Management Accounting: Activity Based Costing and Break-even Analysis

This document provides a comprehensive analysis of activity based costing and break-even analysis in management accounting. It covers topics such as computation of activity cost rates, time-driven activity cost driver rates, cost assigned to each activity, contribution margin per unit, sales level at desired profit, and break-even analysis. The document also includes a discussion on sales and production budgets, component usage budget, and production cost budget.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
QUSETION- 1.................................................................................................................................1
(a) Computation of the activity cost rate as per the traditional method of activity based costing
......................................................................................................................................................1
(b) Computation of the time-driven activity cost driver rates......................................................1
(c) Computation of the cost assigned to each activities...............................................................2
(d).................................................................................................................................................2
QUESTION- 2.................................................................................................................................3
(a) Contribution margin per capacitor in January........................................................................3
(b) Sales level at the desired profit of 20%..................................................................................3
(c) Break-even analysis of single shift operations.......................................................................4
Break-even analysis of double shift operations...........................................................................4
(d) Sales level at the desired profit of 10% in February at single shift of operation...................4
Sales level at the desired profit of 10% in February at double shift of operation........................5
QUESTION 3...................................................................................................................................6
a) .................................................................................................................................................6
b)..................................................................................................................................................7
QUESTION 4...................................................................................................................................7
REFERENCES..............................................................................................................................12

QUSETION- 1
(a) Computation of the activity cost rate as per the traditional method of activity based costing
S.NO ACTIVITY
TIME
PERCENT
AGE
ASSIGNED
COST
ESTIMATED COST
DRIVER
QUANTITY
COST
DRIVER
RATE
1
Handle customer
orders 50.00% 300000 5000 customer orders
60 per customer
order
2
Process customer
complaints 35.00% 210000
700 customer
complaints
300 per
customer
complaint
3
Perform
customer credit
check 15.00% 90000 600 credit checks
150 per credit
checks
RM 600000
The total assigned cost to the various services is RM 600000 which is used by the service
personnels in three different types of services which are handling the customer orders, processing
the customer complaints and performing the customer credit check (Keel and et.al., 2017).
It can be assessed that the activity cost rate is RM 60 per customer order, RM 300 per customer
complaint and RM 150 per credit checks on the basis of their respective level of the actibvities
that are undertaken.
(b) Computation of the time-driven activity cost driver rates
Committed resource cost for
customer service 600000
Working hours 30000
Cost per hour 600000/30000
20
S.NO ACTIVITY
UNIT TIME
(HOURS)
ACTIVITY COST
DRIVER @ 20 PER
HOUR
1 Handle customer orders 2 40
2 Process customer complaints 7 140
3 Perform customer credit check 5 100
1

The cost per hour is RM 20 based on the supplied resources and the actual working hours
that are undertaken by the company (Leahy and et.al., 2017). On the basis of the provided unit
time the activity cost driver per activity is ascertained which is RM 40 per hour for handling
customer orders. RM 140 per hour is for processing the customer complaints and RM 100 per
hour is for performing the credit checks.
(c) Computation of the cost assigned to each activities
S.NO ACTIVITY
UNIT
TIME
(HOURS)
QUANTIT
Y OF
ACTIVITIE
S TOTAL HOURS
ACTIVITY
COST
DRIVER @
20 PER
HOUR
TOT
AL
COS
T
1
Handle
customer orders 2
5000
customer
orders 10000 40
20000
0
2
Process
customer
complaints 7
600
customer
complaints 4200 140 84000
3
Perform
customer credit
check 5
400 credit
checks 2000 100 40000
Total used 16200
32400
0
Total supplied 30000
60000
0
Total unused 13800
27600
0
After the allotment of the total cost based on the quantity and the time taken, it can be
analysed that the total cost used by the company is RM 324000 which RM 276000 less than the
total cost supplied which was RM 600000. The total hours provided are 30000 but only 16200
are successfully used by the company (Jiang, Ferreira and González, 2017). This means that
13800 hours remain unused and simultaneously RM 276000 also remain unused. This depicts the
operational inefficiency of the company where time and the cost both are remaining unused
because of the limited services that are provided by the service personnels.
2

