Business Finance Report: BEP, Costing, Budgeting and Variance Analysis

This report provides a comprehensive analysis of business finance concepts, addressing break-even point calculations, margin of safety, and the application of marginal and absorption costing methods. It explores different cost types, their relevance to pricing decisions, and the preparation of budgets for operational control. The report includes detailed calculations of variances such as material, labor, and overhead variances, providing insights into cost control and financial performance. The report also examines the role of budgeting in managing operations and controlling expenses, with a focus on the preparation of budgets to guide financial planning and decision-making, with a case study on Company XY and Sydney manufacturers.

BUSINESS FINANCE

TABLE OF CONTENTS
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
Calculation of Break Even point ad margin of safety for company XY.....................................3
Amount of profit with help of marginal and absorption costing.................................................4
PART B............................................................................................................................................6
Different types of cost and their relevance.................................................................................6
Calculation of different variance for Sydney manufacturers......................................................7
Preparation of budget for controlling operation..........................................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Finance is referred to as the money which is being used within the business and for its
running and proper operations of the company. Without finance not a single work can be
accomplished. In the business, the finance is the blood or lifeline of business as without money
no activity within the business can be undertaken (Bendell and Doyle, 2017). Hence, the proper
and effective allocation and use of many is very necessary for the business and its success.
Thus, the present report will outline some of the calculation relating to the BEP, marginal
and absorption costing and many other related income statement on basis of both these costing
methods. Further the report will outline the different types of cost and there importance for
pricing decision. Also the calculation of different types of variance like material, fixed overhead
and labour rate variance will be calculated.
PART A
Calculation of Break Even point ad margin of safety for company XY
Computation of break- even point
Break- even point can be defined as a point where total costs (expenses) and total sales
(revenue) are equal. Break-even point can be described as a point where there is no net profit or
loss.
Particulars Formula Figures (in £)
Selling price per unit 24
Variable cost per unit 18
contribution per unit
Selling price per unit - variable cost
per unit 6
Budgeted fixed cost 800000
BEP (in units) Fixed cost / contribution per unit 133333
BEP (in £) BEP units * SPU 3200000
Actual sales 3360000
BEP sales 3200000
Margin of safety Actual sales - BEP sales 160000
BEP as a % of Budgeted sales 3200000/3360000*100 95%

Margin of safety as % of budgeted
sales 160000/3360000*100 5%
After going through breakeven point analysis of it has been find out that BEP of the company is
3200000 which is very high for the organization. It has been analyzed that organization has the
sales of 3360000.So it can be said that organization is doing well in the market as they are
having a safety of 16000 unit in the organization this is very good sign for the company
(Connolly and Jackman, 2017). At the same time it also has seen that there are many negative
sign for the company, As cost of the company is very high in the market this is eventually has
increased the BEP of organization. It has been recommended to the organization that they have
to reduce the amount of the cost which is incurred by the company to carry out different
operation of the company. As these analyses show that organization fixed cost is very high. So
organization has to make sure that they used to take different activity to lower down the fixed
cost of the company in the market.
The margin of safety is the difference between the actual or the budgeted sales and the level of
the breakeven sales. In some other words the margin of safety can also be referred to as the
amount of sale which is above the breakeven point.
It is advisable for XY company that if they will increase the level of production then the margin
of safety can be increased. This is because of the fact that when the production will be increased
the the selling unit will increase and this will increase the sales.
Another major recommendation for the company is to reduce the fixed cost of production. This is
because of the fact that id the fixed cost or overhead will be reduced then this will increase the
sales of company. This will result in increase in the margin of safety for the company.
Amount of profit with help of marginal and absorption costing
Marginal costing- this is a type of costing under which the variable cost is charged to the cost of
unit and the fixed cost is charged over the period of time till it is completely written off.
Absorption costing- this is another type of costing which is being used by company XY in order
to calculate the cost for the company (Adhikary and Kutsuna, 2016). Under this method the cost
of product and service of the company is calculated by keeping in account all the indirect
expenses along with all the direct cost.
Profitability statement as per marginal and absorption costing method is enumerated below:

