Comprehensive Management Accounting Report for KBC Ltd (Case Study)

This report provides a comprehensive analysis of management accounting principles applied to a case study of KBC Ltd. It begins with an introduction to management accounting and the significance of budgeting, outlining administrative procedures and the stages of the budgeting process. The report then delves into cost classification, including direct, indirect, fixed, variable, and semi-variable costs, alongside an explanation of the high-low method for calculating fixed and variable costs. Furthermore, the report examines the effects of absorption and marginal costing on stock valuation and profit determination, differentiating between job, batch, process, and service costing. The report includes profit and loss statements prepared under both absorption and marginal costing methods for different regions of KBC Ltd. It also offers recommendations related to product combinations with limited labor hours, and calculating profits under varying scenarios. The report concludes with an analysis of different budgeting methods, including cash budgets, and variance analysis, along with calculations of units sold, sales value, and profit determination at different sales levels. It also includes recommendations for improving performance of Bata Ltd.

Management Accounting
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TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................4
TASK 1............................................................................................................................................4
A Purpose of using budgeting......................................................................................................4
B Administrative budgeting procedure........................................................................................4
C Describing the stages of budgeting process.............................................................................5
TASK 2............................................................................................................................................5
A Classifying cost........................................................................................................................5
B Calculating the fixed and variable cost using high low method..............................................6
TASK 3............................................................................................................................................6
A Absorption and marginal costing effect on stock valuation and profit determination.............6
B Difference between job costing, batch costing, process costing and service costing..............7
C Preparing profit and loss statement for North and South area under absorption costing.........7
D Prepare profit and loss statement for South region on the basis of marginal costing..............9
TASK 4............................................................................................................................................9
A Advise the KBC.......................................................................................................................9
B Calculating following figures.................................................................................................10
(i) Contribution to sales ratio (PVR)..........................................................................................10
C Combination of products with limited labour hours..............................................................11
D Calculating of profits at 6000 further hours...........................................................................11
TASK 5..........................................................................................................................................11
A Different types of budgeting method.....................................................................................11
B Cash budget............................................................................................................................12
TASK 6..........................................................................................................................................13
Budget and calculation of variance............................................................................................13
TASK 7..........................................................................................................................................15
(A) Calculating units sold and sales value.................................................................................15
B Computing profit or loss at the sale of 26500 pair of shoes...................................................15
C Computation number of units to earn desired profit worth £240100....................................16
D Computing total number of units at increased selling price by 15% & advertisement cost of
£20000........................................................................................................................................16
E Recommending and justifying appropriate action for improving performance of Bata Ltd..16
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CONCLUSION..............................................................................................................................17
REFERENCES..............................................................................................................................18
3

INDEX OF TABLES
Table 1: Table 1: Profit for North Area...........................................................................................9
ILLUSTRATION INDEX
Illustration 1: P & L for south area................................................................................................10
Illustration 2: P & L for south Region...........................................................................................10
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INTRODUCTION
Management accounting is the procedure of preparing management report and accounts
through which decision related to daily business activities are taken effectively. BY using
concepts of management accounting reports are generated on monthly or weekly basis in order to
show balance related to cash, sales turnover and outstanding debts. Present report is based on
case study of KBC Ltd which handle its work related to management accounting by utilizing
number of techniques. Furthermore, purpose of budgeting and control mechanism are also
explained effectively. In addition to this, effect of absorption and marginal costing has been
discussed along with proper demonstration.
TASK 1
A Purpose of using budgeting
Budgeting
Budgeting is defined as a tool used for estimating the revenue and expenditure, for the
pre-set time period. It is a quantitative plan used for deciding which activities and associated
expenditure. KBC Company designs budget to make optimum use of financial resource and to
find the way to overcome or control expenses. The main purpose is to have control over
expenses and avail financial resources on important activities of business.
Benefits of budgeting
Budgeting is very important for business as is provide certainty for future business
activities. It assists corporation in reducing cost of production and increasing overall rate of
return. The use of budget enable business to maintain effective balance between potential
expenditure and income in KBC ltd. Similarly, budgeting benefits management of KBC Ltd to
get information related to potential threats so that accordingly appropriate action can be taken for
smooth operation of business (Davies and Crawford, 2011). Another benefit of budget for KBC
Company is that resources allocation is also done with the help of budgeting process. It helps in
analyzing cost and expenses is done in the light of expected return or growth of company.
