Managerial Accounting: Costing Methods, Break-Even & Margin Analysis

This report provides a detailed analysis of managerial accounting concepts, focusing on costing methods and break-even analysis. It begins by comparing plant-wide overhead allocation with activity-based costing (ABC), highlighting the advantages of ABC in accurately allocating indirect costs. The report then delves into break-even analysis, calculating break-even points in units and sales revenue, and determining the margin of safety. A sensitivity analysis is performed to evaluate the impact of increased advertising expenses on sales and profitability. Furthermore, the report assesses the relevant and irrelevant costs associated with expanding business operations, providing a framework for informed decision-making. The analysis includes calculations and explanations to guide understanding of these essential managerial accounting techniques.

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the Student:
Name of the University:
Author’s Note

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MANAGERIAL ACCOUNTING
Table of Contents
Question No 1..................................................................................................................................3
Requirement 1a............................................................................................................................3
Requirement 1b............................................................................................................................4
Requirement 1c............................................................................................................................6
Question No 2..................................................................................................................................7
Requirement 2a............................................................................................................................7
Requirement 2a............................................................................................................................8
Requirement 2c............................................................................................................................9
Requirement 2d............................................................................................................................9
Requirement 2e..........................................................................................................................10
Question 3:.....................................................................................................................................12
Part A:........................................................................................................................................12
Requirement a:.......................................................................................................................13
Requirement b:.......................................................................................................................14
Part B:........................................................................................................................................15
Question 4:.....................................................................................................................................15
Requirement a:...........................................................................................................................15
Requirement b:...........................................................................................................................16
Question 5:.....................................................................................................................................19

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Requirement a:...........................................................................................................................19
Part (i):...................................................................................................................................19
Part (ii):..................................................................................................................................19
Requirement b:...........................................................................................................................20
Requirement c:...........................................................................................................................21
References:....................................................................................................................................23

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Question No 1
Requirement 1a
The computation which is shown in this part is related to computation of total costs of the
business considering different methods for allocation of overheads of the business. Overhead
costs are related to the operations of the business are indirect expenses in nature. Overhead costs
of the business are of two types variable overheads and fixed overheads. The computation
considers the business of Megah Company which is engaged in the business of producing
televisions and the company basically produces two different models for televisions which are
basic model and Premium model. The computation considers different machine hours for
allocation of overheads in one of the methods.
Particulars Details
Basic
Model
Premium
Model
General
Cost
Prime Cost A
$
40.00
$
80.00
Machine hours B 2500 2500
Number of Output C 20000 10000
Machine hour rate (B/C)
$
0.13
$
0.25
Total Overhead cost D 332000
Total machine hour E 5000
Overhead per machine hour (D/E) 66.4
Overhead cost for each
product
(D/E)*(B/
C)
$
8.30
$
16.60
Total Cost 48.3 96.6
Formula View

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It can be seen from the above calculation that company cost for its product are different.
The total cost of the product has been determined by adding prime cost and overhead cost. The
overhead cost is calculated by total productive machine hours. The overhead costs which is
computed has an important part in computing the totals costs of the business and also deciding
how much profits can be generated by the business.
Requirement 1b
The calculation of unit cost of each model with the help of four activity driver
Activity Cost Driver
Estimated
Overhead Cost
Estimated Cost Driver
Activity
Predetermined Cost
Overhead
Purchasing
Material
Purchase
Requisitions 87000 2000 43.5
Maintaining
Equipment
Maintaince
Hour 220000 8000 27.5
Setting up
Equipment Set up time 112000 40 2800
Below we can see the total cost of the product under activity based costing
Particular Details
Basic
Model
Premium
Model General
Prime Cost A
$
40.00
$
80.00
Number of Requisitions B 500 1500
Maintaince Hour C 2000 6000
Set up time D 8 32
Overhead on Maintance E 27.5
Overhead on Purchase F 43.5

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Overhead on Set up G 2800
overhead chareged for all product H
$
99,150.00
$
3,19,850.00
Number of unit produced I 20000 10000
Overhead per product (H/I) 4.9575 31.985
Total cost
$
44.96
$
111.99
Formula View
Activity based costing refers to the costing which allocate the overhead as per the activity
perform. It sees the relation of the overhead, the cost and the manufacturing and through the
relationship it allocates the overhead cost. Activity based costing is considered to be one of the
most useful techniques for the purpose of identifying and accurately allocating the costs of the
business to the products. The costing technique is used in major businesses for computing anf
allocating costs of the business. As there some expenses which are of high costly nature so this
help the organization about the level of increasing the cost of the product. As there are many
costs which cannot be allocated through cost accounting method so to remove the barrier these
costs came into the picture.

