Accounting Fundamentals: Break-even Analysis, Management Accounting Relevance, and Techniques

This document provides an overview of accounting fundamentals, including break-even analysis, the relevance of management accounting, and techniques used in planning, controlling, and decision making. It covers topics such as the breakeven point, profit analysis, limitations of break-even analysis, and the importance of management accounting in business operations. The document also discusses various techniques used by management accountants, such as budgetary control, ratio analysis, and marginal costing.

LCBB4001 ACCOUNTING
FUNDAMENTALS

TABLE OF CONTENTS
QUESTION 1.............................................................................................................................3
(a) Breakeven point................................................................................................................3
(b) Profit made on sale...........................................................................................................3
(c) Analysing the new strategy of Solent Ltd by making advertisement expenses of £12,500
................................................................................................................................................4
(d) Limitations of break-even analysis...................................................................................4
QUESTION 2.............................................................................................................................6
(a) Critical analysis of the relevance of management accounting..........................................6
(b) Techniques which is used by the management accountant for objective of planning,
controlling and the decision making......................................................................................7
REFERENCES...........................................................................................................................8

QUESTION 1
(a) Breakeven point
Units = Fixed Cost / Contribution per unit
Fixed Cost (£) = 180000
Contribution per unite = Sales – Variable Cost per unit
Selling price per unit (£) = 5.75
Variable Cost Per Unit (£) = Direct material + Direct Labour + Other Direct Cost
1.75 + 1.35 + .40
3.5
Contribution Per Unit (£) = 5.75 – 3.5
2.25
Break even point in unit = £ 180000 / 2.25
80000 Units.
Breakeven Point in Amount (£) = Breakeven point in unit * Selling price per unit
= 80000 * £5.75
= £460000
Interpretation: Therefore, the break even point of the sandals of the Solent ltd is 80000 in
terms of units and £460000 in respect to the amount or revenue. This is the point at which the
company will be at no profit and no loss situation.
(b) Profit made on sale
Sales (£) = 517500 (90000 * 5.75)
Variable Cost (£) = 315000 (90000 * 3.5 {1.75 + 1.35 + .40})
Fixed Cost (£) = 180000
Profit (£) = Sales – Variable Cost – Fixed Cost
= 517500 – 315000 – 180000

= £22500
Interpretation: Based on the above evaluation, the profit earned by the Solent Ltd on selling
90000 units amounted to the £22500.
(c) Analysing the new strategy of Solent Ltd by making advertisement expenses of £12,500
New Strategy Existin
g New
Increase in sales
price 5.75 6
Increase in sales
unit 90000 94500
Calculation of
Profits
Units 94500
Sales 6 567000
Variable Cost
Materials 1.9 179550
Labor 1.4 132300
Other direct costs 0.4 37800
Contribution 217350
Advertising 12500
Fixed Cost
Production 180000
Profit 24850
Analysis and interpretation: If the Solent Ltd make an investment in its advertisement
expenditure which amounted to the £12500, it will result into increase in the profits of the
company in comparison to its before advertising campaign. Therefore, it is beneficial for the
company to invest in the marketing activities even if there is an increase in the selling price
of the product to 6 and the material cost to 1.9 and labour expense to 1.4.
(d) Limitations of break-even analysis
The BEP analysis is an important tool which is being used by the business organization
for the purpose of determining the point at which the business is at the position of no profit
no loss. But there are certain limitations of it which cannot be ignored. Some of the
limitations of break even point analysis is stated below.

 The BEP tends to keep everything very constant. In other words, it is based on the
assumption that the selling price of the product or the service will remain constant
along with that eth cost function is linear which is not so in actual or in practical
terms.
 There are times in which the cost is semi variable which is not considered while
conducting the BEP analysis.
 Also, the sales proportion and the variable costs does not rise with the rise in the
proportion of the amount of the production value (Martinović, 2019). In case of the
higher level of production, it is less proportionate in comparison to the what it should
be. This is mainly because of the trade discounts that is availed by the organization,
taking advantage of bulk buying and the concession in relation to the higher sales and
so forth.
 Since variable overheads are appropriated on assessed premise, issue of under or over
recuperation cannot be eliminated.
 The price fixation and correlation between two tasks is impossible without thinking
about fixed expenses.
 Break even point analysis also ignores the time factor as over the longer term the cost
changes. Thus, the comparison on the basis of the contribution of the two periods
performance is not possible.
 As per the principle of the marginal cost, a business organization may opt for the bulk
ordering against the lower price while ignoring the production capacity. It creates the
necessities for undergoing the overtime working and even the expansion of the
manufacturing capabilities and capacity which will result into increase in the
production cost and also bringing change to the fixed costs. Therefore, many a times
businesses incur huge losses.
 Another limitation of the break even point analysis is that valuing the closing stock of
the product at the marginal cost will cause under estimation of it which causes the
final outcomes or profits to be reduced and the balance sheet of the company is also
hampered.
 It is discovered unsuitable in ventures like ship building, and so on (Morano and
Tajani, 2017). As in situation if the fixed costs are overlooked in valuation of WIP,
losses might be acquired each year till the agreement is finished. It might make
income tax issues.

