Management Accounting Issues

This study focuses on management accounting issues such as evaluation of investment options, determination of break-even and MOS, and preparation of cash budget. It provides analysis and suggestions for improvement.

Management
Accounting Issues

INTRODUCTION...........................................................................................................................3
Issue 1..............................................................................................................................................3
a. Evaluation of investment options.............................................................................................3
b. Analysis of the results..............................................................................................................5
c. Limitations of analysis.............................................................................................................6
Issue 2..............................................................................................................................................6
a. Determination of break-even and MOS...................................................................................6
b. Advising on alternative options...............................................................................................8
Issue 3..............................................................................................................................................8
a. Preparation of cash budget.......................................................................................................8
b. Critically analyzing cash budget and suggesting measures for improvement.........................8
c. Explaining the reason for preparing cash budget.....................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Management accounting includes formulation and facilitating statistical & financial information
to the managers of an organization which helps them in making routine or short term decisions.
The present study is based on AV Roe, engineering company headquartered in Manchester
which formerly made the aircraft but presently specialized in respect of medical equipment. The
report highlights application of capital budgeting tools and break even analysis for choosing best
option. Moreover, it also presents framing of the cash budget with appropriate analysis.
Issue 1
a. Evaluation of investment options
H type of ventilator
Years Profits Discounting factor
Discounte
d cash
inflows
1 550 0.91 500
2 800 0.83 661.2
3 1050 0.75 788.9
4 1300 0.68 887.9
5 1550 0.62 962.4
Total of discounted cash inflows 3800.4
less: Initial investment 3000
NPV
sum of discounted cash inflows-
initial outlay 800.4
Years
Cash
inflows
0 -3000
1 500
2 661.16
3 788.88
4 887.92
5 962.43
IRR 8%
Years Cash inflows
1 500

2 661.16
3 788.88
4 887.92
5 962.43
sum of annual profits 3800.38
Years 5
Average annual profits Sum of annual profits/No. of years 760.0766217
Initial investment 3000
Accounting rate of
return
Average annual profits/Initial
investment 25%
Years
Cash
inflows
Cumulative cash
inflows
1 500 500
2 661.16 1161.16
3 788.88 1950.04
4 887.92 2837.96
5 962.43 3800.38
Initial investment 3000
Year 4
0.7
4.7
Payback period
4 years and 7
months
U type of ventilator
Year
s Profits Discounting factor
Discounted cash
inflows
1 350 0.91 318.18
2 500 0.83 413.22
3 700 0.75 525.92
4 950 0.68 648.86
5 0 0.62 0
Total of discounted cash inflows 1906.19
less: Initial investment 1500
NPV
sum of discounted cash inflows-initial
outlay 406.19
Years
Cash
inflows

0 -1500
1 318.18
2 413.22
3 525.92
4 648.86
5 0.00
IRR 9%
Years
Cash
inflows
1 318.18
2 413.22
3 525.92
4 648.86
5 0.00
sum of annual profits 1906.19
Years 5
Average annual profits Sum of annual profits/No. of years 381.2376
Initial investment 1500
Accounting rate of
return
Average annual profits/Initial
investment 25%
Years
Cash
inflows
Cumulative cash
inflows
1 318.18 318.18
2 413.22 731.40
3 525.92 1257.33
4 648.86 1906.19
5 0.00 1906.19
Initial investment 1500
Year 3
0.5
3.5
Payback period
3 Years and 5
months

b. Analysis of the results
The above evaluation reflects that U type of the ventilator is counted as the better
investment option as compared to H type of the ventilator. It has been stated that positive value
of NPV means the project or option will be profitable. However, if it resulted as negative, it
means that the option will incur a loss. Though net present value of U ventilator accounted as
lower value that is 406.19 than H valuing 800.4, but in other techniques U ventilator attained
better results so it is indicated as suitable option over U ventilator. Internal rate return of U
ventilator is higher as compared to H type of the ventilator which means that the former option
will be generating higher amount the return (Alkaraan, 2017). Furthermore, accounting rate of
return of both the options attained as 25% which clearly means that equal amount of average
profits will be gained. Moreover, the payback period of U ventilator is seen as good as that is 3
years and 5 months in comparison to H equates to 4 years and 7 months. This means that U type
of ventilator will take less time in recovering the cost of initial investment comparing to H
ventilator. Thus, U type is considered as better proposal than H.
c. Limitations of analysis
In the analysis there are several limitations which have been analyzed like some of the
investment appraisal tools fails in considering timings of the cash flow and might face difficulty
in analyzing adequate value of capital cost (Jibril and Jagun, 2018).
Issue 2
a. Determination of break-even and MOS
Option A
Particulars Units
Price per
unit Amount
Sales 550000 13
715000
0
less: Variable
cost 550000 4
220000
0
Contribution 9
495000
0
less: Fixed cost
200000
0
Profit
295000
0
Particulars Formula Amount

