Management Accounting Report: Contribution, Budgets, and Factors

This report provides a comprehensive analysis of key concepts in management accounting. It begins by defining and explaining the significance of contribution margin, emphasizing its role in decision-making and break-even analysis. The report then explores the concept of limiting factors, detailing their impact on a business's ability to achieve its goals and the importance of proactive planning to mitigate their effects. The discussion further delves into different types of budgets, distinguishing between fixed and flexible budgets, and highlighting their respective applications in planning and controlling business operations. The report underscores the value of budgeting as a tool for forecasting, controlling costs, and improving overall business performance, concluding with a summary of the importance of these concepts in the context of management accounting practices.

Running head: MANAGEMENT ACCOUNTING
Management Accounting
Name of the Student:
Name of the University:
Author’s Note

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Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Contribution and Limiting Factor..........................................................................................2
Different Types of Budgets....................................................................................................4
Conclusion..................................................................................................................................7
Reference....................................................................................................................................8

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Introduction
Costing practices are common in a business organization and the same is done with a
view to reduce the costs so that the overall profitability can be enhanced for a business. The
management of different companies is also looking to avoid unproductive costs and at the
same time minimize the variable costs. This process requires analysis and estimation which is
useful in decision making process for a business. The main purpose of the analysis is to
concentrate on different concepts which are associated with the costing principles for a
business (Mohamed, Kerosi & Tirimba, 2016). The analysis further shows how such
elements have an impact on the decision-making process of the business. In addition to this,
the analysis would also be shooing different types of budgets which can be prepared by a
business and features which re associated with the same.
Discussion
Contribution and Limiting Factor
Contribution may be defined as the amount which is left after deducting all direct
costs from the revenue which is generated by the business. The contribution of a business
represents the amount which is available to meet the fixed costs of the business. The
contribution amount is basically the difference between the profit element and the fixed costs
of a business (Elhamma, 2013). It is therefore imperative that a management of company
considers this aspect in their decision making process as the same related to the overall costs
associated with the business. The relevance of contribution margin is significantly important
as the same forms the basis on which break even analysis is conducted for a business. The
contribution for business is considered to be important as the same separates the profit
element of a business and the fixed costs of the business. The analysis of contribution for a
business effectively allows the management of the company to recognize the estimated sales
which can be anticipated from products and what will be the desired sale price of the

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business. These are the decisions which are considered to be important as the management
firstly needs to ensure that the business is able to cover the fixed costs and achieve the
breakeven point after which the management can focus on profits. It is imperative for a
business to cover the costs in order to continue operations for a longer period.
The contribution margin are computed in a business for taking major decisions plainly
because it measures variable and fixed costs appropriately and shows how much a particular
product line is contributing to the profitability of the business. If a product line is not
contributing as per the expectation of the management than decision can be taken for
selecting an alternative product line or making improvements to the same one. In this manner,
contribution is considered to a major concept in costing and is important for taking decisions
in an organization for various reasons. It has been often noted that a products which has the
highest contribution is the most profitable for the business and therefore the management
should allocate more funds to such a product so that the overall capacity of production is
increased.
Limiting Factor are factors which puts a limit on the capacity of a business to achieve
its goals or enhance its performance. There might be several objectives and goals for a
business for which there is always one or more limiting factor which proves as a hindrance
for the business for achieving its goals. Some of the examples of limiting factor for a business
which can be provided are plant capacity, shortage of resources, and inefficiency of the
labour forces. These factors are required to be considered in a decision making process so
that back up plans can be formulated against the same. It is to be noted that the limiting
factors have a direct impact on the profitability of operations of the business and therefore the
same cannot be ignored. The first step for a management is to identify the probable limiting
factors which can prove as a hindrance in achieving the targets which are set. Once the
limiting factors have been identified appropriate steps can be taken in this regard so that the

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business is able to meet its targets. The steps which can be taken by the business are basically
alternative solutions aimed at reducing the effects of limiting factor on the operations and
production capacity of the business.
In a business organization, which has done full proof planning regarding the activities
and also regarding some of the limiting factors, the same still might not be enough. As one
limiting factor is reduced another one arises and therefore in such cases spontaneous
decisions are to be taken so that the business is able to counter the same effectively.
Therefore, it is clear that limiting factors have a significant impact on the decision making
process and the same needs to be considered by the executives of a company in the planning
stage itself so that a realistic plan can be formulated.
Different Types of Budgets
Budgeting is a practice in a business by all the income and expenses which might be
incurred in a project is estimated. The budgets are prepared in a statement form where all
income and expenses for a particular time frame is estimated considering the present trends of
the market (Olusegun & Arogundade, 2017). It is also to be noted that a budget is an effective
tool which can be used for planning as well exercising control over the operations of the
business. The planning activities which is involved in case of a budget is by estimating the
amounts of income and expenses associated with a business and also by considering how a
business will perform in the long run. The management of the company sets targets which are
consistent with the goals of the business in the budget and thereby appropriately frames the
policies and practices which the employees needs to follow. In term of controlling, the budget
is used as a guideline which the different departments of the business need to follow while
conducting their duties (Siyanbola, 2013). At the end of the period, the actual performance
which is achieved by the business is measured by making comparison with the targets which
is already set in the budget. The differences between the budgeted estimated and actual

