Cost Volume Profit Analysis and Break Even Analysis

This report provides a comprehensive overview of the concept of management accounting, including the difference between financial accounting and management accounting. It outlines various management systems such as cost management system, inventory management system, and job costing system. The report also discusses absorption and marginal costing, and highlights planning tools like budgetary control, sales budget, cash budget, and performance budget. Additionally, it explains break even analysis and cost volume profit analysis techniques used by companies to solve financial problems.

MANAGEMENT
ACCOUNTING

INTRODUCTION
MA is the procedure of preparing the financial reports and documents that analysis the
financial condition of the organisation which help them to undertake their operations according
to those financial statistics. Moreover, the report will highlight about the variation between the
MA and financial accounting and along with it will outline cost accounting systems and their
types namely; direct cost and standard costing. Furthermore, the project will frame about the
various costing system (Calabrò,2017).
On the flip side, the assignment will comment on the types of managerial accounting
reports which is inclusive of cash report, budget report, financial report, performance report etc.
However, the report will outline about the absorption costing and marginal costing including
their advantages and disadvantages and along with it will frame about the three planning tools of
budgetary control namely, sales budget, cash budget, performance budget. Eventually, the
project will frame about the various managerial accounting techniques used by the company to
solve their financial issues like break even analysis, cost profit analysis etc.
LO1
P1 Understanding of MA
Management accounting (MA)
MA, also known as managerial accounting. It is the procedure of studying organisation
expenses and operations to prepare financial file, statistics, and account to support managers’
choice making technique in achieving business objectives. However, it is the method of
preparing monetary and costing information and translating that statistics into beneficial
information for administration and officers within a company (Collis, and Hussey, 2017).
Financial accounting
Financial Accounting is the system of determining, recording, concise and reporting the
infinite of transactions as a result of enterprise operations over a time frame. Further, these
transactions are sum-up in the formulation of financial statements, inclusive of the balance sheet,
earnings assertion and cash flow statement, that document the organization's operating overall
performance over a designated period.
Difference Between Management Accounting And Financial Accounting
Comparison Management Accounting Financial Accounting

Objectives To help management in
making plans and selection
making technique through
offering specific statistics on
various topics.
To provide information
regarding the financials of
company to outsiders.
Time frame The reports are organized as in
keeping with the need and
necessities of the company
(Gooneratne and Hoque,
2016).
monetary Statements are
organized on the end of the
accounting duration which is
normally 365 days.
Standards management accounting does
not comply with any
requirements when statistics is
compiled for internal intake.
financial accounting ought to
follow numerous accounting
requirements.
Valuation Managerial accounting isn't
involved with the cost of these
objects, but only consider their
productivity.
Financial accounting considers
the valuation of belongings
and liabilities, and is
concerned with impairments,
economic value, and so on
Efficiency Management accounting
reports focuses on what factor
is causing trouble and how to
eliminate those factors.
Financial accounting reports
focuses on the profitability of
an organisation
(Hamamura,2019).
Cost Accounting Method
Cost Accounting is an accounting technique that pursuits to acquire a corporation's
expenses of production through considering the cost of each unit of production in addition to
fixed costs, along with diminution of capital gadget. Further, cost accounting evaluate and report
these charges and compare these input effects to output or actual effects to resource enterprise
management in measuring economic performance. Moreover, cost accounting may be maximum

useful as a device for control in budgeting and in putting price manipulate applications, that may
enhance net margins for the organisation within the future. Further, there are three major
objectives of cost accounting:
Cost Control: the first objective of cost accounting is to manipulate the price in the
budgetary management that has set for a specific services or products. However, this function is
essential as management allocates restricted assets to specific initiatives or production tactics
(Hatch and et.al., 2017).
Cost Calculation: this is the main objective of cost accounting and is the source of all
different features of cost accounting. Further, with the help of this function company can see
how they will evaluate the cost of sales per unit for a selected product.
Cost Reducing: This function allows the business enterprise to reduce fees on projects
and tactics. Therefore, reduction in expenses helps to get extra earnings so that margin can
increase.
Types of cost accounting
Standard-costing method: This form of cost accounting makes use of ratios to evaluate
effective use of worker and materials to produce items or offerings below trendy situations.
Therefore, evaluating those variations is known as a variance evaluation. Further, traditional cost
accounting essentially allocates fee based totally on measure, exertions or system hours. Thus,
overhead value has risen proportional to exertions cost for the reason that beginning of standard
value accounting, assigning o/h cost as a standard cost has ended up generating once in a while
deceptive vision.
Direct cost: Direct costs are at once concerned in producing items which means direct
costs can be immediately identified as being used inside the production of goods. As An
Example, direct fabric and direct labour that is used in generating goods. Thus, these costs are
considered as direct costs.
Inventory Management Systems
Inventory Management System track the production and inventory levels. It helps in
delivering chain or the part of it a companies activities run in which covers the lot from
manufacturing to retail, warehousing to delivery, and all the change of stock and components
between. Further, through this method the company can observe all the small transferring parts
of its operations, allowing it to make higher choices and investments. Moreover, distinctive

