Financial and Management Accounting: Break-Even Analysis and Variance Analysis

This article covers financial and management accounting concepts such as break-even analysis, variance analysis, and strategies for eliminating variances. It also discusses the advantages and disadvantages of switching from incremental based budgeting to zero-based budgeting. The article includes calculations and projections of variances, along with possible causes and suggested strategies for correction. The subject is Financial and Management Accounting, and the course code and college/university are not mentioned.

Financial and Management
Accounting

Table of Contents
Question 1........................................................................................................................................3
Question 2........................................................................................................................................4
Question 3........................................................................................................................................7
1. Calculation of three most significant variances between projected and actual (outrun)
figures..........................................................................................................................................7
2. Possible causes of this variances.............................................................................................7
3. Projection of likely consequences of the variances for the businesses....................................8
4. Suggested strategies for elimination or correction of this variances.......................................9
5. Advantages and disadvantages of switching from Incremental based budgeting to zero
based budgeting...........................................................................................................................9
REFERENCES................................................................................................................................1

Question 1
1.
Particulars 2021 (in £) 2020 (in £)
Sales Turnover (A) 612000 970000
Cost of Sales (B) 212000 320000
Direct labor costs © 233000 212000
Gross Profit
A – (B + C) 400000 650000
Indirect expenses
Warehousing Costs 30000 10000
Distribution Costs 55000 28000
Other overheads 35000 17000
Dividend paid 40000 60000
Total Expenses 160000 115000
Net Profit 7000 323000
2.
Gross Profit ratio
Particulars Formula 2021 2020
Gross Profit 400000 650000
Net sales 612000 970000
GP ratio GP / net sales * 100 27.3% 45.2%
Net profit ratio
Particulars Formula 2021 2020
Net Profit
Net sales 612000 970000
NP ratio NP / net sales * 100 1.1% 33.3%

Gross profit state about the trading profits occurred by the company. This is a profitability
generate out of making a trade in the business. The direct trade activity associated with the
organization is associated with this profit margin. In current situation gross profit of the company
for the year 2021 is 27.3% and in the year 2020 the profitability is identified as 45.2%. On the
other hand net profit is a net revenue available for the company after deduction of each
individual expense own by the organization. Net profit margin are the new profitability and
revenue in the business left once all the expenses get deducted from the income of company.
3.
The possible reason behind decline in the profit is such that company get to address the lesser
sales turnover in the year 2021 in comparison to the year 2020. The sales of the company got
affected due to many reasons such as covid. Inflation in economy, reduced buying capacity of
the people in country and such other reasons. All these could cause to the lesser sales and
profitability associated with the business. IN recent time the debtors of the organization took
extra time that could further arise an issue of liquidity in business. Cash flow is high influenced
with thee flow of cash activity in business (Ledley and et.al., 2020). Taking extra time could
cause to an issue in the cash management of the company. Decline in sales turnover could also
become another possible reason behind the organization is facing an issue related to managing
cash in the business.
4.
Company and its directors can adopt strategies like discount strategy. This would favour to the
organization to improve the sales of the company in coming financial year so that better
possibilities can arrive to generate revenue in the business. Directors of the company can sold
interact with the debtors about the payment schedule. Company should adopt a payment schedule
that will direct to the debtors of the company to make the percentage payment on a regular basis.
This will completely influence to the payment cycle of the debtor in business. The third strategy
is possibility the marketing related strategy (Öztürk and Karabulut, 2018). Company can enhance
its sales by adopting an appropriate digital and social media marketing strategy in business. This
will favour to the company to attract more number of customers and stakeholders towards
delivering the business operations.
Question 2
1.