Budgeting facilitates KBC Ltd to access cost effective sources of finance in order to reduce cost
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of production and ensure expansion of business in the marketplace. As a benefit, effective
management of capital structure is ensured by using budgeting practices.
B Administrative budgeting procedure
The following points represents the administrative budgeting procedure:
Setting objectives of budgeting in a line with corporation budget: The administrative
budgeting process start with setting objectives of corporation for preparing budgets. In this
process m the KBC Ltd might set objectives related to enhancement of profitability and
increasing sales turnover and increased customer base (Gibbons and et.al. 2010).
Review the plan with different departments: The plan of budget is to be discussed with
different department so as to assess the funding needs for each department. This is the process in
which business has to define functions of finance. The budget is to be set in accordance with
objectives of each department which are set in order to ensure growth and success of KBC Ltd.
Make a budget: The last stage is of preparing budget for the business by monitoring
strategies so as to reduce gap between actual and expected outcome. The continuous monitoring
tend is to be ensured for growth and success of company for long run (Kaplan and Atkinson,
2015).
C Describing the stages of budgeting process
The budgeting process of KBC Ltd has been stated as follows- Draft- The primary stage of budgeting is to draft the budget. In this stage, objectives of
budgets are to be designed in accordance with the requirements of business. Budgeting is
done by managers by drafting the budgets such as sales budget, cash budget and
production budget (Chua, Lowe and Puxty, 2015).
 Approve- The prepared budget is to be approved by the management of company for this,
it has to set standard related to expenses. The expected amount of profitability can be
debated by the managers. Execute- After their approval, the process starts with implementation of budget and start
expending. The activities discussed with budgets and monetary aspects of budget will be
applied.
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 Review- After setting or creating budget monitoring or reviewing process is started so
that expected outcome is achieved. This is the last step under which modification are
done in accordance with variation of expected and actual outcome.
TASK 2
A Classifying cost
The cost classification has been done as follows- Nature-It classifies cost into two parts such as direct and indirect. Here, direct cost is
incurred on production activities which consists of wages, material and other related cost.
On the other part, stationary, depreciation and salaries of administrative department will
also be included (Zimmerman and Yahya-Zadeh, 2011). Behavior-According to behavior there are different types of cost such as fixed, variable
and semi-variable as well as stepped fixed cost. The first one remain constant throughout
production process whereas variable cost varies in accordance with volume of production
(Mistry and et. al., 2014). Furthermore, semi-variable cost includes electricity and
telephone bill whee some portion remain constant and after that expenses are based on
consumption. In addition to this, stepped fixed cost is like fixed cost of production which
does not decrease or increase with production. However, due to shifting of production
activities cause high cost of production.
 Function-Under this, different activities such as production, marketing and
administration. Here, production cost includes expenses of rent, unproductive wages and
depreciation as well as lighting (Caliskan, 2014). On the other hand, marketing cost
consists of expenses such as advertisement, free sample. These cost are indirectly related
to production. Apart from this, administrative cost consists stationary, postage and office
rent etc.
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B Calculating the fixed and variable cost using high low method
Mixed cost- The mixed cost is one which contains the components of both fixed and
variable cost. The charges for machine rental include $400 per month plus $4 per hour of use it
contains fixed cost i.e. $400. Here, the techniques used for separating mixed cost into variable
cost and fixed cost are scatter graph, high-low method and regression analysis.
High low method- The high low method used to calculate variable cost and fixed cost
which is also said as an effective method which helps in segregating the fixed and variable
aspects. This is a simpler methods and does not cover huge formality and it also offers unreliable
solutions.
