Managing Business Performance: Marginal Costing and Standard Costing

This document discusses the concepts of marginal costing and standard costing in managing business performance. It includes a case study of Sunshine Footwear and explores the impact of changes in selling price and variable cost on profitability. The document also highlights the limitations and benefits of these techniques.

Managing business performance
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Contents
INTRODUCTION...........................................................................................................................1
PART 1............................................................................................................................................1
1. Statement of marginal costing showing 20 % profit on selling price..........................................1
2. and 3. Statement of marginal costing showing various changes in selling price and variable
cost..........................................................................................................................................2
4. Explanation of results and limitations of the exercise:.......................................................5
PART 2............................................................................................................................................6
1. Explanation of standard costing and process of setting standard costs..............................6
2 Explanation of factors that can lead to both adverse and favourable materials and labour 7
3 explanation of standard costing as a tool for control.........................................................10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12
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INTRODUCTION
Managing business performance is a strategical term which is applied by managers to
improve efficiency, productivity and quality of an organisations department. It is continuous
process. In order to better understand the concept of business performance, Sunshine Footwear
has been taken. It is newly set up company and wants to expand their business through
introducing their new product in market. In this report essential requirements of marginal costing
for decision making has been defined and concept of standard costing as tool of controlling
business activities has been clarified.
PART 1
1. Statement of marginal costing showing 20 % profit on selling price
Particular Units2500 @ £150 per unit Amount
Sales 150 375000
- Variable cost ( 30%) 45 112500
Contribution 105 262500
- Fixed cost 80000 80000
Net profit 182500 182500
Computation of Breakeven
BEP in units = Fixed cost / Contribution per unit (Schaltegger and Wagner,2017)
BEP: 80000 / 105 = 1778
BEP in sales amount = Fixed cost / PV Ratio
Computation of PV ratio = Contribution / Amount of sale
PV ratio = 262500 / 375000 = 70%
BEP in sales amount = 80000 / 70% = 114285
Computation of margin of safety
Margin of safety in unit =Actual sale unit – BEP sales unit
Margin of safety in unit =2500-1778 = 722 units
Margin of safety in % = Current sale – BEP sale / Current sale *100
Margin of safety in % = 375000-114285 / 375000 = 69.70 %
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Computation of net profit %
Net profit % = Net profit / Sales *100 (McDowell Harris and Geho, 2016)
Net profit % = 182500 / 375000 = 48.66 %
2. and 3. Statement of marginal costing showing various changes in selling price and variable
cost
 Increasing original selling price by 10%, leaving the variable cost unchange
Statement of marginal costing
Particular Amount £ 1000 @ per unit Amount
Sales 165 412500
- Variable cost ( 30%) 45 112500
Contribution 120 300000
- Fixed cost 80000 80000
Net profit 30000 220000
Computation of Breakeven analysis
BEP in units = Fixed cost / Contribution per unit
BEP in units =80000 / 120 = 667
BEP in sales amount = Fixed cost / PV Ratio
Calculation of PV ratio = Contribution / Amount of sale*100 (Cleary and Quinn, 2016).
PV ratio = 300000 / 412500*100 = 72.72 %
BEP in sales = 110000
Computation of margin of safety
Margin of safety in unit = Actual sale unit – BEP sales unit
Margin of safety = 2500-667 = 1833
Margin of safety in % = Current sale – BEP sale / Current sale *100
Margin of safety in % = 412500 – 110000 / 412500 = 73 %
Computation of net profit % (Gupta and Sharma 2016).
Net profit % = Net profit / Sales *100
Net profit % = 220000 / 412500*100 = 53.33%
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Reduce original selling price by 10%, leaving the variable cost unchanged
Statement of marginal costing
Particular Amount £ 1000 @ per unit Amount
Sales 135 337500
- Variable cost ( 30%) 45 112500
Contribution 90 225000
- Fixed cost 80000 80000
Net profit 145000 145000
Computation of Breakeven analysis
BEP in units = Fixed cost / Contribution per unit (Möller and Halinen, 2017).
