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ILLUSTRATION:
The
following data relate to a budget at 80% level of activity for the Plato
Company:
Revenue:
2,000 units @ N5 = N10,000
Less
Variable Cost:
Direct
Material 300
Direct
Labour 200
Variable
Over head 50
Fixed
Overhead 1200 (1,750)
Profit 8,250
REQUIRED:
(a) Prepare a flexed budget at 60%
using marginal costing technique
(b)
Using
the information in (a) above, find:
i.
Break
Even Point
ii.
Sales
Level to Achieve a profit of N2,000
SOLUTION:
First
of all, write out the company’s name like this:
PLATO COMPANY
FLEXIBLE BUDGET AT 60%
Revenue: 2000 x 0.6 x N5 = N7,500
0.8
EXPLANATION:
We are preparing
the budget for 60%. The budget was at
80% - look up the question. For us to
get 60%, we must move to 100%, then get our 60% from the 100%. To do this, the 2000 units given us in the question,
we have to divide it by 0.8 which is the 80% that the budget was and that will automatically
move us to 100%. Now to get 60%, just
multiply your answer by 0.6 which is 60%.
After getting the 60%, multiply it by N5 which is the selling price to
give the total revenue at 60%.
Note: We will do this same process of moving to
100%, from 100% to 60% to Direct Material, Direct Labour and Variable
Overhead. But fixed overhead is excluded
because it is fixed. So, the original fixed overhead figure will be used like
that. Now, take a deep breath, relax and
following me as I take you to the coastal ride of the workings.
I start from
afresh;
Revenue: 2000 x 0.6 x N5 = N7,500
0.8
Less
Variable cost:
Direct
Material 300
0.8 X
0.6 = 225
Direct
Labour 200
0.8 X
0.6 = 150
Variable
Over head 50
0.8 X
0.6= 37.5 (412.5)
Contribution: 7,087.5
Less
Fixed Overhead: (1,200)
Net
Profit:
5,887.5
The
answer to (a) part of the question is 5,887.5
Solving
for (b):
Break
Even Point in Unit:
B.E.P
(unit) = FC_______
Contribution/Unit
Contribution
in unit is SP/Unit – VP/Unit
Unit
Note,
we can’t solve for the B.E.P (unit) when we don’t know our contribution/unit
and that is why we are trying to calculate it.
Contribution
= N5 - 412.5
1,500 = 4.725
Here
is how I got this; N5, is the selling price in the question, 412.5 is the total
variables, 1,500 is the 60% unit. I got
it by calculating 200/0.8 x 0.6 = 1,500.
So,
our contribution is 4.725. So, we can now calculate B.E.P (unit).
B.E.P
(unit) = FC_______
Contribution/Unit
B.E.P
(unit) = 1,2000
4.725
B.E.P
(unit) =254
Now,
let’s calculate Break-Even Point in Naira:
B.E.P
(N) = FC
CMR
Again,
we have to solve for our CMR before we can solve for B.E.P in Naira.
CMR
= Contribution
Sales
Look
for the contribution figure and sales figure in the question and bring fill it
in.
CMR
= 7087.5
7,500
CMR
= 0.945
Now
that we know our CMR, let’s solve for the B.E.P (N):
B.E.P
(N) = FC
CMR
B.E.P
(N) = 1,200
0.945
B.E.P
(N) =N1,270
SOLUTION TO (II):
Just
add the targeted profit which is N2,000 to the fixed cost which is N1,200, then
divide by contribution.
Targeted
profit = 2,000
Fixed
cost = 1,200
3,200
3,200
divide by the contribution which is 0.945 = 3,386
QUESTION:
What
is the difference between Financial Accounting and Management Accounting?
SOLUTION:
FINANCIAL ACCOUNTING
Financial
accounting is used to present the financial health of an organization to its
external stakeholders. Board of directors, stockholders, financial institutions
and other investors are the audience for financial accounting reports.
Financial accounting presents a specific period of time in the past and enables
the audience to see how the company has performed. Financial accounting reports
must be filed on an annual basis, and for publically traded companies, the
annual report must be made part of the public record.
MANAGEMENT ACCOUNTING
Management
or managerial accounting is used by managers to make decisions concerning the
day-to-day operations of a business. It is based not on past performance, but
on current and future trends, which does not allow for exact numbers. Because
managers often have to make operation decisions in a short period of time in a
fluctuating environment, management accounting relies heavily on forecasting of
markets and trends.
DIFFERENCES
Management
accounting is presented internally, whereas financial accounting is meant for
external stakeholders. Although financial management is of great importance to
current and potential investors, management accounting is necessary for
managers to make current and future financial decisions. Financial accounting
is precise and must adhere to Generally Accepted Accounting Principles (GAAP),
but management accounting is often more of a guess or estimate, since most
managers do not have time for exact numbers when a decision needs to be made.
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