Managing Business Performance

This assignment focuses on managing business performance and explores techniques such as marginal costing, break-even point, and margin of safety. It also explains the concept of standard costing and its procedure, analyzes factors leading to adverse and favourable materials, and critically evaluates standard costing as a tool for control.

Managing Business
Performance

Table of 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:......................................................6
PART 2............................................................................................................................................6
Explain the term of standard costing and procedure for standard costs.................................6
Different factors that lead in both adverse and favourable materials.....................................8
Critically analyse standard costing as a tool for control.........................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
A business management approach focuses on the operations as a whole rather than a
division level. The business performance management review on the overall business activities
and analysis of how to meet with organisational goals & objectives. To manage the performance
of business requirements it is required to apply different techniques of performance management.
It is essential for different activities in order to enhance sustainability and get success for a long
period of time. This assignment is based on the new footwear business which is “Spark
Footwear”. For performance management of new business application of different techniques
such as marginal costing, Break-even point and margin of safety is covered in this project
PART 1
1. Statement of marginal costing showing 20 % profit on selling price
Statement of marginal costing
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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 unchanged
Statement of marginal costing
Particular Amount £ 1000 @ per unit Amount
…..Sales 110 110000
…..Less - Variable cost ( 30%) 30 30000
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…....Contribution 80 80000
Less - Fixed cost 50000 50000
…....Net profit 30000 30000
Calculation of Break even analysis
…...BEP in units => Fixed cost / Contribution per unit
…...BEP in units => 50000 / 80 = 625 unit
…...BEP in sales amount => Fixed cost / PV Ratio
Calculation of PV ratio => Contribution / Amount of sale*100 (Cleary and Quinn, 2016).
…...PV ratio => 80000 / 110000*100 = 72.7 %
…...BEP in sales => 50000 / 72.7 % = 68775
Calculation of margin of safety
…...Margin of safety in unit = Actual sale unit – BEP sales unit
…...Margin of safety = 1000 – 625 = 375 units
…...Margin of safety in % = Current sale – BEP sale / Current sale *100
…...Margin of safety in % = 110000 – 68775 / 110000 *100 = 37.4 %
Calculation of net profit %
…...Net profit % = Net profit / Sales *100
…...Net profit % = 30000 /110000*100 = 27.27 %
 Reduce original selling price by 10%, leaving the variable cost unchanged
Statement of marginal costing
Particular Amount £ 1000 @ per unit Amount
…...Sales 90 90000
Less - Variable cost ( 30%) 30 30000
…..Contribution 60 60000
Less - Fixed cost 50000 50000
…...Net profit 10000 10000
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Calculation of Break even analysis
…....BEP in units => Fixed cost / Contribution per unit
…....BEP in units => 50000 / 60 = 833 units
…....BEP in sales amount => Fixed cost / PV Ratio
…....Calculation of PV ratio => Contribution / Amount of sale*100
…....PV ratio = 60000 /90000*100 = 66.66 %
…....BEP in sales amount => 50000 / 66.66 % => 75000
Calculation of margin of safety
….....Margin of safety in unit => Actual sale unit – BEP sales unit ((Fasone Kofler and Scuderi,
2016).
….....Margin of safety => 1000 – 833 = 167 unit
…....Margin of safety in % => Current sale – BEP sale / Current sale *100
…....Margin of safety => 90000 – 75000 /90000*100 = 16.66 %
Calculation of net profit %
…..Net profit % => Net profit / Sales *100
…..Net profit % => 10000 / 90000*100 => 11.11 %
 Using original selling price, reduce variable costs to 25% of the selling price
Statement of marginal costing
Particular Amount £ 1000 @ per unit Amount
…..Sales 100 100000
Less - Variable cost ( 25 %) 25 25000
…...Contribution 75 75000
Less - Fixed cost 50000 50000
…...Net profit 25000 25000
Calculation of Break even analysis
BEP in units => Fixed cost / Contribution per unit
BEP in units => 50000 / 75 => 667 unit
BEP in sales amount => Fixed cost / PV Ratio (Haseeb and et.al., 2019).
