MBA/MSc Assignment: Cost Management, Financial Analysis & Budgeting

This document presents a student's solution to a cost management accounting assignment, covering key concepts such as the advantages and disadvantages of accounting, financial statement analysis, breakeven analysis, cash budgeting, and decision-making. The solution includes a discussion of accounting principles, a calculation of net income and owner's equity, a balance sheet, a breakeven analysis with calculations for target sales, and a cash budget. It also addresses the importance of considering both financial and non-financial factors in business decision-making, highlighting the use of capital budgeting techniques and the understanding of relevant and irrelevant costs. Desklib offers a platform for students to access this and other solved assignments for study purposes.

Running ead Management Accounting CostH :
Management Accounting

Management Accounting Concepts 1
Question 1
Accounting is the comprehensive process of systematically recording all the transactions and
events that takes place during the course of business, in a particular period. These transactions
are recorded in the financial terms in the books of accounts so as to prepare the financial
statements of the company using the accounting data and information. The process of accounting
covers various activities like collecting, recording, summarizing, analyzing and reporting of
financial information relating to business (Rahman & Rahim, 2010). The financial statements
that are prepared under the accounting process are aimed at disseminating the information
relating to financial performance of a business in the given period of time. Accounting
information is useful for various parties who are commonly called as stakeholders of the
company. These stakeholders are: shareholders, lenders of finance, governmental agencies or
regulators, business communities and so on. These parties use financial information regarding
the company to make informed economic decisions. Therefore, accounting serves as the
fundamental language of every business to communicate relevant and necessary information
relating to the business, to the parties that are connected to the business directly or indirectly
(Riahi-Belkaoui, 2004). Though the system of accounting has various advantages but at the same
time it has to suffer from various limitations that are discussed further.
Advantages of Accounting:
 Business records maintenance:
Accounting process allows the recording and maintenance of all economic data related to the
business in the systematic manner at one place i.e. the books of accounts. Since a business

Management Accounting Concepts 2
involves numerous transactions and events, it is not possible for its managers to memorize all the
information without keeping the proper record of such information.
 Financial statements preparation:
Systematic recording of transactions helps the accountants to prepare the necessary financial
statements such as income statement (commonly known as profit and loss account), statement of
financial position (commonly known as balance sheet) and the cash flow statements. These
statements cover the basic financial information of the business. The information contained in
these statements helps in conveying the state of financial affairs of the business.
 Comparison of financial results:
When financial information is systematically and comprehensively prepared it allows the
managers to undertaken comparative study of such information so as to understand the financial
situation of the business in comparison to its previous year financial results or that of other
competitive firms of the industry.
 Serves as legal evidence:
The preparation and presentation of financial information is the integral part of financial
reporting function. Financial reporting is the requirement of various governmental bodies.
Accounting enables a firm to comply with the rules and regulations. Hence, it serves as the
evidence of compliance with various legal regulatory frameworks.
 Facilitates the process of borrowing funds:
The providers of finance require assessing the financial position and creditworthiness of the
business before approving any loans to the firm. Financial statements are used as the prime

Management Accounting Concepts 3
documents to get the loan sanctioned by the banks and financial institutions as it contains
relevant financial information regarding the business of the firm seeking the funds.
 Supports the valuation of business:
The financial results that are derived through the analysis of accounting information of the
business enable the firm to assess its worth in the market. The system of accounting suggests
various methods of determining the value of the firm such as net asset value method,
capitalization method etc.
 Assistance to management:
The system of accounting helps in communication of necessary and material information to the
managerial personnel of the entity so that they can undertake requisite actions that contribute to
the growth and success of the business. The financial information allows the managers of
business to formulate adequate policies and strategies for the sound performance of the business.
 Helps in dealing with taxation matters:
Accounting process helps in determining the net income of the business that is subject to tax
under various taxation frameworks. It allows the managers to comply with the tax related laws
applicable to the business.
 Helps in controlling the assets and liabilities of business:
As the process of accounting helps in maintaining proper records of all the key components of
business such as its revenues, expenditures, assets and liabilities of the business so that proper
and separate control over each business component can be maintained.