Break-Even analysis
Particulars Formula Figures
Selling price per unit 400
Variable cost per unit 100
Contribution per unit
Selling price per unit -
variable cost per unit 300
Fixed cost 275000
BEP (in units)
Fixed cost / contribution per
unit 917
BEP (in value or monetary terms)
BEP (in units) * selling price
per unit 366666.7
2.
Break even point is a situation in sale at which company get to recover all its expenses involve in
the business. This is a no profit no loss situation where company get to recover all its expenses in
the business. Company get to recover all the potential expenses that has been incurred by the
organization at this stage of sales. Any sale that is made beyond to the break even point is
consider as a profit for the business. Initially company get to design and develop strategy just to
reach out at the break even point in the business (Sintha, 2020). This model direct to the
company to formulate and design suitable strategies to improve the sales once the break even
point is achieved by the organization. Company get to change its policy or strategy in such a way
that company will end up achieving a better sales that could further contribute in the profits of
the company (da Silva Etges And et.al., 2020). Once the company has witnessed the break even
point it gets to make a better strategy that can favour to the organization to achieve better sales
value and target in the business. Break even point also allow the company to set a profitable sales
revenue and targets in the business. Companies design strategies and tactics to achieve the set
target of sales revenue in the business.
3.
Supply of more accurate management accounting information favour to the company to make
better decisions in the business. The gentleman accounting allow the organization to take on both
short term decisions along with the long term decision-making for the organization. Decision

making approach by the company will further inspire to the company to approach the business
objectives. Activity based costing is a technique of assigning and allocating the overhead
expenses of the business based on the activity under pin (Chartady and et.al., 2021). This further
favour the company to identify the actual cost of individual operations and further to maximize
the business profits. Cost allocation further inspire to the management to know and adopt the
best suitable sales strategies that can favour to the company to approach the respective business
objectives.

Question 3
1. Calculation of three most significant variances between projected and actual (outrun) figures
The three most significant variances are computed between projected and outrun in this section is
sales variance, direct cost variance and indirect cost variance.
Sales Variance:
Particulars Budget (£) Actual (£) Variance (£)
Sales Turnover 1560000 820000 740000 Unfavourable
Direct Cost Variance:
Particulars Budget (£) Actual (£) Variance (£)
Direct Cost:
Raw material 400000 275000 125000 Favourable
Labour 170000 240000 70000 Unfavourable
Power 70000 95000 25000 Unfavourable
Storage and delivery 40000 50000 10000 Unfavourable
Total 680000 660000 20000 Favourable
Indirect Cost Variance:
Particulars Budget (£) Actual (£) Variance (£)
Indirect Cost:
Administration 100000 130000 30000 Unfavourable
Advertising and
marketing
20000 10000 10000 Favourable
Premises cost 175000 250000 75000 Unfavourable
Total 295000 390000 95000 Unfavourable
2. Possible causes of this variances
The possible or likely causes of this variances are as follow:
 Budgets preparation strategy: The first causes of the above variances is that the
Concorde construction company prepared the budgets for the whole company rather than
for individual department or processes. The impact of which the company are unable to

identify the cost allocated and incur by each department along with the revenue earned by
each department which has ultimately result into the gap between budgeted and actual.
 Changing business or economic conditions: This is another possible causes of variance
which indicate that the change in the economic condition also leads to variance. Due to
Covid-19 situation and lock-down, the business of contraction has stopped which leads to
reduce in the sales of the company. The ultimate result of which the budgeted and actual
sales of Concorde construction has also reduced which leads to sales variance.
 Expectation: The budget variance also causes when the team of the management exceeds
or underperform expectation. It means due to over expectation of company the variance
of total indirect cost is unfavourable. The actual administration and premises cost of
business is low as compared to budgeted one. While on the other hand, due to high
performance expectation, the direct cost labour, power and storage & delivery is also
leads to higher than the budgeted one. Thus, it can be said that over expectation based on
their estimates is the causes which leads to unfavourable variance between actual and
budgeted cost & revenue (Belouadah and Popescu, 2020).
 Incremental based budgeting: This is also one of the causes of variance because
incremental is not fit for Concorde Construction. This budgeting model does not consider
changes which is one of the major reason behind the variance. It hampers potential
growth and based on unreal assumptions.
3. Projection of likely consequences of the variances for the businesses
Sales Variances: There is an unfavourable variance between actual and budgeted sales
turnover of Concorde construction. The likely consequences of this variance over the business is
that they performance in the market get reduce. The unfavourable sales variance of business will
result into less profit than the expected. This result into lower profitability of business also the
loss of loyal customers.
Direct cost Variances: The total direct cost variance is favourable which means actual total
direct cost is lower than then the budgeted total direct cost variance. However, the also
unfavourable variance in labour cost, power cost and storage & delivery cost. The consequences
of this variance is that the company direct cost will increase in future if they do not focus on
three of this direct cost. By the way, the material variance is favourable which has set off the

