Accounting in Business

This document discusses the computation of breakeven point, fixed and variable costs, relationship between contribution margin and variable costs, limitations of the data, and data missing from the case in accounting for business.

Running head: ACCOUNTING IN BUSINESS
Accounting in Business
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1ACCOUNTING IN BUSINESS
Table of Contents
1. Computation of Breakeven point:..........................................................................................2
2. Fixed and variable costs:........................................................................................................3
3. Relationship between contribution margin and Variable costs:.............................................3
4. Limitations of the data:..........................................................................................................3
5. Data missing from the case:...................................................................................................4
References and bibliography:.....................................................................................................5

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1. Computation of Breakeven point:
Revenue per event:
Total Revenue from services 2,25,00,000
Number of services provided 5,000
Revenue per service (22500/5000) 4,500
Variable cost per service:
Floral cost per event 200
Table arrangement costs 100
Soft Drinks and children snacks 500
Wages of temporary staffs 1,800
Total Variable Costs per event 2,600
Fixed Costs:
Annual costs of tents and structures 5,00,000
Annual costs of trucks and vehicles 20,00,000
Annual staff costs 35,00,000
Total Annual Fixed costs 60,00,000
Contribution margin:
Revenue per event 4,500
Less: Variable costs per event 2,600
Contribution margin per event 1,900
Breakeven point in number of events (6000000/1900) 3,158
Breakeven point in amount (3158*4500) 1,42,11,000

3ACCOUNTING IN BUSINESS
The breakeven point in units comes to 3158 events per year. It implies, they need to
serve minimum of 3158 events in year to recover all of their fixed and variable cost which
will make no profit and incur no loss. If they can serve more than 3158 events they would be
earning $1,900 per event as a profit and below that level they will be incurring a loss of
$1,900 per decrease in number of event.
2. Fixed and variable costs:
Assigning cost categories into fixed and variable costs helps in better managing the
costs. It helps in identifying the major cost components easily, which is responsible for an
increase in the total costs. It can give an insight into what measures can be done to become
more competitive without affecting a variable more than another. For example, reducing the
total cost of temp staff hired (a variable cost) and reducing the annual staff maintenance costs
(a fixed cost) might be more effective than just reducing total staffing costs.
3. Relationship between contribution margin and Variable costs:
The contribution margin shows the part of sales revenue that wasn’t spent on variable
costs. In other words, the value that remains when variable costs are subtracted from sales
revenue is considered the amount it takes to cover the company’s fixed costs. It comprises the
fixed costs and the profit of the producer, i.e. after recovering fixed costs from it, the
remaining amount goes to the producer as a profit. Contribution margin is the complementary
to the variable costs, if the variable cost increases then the contribution margin decreases and
vies versa. For example if the variable cost is 60% of the total revenue, the contribution
margin would be 40% of the revenue (Kaplan & Atkinson, 2015).

4ACCOUNTING IN BUSINESS
4. Limitations of the data:
The data presents limitations to how accurate a break-even point analysis can be done.
There are also some limitations regarding the definition of variable and fixed costs since it is
not known what changes are caused by different kinds of events or the amount of events that
take place. All the events may not be of the same size and of same attendance of individuals,
hence the consumptions of soft drinks, use of chairs and tables would be different in every
event. The data provides those expenses as per event basis which is illogical and meaningless
in cost and management accounting (Kaplan & Atkinson, 2015).
5. Data missing from the case:
To be able to provide accurate analysis more detailed data is needed when it comes to
what the client sells her services for. Even though we get the total revenue, it is better to have
data on what the client charges per event. This can also be divided into types of events such
as up to 20 people, 20-40 people, etc. Likewise, to obtain more accurate information
regarding the costs this should also be done so that, variable costs and fixed costs can be
divided up better. For example, are temporary staff mandatory at every event or only after a
certain size, are the table arrangement costs fixed regardless of the type of event and
attendees, etc. being able to discriminate this more effectively would allow for a better
analysis of variable and fixed costs.

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References and bibliography:
Contribution Analysis - Formula, Example, How to Calculate. (n.d.). Retrieved from
https://corporatefinanceinstitute.com/resources/knowledge/finance/contribution-
analysis/
Kaplan, R. S., & Atkinson, A. A. (2015). Advanced management accounting. PHI Learning.
Kokubu, K., & Kitada, H. (2015). Material flow cost accounting and existing management
perspectives. Journal of Cleaner Production, 108, 1279-1288.
Peavler, R. (n.d.). Learn How to Calculate a Breakeven Point with This Helpful Formula.
Retrieved from https://www.thebalancesmb.com/how-to-calculate-breakeven-point-
393469
Staff, I. (2019, April 09). Understanding Contribution Margins. Retrieved from
https://www.investopedia.com/terms/c/contributionmargin.asp