BEP in units = 889
BEP in sales amount = Fixed cost / PV Ratio
PV ratio = Contribution / Amount of sale*100
PV ratio =225000 / 337500*100 = 66.66%
BEP in sales amount = 80000 / 66.66 % = 120000
Computation of margin of safety
Margin of safety in unit = Actual sale unit – BEP sales unit
Margin of safety = 2500 – 889 = 1611
Margin of safety in % = Current sale – BEP sale / Current sale *100
Margin of safety = 64%
Computation of net profit %
Net profit % = Net profit / Sales *100
Net profit % = 145000/337500*100 = 43%
 Using original selling price, reduce variable costs to 25% of the selling price
Statement of marginal costing
Particular Amount £ 1000 @ per unit Amount
Sales 150 375000
- Variable cost ( 25 %) 37.5 93750
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Contribution 112.5 281250
- Fixed cost 80000 80000
Net profit 201250 201250
Computation of Breakeven analysis (Morioka and de Carvalho, 2016).
BEP in units = Fixed cost / Contribution per unit
BEP in units = 80000/ 112.5 = 711 unit
BEP in sales amount = Fixed cost / PV Ratio
Calculation of PV ratio = Contribution / Amount of sale*100
PV ratio = 281250/375000*100 = 75%
BEP in sales amount = 80000 / 75% = 114285
Computation of margin of safety
Margin of safety in unit = Actual sale unit – BEP sales unit
Margin of safety in unit = 2500 - 711= 1789
Margin of safety in % = Current sale – BEP sale / Current sale *100
Margin of safety in % = 375000-114285/375000 = 69%
Computation of net profit % (Chesbrough, 2017)
Net profit % = Net profit / Sales *100
Net profit % = 201250 / 375000*100 = 53.66
 Using original selling price, increase variable costs to 35% of the selling price
Statement of marginal costing
Particular Amount £ 1000 @ per unit Amount
Sales 150 375000
- Variable cost ( 35 %) 52.5 131250
Contribution 97.5 243750
- Fixed cost 80000 80000
Net profit 163750 163750
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Computation of Breakeven analysis (Winterhalter Zeschky and Gassmann, 2016)
BEP in units = Fixed cost / Contribution per unit
BEP in units = 821 unit
BEP in sales amount = Fixed cost / PV Ratio
Calculation of PV ratio = Contribution / Amount of sale*100
PV ratio = 243750 / 375000*100 = 65%
BEP in sales amount = 123000
Computation of margin of safety
Margin of safety in unit = Actual sale unit – BEP sales unit
Margin in safety =2500-821 = 1679
Margin of safety in % = Current sale – BEP sale / Current sale *100
Margin of safety in % = 375000 – 123000 / 375000*100 = 67%
Computation of net profit %
Net profit % = Net profit / Sales *100
Net profit % = 163750 / 375000*100 = 43.66%
4. Explanation of results and limitations of the exercise:
Business organisations management accounting methods to take essential decision.
Marginal costing is part of managerial accounting tools. This tool is beneficial for newly
developed business entities to identified best alternative among others. In this case Sunshine
Footwear, newly incorporated business entity will be entering in business market soon. To take
most profitable decision among all, manager of this organisation uses elements of marginal
costing.
Breakeven analysis: It is a situation of no profit, no loss. At this level expenditure of
organizations are equal to their incomes. The more price increase of their selling product, their
unit level of BEP has been increases.
Net profit ratio: This ratio is used to identify profit margin of products over their sales. Higher
net profit ratio shows high level of profitability in this case company generate higher ratio when
they reduce their variable cost.
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Margin of Safety: This ratio used to analysis the quantity of sales falls for reaching BEP point.
Ratio of marginal safety increase when selling price increase by company.
Sunshine Footwear will be beneficial in the case if they increase their selling price by 10% of
margin.
Marginal costing is play essential part of decision making process but this technique has some
drawback which are describe as follows:
 This method does not consider value of time factor while calculating profitability of
business entities.
 Marginal costing method is only beneficial for short term time period. This technique is
not providing accurate result for long term time period.
By using this method manager cannot separate cost according to their requirement (Chen, and
Lin, 2016).
PART 2
1. Explanation of standard costing and process of setting standard costs.
Standard costing is a systematic process of identifying differences between actual cost and
estimated cost for maintaining cash flow outcomes of business activities. In other words, it is a
method of cost accounting which used by organisations to identifies various variances. Main
objective of using this technique is to maximize profit by minimizing cost of manufacturing
products. For this purpose, managers identify differences of actual incurred cost and standard
cost and then make decision which helps to reduce difference between actual cost and standard
cost (Eriksson Patel Sjödin Frishammar and Parida, 2016).
