Management Accounting Analysis: Cash Budget, BEP, and Overhead Cost

This management accounting report provides a detailed analysis of cash budgeting, break-even point (BEP), and overhead cost allocation. It includes a six-month cash budget, highlighting the company's poor cash position and suggesting improvements through better credit term management. The report calculates the break-even point, margin of safety, and profitability at different sales levels using marginal costing techniques. It also addresses behavioral aspects of budgeting that can lead to problems within a business entity, such as dysfunctional behavior, lack of subordinate participation, budgetary slack, and excessive budgeting pressures. Furthermore, the report calculates overhead cost rates and total production costs, comparing single rate versus departmental rate methods for overhead absorption, offering strategic recommendations for improving financial performance. Desklib offers a range of solved assignments and study resources for students.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION.....................................................................................................................................3
MAIN BODY.............................................................................................................................................3
QUESTION- 1...........................................................................................................................................3
a) Cash budget.........................................................................................................................................3
b) Cash position in the business and what can be done to improve the cash flows..................................5
c) Behavioral aspects of budgeting that may lead to the problems in business entity.............................5
QUESTION- 2...........................................................................................................................................6
a) Calculation of the contribution........................................................................................................8
b) Calculation of the break-even point and the margin of safety..........................................................8
c) Calculation of the profit...................................................................................................................9
d) Calculation of the number of electric kettles to be sold to gain profit of 90000...............................9
e) Calculation of the selling price at which 53000 electric kettles are to be sold for profit of 90000. 10
f) Recommendation for a good strategy............................................................................................11
g) Assumptions of breakeven model..................................................................................................12
QUESTION- 3.........................................................................................................................................13
a) Calculation of the overhead cost rate based on the labor hours......................................................13
b) Calculation of the total production cost of 10 units of the soft stool..............................................14
c) Representing the advantages and disadvantages of using the single rate for absorption of
overheads as compared to the departmental rates..................................................................................15
CONCLUSION........................................................................................................................................15
REFERENCES........................................................................................................................................16
Departmental and Manufacturing Overhead Vs. Single Overhead Rates. 2021. [Online] Available
through: < https://smallbusiness.chron.com/departmental-manufacturing-overhead-vs-single-overhead-
rates-36198.html>......................................................................................................................................17
Behavioural Implications of Budgeting (6 Implications). 2021. [Online] Available through: <
https://www.yourarticlelibrary.com/accounting/budgeting-accounting/behavioural-implications-of-
budgeting-6-implications/52800>..............................................................................................................17

INTRODUCTION
In the current times, business units lay high level of emphasis on undertaking
management accounting tools and techniques for taking appropriate business decisions.
Managerial accounting implies for the process of identifying, analyzing, interpreting and
communicating information associated with business aspects. By using such information
manager can develop competent strategic policy framework that contributes in the achievement
of organizational goals. The present report is based on the different case scenarios which will
provide deeper insight about the concept of cash budget and how it helps in analyzing business
performance. Along with this, report will also develop understanding about BEP and its
significance within business context. Further, it presents how variance analysis technique can be
used to identify deviations. It also highlights different types of budget which are prepared and
analyzed for meeting organizational goals.
MAIN BODY
QUESTION- 1
a) Cash budget
Cash budget for the period of 6 months is enumerated below:
Particulars
Month
1
Month
2
Month
3
Month
4
Month
5
Month
6
Opening cash balance -23780 -46340 -81310 -73290 -77120
Sales 41000 30000 35500
Total cash inflows 0 -23780 -46340 -40310 -43290 -41620
Material 11800 8600 10200 12800
Rent 12000 12000 12000 12000 12000 12000
Lease cost 2500 2500 2500 2500 2500 2500
Marketing and advertising
cost 2000 2000 2000 2000
Manager salary 3000 3000 3000 3000 3000 3000

Labor cost 4280 3060 3670 4880 6130 6760
Total cash outflows 23780 22560 34970 32980 33830 37060
Closing cash balance -23780 -46340 -81310 -73290 -77120 -78680
Working notes
Desk
Month
1
Month
2
Month
3
Month
4
Month
5
Month
6
Forecasted demand 700 500 600 800 1000 1100
selling price 30 30 30 30 30 30
Materials 10 10 10 10 10 10
Sales 21000 15000 18000 24000 30000 33000
Material cost
(expenses) 7000 5000 6000 8000 10000 11000
Cabinet
Month
1
Month
2
Month
3
Month
4
Month
5
Month
6
Forecasted demand 400 300 350 400 650 800
selling price 50 50 50 50 50 50
Materials 12 12 12 12 12 12
Sales 20000 15000 17500 20000 32500 40000
Material cost
(expenses) 4800 3600 4200 4800 7800 9600
b) Cash position in the business and what can be done to improve the cash flows
The cash position of the business is highly poor as it can evidently be seen that there is a
negative balance of cash in the first six months of trade done by the company. The cash budget