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estimates achieved by the business is known as variances which is considered by the
management so that active steps can be taken to make the performance better next period.
There are deferent types of budgets in terms of activity which is prepared by a
business and each type of budget focuses on a different area of operations. Some of the
examples of such budgets are sales budget, production budget, cost budget etc. Another form
of classification of budget is on the basis of fixed and flexible budgets which are prepared by
a business depending on the nature of operations of the business. Fixed budgets are
quantitative plans which are formulated by a business and the same remains constant
irrespective of level of activity of the business and the same is created for a standard volume
of production for a business (Munnell, Aubry & Cafarelli, 2014). This budget is formulated
by a business which is confident that its level of activity would remain constant and no
change would be there in the volume of production. This type of budget does not consider
any change in expenditure arising due to change in the level of activity of the business. The
use for a fixed budget would therefore arise, when the actual level of activity corresponds to
the budgeted level of activity. An example which can be given for fixed budget often is a
mater budget which is prepared for fixed amount of units in a manufacturing concern. From a
realistic perspective, the fixed budget is not accurate as the expenditure and other factors
might increase the budgeted costs and therefore it is not appropriate to consider the costs
constants year by year.
Flexible budgets fulfill the limitations of a fixed budget by considering different level
of production possible for a business and the budget is prepared based on the capacity of a
business. In other words, it can be said that the costs or revenue amounts in the flexible
budget can change depending on the level of production activity of the business (Gómez,
Insua & Alfaro, 2016). Flexible budgets are more applicable for different conditions and
therefore in different circumstances can be used for planning and controlling the activities of

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the business. Furthermore, the flexible budget is very useful for the purpose of planning and
forecasting the activities of the business. In addition to this, it provides a good basis for
making comparison between actual estimates achieved by the business and the budgeted
performance which the business had anticipated (OYEBODE, 2018). One other advantage
which flexible budget enjoys over a fixed budget is that it is more realistic in nature and
therefore is preferred by the senior officials of a business as the same help in decision making
process.
The budgeting practices in an overall estimate are a very useful technique for
exercising control and also for planning ahead for future operations. The budgets which are
prepared irrespective of fixed or flexible budgets contain forecasted income and expenses for
the business which acts as guidelines for the employees while executing their duties. In
addition to this, the budgets also helps in making comparison between actual and budgeted
targets so that any variance in the performance can be identified and appropriate steps can be
taken by the management so that such an instance does not takes place in future operations
(Molenaers et al., 2015). Therefore, it can be rightly said that budgets are valuable tools for
the purpose of planning and controlling the costs and level of activities of a business.
Conclusion
The above discussion appropriately shows the different costing elements for a
business and how the same has an impact on the decision making process for a business. The
application of contribution is effectively done in marginal costing and also for the purpose of
estimating breakeven point for a business. Limiting factors on another hand can be reduced
by appropriate planning on the part of the management. The analysis reveals that both
contribution and limiting factor has a part to play in the planning process of a business.
Furthermore, the discussion also shows the importance of a budget in a business and the types

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of budgets which is available to the management. The discussion also shows the relevance of
budgets in planning and control activities effectively and how the same helps in optimizing
the overall performance of the business.

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Reference
Elhamma, A. (2013). The impact of business strategy on budgetary evaluation in Moroccan
Firms: An emprical study. International Journal of Accounting Research, 42(827), 1-
7.
Gómez, J., Insua, D. R., & Alfaro, C. (2016). A participatory budget model under
uncertainty. European Journal of Operational Research, 249(1), 351-358.
Mohamed, I. A., Kerosi, E., & Tirimba, O. I. (2016). Analysis of the Effectiveness of
Budgetary Control Techniques on Organizational Performance at DaraSalaam Bank
Headquarters in Hargeisa Somaliland.
Molenaers, N., Gagiano, A., Smets, L., & Dellepiane, S. (2015). What determines the
suspension of budget support?. World development, 75, 62-73.
Munnell, A. H., Aubry, J. P., & Cafarelli, M. (2014). Defined contribution plans in the public
sector: An update. Boston, MA.
Olusegun, A. K., & Arogundade, L. S. (2017). The link between agricultural budgetary
allocation and economic growth in Nigeria. International Journal of Business, 4(2),
38-43.
OYEBODE, O. J. (2018). Budget and budgetary control: A pragmatic approach to the
Nigerian infrastructure dilemma. World Journal of Research and Review, 7(3).
Siyanbola, T. T. (2013). The impact of budgeting and budgetary control on the performance
of manufacturing company in Nigeria. Journal of Business Management & Social
Sciences Research, 2(12), 8-16.