Wednesday, 31 August 2022
Question No. 4 - MMPC 004 - Accounting for Managers - MBA and MBA (Banking & Finance)
Solutions to Assignments
MBA and MBA (Banking & Finance)
MMPC 004 - Accounting for Managers
MMPC-004/TMA/JULY/2022
Question No. 4. Explain in detail the various contents of an Annual Report.
Solution:
Question No. 3 - MMPC 004 - Accounting for Managers - MBA and MBA (Banking & Finance)
Solutions to Assignments
MBA and MBA (Banking & Finance)
MMPC 004 - Accounting for Managers
MMPC-004/TMA/JULY/2022
Question No. 3. What is CVP analysis? Does it differ from break even analysis? How is break-even point calculated?
Solution:
A break-even analysis is a financial calculation used to determine a company’s break-even point (BEP). It is an internal management tool, not a computation, that is normally shared with outsiders such as investors or regulators. However, financial institutions may ask for it as part of your financial projections on a bank loan application.
The formula takes into account both fixed and variable costs relative to unit price and profit. Fixed costs are those that remain the same no matter how much product or service is sold. Examples of fixed costs include facility rent or mortgage, equipment costs, salaries, interest paid on capital, property taxes and insurance premiums.
Variable costs rise and fall according to changes in sales. Examples of variable costs include direct hourly labor payroll costs, sales commissions and costs for raw material, utilities and shipping. Variable costs are the sum of the labor and material costs it takes to produce one unit of your product.
Total variable cost is calculated by multiplying the cost to produce one unit by the number of units you produced. For example, if it costs $10 to produce one unit and you made 30 of them, then the total variable cost would be 10 x 30 = $300.
The contribution margin is the difference (more than zero) between the product’s selling price and its total variable cost. For example, if a suitcase sells at $125 and its variable cost is $15, then the contribution margin is $110. This margin contributes to offsetting fixed costs.
The average variable cost is calculated as your total variable cost divided by the number of units produced.
In general, lower fixed costs lead to a lower break-even point—but only if variable costs are not higher than sales revenue.
Why Does Your Business Need to Perform Break-Even Analysis?
A break-even analysis has broad uses on its own merit. But it’s also a critical element of financial projections for startups and new or expanded product lines. Use it to determine how much seed money or startup capital you’ll need, and whether you’ll need a bank loan.
More mature businesses use break-even analyses to evaluate their risks in a variety of activities such as moving innovative ideas to production, adding or deleting products from the product mix and other scenarios. One example is in budgeting the addition of a new employee. A break-even analysis will reveal how many additional sales it will take to break even on expenses associated with the new hire.
What Is a Standard Break-Even Time Period?
An acceptable break-even window is six to 18 months. If your calculation determines a break-even point will take longer to reach, you likely need to change your plan to reduce costs, increase pricing or both. A break-even point more than 18 months in the future is a strong risk signal.
When to Use a Break-Even Analysis
Basically, a business will want to use a break-even analysis anytime it considers adding costs. These additional costs could come from starting a business, a merger or acquisition, adding or deleting products from the product mix, or adding locations or employees.
In other words, you should use a break-even analysis to determine the risk and value of any business investment, especially when one of these three events occurs:
1. Expanding a business
Break-even points (BEP) will help business owners/CFOs get a reality check on how long it will take an investment to become profitable. For example, calculating or modeling the minimum sales required to cover the costs of a new location or entering a new market.
2. Lowering pricing
Sometime businesses need to lower their pricing strategy to beat competitors in a specific market segment or product. So, when lowering pricing, businesses need to figure out how many more units they need to sell to offset or makeup a price decrease.
3. Narrowing down business scenarios
When making changes to the business, there are various scenarios and what-ifs on the table that complicate decisions about which scenario to go with. BEP will help business leaders reduce decision-making to a series of yes or no questions.
Importance of Break-Even Analysis
- Manages the size of units to be sold: With the help of break-even analysis, the company or the owner comes to know how many units need to be sold to cover the cost. The variable cost and the selling price of an individual product and the total cost are required to evaluate the break-even analysis.
- Budgeting and setting targets: Since the company or the owner knows at which point a company can break-even, it is easy for them to fix a goal and set a budget for the firm accordingly. This analysis can also be practised in establishing a realistic target for a company.
- Manage the margin of safety: In a financial breakdown, the sales of a company tend to decrease. The break-even analysis helps the company to decide the least number of sales required to make profits. With the margin of safety reports, the management can execute a high business decision.