Here, in case of KBC, the method of high low assists corporation in segregating fixed and
variable cost. Here, cost of electricity and gas for KBC Ltd is calculated as follows-
Table 1: Values of volume and cost
Month
Production
Volume
Electricity/Gas
Cost
January 5200 52000
February 2500 28000
March 2100 20000
April 3900 36000
May 6100 56000
June 3200 36000
8
Classification
of Cost
On the basis of
Nature
(Direct and Indirect
Cost)
On the basis of
Behavior
(Fixed, Variable and
Semi-variable)
On the basis of
Functions
(Such as production,
marketing and
administration cost)

Table 2: Calculation of fixed and variable costs by using high low method
Particulars Amount (£)
Highest cost 56000
Lowest cost 20000
Highest unit 6100
Lowest unit 2100
Variable cost per unit 9
Total fixed cost 1100 = 1100
Variable cost per unit = (Highest cost - lowest cost) / (Highest unit - lowest unit)
Total fixed cost = [{Highest cost – (Variable cost per unit * Highest unit)} = {Lowest cost -
(Variable cost per unit * Lowest unit}]
 Highest production volume: 6100 @ cost worth £56000
 Lowest production volume: 2100 @ cost worth £20000
Variable cost per unit: Divergence of highest and lowest cost
Divergence of highest and lowest production volume
= (£56000-£20000)
(6100-2100)
= £9 per unit
Fixed cost: = £56000 – (£9*6100 units)
= £1100
Limitation of High low method
 The major limitation of High low method is that it only includes fixed and variable costs
however, semi-variable costs are not considered in calculation.
 The results based on high low costing method are not fully accurate, in case there is a
scenario of unstable cost.
Suitability and Benefit of regression analysis
To calculate monthly fixed cost of electricity as well as to compute variable rate for each
equipment hour, regression analysis will be the most suitable method as it used monthly
electricity bill amount in a specific year along with related number of equipment hours.
However, it will be an effective method that could be used so as to determine total cost.
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TASK 3
A Absorption and marginal costing effect on stock valuation and profit determination
The effect of absorption and marginal costing on stock evaluation and profit
determination has been discussed as follows- Marginal costing-Under this closing inventory is valued at variable cost of production.
However, profit determination is done through comparison of opening and closing
inventory. Here, in case of closing inventory is less than opening one then high
profitability will be shown (Leszcynska, 2012).
 Absorption costing-On the other hand, both fixed and variable cost are considered for
valuation of inventory where total cost per unit is taken as basis for management of
inventory. Furthermore, profit determination is done on the basis of comparison with
closing and opening inventory (Sandalgrh and Bukh, 2014). In case closing inventory is
higher than opening on then profit calculated according to absorption cost will be higher
than other.
B Difference between job costing, batch costing, process costing and service costing
The difference between job, batch and service as well as process costing is stated as
follows-
Job costing Batch costing Process costing Service costing
The cost of job is
calculated by
considering both
fixed and variable
cost for each job
included in the study
(Macintosh and
Quattrone, 2010).
It is calculated for
group of products and
services manufactured
together. Under this,
cost of specific order
to calculated in order
to assess ratio of
profitability (Butt,
It consists of different
types of cost such as
crushing, refining and
finishing process.
Under this, production
process is completed
with different process
or stages which leads
This cost is
incurred in
corporation after
production of
product when
services are
rendered.
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2010). to support final
outcome.