Calculation of PV ratio => Contribution / Amount of sale*100
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PV ratio => 75000 / 100000*100 => 75 %
BEP in sales amount => 50000 / 75% = 66667
Calculation of margin of safety
Margin of safety in unit = Actual sale unit – BEP sales unit
Margin of safety in unit = 1000 – 667 = 333 unit
Margin of safety in % = Current sale – BEP sale / Current sale *100
Margin of safety in % = 100000 – 66667 / 100000 *100 = 33.33 %
Calculation of net profit %
Net profit % => Net profit / Sales *100
Net profit % => 25000 / 100000 *100 = 25 %
 Using original selling price, increase variable costs to 35% of the selling price
Statement of marginal costing
Particular Amount £ 1000 @ per unit Amount
Sales 100 100000
- Variable cost ( 35 %) 35 35000
Contribution 65 65000
- Fixed cost 50000 50000
Net profit 15000 15000
Calculation of Break even analysis
BEP in units => Fixed cost / Contribution per unit
BEP in units => 50000 / 65 = 680 unit
BEP in sales amount => Fixed cost / PV Ratio
Calculation of PV ratio = Contribution / Amount of sale*100
PV ratio => 65000 / 100000*100 => 65%
BEP in sales amount => 50000 / 65% => 76923
Calculation of margin of safety (Heisig and et.al., 2016)
…....Margin of safety in unit => Actual sale unit – BEP sales unit
…....Margin in safety => 1000 – 680 unit = 320 unit
…....Margin of safety in % => Current sale – BEP sale / Current sale *100
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…....Margin of safety in % = 100000 – 76923 / 100000 *100 = 23.07 %
Calculation of net profit %
Net profit % => Net profit / Sales *100
Net profit % => 15000 / 100000 * 100 = 15%
4. Explanation of results and limitations of the exercise:
The marginal costing technique is part of costing that supports a business to recognise the
changes in profits with increment or decrease in production units. Such as, Spark footwear sale
out about 1000 units wit effective profit margin of 20% as a result they get BEP is 71429 and
margin of safety 28.57%. When selling price enhance so it is direct impact on the profitability
and increase PV ratio and net profit. The manager of company decide to increase variables cost
so it shows negative impact on PV ratio as well as margin ratio. After overall analysis there is
identified some limitation such as:
 In this exercise does not consider factors during to calculation of profit margins.
 Results are not using of short time period.
PART 2
Explain the term of standard costing and procedure for standard costs
Standard costing is a costing method which is applied by the business to compare
standard costs and revenues with actual outcomes. In case of succeeding at the variances with a
reason of informing the administration in regard of fluctuation and take right measures for the
development. It is related to the different variances which are important for management of
operational activities. When variances occur in business then at that time management became
aware of the manufacturing costs that have varied from the standard costs. It is applied by the
Spark Footwear to find out differences between actual and budgeted cost unit.
The term, standard cost mainly defines about the expected cost per unit to manufacture
footwear in particular period of time. The main purpose of this cost is to measure the
performance, control the fluctuations, analyse the value of stock and set up the selling price of
each product to prepare a quotation.
 Establishment of standards: It is a first step in which managers establish standards as per
the reason for comparison with actual costs. For this system, a standard can be set by
administration on estimation basis. To set up these costs managers require more weight
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which is mainly based on the past data, the current plan and future trends, Moreover,
these standards are fixed in both costs and quantity. The Spark Footwear also set up
standards for standard cost in order to compare the actual and budgeted cost. It may be
traced from the average direction of the footwear industry.
 Determination of actual cost: After setting the standard it is required to conduct an
analysis of each element like material, labours and overheads. For determination of them
it is required to use wages sheets, invoices, account book and many more. With the help
of it, Spark Footwear get aware of all the production cost that is categorised into the
material, labour and overheads.
 Comparison of actual cost with a standard cost: In next step manager requires to
compare actual cost with the standard cost to analyse the differences. Through this
variance analysis, the actual performance of a business could be determined and
according to that effective decisions could be made. If these variances are favourable then
these are good for the company adverse variance shows weak estimation power of
organisation. Like, Spark Footwear has equivalenced the actual costs with budgeted cost
to get the result of favourable and adverse variances.
 Determination of causes: After the examination, in the next step it is required to find out
the causes for the variances to take the right action. Managers apply all the modifications
to analyse the overall performance of business. Spark Footwear faces the problem of
differences and at that time managers search reason and take the right action to enhance
the performance of business.
 Disposition of variances: At the end of this procedure management take decision of
disposition of variances by moving the costing profit and loss account. The Spark
footwear is required to be assured about the disposition of variances.