inventory managers concentrates on one of an element of supply chain even though small
companies are typically interested in the ordering and ending the chain of sales (Isaac, Lawal and
Okoli,2015).
Job costing system
A job costing method entails the technique of gather records about the prices related to a
selected production or carrier task. Further, this data can be used so one can put up the cost
records to a purchaser below a settlement where charges are refund. Further, the statistics is
likewise useful for deciding the accuracy of an organisation calculation system, which helps in
predicting charges that permit for a sensible and sustainable earning. Moreover, the information
also can be used to allot inventory charges to synthetic items. However, the job costing system
includes three types of cost namely; direct labour, material, and o/h.
Direct Labour: The job costing method have to analyse the value of the labor utilized on
a activity. Further, activities related with services, direct labour may additionally contain almost
all the process cost. Moreover, Direct labour is generally assigned to a task with a time
card, time sheet or with a computerized time clock software and this data can also b e taped on a
smart electronic equipment or through the computer network. Therefore, the user must become
aware of the task, in order that the value facts can be carried out to the appropriate task.
Direct Material: The job costing method can evaluate the value of materials that are
used throughout the performance of the task. As a result, if a company is framing a custom-made
system, the value of the sheet used in the business enterprise ought to be accumulated and
charged to the activity. However, the method can collect this cost through the manual
observation of materials on costing sheets, or the statistics may be charged via using online
terminals inside the storehouse and manufacture location (Kaplan and Atkinson,2015).
Overhead: The job costing method distribute o/h costs like diminution on manufacturing
machine, rent of building etc., to one or greater cost organisation. Further, at the end of every
accountancy duration, the entire amount in each price pool is allotted to the diverse jobs
primarily based on some allotment method that is systematically practical.
Moreover, a job costing system additionally can be custom-made to the necessities of the
customer as some clients permit prices to be charged to their business. However, this is most
usual in cost compensation conditions where the patron has agreed to reimburse a company for
all charges charged to a particular job. Therefore, a job costing method may additionally

incorporate a huge quantity of differentiated rules that aren't broadly applicable to all jobs for
which it's far assembling facts.
Importance Of Management Accounting
Management Accounting makes applicable effort to the company’s profitability
forecasting and economic planning by offering facts on future expenses and income. Further,
management accounting additionally enables the company for preparing the budget preparation,
tracking and manipulate technique in step with agreed regulations and procedures.
Moreover, management accounting method help in placing the pre-decided performance
and corporation standards with real consequences and analysing if any deviation occur which is
accomplished through a way called Variance analysis (Macve,2015).
Furthermore, management accounting develops proper data and information for the cause
of selection making. Thus, the statistics derived from the management accounting procedure
enables management become well knowledgeable to make applicable selections. Moreover,
another vital function of MA is that it helps the management of company in analysing the
opportunities of activities open to management in selection making.
However, The essential function of the management accounting is to develop an accurate
cost analysis to determine the present charges and provide suggestions for the future activities.
Moreover, before an enterprise takes any action, it desires to look into all prospects and
analyse the best plan of action to growth the earnings which indicates that management
accounting can evaluate various sales paths, products, offerings, and advertising activities with a
purpose to find the maximum profitable enterprise version. Therefore, as soon as the
management accounting is done with cost analysis, the company can make better and evidence-
primarily based selections (Morano and Tajani,2017).
P2 Types of Management Accounting Report.
MA report is an effectual approach which helps in efficaciously analysing the fiscal
position of the organisation. It helps in effectively identifying the aims and objectives of the
organization (Appelbaum and et.al, 2017). Management accounting report helps in taking
strategic decision and make proper plans to reduce the problem. It helps management in taking
necessary action to control the deviation and monitor the progress of the Excite Limited.
Financial report: Financial report also known as financial statements of the company are
formal records of all the financial activities and transaction which are carried to achieve gaols