C Preparing profit and loss statement for North and South area under absorption costing
North
Absorption costing Standard Super Delux Total
Sales 3680000 1920000 1680000 7280000
Less: costs of production
Purchase 2944000 1440000 1232000 5616000
Variable Transportation costs 92000 48000 42000 182000
Fixed costs of transportation 73600 38400 33600 145600
Total costs of production 3109600 1526400 1307600 5943600
Gross profit(Sales-cost of goods sold) 570400 393600 372400 1336400
Less: Other expenses
Variable packaging cost 80000 40000 20000 140000
Fixed packaging costs 160000 80000 40000 280000
Variable advertisement cost 92000 40000 28000
16000
Fixed advertisement cost 184000 80000 56000 320000
Total expense 516000 240000 144000 900000
Profit/Loss 54400 153600 228400 436400
South
Absorption costing Standard Super Delux Total
Sales 1200000 1920000 2400000 5520000
Less: Variable costs
Purchase 960000 1440000 1760000 4160000
Variable Transportation costs 30000 48000 60000 138000
Fixed costs of transportation 24000 38400 48000 110400
Total costs of production 1014000 1526400 1868000 4408400
Gross profit(Sales-cost of goods sold) 186000 393600 532000 4656800
Less: Other expenses
Variable packaging cost 12000 20000 16000 48000
Fixed packaging costs 24000 40000 32000 96000
Variable advertisement cost 30000 40000 40000 110000
Fixed advertisement cost 60000 80000 80000 220000
Total expenes 126000 180000 168000 474000
Profit/Loss 60000 213600 364000 637600
Working Note
Apportion basis Standard Super Delux Total
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Number of orders 40000 20000 10000 70000
Number of orders 6000 10000 8000 24000
Total 94000
Variable packaging Standard Super Delux Total
North No. of orders 80000 40000 20000 140000
South No. of orders 12000 20000 16000 48000
Total 188000
Fixed Packaging Standard Super Delux Total
North no. of order 160000 80000 40000 280000
South no. of order 24000 40000 32000 96000
Total 376000
Advertisement Apportion basis Standard Super Delux Total
North Units sold 92000 40000 28000 160000
South Units sold 30000 40000 40000 110000
Total 270000
Variable
advertisement Standard Super Delux Total
North Units sold 92000 40000 28000 160000
South Units sold 30000 40000 40000 110000
Total 270000
Fixed advertisement Standard Super Delux Total
North Units sold 184000 80000 56000 320000
South Units sold 60000 80000 80000 220000
Total 540000
Fixed transportation Standard Super Delux Total
North Sales value 73600 38400 33600 145600
South Sales value 24000 38400 48000 110400
Total 256000
Variable
transportation Standard Super Delux Total
North Sales value 92000 48000 42000 182000
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South Sales value 30000 48000 60000 138000
Total 320000
D Prepare profit and loss statement for South region on the basis of marginal costing
South Area
Table 3: Profit and loss statement by using marginal costing
Marginal costing Standard Super Delux Total
Sales 1200000 1920000 2400000 5520000
Less: Variable costs
Purchase 960000 1440000 1760000 4160000
Packaging 12000 20000 16000 48000
Advertisement 30000 40000 40000 110000
Transport 30000 48000 60000 138000
Total variable costs 1032000 1548000 1876000 4456000
Contribution 168000 372000 524000 1064000
Packaging costs 24000 40000 32000 96000
Advertisement 60000 80000 80000 220000
Transport 24000 38400 48000 110400
Total fixed costs 108000 158400 160000 426400
Profit/Loss 60000 213600 364000 637600
TASK 4
A Advise the KBC
According extracted information KBC Ltd is suggested to close the operation of loss
marking departments such as A and D products. This is because production of B and E is
generating higher rate of return as 23.81% and it will minimise break-even point from current
level of £2500 to £2100. Similarly, the company will generate profit at the sale of £2478 less
than current level of £4525 in case it continues with A and D products.
B Calculating following figures
The following tables are showing figures related to contribution to sales, sales mix of
four products and break even points (Callahan, Stetz and Brooks, 2011). It enables company to
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assess information related to rate of return, break even point and units required to earn desired
profitability.