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Requirement 1c
Costing is a process which help the company to evaluate the cost of its business and help
them to get an overview of the market. Each company follow the different method of costing.
The process of computing the costs of the business is considered to be very important as they
have direct impact on the revenue and profits which is generated by the business. In addition to
this, the costs of the business also have an important role in determination of the price for the
products which is offered by the business. There are different costing techniques which are
available to the management of the company for computing total costs of the business and also
allocation of the indirect costs of the business. In the above it has been seen that company has
used two different method of costing one is Plant Wide Rate and another one is Activity Based
Costing.
 Plant wide rate –It is the rate which assign all the company manufacturing overhead cost
to its production cost. It is a simple concept as it allocates at one rate so the costing of the
overhead become very easy and no complex method is used. The method is followed by
businesses as the method does not involve any complexities and it is much easier to
understand while conducting a review of the system.
 Activity based costing – Under this method the cost is allocate as per the activity. It is
done for different overhead different rates are being used. The allocation of indirect costs
of the business are done on the basis of the activities which are carried out by the
business. This is considered to be the most popular and effective method for allocation
and computation of costs of the business and in most of the situation, the method is
known to provide the most accurate estimates.

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Activity based costing is better method than plant wide method as in activity costing the
overhead are allocated as per the activity so it helps the organization to know how the product
price is rising. The main advantage of activity-based costing is that it gives an accurate
estimation of costs and appropriate allocation of overhead costs on the basis of activities which is
carried out by businesses. Therefore, it can be clearly indicated that if the business follows
activity-based costing techniques than it would give a better presentation of the total cost and
also assist in the determination of prices for the business.
Question No 2
Requirement 2a
Break even analysis is a widely used technique by management accountants and
production manager. It is based on the production costs which are divided into two parts one is
variable cost which varies with the production unit and another one is fixed cost which remain
same in respect of production unit. Both cost is combined than it is compared with sales revenue
to get the position where by selling certain amount of goods company is earning neither profit
nor loss and that point is termed as break-even point.
In other words, breakeven analysis is very useful tool for taking vital decisions of the
business. The breakeven analysis tells the management the required units or revenue which the
management of the company needs to generate in order to at least cover the costs of the business
and reach a no profit no loss situation. On the basis of breakeven analysis, the management of
the company decide what prices are to be set for the products and what quantity of products the
management needs to sell in order to reach a no profit no loss situation. In addition to this,
breakeven point needs to be achieved by the business in order to ensure that the business

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continues its operations for a long period of time. The requirement of the part is to undertake
breakeven and sensitivity analysis for AzamJuta which is engaged in production process.
Management of a company uses breakeven analysis for the purpose of taking important decisions
relating to the business.
Requirement 2a
Calculation of break-even point in unit as well in sales revenue.
Break-even point in units = (Total fixed cost / Contribution per unit)
Particular Details Amount Unit
Contribution A
$
3,50,000.00
No of unit B 100000
Contribution per
unit (A/B)
$
3.50
Particular Details Amount UNIT
Total Fixed Cost A
$
2,10,000.00
Contribution per unit B
$
3.50
Break even in units (A/B) 60000
Break-even point in sales revenue = (Break-even in units * Sales per unit)
Particular Details Amount Unit
Sales A
$
7,50,000.00
No of unit sold B 100000
Sales per unit (A/B)
$
7.50
Break- even unit D 60000
Break-even in sales (A/B)*D
$
4,50,000.00

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Requirement 2c
Calculation of margin of safety in both units as well as sale revenue
Margin of safety in units = (Total profit / Contribution per unit)
Particular Details Amount Unit
Total profit A
$
1,40,000.00
Contribution per
unit B
$
3.50
MOS in unit (A/B) 40000
Margin of safety in sales revenue = (Total Sales – Break-Even sales)
Particular Details Amount
Total Sales A
$
7,50,000.00
Break-even sales B
$
4,50,000.00
MOS in sales (A-B)
$
3,00,000.00
Requirement 2d
As the company want to increase their sales from 8000 units and for that the company is
ready to incur for advertisement expenses. The estimation of the sales manager is that increase in
the sales of the business would be enhancing the revenue of the business. The calculations which

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is presented below shows the extra expenses which the management of the company is willing to
undertake for the purpose of enhancing the sales of the business.
Calculation as per company new proposal
Particular Details Amount Unit
Sales in unit A 108000
Sales per unit B
$
7.50
Total sales (A*B)
$
8,10,000.00
Variable cost per unit D
$
4.00
Total variable cost (D*A)
$
4,32,000.00
Total fixed cost E
$
2,10,000.00
Advertisement cost F
$
22,000.00
Total cost (D*A)+E+F
$
6,64,000.00
Total profit (A*B)-{(D*A)+E+F}
$
1,46,000.00
It can be seen from the above calculation that previously the company was earning
$140000 when they were selling 100000 units but when they did advertisement expense of
$22000 than they able to sell 108000 and then the profit was $146000 so it can be said that by
the new proposal which company is thinking for implement than they will able to earn (146000-
140000) profit that is more $6000 profit they will able to earn if they invest $22000 on
advertisement so there income will increase by $6000.
Requirement 2e
The maximum amount which the company can invest on advertisement to increase their
sale by 8000 units and not by affecting the current profit. The amount which can be invested is

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(22000+6000) = 28000 so till $28000 company can invest in advertisement and this will not
make any impact on their current profit which is $140000.