total loss against the income. So, this has reduced the consequences of variance on business such
as low profitability etc.
Indirect cost variances: After analysing the calculations, it is identified that the variance
between actual and budgeted total indirect cost of unfavourable. Also, the administration and
premise cost variance is unfavourable whose likely consequences is that the profitability of the
business such as net income will reduce (Fancy and White, 2018).
4. Suggested strategies for elimination or correction of this variances
The following strategies are suggested to the organization in order to eliminate and reduce the
variances are as follows:
 The company should adjust the budget to be more realistic with the help of adopting
zero-based budgeting techniques.
 Further the company should provide training and development session to its employee in
order to reduce the administration cost of the company.
 Further, the organization should take the premise from other builder from where they
need to provide low rent to the company.
 In order to reduce the labour, cost of the business it is advisable to the company that they
should hire cheap labour from the international market. This helps in reducing the cost of
the labour in the given case.
 Lastly, to reduce the storage and delivery cost, it is advisable to the company that they
should adopt Just-in-time inventory management system. This helps the company to
order the stocks directly to construction site rather than premises. This will ultimately
result into the lower delivery cost (Hidayat, Riaventin and Jayadi, 2020).
5. Advantages and disadvantages of switching from Incremental based budgeting to zero based
budgeting
Advantages:
 In this the budgets are prepared on real assumptions which leads to best budgeting.
 The managers able to keep legacy expenses in check.
 This helps the manager to update the budgets based on new changes (Chen and Au,
2022).
Disadvantages:

 The poor resources incentive is a disadvantages of shifting from incremental budgeting
and zero based budgeting.
 The conflict between manager arises to get more resources in their department (Liu,
Schiele and Sun, 2021).

REFERENCES
Books and journals
Belouadah, E. and Popescu, A., 2020. Scail: Classifier weights scaling for class incremental
learning. In Proceedings of the IEEE/CVF Winter Conference on Applications of
Computer Vision (pp. 1266-1275).
Fancy, S. G. and White, R. G., 2018. Incremental cost of activity. In Bioenergetics of wild
herbivores (pp. 143-160). CRC Press.
Hidayat, Y. A., Riaventin, V. N. and Jayadi, O., 2020. Economic order quantity model for
growing items with incremental quantity discounts, capacitated storage facility, and
limited budget. Jurnal Teknik Industri. 22(1). pp.1-10.
Chen, A. and Au, T. C., 2022. Robust causal inference for incremental return on ad spend with
randomized paired geo experiments. The Annals of Applied Statistics. 16(1). pp.1-20.
Liu, Y., Schiele, B. and Sun, Q., 2021. Adaptive aggregation networks for class-incremental
learning. In Proceedings of the IEEE/CVF Conference on Computer Vision and Pattern
Recognition (pp. 2544-2553).
Ledley, F. D. And et.al., 2020. Profitability of large pharmaceutical companies compared with
other large public companies. Jama. 323(9). pp.834-843.
Öztürk, H. and Karabulut, T. A., 2018. The relationship between earnings-to-price, current ratio,
profit margin and return: an empirical analysis on Istanbul stock exchange. Accounting
and Finance Research. 7(1). pp.109-115.
Sintha, L., 2020. Importance of Break-Even Analysis for the Micro, Small and Medium
Enterprises. International Journal of Research-Granthaalayah, 8(6).
Chartady, R. and et.al., 2021. Determination of Hotel Room Rental Rates during Low Season
with the Break-Even Point Analysis Method at Aston Hotels International. Budapest
International Research and Critics Institute (BIRCI-Journal): Humanities and Social
Sciences. 4(3). pp.7364-7373.
da Silva Etges, A. P. B. And et.al., 2020. Advances in value-based healthcare by the application
of time-driven activity-based costing for inpatient management: a systematic
review. Value in Health. 23(6). pp.812-823.
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