BBAP2103

<BACHELOR OF BUSINESS ADMINISTRATION WITH HONOURS >

<SEMESTER MAY / 2019 >

<BBAP2103>

<MANAGEMENT ACCOUNTING>

NO. MATRIKULASI : 841002105612001

NO. KAD PENGNEALAN : 841002-10-5612
NO. TELEFON : 018-2420663
E-MEL : haleema.oum@gmail.com

PUSAT PEMBELAJARAN : BANTING LEARNING CENTRE

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QUESTION 1
Keemar is a production manager of Kilang Kemboja which involves in making curry puffs in
Bandar Kemaman.

a) Explain how management accounting is different from financial accounting.

Management Accounting produces information primarily for internal use by the

company's management. The information produced is generally more detailed than that
produced for external use to enable effective organization control and the fulfilment of
the strategic aims and objectives of the entity. Information may be in the form budgets
and forecasts, enabling an enterprise to plan effectively for its future or may include an
assessment based on its past performance and results. The form and content of any
report produced in the process is purely upon management's discretion. Cost accounting
is a branch of management accounting and involves the application of various
techniques to monitor and control costs. Its application is more suited to manufacturing
concerns.

Financial Accounting is the process of producing information for external use usually
in the form of financial statements. Financial Statements reflect an entity's past
performance and current position based on a set of standards and guidelines known as
Generally Accepted Accounting Principle (GAAP). This generally includes accounting
standards (e.g. International Financial Reporting Standards), accounting conventions,
and rules and regulations that accountants must follow in the preparation of the
financial statements.
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Management Accounting Financial Accounting

1. Users Managers who plan for and External persons who make
control an organization financial decisions
2. Time focus Future emphasis Historical perspective

3. Verifiability versus Emphasis on relevance Emphasis on objectivity and

relevance verifiability
4. Precision versus Emphasis on timeliness Emphasis on precision
timeliness
5. Subject Focus on segment reports Primary focus is on
companywide reports
6. Rules Not bound by GAAP / IFRS or Must follow GAAP / IFRS and
any prescribed format prescribed formats
7. Requirement Not Mandatory Mandatory for external reports

Management accounting vs Financial Accounting

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b) Discuss how management accounting information can assist Keemar in making
decisions in her daily production operation.

Management accounting uses information from Kilang Kemboja operations to produce

reports that provide ongoing insight into business performance, such as profit margin and
labor utilization, so Keemar have data-driven input to make everyday decisions. Small
businesses like Kilang Kemboja can leverage this powerful trove of calculations to improve
decision-making over time for higher profitability and greater competitive advantage. Refer
to this table for explanation:-
Criteria Explanation
Relevant To be useful, information must be relevant to the decision-making
needs of users. Information has the quality of relevance when it
influences the economic decision of users by helping them evaluate
past, present or future events or confirming, or correcting there past
evaluations.
Understandable Understandability is assumed users to have a reasonable knowledge
of business and economic activities and accounting and a
willingness to know more the information with reasonable
diligence.
Timely Management may need to balance the relative merits of timely
reporting and the provision of reliable information. More accurate
information may take longer to produce
Comparable Comparability helps to make compare the financial statements of an
entity through time in order to identify trends in its financial
position and performance.
Reliable and Reliability is the quality of information that allows those who use it
complete to depend on it with confidence. The reliability of an item is the
probability that the item will perform a specified function under
specified operational and environmental conditions, at and
throughout a specified time.
With cost benefits The value of information obtained must be more than the costing
features obtaining it. The information must be useful before it can be
produce results.

QUESTION 2
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a) Explain what contribution margin is. Then, determine the contribution margin per box
and contribution margin ratio for TT.

Contribution margin can be stated on a gross or per-unit basis. It represents the incremental
money generated for each product/unit sold after deducting the variable portion of the firm's
costs. The contribution margin is computed as the selling price per unit, minus the variable
cost per unit.

Contribution margin per box: RM90

Selling price per unit - Variable cost per unit
RM150 – RM90
= RM90

Sales 3,450,000.00 Rm 150 x 23,000 boxes

Variable cost 1,380,000.00 Rm 60 x 23,000 boxes

Contribution margin 2,070,000.00 For 23,000 boxes

Contribution margin ratio for TT

CM/SALES = RM2, 070,000.00 / RM 3,450,000.00

= 60%

b) Calculate the break-even point for TT in box and RM.

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Profit = unit cm x Q – Fix

0 = RM90 x Q – RM1, 404,000.00
90Q = RM1, 404,000.00
Q = RM1, 404,000.00 / 90
Q = 15,600 Box

Breakeven point in box is 15,600 while in RM is

CM Ratio x sales – Fix
60% x sales – RM 1,404,000.00
Sales = RM 2,340,000.00

c) Explain what margin of safety is. Then, determine the margin of safety for TT in box
and RM.

