Accounting Fundamentals Exam: Cost Analysis and Management Accounting

This assignment provides a detailed solution to an accounting fundamentals exam, covering key concepts such as break-even analysis, profit calculations, and the limitations of break-even analysis. The solution includes calculations for break-even points in units and sales, profit determination under different scenarios, and an analysis of the impact of an advertising campaign. Furthermore, the assignment explores the importance of management accounting, differentiating it from financial accounting and highlighting its role in aiding managerial decision-making. It also identifies and explains three key techniques used by management accountants, including margin analysis, capital budgeting, and trend analysis, demonstrating how these techniques contribute to achieving management accounting objectives. The solution references various academic sources to support its analysis and conclusions.

Accounting fundamentals
exam

TABLE OF CONTENTS
Question 1........................................................................................................................................4
(a) Calculation of break-even point.............................................................................................4
(b) calculation of profit made on selling 75000 units..................................................................4
(c) Calculation of profit after making advertising campaign.......................................................4
(d) Limitations of break-even analysis........................................................................................5
Question 2........................................................................................................................................5
A) Importance of management accounting and the way it differs from financial accounting
provides........................................................................................................................................5
B) Three techniques that are used by management accountant can achieve objective of
management accounting...............................................................................................................6
REFERENCES................................................................................................................................8

Question 1
(a) Calculation of break-even point
break-even point in units = Total fixed costs / Contribution margin per unit
Total fixed costs = 350000
Contribution margin per unit = Sales price – Variable cost per unit
= 11 – 6 = 5
BEP (in units) = 350000 / 5 = 70000 units.
Break-even point (in sales) = Total fixed costs / Contribution * Sales price
Total fixed costs = 350000
Contribution = SP – VC = 11 – 6 = 5
Sales price = 11
BEP in sales = 350000 / 5 * 11 = 770000 pounds.
(b) calculation of profit made on selling 75000 units
Sales (75000 * 11) 825000
Less : variable cost (75000 * 6) (450000)
Contribution margin 375000
Less: Fixed costs (350000)
Profit 25000
(c) Calculation of profit after making advertising campaign
Additional fixed costs of advertising = 10000 pounds
Sales price after campaign = 13 per unit
Variable cost = 6 + 1 = 7 per unit
Sales = 80000 units
Sales (80000 * 13) 1040000
Less: Variable cost (80000 * 7) 560000
Contribution Margin 480000

Less: Fixed Cost (350000 + 10000) 360000
Profit 120000
(d) Limitations of break-even analysis
Separation of costs into fixed and variable costs: BEP analysis assumes that all the costs
associated with production of a particular product can be categorise into fixed and variable. But
the same assumption doesn't prove to be true in real sense as it is not possible to separate total
costs into variable and fixed costs (Martinović, 2019).
Constant fixed cost: In BEP analysis it is assumed that the fixed costs remains the same at all
level of output. But the same is not true as by changing fixed cost only, sometime it becomes
possible to increase sales. In the above illustration it has been clearly indicated that how by
spending an amount on advertising campaign in terms of fixed cost, the company's sales and
profits get improved.
No concern towards capital structure and amount: There is no consideration given on the type
and amount of capital a business has employed. As such capital structure of the company is
considered as an important factor influencing profitability of a company.
Equal quantities of production and sales: It assumes that whatever has been produced is sold,
but such practice are not actually true in real sense as there must be always presence of opening
and closing stock of products (Martinović, 2019).
No differentiation in terms of fixed costs: when two firms under consideration for comparison
have different fixed costs then they cannot be compared on the basis of their contribution
margin.
Question 2
A) Importance of management accounting and the way it differs from financial accounting
provides
Management accounting is process of preparing several reports and document about
business operation so that manager of company can take accurate short and long term decision
for benefit of organisation. It is important as it helps in achievement of goals by effectively
analysing, measuring and interpreting information to manager so that it can take fruitful decision

for growth and success of firm (Wnuk-Pel, 2018). Therefore several importance of management
accounting can be illustrated as follows:
Helps in understanding problem or key issue: Furthermore, it is also important as it helps in
identifying early sign of problem or areas that were underperforming so the way they can be
improved for achievement of end goals.
Planning: It is another reason which clearly state importance of management accounting as
Manager through management accounts is able to forecast actual budget or expense that
company need to several various task so that company can attained its end objectives. Thereby
plan activities that company need to undertake in order to achieve end goals
Contribute in taking accurate decision: Based on management accounts or record manager is
able to make modification in its strategy that could helps in growth and sustainability of business
in longer run. Therefore, it is helpful to manage in taking right decision for enterprise so that it
can enjoy more market share and sales volume.
Difference between management accounting and financial accounting
Financial accounting is based on the historical data or business transaction where on the
basis of which various financial statements are prepared. Management accounting on the other
hand is the preparation of various reports that are based on internal needs of the company
(Alsharari, 2019). Financial accounting statements are generally for the use of external parties
like investors, shareholders and public whereas management accounting reports are helpful for
managing internal affairs of the company and for internal use only. (Schroeder, Clark and
Cathey, 2019)Financial accounting provides information of company's position which is the
outcome of past performance while management accounting provides information on future
outlook of the company financial status. In financial accounting, the results are depicted on the
basis of actual figures while in management accounting, whatever reports are generated is based
on the estimated figures. MA provides operational reports on regular basis like weekly, monthly
or quarterly whereas FA statements are prepared only at the end of the financial year.
B) Three techniques that are used by management accountant can achieve objective of
management accounting
There are different techniques which has been used by management accountant like
margin analysis, Trend analysis and forecasting and capital budgeting in order to attained the end
objectives. Such as:

Margin analysis: This is most essential techniques in management accounting which emphasis
on incremental benefits of optimising production (Dekker, Kawai and Sakaguchi, 2019)
Calculation of break-even point is included which helps in determining optimal sales mix for
benefits of company products.
Capital budgeting: in this manager calculate internal rate of return and new present value in
order to help manager to take accurate decision regarding new capital budgeting. Therefore, it is
helpful techniques in order to make appropriate decision regarding capital expenditures (Wang,
and Wang, 2017).
Trend analysis and forecasting: It is another techniques which is helpful in deciding trends and
accurate patters of products cost as unusual variances from the forecasted value. Moreover it also
included the reason for such variances thereby contributing in maintaining accurate record of
accounts.

REFERENCES
Books and Journals
Alsharari, N. M., 2019. Management accounting and organizational change: alternative
perspectives. International Journal of Organizational Analysis.
Dekker, H. C., Kawai, T. and Sakaguchi, J., 2019. The interfirm contracting value of
management accounting information. Journal of Management Accounting
Research, 31(2). pp.59-74.
Martinović, D., 2019. Advantages and limitations of linear and nonlinear break-even
models. Ekonomski horizonti, 21(3), pp.221-238.
Schroeder, R. G., Clark, M. W. and Cathey, J. M., 2019. Financial accounting theory and
analysis: text and cases. John Wiley & Sons.
Wang, J. and Wang, D., 2017. Application of mathematical modeling in management
accounting. Italian journal of pure and applied mathematics, 38. pp.573-580.
Wnuk-Pel, T., 2018. Management accounting practices in support of lean management strategy
in service organizations. Engineering Economics, 29(5). pp.559-570.