and objectives of the company (Lev, 2018). This leads to high functional performance and
profitability for the Excite Limited company. Financial reports mainly includes financial
statements like P& L statements, balance sheet, shareholders equity statement and cash flow
statement. It helps managers in determining the financial position of the company and take
strategic decision for high growth of the Excite Limited company.
Advantages and benefits of Financial reports:
Financial report is important and beneficial for the organization as it outlines all the
financial transaction of the company. This reports are beneficial for all the stakeholders of the
company to take informed decision. It also helps in taking informed decisions and avoid
potential roadblocks. Financial reports helps in improving debt management and identify current
trends to improve overall health of the business. Financial reports helps in managing capital,
assets and liabilities of the company.
Budget report:
Budget report is one of the most important report in managerial accounting. This report
helps in managing and controlling the cost of the company. These reports are prepared in order
to compare the actual performance with the budgeted performance of the company. This report
helps in managing the performance of the company and set budget to each activities. Budget
report helps in effectively comparing the actual performance with the budgeted plan and if
management founds any deviations then they take corrective actions in order to achieve the
targets of Excite Limited company (Brown and et.al., 2016).
Advantages and benefits of Budget report:
Budget report helps in controlling the cost of the company by setting budget to carry out
a particular activity in the company. These report helps in cutting cost and offer better employee
incentive, renegotiation with suppliers. Budget report helps in effectively forecasting the future
and take informed decision accordingly for Excite Limited company.
Performance report: Performance report helps stakeholders in determining and
evaluating the performance of the particular project. It helps in evaluating financial and
operational performance of the Excite Limited company (Maas and Verdoorn, 2017). It also

helps in determining the performance of each department in the organization and in case of any
deviation take necessary action accordingly.
Advantages and benefits of Performance report:
Performance report helps in effectively identifying the deviation in the activity with the
help of various management accounting techniques. This report helps in analysing the
performance result with the benchmark to get desired results and outcomes. It helps in
forecasting future progress, utilization of resources, forecasting future progress, communicating
project progress for the Excite Limited company. Performance report saves time, ensures
efficiency, improved productivity, reduction in conflicts and consistency.
Cost analysis report: Cost analysis report helps in effectively identifying the cost
attached with each activity to attain goals and objectives in the cost efficient manner. Cost
analysis report helps in identifying the cost attached with raw material, labour, resources and
overhead. It helps in reducing wastage and optimally utilize the resources of the Excite Limited
company which leads to higher profitability.
Advantages and benefits of Cost analysis report:
Cost analysis report helps in determining whether the project is sound, feasible and
justifiable. It helps in analysing how much cost must be attached to carry out activity and how it
adds value to gain profitability in the business (Ramsey and et.al., 2015). It helps in assigning
cost to the project and evaluate the economic value in return. It is simple and convenient to take
informed decision.
Assessment Of Information Presented In Managerial Accounting Reports
Management accounting report is beneficial for Excite Limited company as it helps in
taking strategic and informed decision. The information disclosed in the management accounting
report must be reliable, transparent and true. The report should be in compliance with various
accounting standards for higher accuracy and reliability of the data. Accurate and reliable
information helps managers in taking informed decision which eventually helps in further growth
and development of Excite Limited company (Herremans and Nazari 2016). The report should
be presented on the timely manner so that proper goals can be set for the future and evaluate the
present performance of the company effectively. Management accounting report helps in
developing effective strategies for higher growth of the business. It also helps in taking necessary

action in case of any deviation. True, reliable, accurate and relevant management accounting
report is very useful for the stakeholders of the company to take informed decision with utmost
accuracy.
LO 2
P 3 Income statement using absorption and marginal costing
Absorption Costing
Absorption costing also called full costing method which is a formulaic approach of
determining cost. Further, it is the method of charging all fees both variable and fixed to
transaction, procedures and products. Moreover, it's miles the oldest and extensively used
method of figuring out fee. However, under absorption method, cost is made from direct prices
plus overhead fees absorbed on some appropriate foundation (Mullinova,2016).
Advantages
 Absorption Costing is the most appropriate method for maintaining the accounting
system of company. However, this is the method which is satisfactory below the
generally accepted Accounting ideas(GAAP ). Therefore, the principle reason for that is
that under absorption costing inventory isn't always under-valued as it responsible for the
attributable expenses but also the constant business overheads.
 The absorption costing is the best method of costing for companies. Further, absorption
costing makes calculations less difficult for organisation. Moreover, it makes these
agencies capable of absorb constant charges in advance and promote their merchandise
on a higher selling charge in addition to income.
Disadvantages
 Absorption Costing can't be used as an effective device to assess profitability of a
business enterprise that is due to the fact the absorption costing includes constant charges
within the cost of the product, that will be fixed regardless of the output or production.
Income Statement (Absorption Costing)
as on 30th May 2019
Under Absorption Costing