Given that
Particulars Figures (in £)
Selling price per unit 15
Direct material cost per unit 4
Direct labor cost per unit 3
Variable overhead cost per
unit 2
Fixed overhead 12000
Particulars Figures (in units)
Budgeted production and
sales 5000
Actual production 4800
sales 4700
Calculation of cost per unit as per marginal costing
Particulars Figures (in £)
Direct material cost per unit 4
Direct labor cost per unit 3
Variable overhead cost per
unit 2
Total cost per unit 9
Per unit cost assessment according to absorption costing method
Particulars Figures (in £)
Direct material cost per unit 4
Direct labor cost per unit 3
Variable overhead cost per
unit 2
Fixed overhead 2.4
Total cost per unit 11.4
Income statement (Marginal costing)
Particulars Figures (in units)
Per unit
cost
Figures (in
£)
Figures (in
£)
Sales 4700 15 70500
Less: COGS

Opening stock 0 9 0
Purchase 4800 9 43200
Less: closing stock 100 9 900 42300
contribution 28200
Less: fixed expenses 12000
Net profit 16200
Profitability statement (Absorption costing)
Particulars Figures (in units)
Per unit
cost
Figures
(in £)
Figures
(in £)
Sales 4700 15 70500
Less: COGS
Opening stock 0 11.4 0
Purchase 4800 11.4 54720
Less: closing stock 100 11.4 1140 53580
Net profit 16920
With the help of the above calculation it is clear that the absorption costing method is more
effective. This is majorly because of the reason that this method includes both direct and indirect
cost. Also, the profit as per marginal costing method is only 16200 but in case of absorption
costing the profit is 16920 which is high.
PART B
Different types of cost and their relevance
The cost is the amount of money which is being incurred by the company in continuing
the business operations and working. There are many different types of cost which can be
incurred by the company at time when it operates in the highly competitive world. The major
cost being incurred by the Sydney manufacturer is as follows-
Fixed cost- this is a type of cost which remains fixed or same a t any level of production
within the company. This i the cost which is incurred even if the production is not continued for
some of the time (Klopotan, Zoroja and Meško, 2018). This cost involves cost like rent,
maintenance of machineries, electricity bills and many other expenses. This has a major impact

over the decision of pricing of product because the fixed cost will be charged by the consumers.
This is so because of the fact that this cost will be added in the price of product even if the
production is not continued.
Variable cost- this is the cost which varies with the variation in the level of production.
This is majorly because of the fact that this cost is based on the facts that of there will not
production then this cost will not be incurred. And if there will be some production then the coat
will be incurred in that proportion only (Babajide, Olokoyo and Taiwo, 2016). This type of cost
does not have much impact over the decision relating to the price of the product. This is so
because if the product will not be produced then this type of cost will not occur. Hence, this will
not be charged by the company over their consumer or will not be added within the price of the
product.
Role of budget
The budget is referred to as a document or account which is being prepared by the
company in order to estimate the expenses and income which may occur in the future. The
budget is being prepared for generally a period of one financial year and is very helpful for the
company in directing and planning all the activities on the basis of the budget being prepared.
Thus, the major role of making budget is to set some guideline to the employees that how much
they have spent as expense and what all other money can be gathered in form of income.
Calculation of different variance for Sydney manufacturers
Computation of variances
Material variance
Particulars Formula Budgeted Actual Figures
Quantity 1500 25000
Price 0.25 0.48
cost 750 12000
Direct Material Price
Variance:
(Standard Price – Actual
price) * Actual quantity
-5750
Material quantity or usage
variance
SP (SQ – AQ) -5875
Direct material cost
variance
Standard cost – actual
cost
-11250

