Accounting Fundamentals: Break-Even Point and Management Accounting

This document provides solutions to an accounting fundamentals exam, covering key concepts such as break-even point (BEP) calculation and the importance of management accounting. The BEP is calculated in units and rupees, and its limitations are discussed. The importance of manage...Read More

Online exam ACCOUNTING
FUNDAMENTALS

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
a) Calculation of BEP.................................................................................................................3
b) Profit made on sale of 75000 units.........................................................................................3
c) Calculation of new profit figure..............................................................................................3
d) Limitation of break even.........................................................................................................4
QUESTION 2...................................................................................................................................4
Importance of management accounting and difference with financial accounting.....................4
Three techniques through which management accountant can attain objectives of management
accounting...................................................................................................................................5
REFERENCES................................................................................................................................7

QUESTION 1
a) Calculation of BEP
Particulars Formula Amount
Selling price per unit 11
Less: VC per unit 6
Contribution Selling price- VC 5
Fixed cost 350000
BEP (units) Fixed cost/ contribution 70000
BEP (rupees) 770000
With the above calculation it is clear that BEP is 70000 units that is in case company will
sell this much of units then they will be in no profit no loss situation. In case company sells
beyond 70000 then they will start earning profits.
b) Profit made on sale of 75000 units
Sales 825000 (75000 * 11)
Less:
Variable cost 450000(75000 * 6)
Contribution 375000
Less:
Fixed cost 350000
Profit 25000
c) Calculation of new profit figure
Sales 1040000 (80000 * 13)
Less:
Variable cost 560000 (80000 * 7)
Contradiction 480000

Less:
Fixed cost 350000
Profit 130000
d) Limitation of break even
 The key limitation of break- even analysis is that this method does not predict the
demand as it outlines the level of production wherein company will be in no profit no loss
situation (Sintha, 2020). Hence, this will not provide the optimal level of demand which
is actually present in the market.
 Along with this, another limitation of break- even point is that the calculation is totally
dependent on the data relating to cost of company. in case the data is wrong or the cost
selected is fluctuating then it will not provide the actual results.
 Moreover, at time of using the BEP, the competition is ignored and this is the biggest
limitation. This is particularly because of the reason that competition and new entrant
within the market can affect the demand of product but will not cause any change in price
(Morano and Tajani, 2017). Hence, as a result of this there will not be any change in
BEP.
QUESTION 2
Importance of management accounting and difference with financial accounting
Management accounting is being defined as the process of identifying, measuring and
analysing and interpreting the accounting information in order to take decision of business. The
management accounting is very essential for the proper and successful running of the business.
Hence, it is essential for every business that there is requirement of proper management
accounting in order to implement and manage the business. the key importance of management
accounting is as follows-
 The key importance of management accounting is that it assists the company in proper
planning of business strategies. The reason underlying this fact is that when the proper
analysis of financial information is being done then this will outline the actual position of
company and in accordance to that work can be managed.

 In addition to this, another importance of management accounting is that it will assist in
decision making as well. the reason pertaining to the fact is that when proper planning is
done then this will provide a base to the manager for taking proper decisions of business.
 Moreover, identification of early signs of problem is also an importance of effective
management accounting system (Importance of management accounting, 2019). This is
particularly because of the reason that when proper research and analysis of financial
information is being done then this will assist company in identifying the issues where
company is lacking and take corrective actions.
Moreover, there is a difference between management and financial accounting which can be
illustrated as below-
Management accounting Financial accounting
The management accounting is being defined
as the use and analysis of the financial
information for taking the decisions (Brandau
and et.al., 2017).
Whereas financial accounting is being referred
to as the recording the financial transaction and
analysing and communicating the financial
outcome to the users of accounting.
Under management accounting use of both
financial and non- financial information is
being undertaken.
On the other side, financial accounting deals
with only financial information.
The reports relating to management accounting
are being prepared as per requirement of
company.
But financial statement is compulsory to be
prepared and are prepared at the end of every
year.
The use of management accounting report is
generally for the internal users only.
Whereas financial statements are being used by
both internal and external parties.
Three techniques through which management accountant can attain objectives of management
accounting
With the above analysis it is clear that use of management accounting is very essential for
the smooth running of the business. the reason underlying this fact is that when the management
accounting is being used in proper and effective manner then this will improve working of
company. hence, there are many different management accounting techniques which can be used
by company in attaining objectives of business. these techniques are as follows-

 Budgetary control- this is a technique under management accounting which assist the
company in attaining objectives of management accounting. The budgetary control
provides a better idea as it involves estimation of the all the future expenses and income
along with cost (Dahal, 2021). When the company and employees are having an
estimation of all the aspect then it assists in proper attainment of objectives of business.
 Financial statement analysis- this is another technique of management accounting which
involves analysing the financial statements of company that is P&L, balance sheet and
cash flow statement. All these statement analyses will definitely assist the company in
attaining the objectives of business as it will provide information relating to business and
its profitability.
 Trend analysis and forecasting- this is also a type of technique under management
accounting which is assistive to attain objectives of the business. with the help of trend
analysis, it was evaluated that company can identify the trend which is present in the
company and then take decision relating to the future working of company. hence, this
will assist company in developing the strategies accordingly (Ntshonga and Kamala,
2019). As a result of this, all the objectives of the business will be attained in proper and
effective manner.
Thus, it can be stated that the use of all these techniques and other techniques will definitely
assist the company in analysing the working efficiency and take decision of the business. thus, as
a result of this proper working will be conducted and this will result in attainment of goals of the
business.

REFERENCES
Books and Journals
Brandau, M., and et.al., 2017. Separation–integration–and now…? A historical perspective on
the relationship between German management accounting and financial accounting.
Accounting History. 22(1). pp.67-91.
Dahal, R.K., 2021. TRADITIONAL VS CONTEMPORARY MANAGEMENT
ACCOUNTING TECHNIQUES IN THE NEPALESE MANUFACTURING
COMPANIES. Journal of Management Information and Decision Sciences. 24(5). pp.1-14.
Morano, P. and Tajani, F., 2017. The break-even analysis applied to urban renewal investments:
a model to evaluate the share of social housing financially sustainable for private investors.
Habitat International. 59. pp.10-20.
Ntshonga, O. and Kamala, P., 2019. Suitability of conventional management accounting
practices to small and medium enterprises operating in the hotel sector of the Cape
Metropole. African Journal of Hospitality, Tourism and Leisure. 8(5). pp.1-14.
Sintha, L., 2020. Importance of Break-Even Analysis for the Micro, Small and Medium
Enterprises. International Journal of Research-Granthaalayah. 8(6).
Online
Importance of management accounting. 2019. [Online]. Available through: <
https://legaldocs.co.in/blog/importance-of-management-accounting>