(i) Contribution to sales ratio (PVR)
Contribution to sales ratio = Total contribution / total sales revenue * 100
Total contribution = sales – total variable cost
Production of all the four products
A B D E total
Detail £'000 £'000 £'000 £'000 £'000
Sales 750 1000 800 1100 3650
TVC 630 750 678 850 2908
Fixed
overhead 125 125 125 125 500
Profit/Loss -5 125 -3 125 242
Contribution 120 250 122 250 742
Total Contribution sales ratio = 742000/3650000*100
= 20%'
1) C/Sales ratio
A → 120 / 750 = 0.16 = 16%
B → 250 / 1000 = 0.25 = 25%
D → 122 / 800 = 0.153 = 15.3%
E → 250 / 1100 = 0.237 = 23.7%
(ii) The break-even point
Production of all the four products
BEP (£000) = Total fixed overheads/(contribution/total unit)* selling price per unit
OR
BEP (£000) = Total fixed overheads/contribution sales ratio
= £500/0.20
= £2500
(iii) Total sales need to earn profit of £90000
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Total sales to earn profit = Total fixed overheads+target profit/Cont.-sales ratio
= (500+90000) / 20%
= £4525
C Combination of products with limited labour hours
Table 4: Combination of product
Particulars A B D E
Total labor
hour
available
Total labor cost 260000 260000 200000 280000
1000000
Labor cost/ hour 10 10 10 10 10
Labor hours (Key
factor) 26000 26000 20000 28000 100000
Contribution / product
120000 250000 122000 250000
742000
Contribution/ labor hour 4.62 9.61 6.1 8.92
Ranking 4 1 3 2
D Calculation to increase in profit that would arise
Table 5: Increase in profit (Product Maximization)
Product Labour hour
Contribution / labour
hour Total contribution
A 0 4.62 0
B 26 9.62 250.12
D 12 6.1 73.2
E 28 8.93 250.04
TOTAL 66 573.36
TASK 5
A Different types of budgeting method
There are different types of budgeting methods used by corporation which are explained
as follows-
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 Zero based budgeting-It is the most effective method which does not consider previous
record for budget allocation. Under this, expenses and income are estimated in
accordance with future profitability of KBC Ltd (Verbeeten, 2011). Fixed budget- Under this, all expenses associated with production activities are
considered. However, all fixed expenses are estimated which do not relate to market
conditions. Owing to this, performance cannot be compared with real market situations. Incremental budget-Under this previous year's record are considered in making budget.
It can be critically evaluated that some of the unnecessary spending can be occurred due
to considered basis of previous year (Allen, K. and Economy, P., 2011). Here, certain
portion of budget is increased every year by looking at uncertainty of previous financial
year.
 Flexible-Here, KBC Ltd prepare flexible budget for more than one production volume.
However, actual budget can be varied in accordance production of products and services.
However, profit can be assessed in the light of actual and expected profitability (Morse,
G., 2010).
Accordingly it can be suggested to KBC Ltd to make use of zero based budgeting and
flexible one. It assists corporation to keep record related to all its business activities and derive
profitability in an effectual manner. It will also be feasible for corporation to compare
profitability of each year in accordance with set standard.
B Cash budget
Cash budget consists of all information related to cash activities of business. Owing to
this, all operations or transaction of cash will be considered in the same-
(I) Calculating direct material purchase
Table 6: Calculation of direct material purchase
Particulars July August September
Material used 24000 27000 30000
Add: closing stock 10500 18000 12000
34500 45000 42000
Less: opening stock 15000 10500 18000
Total Material purchase 19500 34500 24000
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(II) Preparing cash budget
Cash budget
Particulars July August September
Receipt
Receipt from sales 87000 138000 156000
Total receipt 87000 138000 156000
Payment
Raw material purchased -19500 -34500 -24000
Wages -36000 -39000 -43500
Overhead -18000 -19500 -22500
Tax -75000
Total payment -73500 -93000 -165000
Net receipts/ (payment) 13500 45000 -9000
Opening cash flow 27000 40500 85500
Closing cash flow 40500 85500 86500
(III) Advantages of cash budget
There are several advantages of cash budget which support business to move in the
upward direction. Here, cash required in business activities will be forecasted in advances which
leads to reduce uncertainty. It proves to be effective to ensure optimum utilization of limited
resources thereby corporation can increase overall rate of return. In addition to this, activities
related to monitoring and administration become easy when cash budget is implemented at
workplace (Chandra and Prasanna, 2011). All monetary resources are allocated in right manner
so that accordingly business can easily operate business at global level. Therefore, cash budget
aid to assess performance of corporation in accordance with proper analysis of deficit and
surplus.
(IV) Advising to BOD of KBC
As per the analysis of budget board of director of corporation should focus upon
increasing their cash revenue. For this purpose, credit policies should be improved so that
payment will be made on right time (Davies and Crawford, 2011). Furthermore, wages control
should also be there by ensuring inclusion of highly skilled workforce at workplace.