Management Accounting Concepts 4
Disadvantages of accounting:
 Recording of only monetary transactions:
The accounting process supports the processing of financial or economic matters of the business
and hence it delivers the financial information to the stakeholders of the entity. However, to
assess the overall information of any entity, it is necessary to study both financial and non-
financial information related to the business. Accounting process does not provide the valuable
non-monetary information of the business.
 Negligence of price level changes:
The system of accounting generally works on cost concept and therefore it does not take into
account the changes in the levels of prices of various significant items of the business such as its
assets. The values of assets keep on changing frequently due to change in the environmental
conditions. In such situation accounting system proves to be inadequate.
 Lack of realistic information:
As the information that is contained in the financial statements of the entity is processed and
maintained on the basis of certain accounting conventions and assumptions which might not be
suitable in every business situation hence accounting system fails to offer realistic financial
information relating to the business (Garrison, 2010).
 Manipulation of financial statements:
While preparation and presentation of accounting is the internal function of the management it
becomes easy for the managers to manipulate the financial results to achieve the desired financial

Management Accounting Concepts 5
position with the intention of deceiving the shareholders of the business. It affects the true and
fair view of financial affairs of the company (Account Study, 2018).
 Personal biasness in accounting treatments:
Since accounting process involves use of personal judgments at various levels of business such
as selection of method of depreciation, treatment of expenditures incurred during the course of
business. All such aspects affect the quality of financial statements of the company.
Question 2
Calculation of Net Income for 31st July, 2014
Particulars Amounts
Service Revenue $ 14,390.00
Operating Expenses
Rent Expenses $ 2,740.00
Salary and Wages Expenses $ 7,145.00
Depreciation Expenses $ 665.00
Supplies Expenses $ 580.00
Interest Expenses $ 45.00
Net Income $ 3,215.00
Owner's Capital
Particulars Amounts
Opening Balance $ 10,640.00

Management Accounting Concepts 6
Add: Net Income $ 3,215.00
Less: Owner's Drawings $ (800.00)
Closing Balance $ 13,055.00
Balance Sheet of Yankee Hotel
Foxtrot
as at 31 st, July, 2014
Assets Amounts
Cash $ 7,680.00
Accounts Receivables $ 810.00
Supplies $ 1,160.00
Prepaid Rent $ 1,965.00
Equipment $ 11,400.00
Less: Accumulated Depreciation $ 840.00 $ 10,560.00
Total Assets $ 22,175.00
Liabilities
Notes Payable $ 6,000.00
Accounts Payable $ 2,140.00
Salaries and Wages Payable $ 360.00
Interest Payable $ 40.00
Unearned Revenue $ 580.00
Owner's Capital $ 13,055.00

Management Accounting Concepts 7
Total Liabilities and Capital $ 22,175.00
Question 3
Per unit
Sales price $90
Variable cost 63
Contribution
margin
$27
Total fixed
costs
$1,080,000
Part
1
Breakeven
Units Total Fixed Costs
Contribution Margin
$1,080,000
$27
Breakeven
Units 40000

Management Accounting Concepts 8
Part
2
Sales Units
Total Fixed Cost + Desired
Profit
Contribution Margin
$1,140,000
$27
42222
Per unit At 42222 Units
Sales price $ 90.00 $ 3,800,000.00
Variable cost $ 63.00 $ 2,660,000.00
Contribution
margin
$ 27.00
$ 1,140,000.00
Total fixed
costs
$ 1,080,000.00
$ 1,080,000.00
Profits $ 60,000.00