(d)
In the case when management knows about the pertaining unused capacity in the organization
they shall take some necessary actions to avoid the same and work at the level of optimal
capacity and with the operational efficiency. One of the major actions could be to employ more
personnels so that the unused capacity of the organization can be used. Apart from this the
existing personnel can be developed in order to achieve operational efficiency through training
and development (Childers and Maggard-Gibbons, 2018). Also, they can automate some of the
processes so that the resources an eb used in an optimum manner.
QUESTION- 2
(a) Contribution margin per capacitor in January
Per unit cost
Sales 300
Variable cost -150
Variable selling and distribution cost -30
Contribution margin 120
The above table shows that the capacitor is sold at a per unit cost of 300 and the variable
cost that are ascertained for the operations is 180 per capacitor. So, the contribution margin of
the capacitor is 120 per capacitor (Calabrò, 2017).
(b) Sales level at the desired profit of 20%
Fixed cost+ Desired profit/ Contribution margin
360000+ (300x*20%) / 300x*40%
360000+60x / 120x
360000+60x=120x
360000=120x-60x
360000=60x
x=6000 capacitors
Sales level= 6000*300= 1800000
If the desired level of profit on sales is 20% then the company has to maintain the sales level of
6000 capacitors (Morano and Tajani, 2017). This shall generate the revenue of 1800000 and after
3

deducting the fixed and the variable cost of product and distribution, the company shall earn
profitability of 360000 which is 20% of the sales volume.
(c) Break-even analysis of single shift operations
Per unit cost Total Cost (10000 units)
Sales 250 2500000
Variable cost -150 1500000
Variable selling and distribution cost -30 300000
Contribution margin 70 700000
Fixed cost 300000
Fixed selling and distribution cost 71000
Profit 329000
Break-even point
Fixed cost / Contribution
margin
371000/70
5300 capacitors
Break-even analysis of double shift operations
Per unit cost Total Cost (10000 units)
Sales 250 2500000
Variable cost -150 1500000
Variable selling and distribution cost -30 300000
Contribution margin 70 700000
Fixed cost 454000
Fixed selling and distribution cost 71000
Profit 175000
Break-even point
Fixed cost / Contribution
margin
525000/70
7500 capacitors
The break-even point of sales is the level at which company's revenues are equal to its
total costs. This is where they have no profits and no losses and is the minimum level that needs
to be ensured by the company so that they do not incur losses (Hatch and et.al., 2017). If the
company works in single shift then the break-even point is 5300 capacitors which shall land the
company in a no profit no loss zone.
4

But if the company works in two shifts in that case the break-even point is at 7500
capacitors which is the minimum level of sales so that no losses are incurred to the company.
(d) Sales level at the desired profit of 10% in February at single shift of operation
Fixed cost+ Desired profit/ Contribution margin
371000+ (250x*10%) / 250x*28%
371000+25x / 70x
371000+25x=70x
371000=70x-25x
371000=45x
x=8244.44 capacitors
Sales level= 8244*250= 2061000
The sales level under the single shift system to earn the profitability of 10% is up-to 8244
capacitors (Van Asseldonk, Van Wagenberg and Wisselink, 2017).
Sales level at the desired profit of 10% in February at double shift of operation
Fixed cost+ Desired profit/ Contribution margin
525000+ (250x*10%) / 250x*28%
525000+25x / 70x
525000+25x=70x
525000=70x-25x
525000=45x
x=11666.66 capacitors
Sales level= 11667*250= 2916750
The sales level under the double shift system to earn the profitability of 10% is up-to 11667
capacitors.
5

QUESTION 3
a)
I. Sales budget (in RM and units)
Sales Budget (in RM & units)
Q1 Q2 Q3 Q4
Sales volume budget (units) 35 50 30 45
Selling price (RM per unit) 165 165 176 176
Sales budget ('000) 5775 8250 5280 7920
ii. Production budget (in units)
Production Budget (in units)
Q1 Q2 Q3 Q4
Sales volume budget (units) 35 50 30 45
Add:
Closing stock (15% of next
quarter sales) 7.5 4.5 6.75 6.75
Less:
Opening stock 0 7.5 4.5 6.75
Production Budget (Units) 42.5 47 32.25 45
Iii. Component usage budget (in units)
Component Usage Budget (in units)
Q1 Q2 Q3 Q4
Component A (2 units) 85 94 64.5 90
Component B (2 units) 85 94 64.5 90
Component C(1 unit) 42.5 47 32.25 45
iv. Production cost budget (in RM)
Production Cost Budget (in RM)
Q1 Q2 Q3 Q4
6

