Management Accounting Report

TO: Jenny Clarke

FROM: Merita Myrtollari

REF: The Oakdene Engineering

DATE: 5th of March 2003

## Introduction

The purpose of this report is to help making decisions and recommendations to Oakdene Engineering limited company to develop new products. Finding out if the company will make profit and not have a bad effect on other products. Management accounting techniques will be taken in to consideration to produce this report. The ways that will be used to help the Oakdene Engineering limited company are by using:

- Break-even

- Marginal costing

- Investment appraisal

- Budgetary control

- Standard costing and variance analysis

- Overhead absorption and job costing

Using these management accounting techniques the company will be able to know advantages and disadvantages of the problems that will be mentioned on the report.

## Break-even

## Introduction (Break-even)

The first problem of the company is to find out if the company will make a profit if they developed a new type of electronic dispenser for serving exact quantities of beer and lager. The first accounting technique that will be used is the break-even.

## Method of investigation (Break-even)

To investigate this problem I am going to use:

- Table

- Graph

- Calculation

## Findings (Break-even)

The costs shown below are the main costs that I will use to carry my investigation.

- Material cost - £20 per unit

- Labour cost - £15 per unit
- Selling price - £60 per unit
- Fixed costs - £60,000 per annum
- The maximum number of the units of the product per annum is 10,000.

This is a table that will show the calculated profit or loss.

The bolded figures on this table show where we start to make a profit but think that point is too risky to be the Margin of the safety. That is the reason I recommend the company to try and sell more than 3,000 products.

On the graph Number one I will show the breakeven point and the margin of safety.

The calculations below show prove the answer of the graph.

Selling price £60 take away the variable cost £35 equal gross profit per unit £25. Fixed costs £60,000 divided by contribution £25 equal £2400.

If 2,000 dispensers are sold then the company have a loss of £10,000, but if 6,000 dispensers are sold then the company will have a profit of £90,000.

When the production is at 10,000 dispensers per annum the margin of the safety in units will be 7,600 units or 76%, because 10,000 take away 2,400 equal 7,600.

The maximum profit that can be earned for the year is £190,000 but if the variable costs are increased by £5 per unit for labour and £10 per unit for materials the maximum profit will be £40,000 as shown on the table below.

The graph Number two will show the breakeven and the margin of safety when the variable cost change.

The maximum profit that the company can make when the variable costs have raised by £15 per product is £40,000 per annum.

## Summary (Break-even)

This product is going to be successful and make a reasonable profit for the company, but if the variable cost goes up by £15 then this product is going to be too risky for the company. This is because the company has to sell at least 6,000 dispensers to cover fixed and variable costs. The company has to sell at least 7,000 dispensers to make a profit of £10,000 per annum.

## Recommendation (Break-even)

- According to the breakeven table, graph number one and the calculation the project that the company is developing is going to be successful and is going to make a maximum profit of £190,000 (if it goes according the graph). The break-even and the margin of safety point is at £2400. The only problem that the company will have at this point is that 1,000 dispensers must be sold to cover the fixed cost and 7,000 dispensers to cover the total costs.
- If the variable cost will rise by £15 the company will not be able to make more than £40,000 profit. At this point the company profit will be at risk as the margin as safety will be hard to reach. The company has to sell 10,000 dispensers to cover the total costs that will leave the company with a profit of £40,000. So at this point I recommend the company to increase the selling price from £60 to £70 per unit because if the company sells 10,000 dispensers the profit will be £140,000. The calculations are: £70 - £50 = £20. £20 * 10,000 unit = £ 200,000. £200,000 - £60,000 = £140,000 net profit.

- The problem is that we do not have a fact that the company will manage to sell all the dispensers that will be produced.

- The only reason that might make this product successful is that there are a number of public houses in England that might be interested to buy the product to make sure that they charge for beers and lagers as much as they are worth.

- I recommend the company to do some research on how many dispensers minimum are needed in England. If there are needed more than six thousand dispensers I recommend the company to go ahead with the project in this case if the variable cost raise the fixed cost will still be covered.

## Marginal Costing

## Introduction (Marginal costing)

The Oakdeen Engineering makes a standard food mixer with a selling price of £525 each. The company has been asked to make a special offer of 400 food mixers for Jalvis Hotel Group. The amount of money that the hotel has offered is £78,000 for the 400 food mixers. The question is that should the company accept the offer and what are the advantages and disadvantages of this special order?

The Marginal costing technique will be used to find out the problem.

## Method Of Investigation (Marginal costing)

For this problem the methods of investigating are:

- Table
- Graph
- Calculations

The costs used to manufacture one food mixer are:

## Findings (Marginal costing)

The Jalvis hotel has offered £78,000 for 400 food mixers. Dividing the 400 food mixers by the amount of the money offered, one food mixer for this offer would cost £195. The marginal cost as previously shown is £189. That will give the company an extra profit of £6 per food mixer, which we multiple the £6 by 400 food mixer and it gives the company a total of £2400 extra profit.

The table below will show the calculations for the monthly production and it will show the profit and loss. The table shows that the company will make a profit if they sell 600 food mixers for one month.

The graph attached to the assessment will show the breakeven point which is at 550 food mixers.

## Summary (Marginal costing)

This offer means extra profit to the company. It is a very good offer, and it is hard to make the right decision as it might affect the company in different ways.

## Recommendation (Marginal costing)

- This offer is a bit risky because other hotels and organisation might come and ask to buy the products at the same price as the above offer. And if you do not agree with them then they might go somewhere else.