The term of standard costing can help to determine the profit margin of business at
different phases of production. Moreover, it is useful in practical management functions like
planning as well as controlling.
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Different factors that lead in both adverse and favourable materials
Explanation:
Material as well as labour are important part of standard costing as they support of the
business to analyse the reason for weak effectiveness and efficiency. On the basis of these
variances, organisation can take right decision and apply right techniques on right time. The
actual cost is different from standard material cost where the price paid with the number of
materials that utilised by the management to set amounts. All the different factors that impact on
the material and labour variances are discussed below:
 Managerial policies: It is an essential factor that impacts on the organisational policy in
order to manage different things. On the basis of these policies variances could be
analysed whether they are favourable or unfavourable. The managerial policies are not
good so it shows negative impact on business policies.
 Incentive Policies: Every organisation pay an extra amount to their employees for their
extra effort. It is known as an incentive which depends on the performance of labour then
variance occurs in favourable outcomes. When labour variances are generating negative
results then it shows a negative impact on business activities. As a result, if a business
organisation does not provide the incentive then it shows decreased efficiency ratio.
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 Quality of raw material: The material variances are based on the quality of raw material
in which quality ratio is calculated which helps to determine that operations are
generating positive outcomes in favour of business activities. When Spark Footwear will
use the low quality of material then it will show a negative impact on organisation
occurrence.
 Effective operating cycle period: To circulate the procedure of operating cycle period is
short so present effect variances in a positive manner. On the other side, it takes a long
time in this cycle so it presents a negative impact on business activities. As per this
example, it is analysed that there are material as well as labour variances and both are
unfavourable that means operating life cycle takes more time for a particular procedure.
Critically analyse standard costing as a tool for control
Standard costing is an effective tool which is applied by administration in certain period
of time. This tool is helping an organisation in planning, controlling and decision making in the
operation of a business. It is analysed that standard costing technique is applied in business
because it acts as an instrument of encouraging the staff, preventing wastages and increasing
productivity. As a result standard costing is applied by Spark Footwear in adequate manner
which will help the managers to determine deduction in unplanned cost and enhance profitability
level of organisation. With the help of this term a business take right decision on time. Along
with that control all those activities which are not appropriate for a business.
When an organisation apply standard costing technique the at that time managers
compare standard cost with actual cost and get variances in positive as well as negative manner.
If negative results are analysed then managers must take action and control the cost. In positive
manner follow the particular cost structure. So it is understood that standard costing is working
as a controlling tool which control all business activities in appropriate manner. There are
different advantages using standard costing as management tool and all of them are as follows: Fixing of standard price: The standard price is fixed for stock as raw material and
finished goods which are keeping for sale. Furthermore, profit planning is also finished
with the support of standard costing. Comparison and analysis of data: When standard are set that time standards can be
compared with actual to find the variances. The reason of occur these variances that
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internal as well as external factors impact on the business performance. So according to
that business take right decision on right time. Emphasis on cost: The behaviour of people impact on the management, staff members
and workers in order to change cost. Besides, this time incentive scheme is working
properly on basis of standard technique. Better forecasting: The main reason of probable variances are interpreted in the
circumstance to develop effective budget. This budget can supports in better forecasting
of sales be made very effectively.
 Reduce the costs: For the raw standard price is fixed and standard rate is fixed for labour.
Standards are fixed where variable overhead as well as fixed variable separately. It is a
good way to control cost effectively.
CONCLUSION
As per the above report it has been articulated that to manage the performance of
business in proper manner to apply effective techniques that compare the actual and standard
cost. Through comparison get the result as variances that occur in business with reason of
internal and external factors that impact on the business performance. The standard costing
technique working as a controlling tool which is analysed all the cost of material and labour and
according to that company take appropriate action.
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REFERENCES
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(Arena, Azzone and Bengo, 2015) (Du, Jordan and Funk, 2015) (Haseeb and et.al., 2019) (Heisig
and et.al., 2016) (Invernizzi, Locatelli and Brookes, 2017) (Mari, Poggesi and De Vita,
2016) (Modak, Panda and Sana, 2015) (Rahim, 2017) (Rajvanshi, 2015) (Saban,
Mawhinney and Drake, 2017) (Zaitouni and Gaber, 2017)
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