Manager of Sunshine footwear use systematic process of formulating standard cost which
are describe below:
 Selection of standards: It is the first step of setting standard cost. Organisation will be
choosing standards by analysing other industries estimated cost or they can make their
own standards by identifying their past data. Manager of Sunshine Footwear decide their
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standard on the basis of analysing their rival industries cost as it is newly entity in market
area will be established.
 Computation of actual cost: After selecting standard cost. Companies needs to identify
actual cost incurred on their products, for this purpose they calculated cost of materials,
labour and cost incurred on overheads. Manager of Sunshine footwear needs to computed
actual cost incurred during their production process.
 Evaluation of actual and standard cost: In this step business entities compare actual
cost with standard cost of the product. It is essential step. Manager of Sunshine limited
needs to compare their actual cost with standard cost for identifying differences amount
between them.
 Identification of causes: After comparing differentiate amount between standard cost
and actual cost, managers identified main causes of differences arises between actual and
standard cost. Managers of Sunshine needs to analysis causes of difference between
actual and standard. Main reason of this step is to compare performance of organisation
with its rivalries and formulation of those policies which help in overcome causes of
differences.
 Dispositions of variance: It is the last step of setting up standard costing. In this step
managers need to write of amount of different variance calculated during this process.
Materials, labour and overheads variance are calculating in standard coting method.
Companies need to shoe the balance of their variance weather it will be adverse or
2favourable. Manager of Sunshine Footwear should be show variances in their
accounting statements to show performance status of their organisation.
2 Explanation of factors that can lead to both adverse and favourable materials and labour
Variances with example.
Material variances:
Product Standard
Quantity
Standard
price
Total Actual
Quantity
Actual
price
Total
A 1000 15 15000 850 14 11900
B 2000 20 400000 17000 18 306000
Material Price variance: standard price – Actual price (Actual quantity)
Material Price variance of A = 15 – 14 (850) = 850(Favourable)
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Material Price variance of B = 20 – 18 (17000) = 34000
Material Quantity variance: standard quantity – Actual Quantity (standard price)
Material Quantity Variance A = 1000 – 850 (15) = 2250 (F)
Material Quantity Variance B = 20000 – 17000 (20) = (60000)
Product
Standard
Time Per
Unit
Budgeted
Units
Total
Standard Hour
Actual
Production
Units Total Production Hour
A 3 3000 9000 1800 5400
B 4 2000 8000 800 3200
Q 5 500 2500 400 2000
Budgeted Hours
Variable Cost Product A Product B Product Q
Cost Item Per Hour 9,000 8,000 2,500
Direct Labour £2.00 18,000 16,000 5,000
Variable
Overhead £4.00 36,000 32,000 10,000
Total Variable
Costs £6.00 £54,000 £48,000 £15,000
Actual Production Hours
Variable Cost Product A Product B Product Q
Cost Item Per Hour 5,400 3,200 2,000
Direct Labour £2.00 10,800 6,400 4,000
Variable
Overhead £4.00 21,600 12,800 8,000
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Total Variable
Costs £6.00 £32,400 £19,200 £12,000
Actual Production Hour
Variable Cost Product A Product B Product Q
Cost Item Per Hour 5,400 3,200 2,000
Direct Labour £2.17 11,700 6,933 4,333
Variable
Overhead £3.33 18,000 10,667 6,667
Total Variable
Costs £5.50 £29,700 £17,600 £11,000
Variances between price and quantity:(Crema and Verbano, 2016).
Direct Labour Rate Variance = Actual Hours X Actual Rate - Actual Hours X Standard Rate
Product A = 5400*2.17-5400*2
= 918
Product B = 3200*2.17-3200*2
= 544
Direct Labour Efficiency Variance = Actual Hours X Standard Rate - Standard Hours x Standard
Rate
Product A = 5400*2.17-9000*2
= -6282
Product B = 3200*2.17-8000*2
= -9056
Factors affecting material and labour variances:
Standard costing is used to analysis performance and manage unwanted activities in a
running organisation. Various factors are effect outcomes of material and labours variance these
are mention below:
 Outcomes of variance are depending on rules, regulations and polices
implemented by managers. If all the polices are favourable for workforce, then
they work with full of their efficiency. It will positively impact on material
variances.
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 Relationship of labour with their supervisors is also reason which directly affect
result of variances. Labour will go on strike and lockout to their production
department if they not satisfied with their work.
