Actual production 4800
sales 4700
Calculation of cost per unit as per marginal costing
Particulars Figures (in £)
Direct material cost per unit 4
Direct labour cost per unit 3
Variable overhead cost per
unit 2
Total cost per unit 9

Per unit cost assessment according to absorption costing method
Particulars Figures (in £)
Direct material cost per unit 4
Direct labor cost per unit 3
Variable overhead cost per
unit 2
Fixed overhead 2.4
Total cost per unit 11.4
Income statement (Marginal costing)
Particulars Figures (in units)
Per unit
cost
Figures (in
£)
Figures (in
£)
Sales 4700 15 70500
Less: COGS
Opening stock 0 9 0
Purchase 4800 9 43200
Less: closing stock 100 9 900 42300
contribution 28200
Less: fixed expenses 12000
Net profit 16200
Profitability statement (Absorption costing)
Particulars Figures (in units)
Per unit
cost
Figures
(in £)
Figures
(in £)
Sales 4700 15 70500
Less: COGS
Opening stock 0 11.4 0
Purchase 4800 11.4 54720
Less: closing stock 100 11.4 1140 53580
Net profit 16920
From the above calculation it is clear that the absorption costing method is more effective in
calculating profit. This is majorly because of the fact that with the use of absorption costing the

profit of the company was 16920 which is only 16200 in case of marginal costing. Thus, the use
of absorption costing is more profitable for the operations and calculation of cost and profit.
PART B
Understanding of different types of cost and there relevance in pricing decision
The cost the value of money which is being uncured by the company at time of executing of the
activities of the business. Without incurring cost no business or any other activity can be run as
without money no business can operate or perform any other activity. There are many different
types of cost which can be used and incurred by the company when they operate in the business
environment. The various type of cost being used by the Sydney Company are as follows-
Fixed cost- this is a type of cost which remains fixed even if there is no production of any
business activity being undertaken. The fixed cost remain same at every level of production
whether be it low, medium or large scale production. This type of cost is very relevant to be
analysed at time of pricing decision because this cost is charged in the price expected from the
consumers. So the fixed cost is always added in the price which is charged to the consumers.
This is majorly charged because of the reason that the fixed cost is always there and even if the
production is not there then also this cost is charged to the consumer price.
Variable cost- this is the cost which is dependant over the level of production. If the production
is low then the cost will also be low and if the production will be high then the cost of production
will also be high. This cost has not much impact on the pricing decision because of the fact that
if the production will be there then only the cost will be incurred. Hence, this type of cost does
not have much impact over the prices of consumer as if the production will take place then this
cost will be added in the price and otherwise not.
Role of budget
The budget is referred to as the estimation of the income and expenses of the company in order
to manage the working of the company in effective manner. The role of budget is to provide the
guidance to the employees that how they have to manage the work in proper and effective
manner. Also, another major role of budget in working of company is that this help the
employees in estimating the fact that how much money they have to allocate in the business
activities and they have to manage the work in that particular amount of money only.
Calculation of all variance

The variance is referred to as the difference between the planned activity and the actual activity
which has occurred. There are many different types of variance which the company have to
calculate the cost of the variance.
Material variance- this is defined as deviation of difference between the actual cost incurred in
acquiring direct material and the cost which was expected for that material.
Labour variance- this is a type of wherein the actual cost of the labour differs from the budgeted
or the assumed cost of acquiring the labour (Babajide, Olokoyo and Taiwo, 2016).
Fixed overhead variance- this fixed overhead variance is defined as the deviation between the
actual fixed overhead variance and the budgeted fixed overhead variances.
All these variance help the company to analyse the fact that whether the company is able to
manage the cost of the companies in the managing the cost.
Material variance
Particulars Formula Budgeted Actual Figures
Quantity 1500 25000
Price 0.25 0.48
cost 750 12000
Direct Material Price
Variance:
(Standard Price – Actual
price) * Actual quantity
-5750
Material quantity or usage
variance
SP (SQ – AQ) -5875
Direct material cost
variance
Standard cost – actual
cost
-11250
From the analysis of the above data it is clear that the direct cost of variance is the unfavourable
that is (11250) which is negative for the company. This means that the actual cost of the
company incurred over the material cost is more than the standard cost.
Labour variance
Particulars Formula Budgeted Actual Figures
Hours 4030 4000
Price 10.4 9
cost 41912 36000
DL Rate Variance ( SR − AR ) × AH 5600
(F)
Direct labor quantity
or efficiency variance
SR x (SH – AH) 312 (F)

Total direct labor
variance
(SR x SH) – (AR x AH) 5912
(F)
With the help of the above data calculation the total variance of direct labour is favourable that is
5912. This states that the cost of material which was incurred in actual was less than the actual
cost incurred.
Fixed overhead expenditure variance
Particulars Formula Budgeted Actual Figures
Variable overheads 15600 17000 1400
(A)
Fixed Manufacturing
overhead
23400 2500 1600
(A)
The fixed cost variance is also helpful in analysing the deviation in the actual and budgeted fixed
cost. Thus, with help of above calculation it is clear that the fixed cost is more than the budgeted
fixed cost. This is because the variance was in negative that is adverse
Preparation of budget to control operation
The budget is a tool which includes the estimation of the income and expenses which might incur
during the course of action (Kapinos, Gurley-Calvez and Kapinos, 2016). This is very necessary
for the company to predict or estimate the cost and income in advance so that the company can
direct the policies in order to manage the fund in proper and effective and optimal manner.
Particular Quarter 1 Quarter 2 Quarter 3 Quarter 4
Sales unit
(Forecasted)
9000 10000 11000 12000
Planned ending
unit of inventory
1000 1000 1000 1000
Total production
(A+B)
10000 11000 12000 13000
Opening
inventory
2500 1000 1000 1000
Units to be
produced (C-D)
7500 10000 11000 12000

CONCLUSION
In the end it is concluded that finance and its proper allocation in the business is very
necessary for increasing the profitability of the company. With this it is clear that managing the
money within the company is very necessary for the company to manage all the calculation in
proper manner as this help the company in assessing that whether the company is doing well or
not.

REFERENCES
Books and Journals
Adhikary, B. and Kutsuna, K., 2016. Small Business Finance in Bangladesh:
Can'Crowdfunding'Be an Alternative?. Review of Integrative Business and Economics
Research. 4. pp.1-21.
Babajide, A.A., Olokoyo, F.O. and Taiwo, J.N., 2016. Evaluation of effects of banking
consolidation on small business finance in Nigeria. In Proceedings of the 23rd
International Business Information Management Association Conference (pp. 12522-
12540).
Kapinos, P., Gurley-Calvez, T. and Kapinos, K., 2016. (Un) expected housing price changes:
Identifying the drivers of small business finance. Journal of Economics and
Business. 84. pp.79-94.
Klopotan, I., Zoroja, J. and Meško, M., 2018. Early warning system in business, finance, and
economics: Bibliometric and topic analysis. International Journal of Engineering
Business Management. 10. p.1847979018797013.