- Monitors and controls cost: Companies’ profit margin can be affected by the fixed and variable cost. Therefore, with break-even analysis, the management can detect if any effects are changing the cost.
- Helps to design pricing strategy: The break-even point can be affected if there is any change in the pricing of a product. For example, if the selling price is raised, then the quantity of the product to be sold to break-even will be reduced. Similarly, if the selling price is reduced, then a company needs to sell extra to break-even.
Components of Break-Even Analysis
- Fixed costs: These costs are also known as overhead costs. These costs materialise once the financial activity of a business starts. The fixed prices include taxes, salaries, rents, depreciation cost, labour cost, interests, energy cost, etc.
- Variable costs: These costs fluctuate and will decrease or increase according to the volume of the production. These costs include packaging cost, cost of raw material, fuel, and other materials related to production.
Uses of Break-Even Analysis
- New business: For a new venture, a break-even analysis is essential. It guides the management with pricing strategy and is practical about the cost. This analysis also gives an idea if the new business is productive.
- Manufacture new products: If an existing company is going to launch a new product, then they still have to focus on a break-even analysis before starting and see if the product adds necessary expenditure to the company.
- Change in business model: The break-even analysis works even if there is a change in any business model like shifting from retail business to wholesale business. This analysis will help the company to determine if the selling price of a product needs to change.
Benefits of Break-even analysis
- Catch missing expenses: When you’re thinking about a new business, it’s very much possible that you may forget about a few expenses. Therefore, a break-even analysis can help you to review all financial commitments to figure out your break-even point. This analysis certainly restricts the number of surprises down the road or at-least prepares a company for them.
- Set revenue targets: Once the break-even analysis is complete, you will get to know how much you need to sell to be profitable. This will help you and your sales team to set more concrete sales goals.
- Make smarter decisions: Entrepreneurs often take decisions in relation to their business based on emotion. Emotion is important i.e. how you feel, though it’s not enough. In order to be a successful entrepreneur, decisions should be based on facts.
- Fund your business: This analysis is a key component in any business plan. It’s generally a requirement if you want outsiders to fund your business. In order to fund your business, you have to prove that your plan is viable. Furthermore, if the analysis looks good, you will be comfortable enough to take the burden of various ways of financing.
- Better pricing: Finding the break-even point will help in pricing the products better. This tool is highly used for providing the best price of a product that can fetch maximum profit without increasing the existing price.
- Cover fixed costs: Doing a break-even analysis helps in covering all fixed cost.
CVP analysis is important because it is used to understand the effects of differing levels of activity on the financial results of a business, reports the global body for accounting professionals, the ACCA. Specifically, it helps to determine a company's break-even point. This is the level of sales where the company will not incur a loss, yet not make a profit.
To calculate the break-even point, you must first calculate the contribution margin. The contribution margin is a company's sales less its variable expenses. Then, divide the company's fixed costs by the contribution margin. This will give you the company's break-even point in total dollars of sales. the formula looks like this:
FIXED COSTS ÷ (SALES PRICE PER UNIT – VARIABLE COSTS PER UNIT)
If you want to calculate the break-even point in units sold, replace the contribution margin in the denominator with the contribution margin per unit. The contribution margin per unit is calculated as the sales price less the variable cost per unit.
Break Even Example
Suppose Acme Cereal Inc is considering introducing a new breakfast bar, called Cerealicious. The company wants to know whether this new product will be worth the investment, so the product development team sets about finding the break even point.
Fixed Costs = $3,000 (for the month)
Variable Costs = $0.50 (per bar produced)
Sales Price = $1.00 (per bar)
As a reminder, the formula is: Fixed Costs ÷ (Sales price per unit – Variable costs per unit)
$3,000/($1.00 – $0.50)
$3,000/0.50
=6,000 units
This means Acme needs to sell 6,000 bars of Cerealicious in a month to reach the break-even point.
Question No. 2 - MMPC 004 - Accounting for Managers - MBA and MBA (Banking & Finance)
Solutions to Assignments
MBA and MBA (Banking & Finance)
MMPC 004 - Accounting for Managers
MMPC-004/TMA/JULY/2022
Question No. 2. Explain the following
(a) Marginal Costing
(b) Activity Based Costing
Solution:
a) Marginal Costing
- Classification into Fixed and Variable Cost: Costs are bifurcated, on the basis of variability into fixed cost and variable costs. In the same way, semi variable cost is separated.