Management Accounting Concepts 9
Part
3
Present
Situation
Per unit 45000
Sales price $ 90.00 $ 4,050,000.00
Variable cost $ 63.00 $ 2,835,000.00
Contribution
margin
$ 27.00
$ 1,215,000.00
Total fixed
costs
$ 1,080,000.00
$ 1,080,000.00
Profits $ 135,000.00
Proposed
Situation
Per unit 49000
Sales price $ 90.00 $ 4,410,000.00
Variable cost $ 63.00 $ 3,087,000.00
Contribution
margin
$ 27.00
$ 1,323,000.00
Total fixed
costs
$ 1,080,000.00
$ 1,080,000.00
$ 108,000.00
Profits $ 135,000.00

Management Accounting Concepts 10
Number of units Total Revised Contribution $ 1,323,000.00
4900
0
Contribution per unit
$
27.00
Part
4
Per unit
Sales price $ 90.00 $ 108.00
Variable cost $ 63.00 $
56.70
Contribution
margin
$ 27.00 $
51.30
Total fixed
costs
$ 1,080,000.00
$ 1,290,000.00
Profits
New Break
Even Point
(Units) Total Fixed Costs
Contribution Margin

Management Accounting Concepts 11
$ 1,290,000.00
$ 51.30
Breakeven
Units 25146
Question 4
Cash Budget
Particulars July August
Opening Balance $ 50,000.00 $ 50,000.00
Total Collections $ 396,000.00 $ 307,000.00
Total Cash $ 446,000.00 $ 357,000.00
Payments
Purchase Payments $ 275,000.00 $ 177,500.00
Selling and administrative expenses $ 48,000.00 $ 48,000.00
Interest on borrowings $ 2,400.00
Dividend $ 103,000.00
Purchase of Equipment $ 30,000.00
Total Payment $ 426,000.00 $ 257,900.00
Remaining Cash Balance $ 20,000.00 $ 99,100.00

Management Accounting Concepts 12
Amount Borrowed $ 30,000.00
Amount Repaid $ 49,100.00
Minimum Closing Balance
Requirement $ 50,000.00 $ 50,000.00
Workings:
Particulars June July August
Credit sales $135,000 $145,000 $90,000
Cash sales 90,000 255,000 195,000
Total sales $225,000 $400,000 $285,000
Sales
Particulars June July August
Credit sales $135,000 $145,000 $90,000
Collection from Credit Sales
(60%) $81,000 $87,000 $54,000
Collection from Credit Sales
(40%) $54,000 $58,000
Collection from Credit Sales $81,000 $141,000 $112,000
Particulars June July August

Management Accounting Concepts 13
Cash Sales
$
90,000.00
$
255,000.00
$
195,000.00
Collection from Credit Sales $81,000 $141,000 $112,000
Total Collections $171,000 $396,000 $307,000
Purchases
Particulars June July August
Credit Purchases
$
300,000.00
$
250,000.00
$
105,000.00
Payments made for purchases
$
150,000.00
$
125,000.00
$
52,500.00
$
150,000.00
$
125,000.00
Total Payment made
$
150,000.00
$
275,000.00
$
177,500.00
Particulars June July August
Credit sales $135,000 $145,000 $90,000
Cash sales 90,000 255,000 195,000
Total sales $225,000 $400,000 $285,000
Sales

Management Accounting Concepts 14
Particulars June July August
Credit sales $135,000 $145,000 $90,000
Collection from Credit Sales
(60%) $81,000 $87,000 $54,000
Collection from Credit Sales
(40%) $54,000 $58,000
Collection from Credit Sales $81,000 $141,000 $112,000
Particulars June July August
Cash Sales
$
90,000.00
$
255,000.00
$
195,000.00
Collection from Credit Sales $81,000 $141,000 $112,000
Total Collections $171,000 $396,000 $307,000
Purchases
Particulars June July August
Credit Purchases
$
300,000.00
$
250,000.00
$
105,000.00
Payments made for purchases
$
150,000.00
$
125,000.00
$
52,500.00
$
150,000.00
$
125,000.00