Margin of safety is the difference between the intrinsic value of a stock and its market price.
Another definition: In break-even analysis, from the discipline of accounting, margin of
safety is how much output or sales level can fall before a business reaches its break-even
point.

Margin of safety in box = Total box – breakeven box

= 23,000 BOX – 15,600 BOX
= 7,400 BOX

Margin of safety in RM = Total sales – Breakeven sales

= RM3,450,000.00 – RM2,340,000.00
= RM 1,110,000.00

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d) If Teratai Trading plans to achieve a net income of RM1,499,940, determine the
number of boxes that must be sold to achieve the plan.

PROFIT=Unit CM x Q – Fixed
RM 1,499,940.00 = 90 X Q – RM 1,404,000.00
RM 1,499,940.00 = 90Q - RM 1,404,000.00
90Q = RM 1,499,940.00 + RM 1,404,000.00
90Q = RM 2,903,94.00
Q = 32,266 BOX

e) Teratai Trading is still considering an investment in new technology that will increase
fixed cost by RM200,085 per year but will lower its variable costs to 30 percent of sales.
The number of boxes sold will remain unchanged. If the investment is made, calculate the
new break-even point of TT in box and RM.
Fixed cost = RM 1,404,000.00 + RM 200,085.00
= RM 1,604,085
Variable cost = RM 1,380,000.00 – 30% = RM966,000.00
Profit = unit cm x Q – Fixed
0 = 108Q - RM 1,604,085
108Q = RM 1,604,085
Q = 14,853

Sales : RM150 – Variable cost RM42

= RM108

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f) Elaborate the how this cost-volume-profit analysis could bring benefit to Teratai
Trading in its daily operation.

Cost Volume Profit analysis helps organizations to examine their profits, costs and prices
with respect to any changed that occur in sales volume. CVP is an effective tool that helps
accountants to engage in decision making regarding future operations (Breakeven analysis).
There are:-

Operating Leverage
Another benefit that companies gain by using the CVP approach is the operating leverage
benefit which explains how the cost structure of an organization is made up of fixed cost
processes. This is a huge benefit because the cost structure is directly related to the level of
growth and profit a company has.

Operating leverage can vary greatly from one company to another. In the firms that have a
high ratio of fixed costs as compared to the variable costs, the operating leverage is good
because it produces a high contribution margin. Similarly, higher fixed sales also mean that
the company has a higher breakeven point. A higher breakeven point is directly related to
the financial success of the company because at this point, the company can claim high
profits at a much higher rate.

Income Tax Benefits

Similarly, the simple CVP model can be extended to other issues such as the calculation of
incorporate taxes of multiple products within a company. This is done by modifying the
profit equation of the chart to include taxes as well. This analysis can also be extended to
those firms that offer more than one product or service rather than a simple product. This
can be calculated as follows: After tax profit = [(P-V) X – F] x (1 – t)

Future Forecasting
By using the above mentioned models, approaches and graphs, managers can analyze the
direction in which their company is moving and this analysis might help them to better
understand the different operations and activities within the organizations. By getting

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beforehand knowledge of profits and costs, the company can manage them in a more
efficient way to increase productivity.

Preparation of Budgets
Since the cost profit volume analysis helps in determining the level of sales and thus helps
organizations to achieve their desired targets. This approach would help the managers to
prepare their budgets which consist of the costs as well as the revenues at any level of
production within the organization.

Cost Control
The biggest benefit of CVP analysis is to evaluate the cost volume changes within an
organization and the impact of these changes on revenue generation. For instance: there is a
dental hospital that wants to purchase a new dental machine so that the patient’s level of
satisfaction can be increased by reducing the time required for dental treatment. The
purchase of this new machine will tend to increase fixed costs of an organization. So, at
such complex situations, the cost volume analysis can be the most effective tool to help in
simplifying the company’s decision. If this dental hospital uses CVP analysis, it can manage
to decrease its variable costs by maintain the profit at the same desired level.

Profit Planning
The aim of any business is to create value for the customers and to get profits for the
company. However, managing all operations and costs in such a way that can maximize
profits is not an easy task. Therefore, organizations have to consider a lot of things in order
to engage in proper profit planning techniques. The CVP analysis can help the companies to
create the best and most profitable combination of cost, price and sales volume. Thus, it can
help managers to calculate and estimate their profit at different levels and for different range
of products.

Therefore, CVP is a tool which helps to calculate risk particularly in terms of costs and
volumes. After analyzing this risk, the companies can come up with efficient solutions to
reduce this risk.

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Decision Making
All the above mentioned benefits of Cost Volume Profit Analysis directly or indirectly
related to the decision making processes of a company. Any business organization has to
make a lot of decisions regarding their price, their costs, and products, fixed and variable
unit costs and so on. The CVP approach simplifies this process by providing the companies
with a breakeven point and by helping them to engage in better decision making and
planning for the future.