that is prepared above shows that in each month the business is incurring the cash deficits
wherein the outflow of cash is greater than the inflows leading to the shortage of the same. It can
be seen that the cash management policies of the company are very poor through which it has
been able to generate the negative liquidity position which is further contributing to pushing the
company in the tighter liquidity spot.
This creates a tough position wherein the company shall not be able to even meet the
short term obligations of the business and this shall make them lose their credibility. Further cash
flows of the business can be improved through the better arrangement of the credit terms of the
receivables and the payables of the company (Turner and et.al., 2017). The first and foremost
necessary thing is that the company keep the receivables and the payable days equivalent which
shall be leading to the smooth flow of the working capital cycle of the business. Since the
company is working on the ordering basis so initially it must frame the policy of dealing only on
cash basis until it manages to generate the funds from outside. Apart from that also the
receivables policy must be maintained equivalent to the payables policy so that the lag does not
come and accordingly it is able to create better position of cash.
c) Behavioral aspects of budgeting that may lead to the problems in business entity
There are several behavioral aspects of budgeting that may create problems for the entity
which are:-
 Dysfunctional behavior- The budgets are being prepared by the top management who
generally maintain the goal congruence between the organizational objectives and the
managerial goals. But this sometimes affects the overall budget through the unrealistic
expectations of the management. This shall be leading to the negative behavior among
the subordinates impacting their overall motivation and zeal to perform their jobs
efficiently.
 Participation of the subordinates in the budgeting- Generally it can be noticed that the
budgets are authoritative in nature whereby the top management shall be imposing the
decisions over all the employees regarding the future operations (Azudin and Mansor
2018). On the contrary some business may involve employee engagement but certainly is
the pseudo participation that further impacts the employees negatively. This shall be
generating behavioral problems in the entity in the process of creating the budgets.

 Budgetary slack- The budgetary slack is created when the management who is preparing
the budgets shall be less optimistic and conservative by underestimating the revenues,
overestimating the costs and thereby generating the requirements of arrangement of
funds. This shall be leading to the deviations in between the budgets and the original
level of activity that is being undertaken in the company (Behavioural Implications of
Budgeting (6 Implications), 2021).
 Excessive budgeting pressures- The other aspect of budgeting that shall be leading to the
negative impacts on the business are the excessive pressure and the directing that is
provided by the budgets in the company. It can be known that this restrict the freedom of
taking the initiatives in the business such that the employees are forced to follow each
and every element of the budget. Also this shall further be leading to the development of
the inter departmental conflicts in the organization affecting the operational efficiency of
the business.
QUESTION- 2
Break-even analysis- The break-even model is the technique which is used for the assessment of
the profitability at the different level of sales. The break-even point is at the level of sales where
the total revenues generated are equivalent to the total costs that are incurred in the operations.
This means that at this level there is zero profitability and the revenues are sufficient to cover the
costs of the company (Kostyukova and et.al., 2018). Apart from that it can be identified that this
is the minimum level wherein the company can just survive by covering the costs, as below this
they shall be incorporating the losses. This analysis shall be helping in the ascertainment of the
future optimum level of operations in the company that shall be leading to the fulfilment of the
organizational objectives.
Margin of safety- The margin of safety shall be representing the difference between the intrinsic
value of the stock and its market price that is currently prevailing in the market. It is the margin
that the company is having over the break-even point of the business. It also indicates that the
higher is the difference between the actual and the break-even sales the better it is for the
business as this shall be leading to the increase in the profitability of the business. The safety
margin shall be preventing the company from any sort of losses even if the demand decreases to
some extent.

Profit statement as per the marginal costing technique:-
At 70000 units At 53000 units
Particulars Per unit Total Particulars Per unit Total
Sales 13 910000 Sales 13 689000
Less: Variable
costs
Less: Variable
costs
Materials 5.25 367500 Materials 5.25 278250
Labor 2.95 206500 Labor 2.95 156350
Variable overheads 1.85 129500 Variable
overheads
1.85 98050
Contribution 2.95 206500 Contribution 2.95 156350
Less: Fixed costs Less: Fixed
costs
Production 59000 Production 59000
Selling 47600 Selling 47600
Profits / Losses 99900 Profits / Losses 49750
a) Calculation of the contribution
The contribution margin is calculated by decreasing the variable cost per unit from the
selling price of the product. This shall be available for covering the fixed costs in the
business that shall be remaining constant. The contribution per unit that is generated by each
electric kettle is equal to 2.95 in order to cover the production and the selling fixed costs in
the company. This is if the selling price of the electric kettle is 13 and then the variable costs
are reduced from it leaving the contribution per unit of 2.95.
b) Calculation of the break-even point and the margin of safety
If the selling price of the company= 13
Then,

