Managerial Accounting - Cost Analysis and Breakeven

This assignment analyzes the costs and financial performance of Seda Gilap, a catering company. It begins by separating fixed and variable costs using the high-low method and calculating the variable cost per labor hour. The assignment then determines relevant costs for break-even analysis and calculates the break-even point, margin of safety, and degree of operating leverage. The company's performance is evaluated, highlighting the impact of production changes and the importance of cost management. The analysis concludes with future prospects, emphasizing the significance of break-even analysis, operating leverage, and margin of safety for the company's long-term viability and the need for regular monitoring of overhead and variable expenses. The assignment provides insights into pricing strategies and potential market competition.

Running head: MANAGERIAL ACCOUNTING
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MANAGERIAL ACCOUNTING

MANAGERIAL ACCOUNTING
Table of Contents
Separation of the fixed and the variable costs.................................................................................3
Relevant costs for breakeven analysis.............................................................................................3
Break-even point..............................................................................................................................4
Safety margin...................................................................................................................................4
Degree of operating leverage...........................................................................................................5
Performance of the company...........................................................................................................5
Future prospects...............................................................................................................................6
References........................................................................................................................................7

MANAGERIAL ACCOUNTING
Separation of the fixed and the variable costs
The fixed costs are termed as those costs that remain stagnant and the does not change
even if there is any variation in the costs. The variable costs on the hand are the cost which keeps
on changing as per the change in the value of the production. Cumulatively these both costs
forms the total cost.
From the case study it is clearly evident which costs are fixed costs and which costs are variable
costs? Using the high low method, the variable cost has been arrived at by dividing the change
cost by change in activity. The variable cost per labor comes at RM4.4, whereas the fixed
element is RM32320 (Antle & Bogetoft, 2018).
Particulars Labor Overhead
Hours Expense
High level of activity 7,200 $64,000
Low level of activity 2,200 42000
Change 5,000 22,000
Variable cost Change in cost 22,000
Change in Activity 5,000
4.4
per labour hour
Fixed cost element Amount
Total cost - Variable cost RM32320
Variable cost RM31680
Relevant costs for breakeven analysis
The relevant costs that is required for the breakeven analysis is fixed costs and the
contribution per unit. Breakeven analysis is the stage at which the revenue is equivalent to the
costs and the company faces, no profit no loss situation. The breakeven analysis is also helpful in
determining how much units shall be produced by the company and if the company does not

MANAGERIAL ACCOUNTING
produces; there will be loss, to be borne by company. Hence, the proactive approach if useful for
the Seda Gilap’s. The fixed costs are used as it is a common unforgettable cost and it is divided
by contribution per unit to get the number of units which are required to be produced and sold
(Kresta & Lisztwanová, 2017).
Break-even point
In this current scenario, the break-even point can be observed in the table below.
Calculate the break even cost
Fixed costs 1483.2 47.69
Contribution per unit 31.1
The above table indicates that 47.69 units are required to be produced in order to
achieved a point where there is no profit and no loss. If below47.69 units are produced than the
company will have to bear losses (Calabrò, 2017).
Safety margin
Margin of safety is the variance between the intrinsic of a stock and its market cost.
Another definition also reveals that while considering the break even analysis concept from the
order of accounting, provides a security for the business and also arrives at its make back the
initial investment point (Shilling & Kleckner, 2019).
The margin of safety of the present case study comes at 73.51%. This advises the board
regarding the crucial events which business might face due to such deals. The idea is helpful
when a huge extent of deals is in danger of decay or disposal, as might be the situation when a
deal is reaching a conclusion. A negligible edge of security may trigger activity to decrease costs
(Quintanilla, et al 2019).
Margin of safety