Material
A (RM 9 / 9.9) 765 930.6 638.55 891
B (RM 6 /6.6) 510 620.4 425.7 594
C (RM 25/26.25) 1062.5 1233.75 846.5625 1181.25
Total material 2337.5 2784.75 1910.8125 2666.25
Labour 1062.5 1175 806.25 1181.25
Variable Overheads 637.5 705 483.75 675
Fixed Overheads 66 66 66 66
Production cost 4103.5 4730.75 3266.8125 4588.5
Fixed production Overhead
(264000/4 = 66000 per quarter)
b)
Financial feasibility based on the findings of the budgets
Based on the sales budget, it can be seen that the in quarter 2 and quarter 4 the company
is having maximum sales. Quarter 2, the sales units are expected to increase with no change in
the selling price which has resulted into higher revenue in contrast to the Quarter 4 in which the
sales units are less but with higher selling price (Jimenez, 2019). On making comparison
between the sales budget and the production cost budget, in terms of profits, on deducting
production cost of each quarter from the sales budget (in RM) of the same quarter the net profit
is derived. The below is the profitability budget for each quarter. By reviewing this, it can be
stated that the company Aliza Ltd is profitable in Q2 in comparison to other quarters therefore, it
is better for the company to follow the same prices and the estimation made in the quarter 2 in
order to enhance its profitability (Bužinskienė, 2019). In addition to this, the company requires
making efforts in reducing its production cost or increasing its revenue in order to attain high
profits in other quarter as well (Lu and Lee, 2019). On an overall basis, the company is profitable
in all the quarters which means that these budgets are financially feasible pertaining to carrying
out its business activities.
Q1 Q2 Q3 Q4
Sales budget ('000) 5775 8250 5280 7920
7

Less:
Production cost 4103.5 4730.75 3266.81 4588.5
Profit 1671.5 3519.25 2013.18 3331.5
QUESTION 4
Malaysia University of Science and Technology
Vision – To transform the ways in which the Malaysia University of Science and Technology is
operated.
Mission – Provide students with the superior quality and traditional and innovative education
and resources.
Strategic
priorities
Collaboration Student welfare
Strategic results Providing innovative and effective
methods for providing education to
the students as per the changing time.
Ensuring that students are provided
with all the relevant resources which
will result into building up their
future.
Strategic
Objectives
Measures Targets Projects/Notes
8

 To
increase
sales by
providing
relevant
and
differentia
ted
services.
 To reduce
the cost of
operation
by
eliminatin
g
unnecessa
ry
expenditur
e.
 Net profit
 Operation
al cost
 Attaining
target
revenue
 10%
increase
 20%
decrease
 5%
increase
 Implement
ing the
latest
accountin
g system.
 Hiring
personnel
experience
d in
handling
finances
9
Financia
l

 Improving
the
students
experience
by
providing
clean and
hygienic
surroundin
g and
polite and
friendly
interaction
.
 Retaining
students
by
recognizin
g their
achieveme
nt through
awards
and public
appreciati
on.
 Student
satisfactio
n survey
 Students
rating on
all
dimension
s
 95%
student
satisfactio
n rating
 Average
rating A
on all the
dimension
s
 Creation
and
developm
ent of the
s
environme
nt which
will help
in
encouragi
ng and
motivating
the
students.
 Offering
programm
es which
will help
in the
future.
 Improving
the
efficiency
by
effectively
meeting
 Meeting
with
student
queries
 Pounds of
 100%
accuracy
in
resolving
 10%
reduction
 Creating a
better
selection
process of
the
manageme
10
Custom
er/
student
Internal
process
es

with the
requireme
nts of the
students
and
parents.
 Minimizin
g the
waste and
turning off
lights in
unused
room for
saving
cost.
trash
 Utility
charges
in trash.
 5%
reduction
in utility
cost
nt team
who is
able to
effectively
meet with
the
students
requireme
nts.
 Introducin
g
educationa
l and
mentoring
program
which will
help in
expanding
the
knowledg
e base of
the
students
and
participati
 Faculty
meeting
log
 Students
and
faculty
suggestion
s
implement
ed
 Participati
on
certificate
 100%
quarterly
faculty
meeting.
 20%
increase in
the viable
suggestion
s
 100% of
students
participant
s in
various
activities
and
 Improving
the
technolog
y and the
innovative
method
for
attracting
students.
11
Organizati
onal
capacity