Cost per
unit
Direct
Material 4
Variable
O/H 2
Fixed o/h 4
Total
absorption
cost per unit 10
May
Sales (8000*15) 120000
Cost of
sales:
Opening
inventory (500*6) 3000
Material (10000*4) 40000
Variable o/h (10000*2) 20000
Fixed o/h 40000
100000
-Closing
inventory (2500*6) -15000
-85000
Gross
Profit/Loss 35000
Actual Net
profit/(Net
Loss) 35000
Marginal costing

Marginal Costing is a costing approach in which the marginal fee, i.e. variable cost is
charged to units of price, at the same time as the fixed value for the duration is absolutely written
off in opposition to the contribution (Otley,2016). However, The marginal fee implies the
additional price included in producing a further unit of output, which can be anticipate by using
total variable cost allotted to one unit. it may be calculated as:
Marginal cost = Direct material + Direct labour + Direct fees + Variable Overheads
Advantages
 Marginal costing is very simple to apprehend as it can be blended with standard costing
and budgetary control and thereby makes the management mechanism powerful.
 It facilitates income planning via break-even charts and earnings graphs. Further,
Comparative profitability can effortlessly be evaluated and taken to the notice of the
control for choice-making.
Disadvantages
 The major disadvantage of marginal costing is that it make use of historical records for
preparing the financial report for future operations.
 This method is based totally on a false hypothesis that each one charges can be isolated
into constant and variable costs. Further, for long term sales cost fixed value and variable
cost in step with unit may differentiate.
Income Statement (Marginal Costing)
as on 30th May 2019
Under marginal costing
Cost per
unit
Direct
Material 4
Variable
O/H 2

Marginal
cost per unit 6
Selling price 15
-Marginal
cost per unit -6
Contribution
per unit 9
May
Sales (8000*15) 120000
Cost of
sales:
Opening
inventory (500*6) 3000
Material (10000*4) 40000
Variable o/h (10000*2) 20000
63000
-Closing
inventory (2500*6) -15000
-48000
72000
Contribution 72000
-Fixed costs -40000
Actual Net
profit/(Net
Loss) 32000

From the above calculation it is been identifies that Excite limited is earning higher
profits through marginal costing method as his method is evaluating variable costs by
multiplying sales with the variable cost, on the other hand, absorption costing is undertaking the
direct cost to reach the conclusion. Therefore, marginal costing method is more beneficial for the
company.
LO 3
P 4 Types of planning tools used for budgetary control
Budgetary control means how properly managers apply budgets to reveal and manage
expenses and operations in a given accounting period (Pratt,2016). Thus, budgetary control is a
procedure for companies to set economic and performance goals with budgets, evaluate the real
results, and alter performance, according to their needs.
Tools of Budgetary control
Sales Budget : a sales budget is a computation of expected general income sales and
selling expenditure of the company. Therefore, it's miles called as backbone of the organisation.
Further, it is the start line on which other budgets are also based and it also includes prediction of
sales for the time each in amount and value. Hence, it indicates what product might be bought, in
what quantities, and at what expenses.
Advantages
 The major advantage of sales budget is that it helps the company to observe the weaker
sections of the company which can restrict them in achieving the pre decided budget for
sales.
 Moreover, sales budget helps the company in allocating resources to each department of
the company which will be based on forecasting of sales, planning sales budgets etc.
Disadvantages
 The sales budget are not accurate which affect the operations of the company.
 Another disadvantage of sales budget is that it consumes lot of time while predicting the
budget of company for sales.
Production Budget : Production budget is prepared on the idea of the sales finances.
However, it additionally takes into consideration the inventory ranges required to be maintained
and it considers the manufacturing activities of the corporation. Therefore, it's miles beneficial in
evaluating the value of manufacturing (Ray and Gramlich,2015).