MANAGERIAL ACCOUNTING
Current sales - Breakeven point (5760-(47.69*32)) 4233.92 73.51%
Current sales 5760 5760
Degree of operating leverage
The Degree of Operating Leverage (DOL) is the influence proportion that summarizes
the impact of a measure of working influence on the organization's income before interests and
assessments (EBIT). Working Leverage considers the extent of fixed expenses to variable
expenses in the tasks of a business. In the event that the level of working influence is high, it
implies that the profit before intrigue and charges would be unusual for the organization,
regardless of whether the various elements continue as before. The degree of operating leverage
as per the current case study is 1.42 times (Cadman & Ferracuti, 2018). This also implies that In
the event that you get a higher level of working influence or DOL, at that point you should
attempt to adjust the working influence to offset with the monetary influence so as to give
benefits to the organization. One of the important factors that is relevant in this category is close
parity between degree of operating leverage. Even a minimal amount of deal can help in
extracting the financial benefits. Therefore, it becomes quite difficult to keep alignment between
monetary factors and working criteria to get the benefits (Qiu, Shaukat & Tharyan, 2016).
Degree of operating leverage Contribution margin 0.864 1.42
Operating income 0.606
Performance of the company
The overall performance of the company is sound and smooth; however the separation of
the fixed costs and the variable costs indicates that the change in the production of the units has a
huge impact. The company is earning a net profit of RM3492 as of now at 160 guests. If the

MANAGERIAL ACCOUNTING
company focuses on increasing the number of guests, eventually the cost will also increase. This
must be a check point as it can affect the performance of the company. The company can
enhance its production levels by reducing the overhead expenses (Wang & Sarkis, 2017). The
crucial fact is that a price lowers than the original bid of $32 might set a precedent for the future
or it may lead to clashed among the companies like a war.
Future prospects
The breakeven analysis helped in making the company aware about the number of guests
that must attend the party so that the restaurant can cover the basic costs. Further the degree of
operating leverage and margin of safety also gave insight of how these are also important
elements which are feasible from the point of future prospects. Overall analysis defines that the
restaurant will be feasible in the future generation as well. Also there must be regular supervision
and check to keep the track of the overhead and variable expenses (Wang & Sarkis, 2017).
Another chance would be to keep up her typical cost however toss in extra administrations at no
expense to the client. Regardless of whether to contend dependent on cost or administration is a
fragile issue that Seda Gilap should choose in the wake of becoming more acquainted with the
character and inclinations of her clients.

MANAGERIAL ACCOUNTING
References
Antle, R., & Bogetoft, P. (2018). Procurement with asymmetric information about fixed and
variable costs. Journal of Accounting Research, 56(5), 1417-1452.
Cadman, B. D., & Ferracuti, E. (2018). Degree of Operating Leverage, Earnings Properties and
the Information Content of Earnings. Earnings Properties and the Information Content of
Earnings (June 4, 2018).
Calabrò, F. (2017, July). Local communities and management of cultural heritage of the inner
areas. An application of break-even analysis. In International Conference on
Computational Science and Its Applications (pp. 516-531). Springer, Cham.
Kresta, A., & Lisztwanová, K. (2017). Break-even analysis under randomness with heavy-tailed
distribution.
Qiu, Y., Shaukat, A., & Tharyan, R. (2016). Environmental and social disclosures: Link with
corporate financial performance. The British Accounting Review, 48(1), 102-116.
Quintanilla, P., Domenech, E., Escriche, I., BELTRÁN, M. C., & MOLINA, M. P. (2019). Food
Safety Margin Assessment of Antibiotics: Pasteurized Goat's Milk and Fresh
Cheese. Journal of food protection, 82(9), 1553-1559.
Shilling, E. A., & Kleckner, K. J. (2019). U.S. Patent No. 10,413,734. Washington, DC: U.S.
Patent and Trademark Office.
Wang, Z., & Sarkis, J. (2017). Corporate social responsibility governance, outcomes, and
financial performance. Journal of Cleaner Production, 162, 1607-1616.

MANAGERIAL ACCOUNTING