According to the above calculation the direct material cost variance is negative which means that
the actual cost is more than the standard cost. Thus, this is not a good position for the company
as they have incurred high cost more than the intended or standard cost.
Labour variance
Particulars Formula Budgeted Actual Figures
Hours 4030 4000
Price 10.4 9
cost 41912 36000
DL Rate Variance ( SR − AR ) × AH 5600
(F)
Direct labor quantity
or efficiency variance
SR x (SH – AH) 312 (F)
Total direct labor
variance
(SR x SH) – (AR x AH) 5912
(F)
As per the above calculation the labour variance is calculated with multiplying the standard rate
with the subtracted amount of standard hour and actual hour. With this calculation it is clear that
the total direct labour variance is favourable for the company as it is 5912 and this is very good
for the company and its growth and development.
Fixed overhead expenditure variance
Particulars Formula Budgeted Actual Figures
Variable overheads 15600 17000 1400
(A)
Fixed Manufacturing
overhead
23400 2500 1600
(A)
With the help of the interpretation of the above data it is clear that the both the variable and fixed
overhead is adverse which is not good for the company. The variable overhead is 1400 adverse
which is negative for the company and it states that the standard overhead cost is low as
compared to actual cost. Similarly in case of fixed overhead the variance is of 1600 and this also
means that the standard overhead is less as compared to the actual fixed overhead incurred.
Preparation of budget for controlling operation
The preparing of budget is very necessary for the controlling of operation of the
company. This is pertaining to the fact that that budget will help the company in getting a base
that how they have to work in order to control all the expenses and to increase the sources of

income. This is necessary for the controlling of operation as the reduction in expense and
increase in the income source the profitability of company will increase to a great extent. Hence,
this will be of great benefit or advantage to the company that they will be able to manage and
increase their sales to a great extent (Kapinos, Gurley-Calvez and Kapinos, 2016).
Budget
Particular Quarter 1 Quarter 2 Quarter 3 Quarter 4
Sales unit
(Forecasted)
8000 9000 10000 11000
Planned ending
unit of inventory
1000 1000 1000 1000
Total production
(A+B)
9000 10000 11000 12000
Opening
inventory
2500 1000 1000 1000
Units to be
produced (C-D)
6500 9000 10000 11000
CONCLUSION
In the end it can be concluded that managing the business finance in proper and effective
manner is very necessary as this will increase the productivity and sales of the company. It is so
because of the fact that if the mainly will not be properly allocated then the company will not be
able to utilise the money in complete manner. Thus, for this present report mainly focused on the
calculation of BEP and the income statement on basis of both marginal and absorption costing.
With the interpretation of data it was analysed that absorption costing is more effective in the
calculation of income statement. Further the different cost like fixed cost, variable cost and many
other was discussed. Also, in the end the different types of variance were calculated like labour
variance, fixed overhead variance and many other types of variance.

REFERENCES
Books and Journals
Adhikary, B. and Kutsuna, K., 2016. Small Business Finance in Bangladesh:
Can'Crowdfunding'Be an Alternative?. Review of Integrative Business and Economics
Research. 4. pp.1-21.
Babajide, A.A., Olokoyo, F.O. and Taiwo, J.N., 2016. Evaluation of effects of banking
consolidation on small business finance in Nigeria. In Proceedings of the 23rd
International Business Information Management Association Conference (pp. 12522-
12540).
Bendell, J. and Doyle, I., 2017. Healing capitalism: five years in the life of business, finance and
corporate responsibility. Routledge.
Connolly, E. and Jackman, B., 2017. The Availability of Business Finance. RBA Bulletin,
December, pp.55-66.
Kapinos, P., Gurley-Calvez, T. and Kapinos, K., 2016. (Un) expected housing price changes:
Identifying the drivers of small business finance. Journal of Economics and
Business. 84. pp.79-94.
Klopotan, I., Zoroja, J. and Meško, M., 2018. Early warning system in business, finance, and
economics: Bibliometric and topic analysis. International Journal of Engineering
Business Management. 10. p.1847979018797013.