Quality of material also affect variances as high quality of material result in favourable outcome
(Yu, Tao, Tao, Xia, and Li, 2018).
3 explanation of standard costing as a tool for control.
Standard costing is used by organisation to effectively utilizes their resources by minimizing
additional cost incurred on manufacturing products. Standard costing is part of management
accounting. Manager of Sunshine footwear would be uses it as tool of controlling their business
activities. Standard costing is a part of controlling process. Management department apply this as
a method of performance evolution of their department. As a tool of controlling process standard
budgeting technique provides following benefits to their organisation:
 Elimination of traditional system: Standard costing uses to eliminate old process from
production department. Managers identifies causes of extra overheads and then they
eliminate those procedure and activities through which cost incurred at high level.
 Help in foster efficiency level: With the uses of standard costing method, managers of
organisation enhance capacity level and capability skills of their workforce. Managers
estimate targets and implement various policies which provides incentive and bonus to
their potential employees.
 Easy method of comparison: Standard costing is one of the easiest method of
comparing performance of various departments. This method is mostly applicable on
manufacturing units. It is time consuming process as it does not require lots of mental
stress to calculate standard cost and actual cost.
Provides essential guidelines: This tool of controlling help in provides guideline to managers.
Organisation allocate cost to their resources after analysis past result of standard costing.
Managers focused on those areas which is essential for manufacturing units (Lee, Lanting, and
Rojdamrongratana,2017).
.
 Determination of responsibility: Variance are for identified actual cost differences. This
tool helps in allocating responsibilities of executives to control causes of differences.
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Variance helps in identify controllable and uncontrollable factors effect on business
organisation. Managers uses those policies through which they can control their factors
 Better management of stock: Standard costing is a part of controlling process of
business entities. This technique helps in identifying requirements of raw materials
changes in raw material level of organisation by calculating material variances. This will
help management to implement stock management policies which help in reducing
wastage of raw material of the organisation.
CONCLUSION
From the above report it has been identified that managing business performance has
been essential part of management process. Business entities uses different kind of accounting
techniques to improve their workforce performance. Managers use marginal and standard costing
techniques to take essential decision and identified their performance status. With the calculation
of various marginal factors organisation can identify their profitability ratio which helps mangers
to decide best alternatives. To run business organisation effectively in competitive environment
organisations uses standard costing technique it helps them to minimize cost and improve
performance level of organisation.
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REFERENCES
Books and Journals:
Schaltegger, S. and Wagner, M., 2017. Managing and measuring the business case for
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competitiveness and economic performance. In Managing the business case for
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of maturity on strategic focus and business performance. Journal of Business
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Möller, K. and Halinen, A., 2017. Managing business and innovation networks—From strategic
nets to business fields and ecosystems. Industrial Marketing Management. 67. pp.5-22.
Gupta, N. and Sharma, V., 2016. Exploring employee engagement—A way to better business
performance. Global Business Review, 17(3_suppl), pp.45S-63S.
Morioka, S.N. and de Carvalho, M. M., 2016. A systematic literature review towards a
conceptual framework for integrating sustainability performance into business. Journal
of Cleaner Production, 136, pp.134-146.
Chesbrough, H., 2017. The future of open innovation: The future of open innovation is more
extensive, more collaborative, and more engaged with a wider variety of
participants. Research-Technology Management, 60(1. pp.35-38.
Winterhalter, S., Zeschky, M.B. and Gassmann, O., 2016. Managing dual business models in
emerging markets: an ambidexterity perspective. R&D Management, 46(3), pp.464-479.
Crema, M. and Verbano, C., 2016. Managing Intellectual Capital in I talian Manufacturing
SMEs. Creativity and Innovation Management, 25(3), pp.408-421.
Chen, C .J. and Lin, Y. H., 2016. Managing the foreign investment portfolio: How industry and
governance diversity influence firm performance. International Business Review. 25(6)
pp.1235-1245.
Eriksson, P. E., Patel, P .C., Sjödin, D .R., Frishammar, J. and Parida, V., 2016. Managing
interorganizational innovation projects: Mitigating the negative effects of equivocality
through knowledge search strategies. Long Range Planning, 49(6). pp.691-705.
Lee, K. W., Lanting, M .C .L. and Rojdamrongratana, M., 2017. Managing customer life cycle
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