Fixed cost 2000000
Contribution per unit 9
Breakeven point (in
units)
Fixed cost/Contribution per
unit 222222.22
Particulars Formula Amount
Fixed cost
200000
0
Profit
295000
0
Sales
715000
0
p/v ratio 69%
Break even
sales
Fixed cost/P/V
ratio
288888
9
Particulars Formula Amount
Actual sales 7150000
BEP sales 2888889
Margin of
safety
Actual sales-Break even
sales 4261111
Option B
Particulars Units
Price per
unit Amount
Sales 660000 10
660000
0
less: Variable
cost 660000 4
264000
0
Contribution 6
396000
0
less: Fixed cost
200000
0
Profit
196000
0
Particulars Formula Amount
Fixed cost 2000000
Contribution per unit 6
Break- even point (in
units)
Fixed cost/Contribution per
unit 333333.33

Particulars Formula Amount
Actual sales 6600000
BEP sales 3333333
Margin of
safety
Actual sales-Break even
sales 3266667
b. Advising on alternative options
From the analysis it has been reflected that option A is better in comparison to option B
as it is resulting higher profits valuing as pound 2950000 with better break-even point and high
margin of safety (Nagarajan and Visagamoorthi, 2018). This depicts that choosing Option A
would be effective and efficient for the company in order to gain higher profitability and sales.
Issue 3
a. Preparation of cash budget
Cash budget
Particulars August September
Receipts:
Opening cash balance 10000 -13833.3
Cash received from NHS 525000 550000
Cash received from online sales 38000 42000
Cash available 573000 578166.7
Payments:
Payment to creditors (purchase) 284250 287950
Labor cost 202250 153300
Payment of overheads
93666.6
7 99666.667
Installments of Manufacturing
equipment
6666.66
7 6666.667
Total payment 586833. 547583.334
Particulars Formula Amount
Fixed cost
200000
0
Profit
196000
0
Sales
660000
0
p/v ratio 60%
Break even
sales
Fixed cost/P/V
ratio
333333
3

3
Closing Balance -13833.3 30583.366
b. Critically analyzing cash budget and suggesting measures for improvement
The cash budget shows that in the month of August, the payments are more than receipts
which means that cash inflows are less than cash paid (Kampf, Majerčák and Švagr, 2016). On
other hand, in the month of September, company’s cash position gets better with higher amount
of the cash inflows and lower value of the cash outflows. In order to improve the cash position,
company should increase its sales and ensures control on its expenses.
c. Explaining the reason for preparing cash budget
It is very crucial for the companies to prepare cash budget as it helps in establishing the
amount of the credit which is been extended to the customers without any problem in relation to
liquidity (Mariana, 2018). Cash budget enables in avoiding the shortage of the cash during the
periods within which the firm encounters higher number of the expenses. It also assists in
analyzing the cash position of an organization so that current assets could be managed effectively
in order to meet the current obligations.
CONCLUSION
From the above analysis it has been concluded that management accounting plays a
crucial role in managing the functions and smooth running of the business. However, it includes
many issues like selecting the most suitable option from various alternatives so that larger
profitability can be generated in an efficient manner. There are various tools such as investment
appraisal techniques, break even analysis which helps he firm in choosing or opting for the most
profitable proposal or project. On the basis of NPV, IRR, ARR and Payback period evaluation it
has been identified that U type of ventilator would be better for AVR in managing its issues with
regards to the shortage of the equipments.

REFERENCES
Books and journal
Alkaraan, F., 2017. Strategic investment appraisal: multidisciplinary perspectives. Advances in
Mergers and Acquisitions. p.67.
Jibril, J. D. and Jagun, Z. T., 2018. Risk Identification Techniques in Valuation and Investment
Appraisal. International Journal of Engineering & Technology. 7(3.30). pp.70-73.
Kampf, R., Majerčák, P. and Švagr, P., 2016. Application of break-even point analysis. NAŠE
MORE: znanstveno-stručni časopis za more i pomorstvo, 63(3 Special Issue). pp.126-128.
Mariana, Z., 2018. THE CASH BUDGET–A SHORT-TERM FORECAST TOOL FOR THE
FINANCIAL STATEMENTS OF ECONOMIC ENTITIES. Ecoforum Journal. 7(2).
Nagarajan, K. and Visagamoorthi, D., 2018. Use of Break-even analysis in financial appraisal of
projects. Indian Journal of Public Health Research & Development. 9(11). pp.2098-2105.