Assignment about Nature of Business

2.1
All businesses, irrespective of the nature of business, incur both fixed as well as
variable costs, classification of each cost incurred by the business is essential, so
as to be able to assess the profitability of the products manufactured by it and
also to decide the pricing for the products (Kaplan, Robert S., 2015). From the
given case study, it is understood that management accounting concepts are not
fully utilized by the businesses to take business decisions, it is primarily due to
the lack of understanding of the concepts. Manufacturing units of gins or wine
are more often than not labor intensive industries, relying mainly on labor for the
production activities and hence, salaries account for a major chunk of the
expenses of a distillery.
In case the business classify the cost incorrectly, i.e. a fixed cost as variable or
vice versa, it would have significant effect on the pricing of the goods
manufactured as the fixed cost being loaded on a good would mean that the
good is overpriced and similarly skipping the loading of a variable cost to a good
would imply that good is underpriced and the company would end up making
loss due to manufacturing of the good.
2.2
An organisation’s primary aim is to cover the fixed cost and ensure that the
contribution generated by the goods sold is sufficient enough to cover fixed cost
and then generate profit for the entity. Cost-volume profit is the analysis of
contribution generated by per unit of good sold and also on an overall volume
that the business operates at.
Short term economic decision of a manager is based on the sales volume data
for the firm and the amount of contribution expected from each unit sold. Profit
is a function of total revenue and total cost, total cost includes fixed cost and
variable cost. Variable cost varies proportionately to the quantity manufactured
and fixed cost, as the name suggests remain fixed (Cynthia E. Bolt-Lee, 2016).
Thus, Profit = (Selling price – Variable cost)*Quantity sold – Fixed cost. The
contribution margin per unit is equal to Selling price-Variable cost, the quantity
of goods required to be sold is equal to (Fixed cost + profit)/Unit contribution
margin.
The sales volume considered in the budgeting for break-even analysis and for
analysis of profit, is budgeted number and the actual sales volume could vary
significantly. The managers usually prepare a sensitivity analysis wherein, they
consider various probable sales levels and analyse the profit/loss at each
probable level of sales.