Advantages:
 With the help of production budget company will be able to make optimum utilization of
resources like labour.
 Production budget enable the organisation to maintain minimum stock by properly
planning their production and budget.
 Wit the help of production budget company would be able to meet the demand or
products in the market and according decide the production quantity.
Disadvantages:
 It is very time consuming method for planning the budget for production department and
accordingly produce the products.
Cash Budget: A cash budget is an estimation of inflows and outflows for a commercial
enterprise over a specific time frame. Further, this budget is used to evaluate whether the
company has enough cash to function. Moreover, businesses use sales and manufacturing
forecasts to create a cash finances, alongside anticipation about important spending and debts
receivable.
Advantages
 With the help of cash budget company would be able to observe that whether they have
enough cash to carry out the business operations.
 Furthermore, it helps the company to monitor their finances and plan their expenditure
accordingly.
Disadvantages
 Organisations cannot prepare accurate cash budget as the value of money is not constant
and they keep on changing depending upon the market trends, thus, company may face
losses due to these changes.
LO 4
P 5 Management accounting techniques to solve financial problems
There are various management accounting techniques used by Excite entertainment ltd. to
solve their financial issues namely break even analysis and cost volume profit analysis (CVP),
with the help of such method company will be able to solve their financial problems.
Break Even Analysis

Break Even Analysis includes the calculation and investigation of the margin of safety
for a company based at the revenues accumulated and associated prices (Break-even analysis,
2019). Further, evaluating distinct price levels referring to various stages of demand an
enterprise uses break-even analysis to decide what level of sales are vital to include the
organization's fixed costs (Said,2016).
Calculation of Contribution
Particulars Amount
Budgeted Fixed Cost £120000
Variable Cost per Unit £10
Sale price per Unit £40
Contribution Margin (Sales-Variable Cost) £30 per unit
Break Even Point/ Break Even Quantity (BEQ)= (Fixed Cost/
Contribution per Unit)
BEP= (1,20,000/30)
=4000 units
From the above calculation it is being observed that the contribution of Excite limited is
£30 per unit that mean company's profit is £30 per unit after reducing variable cost i.e. £10 from
sales unit that is £40. Moreover, it is being analysed that company is not earning any profit and
neither suffering any losses at 4000 units of sales and below this unit the company is suffering
loss and beyond this unit the company is earning profit.
Further, the manager of the company observed that they are not earning higher profits at
4000 units of sales, therefore, they set a profit of around £60000 and for achieving this profit
they need to sale 6000 units which is computed below.

Units Required to be Sold to earn Targeted Profit= (Total Fixed
Cost+Profit)/Contribution Margin
(120000+60000)/30= 180000/30
=6000 Units
Units TFC TVC TC SR Profit
1000 120000 10000 130000 40000 -90000
2000 120000 20000 140000 80000 -60000
3000 120000 30000 150000 120000 -30000
4000 120000 40000 160000 160000 0
5000 120000 50000 170000 200000 30000
6000 120000 60000 180000 240000 60000
7000 120000 70000 190000 280000 90000
8000 120000 80000 200000 320000 120000
9000 120000 90000 210000 360000 150000
10000 120000 100000 220000 400000 180000

Cost Volume Profit Analysis (CVP)
This method is used to evaluate how changes in costs and sales of company affects their
operating income and profitability. However, this method is prepared by computing contribution
margin and margin ratio (Said,2017).
Calculation of Contribution
Particulars Amount (£)

Sales 120000
Less:prime cost 32000
Less:variable costs 16000
Contribution 72000
Fixed Cost 40000
Contribution Margin Ratio= (Contribution/Sales)*100
= (72000/120000)*100
=60%
Break Even Sales Volume= Fixed Cost/ Contribution Margin Ratio
=40000/60%
=66000.
The above calculation evaluated that the profit margin of company varies due to changes
in volume of sales and variable as all other cost are fixed.
CONCLUSION
This report briefly summarises about the concept of management accounting which is
inclusive of difference between financial accounting and management accounting and along with
it have outlined about the cost management system, inventory management system and job
costing system. Moreover, the project have highlighted about the absorption and marginal
costing and along with it have commented on the planning tools of budgetary control namely;
sales budget, cash budget, and performance budget. Eventually, the report the highlighted about
the various management accounting techniques used by the company to solve their financial
problems like break even analysis, cost volume profit analysis etc.

REFERENCES
Books and Journals