QUESTION 2
(a) Critical analysis of the relevance of management accounting
Even though the financial statements are prepared according to the relevant laws but
there are several other important things which are required to be undertaken by the
businesses. The management accounting (MA) division is one of the organization's
fundamental units, yet most business people don't understand it because of its "under the
radar" type of work. The accountants are the insiders who make inner examinations to direct
the general business system (Chand, 2019). It supports the management in preparing the
reports for the internal sue by the managers for the decision-making process in order to
accomplish the short and longer term business goals. The most important task which makes
the MA relevant are stated below.
Relevant cost analysis: The most significant activity of the management accountant is
to lead an important cost examination to decide the current costs and give proposals for the
future exercises. Before an organization makes any move, it needs to investigate all prospects
and make sense of the best strategy to expand the profits. This implies the management
accountants should investigate various deals, channels, items, services, and the other
activities such as the marketing activities so as to locate the most productive plan of action.
Make or Buy Evaluations: The product creation is the most costly segment of the
business, so it is important to be certain which choice suits the requirements of the
organization. By and large, there are two arrangements – make items all alone or get them
from the outsider supplier. For this situation, the management accountants are the individuals
who works on evaluation the possibilities available in both the aspects (Sedevich-Fons,
2018). They can assess the genuine expense of every arrangement and decide if it's more
suitable to create things inside or get them from the producer. This may appear to be a basic
choice, yet it's very delicate and has the ability to create or break the business. Therefore, for
carrying out such activities requires the highly experienced and the professional personnel
having good experience in this field.
Controlling: It is another significant part of the MA. In particular, it assesses and
evaluates the working of all organization units and draws conclusion based on the analysis in
respect to the financial performance of the company. That way, one get the chance to get
familiar with the explanations behind both the losses and the benefit produced by different
functional units of the organization. In such conditions, it is a lot simpler for senior heads to

lessen operational expenses. For example, management can cut salaries in failing to meet
expectations of the divisions or lessen the number of workers. Then again, they can likewise
put resources into branches that end up being profoundly productive, hence expanding the
complete benefit of the business.
(b) Techniques which is used by the management accountant for objective of planning,
controlling and the decision making
There are various techniques which is being used by the management accountant in
order to achieve its desired objectives. Some of them are described below.
Budgetary Control: With the help of this technique, the business organization can
analyse the future financial requirements and organized on a systematic premise. It is utilized
to exercise control the financial expenditure of the business concern (Ameen, Ahmed and
Abd Hafez, 2018). Business tasks are coordinated in an ideal and desired way. This will set a
limit on the expenditure of the business and also it will provide some idea in respect to where
the business is being incurring more expenses.
Ratio Analysis: It is utilized by the managers of the organization in order to perform
its main function which are estimating, arranging, coordination, communication and control.
It is prepared for compelling control of business tasks by undertaking an evaluation of both
the physical and financial targets (Rasyid, Sugiarto and Kosasih, 2017). This will help the
management account in taking valuable business decisions for ensuring future growth and
profits.
Marginal Costing: This MA technique is utilized to fix the selling value,
determination of best sales mix, best utilization of limited materials or other useful resources,
to take decision on make or purchase choice, acceptance or dismissal of mass orders and
foreign orders request and so forth. This depends on the fixed cost, variable expense and the
amount of contribution.

REFERENCES
Books and Journals
Ameen, A. M., Ahmed, M. F. and Abd Hafez, M. A., 2018. The Impact of Management
Accounting and How It Can Be Implemented into the Organizational Culture. Dutch
Journal of Finance and Management. 2(1). p.02.
Chand, M., 2019. Management Accounting Practices in Tour Operation Industry: An
Empirical Analysis. International Journal of Hospitality & Tourism Systems. 12(2).
Martinović, D., 2019. Advantages and limitations of linear and nonlinear break-even
models. Ekonomski horizonti. 21(3). pp.221-238.
Morano, P. and Tajani, F., 2017. The break-even analysis applied to urban renewal
investments: a model to evaluate the share of social housing financially sustainable
for private investors. Habitat International. 59. pp.10-20.
Rasyid, A., Sugiarto, E. and Kosasih, W., 2017. Management accounting techniques and
corporate performance of manufacturing industries. Risk Governance & Control:
Financial Markets & Institutions. 7 (2). pp.116-122.
Sedevich-Fons, L., 2018. Linking strategic management accounting and quality management
systems. Business Process Management Journal.