ng in the
school
activities.
getting
certificate
s.
In order to attain the welfare of the students through the way of effectively and efficiently
carrying out the school operation, it is important for the dean or management to look into the
various element of which are needed to be accounted for. The balance score card can be used for
implementing better performance management system (Quesado, Aibar Guzmán and Lima
Rodrigues, 2018). This will help in meeting with the financial perspective like the increasing the
revenue and profitability along with reducing cost through implementing ways of reducing it.
Under customer/student perspective, it will work on attracting the students by meeting with their
requirements which will help in encouraging the students. This will result into increasing the
admission of the students (Krylov, 2019). In addition to this, under the internal processes, the
school management can work on implementing the strategies which will result into increasing
the efficiency of the management in respect to effectively meeting up with the needs and queries
of the students. The process will be simplified which will make it easy for the students to resolve
their issues (Siadat, Abdollahi and Garshasbi, 2017). Under the perspective of the organizational
capacity, the school can come up with the plan which will help in increasing the resources which
will result into adding to the learnings of the students and along with this, ensuring that the
students are participating in the number of activities and programs which will consequently lead
to increasing and enhancing the learnings and knowledge base of the students (Benková and
et.al., 2020). Through with way of introducing digital technology will help in meeting up with
the changing demand of the parents and students pertaining to education. Thus, the above,
balance scorecard, will provide support to the management or Dean of the university in under the
performance of the organization and assessing its desired outcomes. This will altogether help in
accomplishing the desired mission and vision of the organization.
12

REFERENCES
Books and Journals
Benková, E., and et.al., 2020. Factors Affecting the Use of Balanced Scorecard in Measuring
Company Performance. Sustainability. 12(3). p.1178.
Bužinskienė, R., 2019. MASTER BUDGET FORMATION IN PRIVATE
COMPANIES. Professional Studies: Theory & Practice/Profesines Studijos: Teorija ir
Praktika, (21).
Calabrò, F., 2017, July. Local communities and management of cultural heritage of the inner
areas. An application of break-even analysis. In International Conference on
Computational Science and Its Applications (pp. 516-531). Springer, Cham.
Childers, C. P. and Maggard-Gibbons, M., 2018. Understanding costs of care in the operating
room. JAMA surgery. 153(4). pp.e176233-e176233.
Hatch, M. D. and et.al., 2017. The cost effectiveness of vancomycin for preventing infections
after shoulder arthroplasty: a break-even analysis. Journal of shoulder and elbow
surgery. 26(3). pp.472-477.
Jiang, S., Ferreira, J. and González, M. C., 2017. Activity-based human mobility patterns
inferred from mobile phone data: A case study of Singapore. IEEE Transactions on Big
Data. 3(2). pp.208-219.
Jimenez, B. S., 2019. Assessing the efficacy of rational budgeting approaches: fiscal recovery
planning and municipal budgetary solvency. Public Management Review. 21(3).
pp.400-422.
Keel, G. and et.al., 2017. Time-driven activity-based costing in health care: a systematic review
of the literature. Health Policy. 121(7). pp.755-763.
Krylov, S., 2019. Strategic customer analysis based on balanced scorecard. Ekonomicko-
manazerske spektrum. 13(1). pp.12-25.
Leahy, M. F. and et.al., 2017. Improved outcomes and reduced costs associated with a health‐
system–wide patient blood management program: a retrospective observational study in
four major adult tertiary‐care hospitals. Transfusion. 57(6). pp.1347-1358.
Lu, X. and Lee, H. Y. H., 2019. Research into the Production Time of Film Project Management:
Taking Small-budget Films in China as an Example. NIDA Development
Journal. 59(1).
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.
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Quesado, P. R., Aibar Guzmán, B. and Lima Rodrigues, L., 2018. Advantages and contributions
in the balanced scorecard implementation. Intangible capital. 14(1). pp.186-201.
Siadat, S. H., Abdollahi, A. and Garshasbi, L., 2017. Evaluating the impact of information
technology on knowledge management performance with balance scorecard
approach. International Journal of Knowledge-Based Organizations (IJKBO). 7(2).
pp.27-42.
Van Asseldonk, M., Van Wagenberg, C. P. A. and Wisselink, H. J., 2017. Break-even analysis of
costs for controlling Toxoplasma gondii infections in slaughter pigs via a serological
surveillance program in the Netherlands. Preventive veterinary medicine. 138. pp.139-
146.
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