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TASK 6
Budget and calculation of variance
I) Flexible budget and calculation of variance
Original fixed
budget flexed budget actual variances
sales units 8000 8400 8400
production units 8700 8900 8900
£ £ £ £
sales 600000 630000 613200 -16800 adverse
materials 156600 160200 163455 -3255 adverse
labor 217500 222500 224515 -2015 adverse
variable O/H 87000 89000 87348 1652 favorable
Fixed O/H 130500 133500 134074 -574 adverse
Production cost 591600 605200 609392
less closing inventory 47600 34000 34000
cost of sales 544000 571200 575392
profit 56000 58800 37808 -20992 adverse
Material variance
explain
material price variance explain
actual cost of material for 35464 kg £1,63,455
35464 kg @std cost £4.50 £1,59,588
-£3,867 adverse
material usage variance explain
actual usage 35464 kg
standard usage for the actual production
(8900*4kg) 35600 kg
Favourable 136 kg
at standard cost £4.50 £612 Favourable
Total material variance -£3,255 adverse
labor variance explain
labour rate variance £
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actual hours paid at actual cost 224515
actual hours at std cost 45400hrs*£5 227000
2485 fav
labour idle time variance
no. of actual labour hours paid 45400
no. of actual labour hoursworked 44100
1300
1300 hrs at std cost -£6,500 adv
labour efficiency variance
actual hours worked 44100 hrs
std hrs for the actual production 8900*5hrs 44500 hrs
400 hrs
at std cost 400*£5 £2,000 fav
total labour variance=2485-6500+2000 -£2,015 adv
Variable overheads variance
variable overheads cost variance
actual hours worked@ actual cost £87,348
actual hours worked@std cost 44100*£2 £88,200
£852 fav
variable overheads efficiency variance
actual hours worked 44100
std hours for actual production 8900*5 44500
400 hrs
at std cost (£2) £800 fav
total variable overheads cost variance 852+800= £1,652
Fixed overheads variance
Fixed overheads cost variance
actual fixed cost total £1,34,074
original budget total £1,30,500
-£3,574 adv
capacity variance
actual hours worked 44100
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budgeted hours (8700*5hrs) 43500
600 hrs
at std cost of £3 £1,800 fav
Fixed overheads' efficiency variance
actual hours worked 44100
std hours for actual production 8900*5 44500
400 hrs
at std cost (£3) £1,200 fav
total Fixed overheads variance =1200+1800-
3574= -£574 adv
Sales price variance
£
Actual sales at actual selling price 613,200 613200
Actual sales at standard selling price (8,400u
× £75) 630,000 630000
-16800
Sales volume variance -16800
units
actual sales 8,400
budgeted sales 8,000
400 fav
Profit (Standard profifit per unit) @£7 £2,800 fav
Budgeted profit 56000
Budgeted fixed production overheads 130500
Budgeted contribution 186500
Selling price variance -16800
Sales volume variance 2800 -14000
Actual sales minus the standard variable cost
of sales 172500
20

Variable cost variances
Material price -3867
Material usage 612 -3255
Labour rate 2485
Labour idle time -6500
Labour efficiency 2000 -2015
Variable overhead expenditure 852
Variable overhead efficiency 800 1652
Actual contribution 168882
Budgeted fixed production overheads -130500
Expenditure variance -3574
capacity variance 1800
efficiecy variance 1200
Actual fixed production overheads -131074
Actual profit 37808
(II) Variance analysis
There are several kinds of variances such as material price variance which is adverse for
due to £3867. It reflects that actual material is increased till £163455. Furthermore, labour rate
variance of corporation is favourable because of standard rate per hour was £5 but workforce
were paid on the basis of £4.95 per hour. It shows that KBC Ltd derived positive difference of
2225. In addition to this, variable overhead variance is £87348 where standard for the same was
£89000. It is deriving favourable variation which indicate good sign for business (What is
varianceanalysis?, 2016). Apart from this, fixed overhead variance is £574 which is not
favourable. It reflects that corporation should have proper control over its expenses and
appropriate strategies need to be followed for continuous learning of personnel so as to
determine long run growth of KBC Ltd (Gibbons and et.al., 2010).
