# Managerial Accounting 3 assignments

docx.docx

Cost Analysis Models

Unit 3: Written Assignment

BUS 5110

Managerial Accounting

Unit 3

Introduction

Cost management is important for all businesses and is used to plan and control the budget. This is done by analysing business practices, predicting expenditures in advance and reducing the chance of over spending in relation to income. Using the client provided data for a business involved in the catering and events industry we can evaluate how productive and effective her business is.

Provide an accurate solution.

We can see from the data in the attached costing sheet that the company has a break even point of 3158 events. To come to this conclusion, we calculated the revenue per event (Current revenue / number of events) \$22,500,000 / 5000 = \$4,500. We also require our Contribution margin (Revenue per event - Variable cost per event) \$4,500 - \$2,600 = \$1,900. To calculate the Breakeven point, we simply take the Fixed cost and divide that by the Contribution margin = 6,000,000 / 1,900 = 3157.89

Hypothetically, if the company decided they’d like to improve their revenue and increase their profits from \$3,500,000 to \$5,000,000 we can use the data to calculate the number of events required to reach that target. Using the Units to Achieve a Target Income formula (Total fixed costs + Target income) / Contribution margin per unit = (6,000,000 + 5,000,000) / 1,900 = 5789.47 = 5789 events (Walther, L. M. & Skousen, C.J., 2009).

Provide a narrative that defines and discusses the purpose of assigning cost categories of fixed and variable costs.

Operating a business incurs a range of costs. These can be defined as either fixed costs which don’t change in relation to activity and variable costs which do. These costing structures will likely differ between businesses and industries. Companies have even been known to use different costing structures between different internal departments. (CFI., n.d.)

Many fixed costs are going to be unavoidable and come from the simple operational side of your business. Costs such as depreciation, taxes and rent will likely remain unchanged however other fixed costs such as advertising budgets are more discretionary. Variable costs are also able to be altered depending on the size and scale of your business. For example, order quantities can be increased to bring unit costs down however before committing to such decisions forecasting your sales based on this should also be carried out to ensure you don’t end up grossly overstocked (Walther, L. M. & Skousen, C.J., 2009).

In order to maximise profits companies are required to minimise or eradicate unnecessary costs any way they can, ideally with no impact on the quality of the final product. A manager must understand both of these categories and the importance they play in the overall running of the business if they’re ever going to effectively improve the business model, reduce costs and remain profitable.

Provide a narrative that defines and discusses the relationship of variable costs to contribution margin.

Contribution margin is calculated by sales revenues minus variable costs and represents the profit generated for each product or unit sold. This can be measured as a percentage or as a dollar figure. One of the most important factors of contribution margin is that it remains fixed on a per unit basis irrespective of the number of units manufactured or sold. (Investopedia Staff., 2019, February 12)

Because only variable costs change based on units of production, fixed costs have no direct impact on contribution margin. Items such as components and materials used for production can be purchased in larger quantities in order to reduce base unit costs and increase the final number of units produced. As these variable costs go down your contribution margin on your final product will increase. (Walther, L. M. & Skousen, C.J., 2009).

Provide a narrative that discusses the limitations of the data.

As helpful as CVP is to calculate the profitability of a company based on fixed and variable costs, it does have its limitations. Due to the number of data estimations required to calculate, it can lack accuracy and should be considered an approximation instead of a guarantee. For example, CVP assumes that both total costs and total sales are linear however we know that scales of economy can impact costs and large purchases can often lead to a decrease in cost per unit which wouldn’t be represented in this analysis. Another assumption made which can change dramatically depending on external factors is the demand for the provided service. Demand can be forecast to some extent however this yet again add another estimation to the analysis which can easily change. (Agarwal, R., 2015, May 13)

Provide a narrative that speculates what data is missing from the case.

Several other fixed costs pertaining to any business is missing from the provided date. Tax payments are a significant component of fixed costs which should be considered. If taxes aren’t added to the calculation we can only assume the fixed price would rise and our analysis would have to be re-done in order for it to be more accurate.

The client data suggests that the tents and other structures as well as trucks and vehicles are only “allocated costs” and not actual costs. Even though these are considered fixed costs, circumstances can change, and these allocated costs may increase or decrease dramatically. For example, a rise in fuel costs will increase the allocated costs of trucks and vehicles.

Other missing variables specific to this example include fixed costs office rent and storage costs as well as the variable cost of utilities. All of which should be recorded and added to your costing plan. Without these added into your CVP it will give an inaccurate representation of your breakeven point and you could end up losing money.

References: