PREPARING A FLEXIBLE BUDGET IN MANAGEMENT ACCOUNTING

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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.