(III) Reporting the findings
To Board of directors of KBC Ltd
From: Finance analyst
Date: 9th May 2016
Respected Ma'am/ Sir
The variance analysis reflects that material and labour cost is continuously increasing in
comparison to target set. Owing to this, production department is advised to control cost. They
21

can contract other suppliers offering raw material on effective prices so as to reduce cost of
production and increase profitability (Noreen, Brewer and Garrison, 2011). However, workforce
must be provided proper learning to manage their work with lesser cost. At this juncture, usage
of waste material can also be perfect aspect for their learning. Furthermore, sales and marketing
department should also adopt appropriate strategies to increase customer because of rate of
return is going down. Accordingly, performance of firm will be improved and competitive edge
of the same will be created in the marketplace.
TASK 7
(A) Calculating units sold and sales value
The units to be sold and volume of sales are calculated as follows. Along with that,
margin of profit and and break even point are also considered so as to extract information related
to profitability and performance of corporation-
BEP (units) = Total fixed overhead/per unit
contribution
= (£200000+£60000+£300000)/(£60-£40)
= (£560000)/(£20)
= 28000 units
BEP (£) = BEP (units)*selling price per unit
= 28000 units * £60
= £1680000
Margin of safety (M/S) is the return for
corporation over BEP-
Margin of safety (M/S) = Actual sales –
BEP sales
= (£60*40000 units) - (£1680000)
= £720000
M/S ( In units) = 40000 units – 28000
units
= 12000 units
B Computing profit or loss at the sale of 26500 pair of shoes
Items Calculations Results ( In £)
Sales revenue (26500*60) 1590000
Less: buying cost (26500*40) 1060000
Contribution 530000
Less: Annual fixed costs
Salaries and wages 200000
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Rent and rates 60000
Other fixed costs 300000
Total fixed overheads 560000
Net profit (loss) -30000
C Computation number of units to earn desired profit worth £240100
In order to get profit of £240100 company will product 44450 units. It aids to recover
cost of production and increase rate of return for longer time-
Units to be sold = Total Fixed Cost + Required profit
( Selling price-buying cost-salesman commission)
= (£560000+£240100)
(£60-£40-£2)
= £800100
£18
= 44450 shoes pair
D Computing total number of units at increased selling price by 15% & advertisement cost of
£20000
Effective selling price = £60 + (15% of £60)
= £60 + £9 = £69
Total number of shoes pair = (£560000+£20000)
£69-£40
= 20000 shoes pair
E Recommending and justifying appropriate action for improving performance of Bata Ltd
The aforementioned analysis reflects that Bata Ltd should produce certain unit to ensure
optimum utilization of its limited resources. Here, the minimum limit is 28000 pair of shoe
where corporation can generate enough profitability to recover its cost of production. The reason
behind producing 28000 is to utilize overall capacity to derive growth and success of business
for longer time span. However, at production of 26500 pair of shoes company get loss of
£30000. Also, at that level company cannot get break-even point hence profitability cannot be
derived. Owing to this, company should lays emphasis on maximum advertisement and
marketing of its products and services (Mistry and et. al., 2014). It aids to increase overall rate
23

of return and deliver good quality of services to large number of buyers. However, corporation
can easily generate higher rate of return because marketing of products and services tend to
increase customer base (Sandalgrh and Bukh, 2014). In addition to this, company should provide
training among its personnel so they will be able to focus on reducing waste material and
ensuring growth rate of company for longer time span.
CONCLUSION
The aforementioned report concludes that absorption and marginal costing are effective
method through which organization assess its profitability in the light of desired rate of
profitability. Furthermore, cash budget assists management of corporation to keep record related
to all transaction made in cash. This aspect tend to support management in reducing cost of
production and enhancing overall rate of return. It can also be said that, variance analysis is done
by finance department for taking corrective step for achieving long as well as short term
objectives.
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Online
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What is varianceanalysis?. 2016. [Online]. Available through:
<http://www.accountingtools.com/questions-and-answers/what-is-variance-analysis.html>.
[Accessed on 9th May 2016].
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