- Valuation of Stock: While valuing the finished goods and work in progress, only variable cost are taken into account. However, the variable selling and distribution overheads are not included in the valuation of inventory.
- Determination of Price - the prices are determined on the basis of the marginal cost and marginal contribution.
- Profitability - the ascertainment of departmental and product's profitability is based on the contribution margin.
b) Activity Based Costing
As done in conventional costing, ABC is not restricted to the allocation of indirect costs to departments. It moves further to identify the individual activity for indirect cost allocation as the lowest unit.
- Identification of the organisational activities and manufacturing process For ABC, it is indispensable to study the organisational activities and manufacturing process to determine the number of stages involved. By this, all the activities involved in producing the product or service can be identified. ABC believes that activities cause cost.
- Classify the factors which determine the costs of an activity, known as cost drivers. According to CIMA, ‘cost driver is any factor which causes a change in the cost of an activity, e.g. the quality of parts received by an activity is a determining factor in the work required by that activity and therefore affects the resources required. An activity may have multiple cost drivers associated with it.’’4 As per this definition, in the traditional system of product costing, the number of cost drivers can be identified as direct labour hours, units produced, etc. In ABC, cost drivers are related more closely to the consumption of resources and activities. As mentioned earlier, ABC considers that activities bring about costs, so they are linked, and the identified cost drivers are the linkages amid them.
- Identify the costs of each activity, known as cost pools The cost pool concept is similar to the concept of the cost centre. CIMA defines cost pool as ‘the point of focus for the costs relating to a particular activity in an activity-based costing system. ‘It is the sum total of the cost elements allotted to an activity. The cost pool is taken as the point of focus to assign the total cost to an activity.
- Charge costs to the products It is known that ABC is the method of tracing and assigning costs: from resources to activities and then from activities to specific products
Question No 1 - MMPC 004 - Accounting for Managers - MBA and MBA (Banking & Finance)
Solutions to Assignments
MBA and MBA (Banking & Finance)
MMPC 004 - Accounting for Managers
MMPC-004/TMA/JULY/2022
Question No. 1. Explain the following accounting concepts
(a) Business Entity concept
(b) Money measurement concept
(c) Continuity concept
(d) Accrual concept
Solution:
a) Business Entity concept
The business entity concept states that the transactions associated with a business must be separately recorded from those of its owners or other businesses. Doing so requires the use of separate accounting records for the organization that completely exclude the assets and liabilities of any other entity or the owner. Without this concept, the records of multiple entities would be intermingled, making it quite difficult to discern the financial or taxable results of a single business. Here are several examples of the business entity concept:- A business issues a $1,000 distribution to its sole shareholder. This is a reduction in equity in the records of the business, and $1,000 of taxable income to the shareholder.
- The owner of a company personally acquires an office building, and rents space in it to his company at $5,000 per month. This rent expenditure is a valid expense to the company, and is taxable income to the owner.
- The owner of a business loans $100,000 to his company. This is recorded by the company as a liability, and by the owner as a loan receivable.
Reasons for the Business Entity Concept
There are a number of reasons for the business entity concept, including the need to separately track taxes, financial performance, and financial position for each entity. It is also useful for when an organization is liquidated, to determine the amounts of payouts to the various owners. Further, the business entity concept is needed from a liability perspective, to ascertain the assets available in the event of a legal judgment against a business entity. And finally, it is not possible to audit the records of a business if the records have been combined with those of other entities and/or individuals.
1. The business entity concept is very important as it helps to measure the performance of a business separate from its owner and on different parameters such as cash flows, profitability, etc.
2. If the business organisation record mixes with the records of the business owners, it creates an inaccurate representation of the financial position of business. The business entity concept helps in preventing such an issue.