Break-even point (in units) = Fixed costs / Contribution per unit
Break-even point (in units) = 106600 / 2.95
Break-even point (in units) = 36136 units
Break-even point (in amount) = Break-even units * selling price per unit
Break-even point (in amount) = 36136 * 13
Break-even point (in amount) = 469768
Margin of safety (in units) = Actual sales – Break-even sales
Margin of safety (in units) = 53000 – 36136
Margin of safety (in units) = 16864 units
Margin of safety (in amount) = Actual sales revenue – Break-even sales revenue
Margin of safety (in amount) = 689000 – 469768
Margin of safety (in amount) = 219232
Margin of safety (% of sales) = Actual sales - Break-even sales / Actual sales * 100
Margin of safety (% of sales) = 689000 – 469768 / 689000 * 100
Margin of safety (% of sales) = 31.82%
c) Calculation of the profit
In case the Plaistead plc is selling 53000 units at the selling price of 13 then the profits of the
company are:-
At 53000 units
Particulars Per unit Total
Sales 13 689000

Less: Variable costs
Materials 5.25 278250
Labor 2.95 156350
Variable overheads 1.85 98050
Contribution 2.95 156350
Less: Fixed costs
Production 59000
Selling 47600
Profits / Losses 49750
Post decreasing the fixed and variable costs from the sales revenue of 53000 units of electric
kettle at 13 each shall be leading to generating the profitability of 49750. The results are
positive but comparatively lower than the situation where it operates at higher operational
capacity and produces the output of 70000 units in the company.
d) Calculation of the number of electric kettles to be sold to gain profit of 90000
(x * 13) – (x * 10.05) – 59000 – 47600 = 90000
13x – 10.05x – 106600 = 90000
2.95x – 106600 = 90000
2.95x = 90000 + 106600
2.95x = 196600
x = 196600 / 2.95
x = 66644 units
At 66644 units
Particulars Per unit Total
Sales 13 866372

Less: Variable costs
Materials 5.25 349881
Labor 2.95 196600
Variable overheads 1.85 123291
Contribution 2.95 196600
Less: Fixed costs
Production 59000
Selling 47600
Profits / Losses 90000
In order to generate the profits of up-to 90000 the Plaistead plc shall be selling 66644 units of
electric kettles at the selling price of 13 keeping the variable costs per unit and the fixed costs
remain constant. The selling of 66644 units shall be leading to the generation of 90000 units
(Hiebl and Richter, 2018).
e) Calculation of the selling price at which 53000 electric kettles are to be sold for profit of
90000
(53000 * x) – (53000 * 10.05) – 59000 – 47600 = 90000
53000x – 532650 – 59000 – 47600 = 90000
53000x – 639250 = 90000
53000x = 90000 + 639250
53000x = 729250
x = 729250 / 53000
x = 13.76
At 53000 units
Particulars Per unit Total
Sales 13.76 729280

Less: Variable costs
Materials 5.25 278250
Labor 2.95 156350
Variable overheads 1.85 98050
Contribution 3.71 196630
Less: Fixed costs
Production 59000
Selling 47600
Profits / Losses 90000
If the company sells 53000 units and desires the profitability of 90000 then it has to sell the
electric kettles at the selling price 13.76 keeping all the other costs constant in the company.
f) Recommendation for a good strategy
At 62010 units
Particulars Per unit Total
Sales 14.17 878682
Less: Variable costs
Materials 5.25 325553
Labor 2.95 182930
Variable overheads 1.85 114718
Contribution 4.12 255481
Less: Fixed costs
Production 59000
Selling 47600
Marketing and advertising 45000
Profits / Losses 103881

Yes, this is definitely a good strategy as the above table shows that the company is earning a
profitability up-to double than that of earlier when it was selling the 53000 units at 13 per
unit of electric kettle. Now the company is selling 62010 units at 14.17 per unit with an
additional marketing cost of 45000 that is generating profits of 103881 as compared to before
profits of 49750.
g) Assumptions of breakeven model
There are several assumptions that are pertaining to the break-even model which makes the
technique unrealistic for the real life applicability. These are some major assumptions:-
 The first and the foremost assumption is that the selling price of the company shall
remain constant over the period (Rikhardsson and Yigitbasioglu, 2018).
 The other assumption is that all the other components of the cost like the variable
costs per unit and the fixed costs of operations shall be remaining constant for the
company.
 It can be assessed that the prices of the factors shall also be remaining constant for
the period.
 Apart from that it can be identified that as per the model the efficiency of the
company in terms of technology and the manpower shall also be remaining constant
for the company.
 It is assumed that the cost and revenues function shall be linear.
 The assumption is that the units produced are equal to the units sold which means
that there is no scope for the closing stock.
QUESTION- 3
a) Calculation of the overhead cost rate based on the labor hours
Allocation of the overhead costs in the various departments based on the basis on allocation:-
Indirect
costs
Basis for
allocation
Total Assembly Joinery Canteen
Indirect labor Number of
employees
28000 12 / 25 *
28000 =
13440
10 / 25 *
28000 =
11200
3 / 25 *
28000 =
3360