SOLUTION: Management Accounting | My Assignment Tutor

14/03/20211 Unit 5: Management AccountingTypes of management accounting systems1ICTM MODULE DELIVERY TEAM Week 4: Unit 5 Management AccountingLearning ObjectivesUpon completion of this lecture, you will be able to:Explain the behaviour of fixed and variable costs;Prepare a break-even chart;Prepare a profit volume graph;Explain what are the limitations of break-evenanalysis;Construct break-even charts and profit volumegraphs;Apply contribution analysis to decision-making.2ICTM MODULE DELIVERY TEAM 1 214/03/20212 Types of management accounting systemsCost-accounting systemsA costing system is designed to monitor the costs incurredby a business.The system is comprised of a set of forms, processes,controls, and reports that are designed to aggregate andreport to management about revenues, costs, andprofitabilityCost can direct and or indirect3ICTM MODULE DELIVERY TEAM Cost-accounting systemsOpportunity costThe return that could not be realized from the best forgonealternative use of a resourceAn opportunity cost is the sacrifice you make when you use aresource for one purpose instead of another4ICTM MODULE DELIVERY TEAM 3 414/03/20213 Cost AccountingCLASIFICATIONOF COSTSAdministration Production Sales anddistributionICTM MODULE DELIVERY TEAM Research anddevelopment Principles of Management accountingDIRECT COSTSDirect costs are expenditure that can be easilyidentified with a specific cost unit.Ex. Direct material cost.Direct labour cost.Direct expenses.Total direct costs are known as Prime costs.ICTM MODULE DELIVERY TEAM 5 614/03/20214 Indirect costIndirect cost is expenditure that cannot be identifiedwith a specific cost unit, e.g. costs of indirectmaterial, indirect labour, indirect expenses. They arealso known as shared costs. The total of indirect costsis called overheads.TOTAL COSTS.This is the sum of both direct and indirect costs.ICTM MODULE DELIVERY TEAM Indirect costIndirect cost is expenditure that cannot be identifiedwith a specific cost unit, e.g. costs of indirectmaterial, indirect labour, indirect expenses. They arealso known as shared costs. The total of indirect costsis called overheads.TOTAL COSTS.This is the sum of both direct and indirect costs.ICTM MODULE DELIVERY TEAM 7 814/03/20215 VARIABLE COSTThese are costs which vary directly with output. The variable cost of unit is thesame amount for each unit produced.ICTM MODULE DELIVERY TEAM Fixed COSTThese are costs that are classified as period costs , andtherefore are not included in the valuation of stock,e.g., admins cost. Fixed cost remains the same despitea change in the level of outputICTM MODULE DELIVERY TEAM 91014/03/20216 Semi variable COSTA semi-variable cost is also referred to as a semi-fixedcost. It contains both elements of variable and fixedcosts and are partly affected by a change in the levelof output. e.g. telephone billICTM MODULE DELIVERY TEAM Stepped fixed costThis cost is constant at a relevant range of activity butwhen a critical level is reached the total cost incurredincreases in the next step.ICTM MODULE DELIVERY TEAM 111214/03/20217 CVP AnalysisCVP AnalysisICTM MODULE DELIVERY TEAM Break-Even (units)=Fixed Costs /Contribution per unitC/S ratio=Contribution per unit/ Selling PriceMargin of Safety• Budgeted Sales –Breakeven Point Sales• (Budgeted – BEP sales) /Budgeted Sales %Target Profit=(Fixed Costs +Required profit) /Contribution per unitCVPAnalysisICTM MODULE DELIVERY TEAM 131414/03/20218 CVP ANALYSISVolumeThis is the study of relationship between Total Cost,Volume, and Profit.is represented by either unit of production or in aservice industry by the appropriate level of activityi.e. in a hospital it will be the number of beds, in acollege – number of students.Profit is calculated based on the Marginal CostingPrincipleICTM MODULE DELIVERY TEAM CVP ANALYSISSelling Price X– Variable Costs (X)—–CONTRIBUTION X-FIXED COST (X)PROFIT X_ICTM MODULE DELIVERY TEAM 151614/03/20219 CVP ANALYSISCVP analysis determines how cost and profit willreact to a change in the volume or level of activity, sothat the best alternative activity level can be decidedVariable costs and selling price per unit are assumedto be unchanged by any change in volume.Fixed costs do not change with a change in level.However, as more and more units are produced costper unit will fall.ICTM MODULE DELIVERY TEAM Contribution Per UnitSelling price per unit £10.00– Variable cost per unit (£4.00)=Contribution per Unit £ 6.00CONTRIBUTIONContribution is sales less variable costs but alsoprofit less fixed costs.ICTM MODULE DELIVERY TEAM 171814/03/202110 BREAK-EVEN POINTTOTAL FIXED COSTCONTRIBUTION PER UNITBreak-even point is where sales revenue equals totalcosts; at this point there is neither profit nor loss.Target ProfitNo of units to sell to earn the Target ProfitT.F.C + Targeted ProfitContribution Per UnitICTM MODULE DELIVERY TEAM Principles of Management accountingCalculate:Break Even points (units and Revenue)No. of units to sell to earn a target profit of £50,000Margin of safetyICTM MODULE DELIVERY TEAM Selling Price : £25.00 per unitVariable Cost: £15.00 per unitBudgeted Production: 8,000 unitsFixed production cost : £60,000192014/03/202111 CVP AnalysisCalculate:Break Even points (units and Revenue)No. of units to sell to earn a target profit of £50,000Margin of safetyICTM MODULE DELIVERY TEAM Selling Price : £25.00 per unitVariable Cost: £15.00 per unitBudgeted Production: 8,000 unitsFixed production cost : £60,000 Margin of safety Margin of safety is used in break-even analysis toindicate the number of sales that are abovethe Break even point. It indicates the amount by which a company’ssales could decrease before the company willbecome unprofitable.Budgeted sales units – Break even (units)ICTM MODULE DELIVERY TEAM 212214/03/202112 Traditional Break Even Chart23ICTM MODULE DELIVERY TEAM Profit Chart24ICTM MODULE DELIVERY TEAM 232414/03/202113 CVP Analysis(in class activity)Happy House is a travel agency specialising in flightsbetween Rome & London. It books passengers on BritishAirways . Ticket price is £100 per passenger. The variable costs are £35 per ticket. Fixed costs are £26 000 per month. Draw the Break-even chartICTM MODULE DELIVERY TEAM Questions(to be completed by Students) Calculate The number of tickets that must be sold to break-evenand the revenue to be earned How many tickets must be sold to earn £6 500 profit? What is the margin of safety, in units and in £s?(Draw a graph also showing the margin of safety). How many additional tickets must be sold to coverthe extra cost of fixed advertising of £3 900?ICTM MODULE DELIVERY TEAM 252614/03/202114 Break out Room discussion Cost Behaviour Assumptions and Criticisms of CVP analysisICTM MODULE DELIVERY TEAM 27