3. It helps the business in comparison of financial performance with other business organisations.
4. It helps in calculation of separate taxes for the business and its owners.
5. It helps in ascertaining the value of the assets and liabilities of a business in the event of any legal action taken against the business.
b) Money Measurement Concept
The money measurement concept states that a business should only record an accounting transaction if it can be expressed in terms of money. This means that the focus of accounting transactions is on quantitative information, rather than on qualitative information. Thus, a large number of items are never reflected in a company's accounting records, which means that they never appear in its financial statements. Examples of items that cannot be recorded as accounting transactions because they cannot be expressed in terms of money include:- Employee skill level
- Employee working conditions
- Expected resale value of a patent
- Value of an in-house brand
- Product durability
- The quality of customer support or field service
- The efficiency of administrative processes
The key flaw in the money measurement concept is that many factors can lead to long-term changes in the financial results or financial position of a business (as just noted), but the concept does not allow them to be stated in the financial statements. The only exception would be a discussion of pertinent items that management includes in the disclosures that accompany the financial statements. Thus, it is entirely possible that the key underlying advantages of a business are not disclosed, which tends to under-represent the long-term ability of a business to generate profits. The reverse is typically not the case, since management is encouraged by the accounting standards to disclose all current or potential liabilities in the notes accompanying the financial statements. In short, the money measurement concept can lead to the issuance of financial statements that may not adequately represent the future upside of a business. However, if this concept were not in place, managers could flagrantly add intangible assets to the financial statements that have little supportable basis.
As money is regarded as a common unit of recording transactions related to the income, profit, loss, capital, assets and liabilities of a business, it becomes easier to record and present business transactions into the financial statements such as Profit and Loss statement and Balance Sheet.
Following are some of the advantages of the money measurement concept
1. It helps in maintaining business records by recording all transactions that are having monetary value.
2. It is helpful in preparation of financial statements (such as Profit and Loss Statement, Income Statement)
3. As the financial transactions are recorded in a proper manner, it becomes easy when two separate accounting periods are compared.
4. It provides a clear picture of the financial transactions and state of the business which help in assessing the investors in knowing the status of their investment.
c) Continuity Concept
- This concept facilitates preparation of financial statements.
- On the basis of this concept, depreciation is charged on the fixed asset.
- It is of great help to the investors, because, it assures them that they will continue to get income on their investments.
- In the absence of this concept, the cost of a fixed asset will be treated as an expense in the year of its purchase.
- A business is judged for its capacity to earn profits in future.
Going concern concept is very important for the generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The concept of going concern plays a significant role in the way assets are treated.
The concept of depreciation and amortization are based on the assumption that a business will continue to perform its operations in the near future (this period is the next 12 months after an accounting period).
Advantages of Going Concern Concept
Following are some of the advantages of the going concern concept
1.Companies during the formation years will be purchasing fixed assets that will be requiring expenditure upfront, but such assets will be providing the benefits spread over a long term, that is well beyond one accounting period. Therefore, the going concern concept provides a way to record the value of such assets.
2. It is the basis on which the profits and losses of the business are recorded for the year to which it belongs.
Disadvantages of Going Concern Concept
Listed below are some of the disadvantages of the going concern concept:
1. Financial statements are prepared at cost and not on the basis of current market value. In such a case, if the company in an event of liquidation, will have assets valued at the market value, and as such these values will be different from the value determined at cost.
2. In the event of business being liquidated, the financial statements will be calculated on the on going concern basis, which can be misleading for the stakeholders.
d) Accrual Concept
Advantages of Accrual Basis of Accounting
The following are some of the advantages of accrual basis of accounting.
1. It helps the businesses in realising the true profit by providing a more realistic representation of the business.
2. Businesses that use an accrual basis of accounting are seen as more reliable than those using a cash basis method.
3. Auditing of financial statements is possible only when accrual basis is chosen as the method of accounting.
4. It allows for easy planning as the business accounts for all the revenues and expenses that will occur during the accounting period and prepare a budget accordingly.
Disadvantages of Accrual basis of Accounting
Following are some of the disadvantages of accrual basis of accounting:
1. Accrual basis of accounting can be complicated requiring more skill, time and resources.
2. It can give a skewed view of the short term financial position of the company.
MMPC 004 - Accounting for Managers - MBA and MBA (Banking & Finance)
Solutions to Assignments
MBA and MBA (Banking & Finance)
MMPC 004 - Accounting for Managers
MMPC-004/TMA/JULY/2022
Saturday, 29 January 2022
Question No. 3 - MMPC-001 - Management Functions and Organisational Processes
Solutions to Assignments
MMPC -001 - Management Functions and Organisational Processes
Question No. 3 - Discuss and describe different leadership styles and their relevance in the present scenario of organisations.
1. Transactional Leadership
2. Autocratic Leadership
3. Transformational Leadership
4. Servant Leadership
5. Charismatic Leadership
6. Democratic Leadership or Participative Leadership
7. Laissez-Faire Leadership
8. Bureaucratic Leadership
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