PM201 Management Accounting : Break Even Chart

TOTAL COST= TOTAL FIXED COST+TOTAL VARIABLE COST.

There are two ways in which breakeven point can be calculated. Breakeven point can be calculated in terms of number of units and also in terms of sales value. Both has a formula.

Breakeven point (in units) =Fixed cost/ Contribution per unit.

Contribution per unit is the difference between the selling price per unit and the variable cost per unit. Contribution is the amount to cover the fixed cost. As the company can earn profit only when both fixed and variable cost are recovered (Garrison, Noreen and Brewer, 2012).

A proper study is required because this plan helps in the growth and development of an entity. The company first uses it resource in manufacturing and thereafter for the expansion of the entity. The company is able to evaluate its performance with the help of this analysis (Gitman and Zutter, 2012).

An example to understand breakeven analysis more clearly-

A product Zen is produced whose per unit price of sales is $20 The fixed cost is $50000 and the variable cost is $10 per unit. The formula that can be used to calculate the breakeven point is

Breakeven point (in units) =Fixed cost/ Contribution per unit.

The table given below depicts a clear picture of the explanation stated above. It reveals that the breakeven point of this product is 5000 units. The company will have no profit or loss if it sells 5000 units.

3. Evaluate the importance of any six operational budgets for a limited company.

Budgets are the estimates made by the company for the expenses it has to incur to carry on its operation in the near future (Hoyle, Schaefer and Doupnik, 2015). This is one of the most important business tool as it guides the management and helps to take prudent actions. This is prepared for the use of the management and is not for the use of external parties.

There are several functional budgets an entity has to prepare to make its business plan more efficient. Few of them are explained below-

1. Cash budget- The estimated cash inflows and cash outflows for a specific period is called cash budget. This is usually prepared monthly and is useful for smaller companies (Kinney and Raiborn, 2011). This helps to manage the funds of the company so there is no shortage of cash when required. It gives them detailed information whether they should sell goods on credit or not.
2. Production budget- The production budget is prepared keeping in mind two factors one is inventory and the other is the sales target. Production is made according to the demand of the product so that the company can achieve its sales targets. The company also has to keep certain goods ready for prompt orders; therefore it has to keep information of the inventory he should keep.
3. Sales budget- The budget prepared to determine the number of units the company is estimating to sell to generate revenues. If the company sells more than it has estimated then the budget prepared was correct and the company was able to achieve its sales target but if the company could not actually generate revenue that it expected then the budget may have some fault. It keeps the company’s focus towards it sales target and keeps the employee motivated to increase their efforts (Iversen and Norpoth, n.d.).
4. Overhead budget- The company has to bear both direct and indirect expenses in the process of production and distribution. Indirect expenses also known as overhead are those cost which are not directly attributable to the product. It keeps the company informed about the expenses that may arise in the course of production (Mondy, 2015). This budget helps to identify and eliminate the wasteful cost included in the product. Indirect costs are huge and hence are very important to keep proper details of it.
5. Master Budget- The master budget contains the entire functional budget. It depicts the overall financial movements of an entity. It helps to analyse the key financial ratios of an entity so that the company can analyse its progress and make improvements that are required. It is very important as it helps the management to direct the employees in such a manner which will help them to achieve organisational goals.
6. Personnel budget- The manpower that will be required by an entity to meet its production target is known as personnel budget. A production process cannot be completed without human efforts. Therefore, it is important to set a budget which will let the company know the correct manpower requirement for the company. If the manpower requirement is less but presence of manpower is more then it may result in increased cost of the product. But if the manpower required is more but the company does not have enough of it, then it may not be able to meet the production requirement.

Budget helps us to maintain a balance between the expense and Income of an entity. It creates a plan in which the money is to be spent. A plan is prepared so that the expenses are made in a prudent way and reduce wasteful expenditures (Schipper, 2012). It helps to reduce cost and maximise profits. If we follow the budget we prepare there will never be shortage of funds at the time of requirement. It makes sure that the funds are available whenever we need it and decreases the chances of increasing debts. This is one of the most important way in which it can keeps its finance on track.

4. Discuss analytically the importance of variance analysis as a cost controlling and decision making too

• Any difference between the estimated values and the actual values is known as variations.  It is also defined as the deviation of the expenses from its expected values. The deviation should not be large because it signifies faulty management and corrective measures has to be taken. It is a cost accounting tool to manage expenses and keep a control over them (Davidson, 2009).

There are various variances. Few of them are listed below

1. Sales variance- The Company expects to sell a give volume of units in a specific time. If the company sells more than it expects then it is considered good but if the sales of the company is very low when compared to the actual sales (Weil, 2014). Then it is unfavourable and the company should find out the reason behind it and take reasonable steps.
2. Material Variance- A Company has to estimate the requirement of raw material before it starts its production. This estimate will be considered good only when the materials that were brought were sufficient to meet the production targets. If the raw material proves insufficient then the company’s estimate is incorrect.
3. Labour variance- There may be a gap between the expected manpower required and the actual manpower in an entity. If the actual manpower is huge and more than required then it is considered negative. This increases the indirect cost of the product which leads to the rise in the selling price. Therefore it is very important to estimate the correct amount of manpower required in an entity.
4. Overhead variance- A company has to keep a track of the indirect expenses. If the actual overhead is more than estimated then the company should look after this and take necessary steps to reduce such costs. The cost incurred indirectly is included in the final product’s cost and therefore it affects the customer. If the estimate is lower than the actual expense then the company will have under recovery and such under covered amount will be charged to profit and loss account.

Variance is mainly used in management accounting. Variance can result in increase in average wage rate, decline in the productivity of finished goods, increase in the idle time, spending more on the wage of labour because of higher production than budget (Balakrishnan, Sivaramakrishnan and Sprinkle, n.d.). It helps in creating a proper plan and setting standards in order to achieve organisational objective. This creates a proactive attitude in the management of the entity. It saves them from taking a wrong decision and work prudently. If the variance analysis is not performed in a correct manner then the actions of the management may get delayed which may affect the working of an organisation. Hence, it is considered very important in all the entities.

References:

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