Management Accounting Concepts 15
Total Payment made
$
150,000.00
$
275,000.00
$
177,500.00
Question 5
The managers of the business have to face various situations in the normal course of business
where they have to undertake decision making regarding the selection of most appropriate
alternative from among all the options that are available to them. In such cases it becomes
necessary for the managers to critically analyze each and every option so as to reach at the
decision that gives maximum benefit to the business (Hansen, Mowen & Guan, 2007). For the
purpose of carrying the critical analysis of all the possible alternatives, it is important to
determine the individual cost and benefit of such alternatives separately. However, it is not
enough to take into account merely the financial considerations of all the potential options
(Balakrishnan, 2007). Rather, the managers must also consider the non-financial benefits and
costs of the alternative options in order to select the most desirable option.
There are different analytics available to the manager to use for the purpose of evaluating the
most appropriate course of action. For the long term capital investment projects, there are various
capital budgeting techniques such as Net Present Value, Discounted or normal Payback Period,
Internal Rate of Return, Profitability Index or Accounting Rate of Return, After Tax Cash Flows
and so on. These techniques helps to understand the worth of the project, the business proposes
to take. Further, while estimating the cost involved in all the potential options under
consideration, it is also necessary to understand the concepts of relevant and non-relevant cost of
the business (Zimmerman & Yahya-Zadeh, 2011). The risk or uncertainty involved in any

Management Accounting Concepts 16
business decision also becomes the part of its cost and the returns that such alternative decision is
potential to offer can be termed as the benefits of such alternative option. The cost benefit
analysis facilitates a firm to select the most appropriate option of action by considering all the
possible costs and benefits of such option (Horngren, 2013). It is necessary for the managers to
understand the difference between the sunk costs and the relevant costs of business option before
making judgment about the cost involved in the project (Otley & Emmanuel, 2013). While
undertaking the decision making, the managers have to ignore the sunk costs as they are
irrelevant for the business because of their irrevocable nature. Relevant items are such items
under which the future costs and returns are anticipated to be differing for the concerned
alternative decisions. The objective of such analytics is the identification of the decision that
yields the best and most suitable outcome as these analytics are related to the relevant costs and
benefits (Walther & Skousen, 2010).

Management Accounting Concepts 17
References:
Account Study, 2018. Advantages & Limitations of Accounting. Available at:
http://www.accountstudy.com/advantages-limitations-accounting/ Accessed on: 26.07.2018.
Balakrishnan, N., Render, B., Stair, R.M. and Munson, C., 2007. Managerial decision modeling.
New Jersey: Pearson.
Garrison, R.H., Noreen, E.W., Brewer, P.C. and McGowan, A., 2010. Managerial
accounting. Issues in Accounting Education, 25(4), pp.792-793.
Hansen, D., Mowen, M. and Guan, L., 2007. Cost management: accounting and control.
Cengage Learning.
Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D. and Schatzberg, J.,
2002. Introduction to Management Accounting: Chapters 1-19. Prentice Hall.
Otley, D. and Emmanuel, K.M.C., 2013. Readings in accounting for management control.
Springer.
Porwal, L.S., 2001. Accounting Theory, 3E. Tata McGraw-Hill Education.
Rahman, A. and Rahim, A., 2010. An introduction to Islamic accounting theory and practice.
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Riahi-Belkaoui, A., 2004. Accounting theory. Cengage Learning EMEA.

Management Accounting Concepts 18
Schick, A., 2007. Performance Budgeting and Accrual Budgeting. OECD Journal on
Budgeting, 7(2), pp.109-138.
Walther, L.M. & Skousen, C.J., 2010. Analytics of Managerial Decision Making. Available at: <
https://eclass.teicrete.gr/modules/document/file.php/DS107/Books/Analytics%20for
%20Managerial%20Decision%20Making%20%28Walther%20-%20Skousen%29.pdf> Accessed
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Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and
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