Breakeven Analysis and Management Accounting

This document discusses the concept of breakeven analysis, including the calculation of the breakeven point and profit. It also explores the limitations of breakeven analysis. Additionally, it explains the significance of management accounting and discusses various techniques used in management accounting, such as margin analysis, trend analysis, capital budgeting, and inventory valuation.

Online Exam

Table of Contents
Question 1.............................................................................................................................................3
Breakeven point.................................................................................................................................3
Profit made on sale............................................................................................................................3
New profit figure...............................................................................................................................4
Limitations of Breakeven Analysis....................................................................................................4
Question 2.............................................................................................................................................5
Significance of management accounting...........................................................................................5
Techniques of Management Accounting...........................................................................................5
REFERENCES......................................................................................................................................7

Question 1.
Breakeven point
Units = Fixed Cost / Contribution per unit
Fixed Cost (£) = 180000
Contribution per unite = Sales – Variable Cost per unit
Selling price per unit (£) = 5.75
Variable Cost Per Unit (£) = Direct material + Direct Labour + Other Direct Cost
1.75 + 1.35 + .40
3.5
Contribution Per Unit (£) = 5.75 – 3.5
2.25
Breakeven point in unit = £ 180000 / 2.25
80000 Units.
Breakeven Point in Amount (£) = Breakeven point in unit * Selling price per unit
80000 * 5.75
460000
Profit made on sale
Sales (£) = 517500 (90000 * 5.75)
Variable Cost (£) = 315000 (90000 * 3.5 {1.75 + 1.35 + .40})
Fixed Cost (£) = 180000
Profit (£) = Sales – Variable Cost – Fixed Cost
517500 – 315000 – 180000
22500

New profit figure
New Strategy Existin
g New
Increase in sales
price 5.75 6
sales unit 90000 94500
Calculation of
Profits
Units 94500
Sales 6 567000
Variable Cost
Materials 1.9 179550
Labor 1.4 132300
Other direct costs 0.4 37800
Contribution 217350
Advertising 12500
Fixed Cost
Production 180000
Profit 24850
Interpretation: Company should invest in new project as it generate more revenues in
favour of the organisation. The profit after the advertising campaign is more as compare to
current situation of business.
Limitations of Breakeven Analysis
Following are the points denote about the limitations of Breakeven Analysis.
Difficulty in cost differentiation: In case of breakeven point analysis entire assessment is
done on the basis of fixed cost and variable cost. It becomes very difficult to differentiate the
fixed cost and variable cost in company. There is not any prominent method that can project

that the certain cost company has incurred is fixed in nature and certain cost that company
has entertained is variable in nature. This is the tough task to project a certain cost as fixed or
variable. Many times expenses only look fixed due to same amount every month company
need to bear but in general term they might be variable in nature.
Confusions in semi variable cost: Semi variable cost is such costs that are partially fixed in
nature and partially variable in nature. Semi variable cost always creates huge confusions in
the financial analyst as to weather a certain cost he must report as a fixed cost or a variable
cost. Due to any wrong and minor error the entire breakeven point in respect to company gets
change.
Valuation issue: Many times it becomes difficult to evaluate the values. This is also a
limitation attached with the breakeven analysis point. This is becomes very difficult to value
all variable cost in order to calculate the breakeven point.
The above mentioned limitations are some of the major limitations associated with the
breakeven analysis.
Question 2.
Significance of management accounting
Management accounting is accounting principles and code of conducts that are used
to project the financial statements of company. Management accounting is also denoted as
managerial accounting in professional term. In most of the cases managerial accounting is
only used by the internal team in organisation to make the business decisions in company.
The use of management accounting is only restricts towards making the suitable decision in
business based on the actual financial position of company (Granlund and Lukka, 2017). As
per the guidelines issued by Company Law every company requires to prepare the financial
statements as per the rules and guidelines issues in accounting standards to project the actual
financial position of company. Due to necessity of the preparation in financial statement
many companies do not prepare the use of management accounting as it is not mandatory. All
business decisions can also be taken by board of director on the basis of the regular financial
statement of company.
Techniques of Management Accounting
Following are the techniques used in management accounting.

Margin analysis: Margin analysis is about to assess the incremental benefits company has
entertained from the increased production. This is an important analysis part of management
accounting which denotes the trade profit in respect to increased in production of company
(Johnstone, 2018). Company make the decisions in respect to improve the sales of company
on the basis of the margin analysis part of management accounting.
Trend analysis: Board of director in company analysis the current trend in respect to product
cost and unusual variances from such forecast values. This play a huge role in taking crucial
decision for the production in company’s business. Trend analysis allows company to control
cost of production in order to improve the profitability.
Capital Budgeting: Capital budgeting is a crucial technique part of the management
accounting. In order to take decision related to the capital expenditure company is planning to
entertain this technique of management accounting is used (Mahmoudian and et.al., 2020).
This technique guides company in taking the best investment decision for the future growth
of company.
Inventory valuation: Inventory valuation is all about identifying the actual cost incurred
with the production and inventory left at the end of financial year. This is an important
assessment part of management accounting which allows company to control the inventory
and also the cost control in producing the overall production of company.
The above mentioned techniques are the part of management accounting.

REFERENCES
Books and Journals
Granlund, M. and Lukka, K., 2017. Investigating highly established research paradigms:
Reviving contextuality in contingency theory based management accounting
research. Critical Perspectives on Accounting. 45. pp.63-80.
Johnstone, L., 2018. Theorising and modelling social control in environmental management
accounting research. Social and Environmental Accountability Journal. 38(1).
pp.30-48.
Mahmoudian, F. and et.al., 2020. Inter-and intra-organizational stakeholder arrangements in
carbon management accounting. The British Accounting Review, p.100933.