Management Accounting Assignment on 'Jones Compact Cars'.

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Unit 13- Management Accounting

Assignment  - ‘Jones Compact Cars’  

I have given the opportunity to investigate and write a full management report on Jones

Compact Cars.  The firm requires my expertise in the area of management accounting; I will

use my knowledge to evaluate each course of action needed to run the firm effectively.  

Jones Compact Cars is a small family business in rural Southgate.  It was established 40

years ago and its star product is the flame red MG.  The firm is not functioning efficiently and

there is a lot of room for improvement.

The firm suffers from four major problems, poor marketing, internal co-ordination, personnel

and the lack of production.  

I will investigate the above and outline the major problems to a greater degree.

One of the major problems that can be seen is that the firm does not practice good

budgetary control.  The sales forecast is set but it is very rarely monitored and costs are

poorly controlled.

The firm believes that if it sells 300 cars at the price of £40 each they will break even.

From using the company information, by analysing and producing a break-even chart I have

found out that

The firm is incorrect in its assumption that it needs to sell 300 cars per year to break even.  

The actual amount that has to be sold to break even is 321 cars each month.  I have

illustrated this in my break-even chart that clearly shows the number of cars to break even is

321.  Break even in appendix.

There are several benefits of the break-even analysis, and I have used it to show how the

firm is performing.

Visual impact, the break-even chart provides a visual means of analysing businesses

financial position at different level of output.  Business decisions makers can see at a glance

at the amounts of profit or loss that will make at different sales levels.

Risk assessment, the margin of safety shown on the break even chart provides business

with an assessment of risk.  It shows how much sales can fall before a loss is made.  The

chart therefore gives an indication of the businesses ability to withstand unfavourable trading


Break-even analysis can also be used to consider what would have to the level of

profitability if for instance price or costs were changed.

E.g. if price was being considered and was actually raised by drawing a new total revenue

line on the break even chart, the total amount of profit at each level of sales could easily be

seen.  The impact of change in price, fixed costs and variable costs can easily be seen and


The limitations of the break-even analysis

The break-even analysis has a number of limitations.  In particular it is sometimes criticised

because certain of its assumptions are unrealistic.  I have used the chart to find out how the

firm is performing.  

Uncertain data, the precise figure of total costs and total revenue are not likely to be

known over the full range of sales.  This is relatively true in the long term, e.g. changes in

technology, raw materials costs or market conditions might affect total costs and total

revenue.  The process simplistically assumes prices are constant and cannot take these

changes into account.  

Fixed and variable cots, the break-even analysis assumes that costs can be divided into

fixed and variable costs.  This is not always the case as fuel costs are generally considered

to be semi-variable.  They have a fixed standing charge and a variable charge that depends

on how much gas and electricity is used.  Another difficulty is that some fixed costs are

stepped or semi fixed, e.g. if a manufacturer raises production, large premises might have to

be obtained this in return will raise costs.  Different types of stepped costs such as rent,

administration costs or interest payments on machinery, might have their steps at different

output levels.  These factors might make it difficult to construct an accurate break-even


Unsold production, the break-even analysis assumes that all goods that are produced are

then sold.  All businesses hope to sell everything that they have produced this is sometimes

not the case.  Some stock might become outdated, unfashionable or damaged and therefor

impossible to sell.  If this happens the costs of production will not relate to the number of

goods sold, but to the number of goods produced.  Under these circumstances break-even

analysis becomes inaccurate.  

Many other factors must be considered such as the accuracy of the data.  A firm must be

accurate with its numbers as wrong figures could project sales targets that cannot be

reached.  The economy could be in crisis so sales could fall, these factors are not

considered by the break-even analysis.  

Some firm sometimes considers break-even analysis to be too simple as x amount has to be

produced and sold to break even but it does not take into account all the above factors such

as unsold stock and the conditions of the market.  


On the basis of my calculation I would put forward the following recommendations

to JCCS’s.  

The firm must produce an accurate break-even analysis in-order to find out that the firm

must sell 321 cars each month and not 300 per year to break even.

The firm could introduce an effective break even analysis into to management techniques and

then use it to monitor future levels of sales so they can have a ready appreciation of profit

and loss for any given quantity.  At present the firm does not have a problem as they re

selling more and margin of safety exists.  The business is product oriented and the firm must

realise that marketing needs to be effective and constantly ongoing.  In order to maintain and

increase sales.  The firm last year set it self a sales target of £500,000 but did not manage to

achieve it.  This is because the market is constantly changing and children are becoming less

interested in toys and more into computer games.  However there appears to be marketing

emerging, men aged 40-60 with a captivating interest in model cars.  The firm must take

advantage of this interest in cars by effective marketing and segmentation in order to attract

these potential sales.  As the market is dynamic the firm needs to focus a lot more on its

marketing and the new age who are interested.  

Also to overcome the above the firm could introduce constant monitoring of sales and its


I have also analysed the variances as it states JCC does not practice good budgetary

control and very rarely monitors them.  Costs are appearing to be poorly controlled and all

this has a major affect on the way a business performs.

I have produced the following variance analysis.

                                Budgeted                Actual                Variance

                                £000                        £000                        £000

Sales                                480                        432                        48 ADV

Special orders                10                        0                        10 ADV

Total sales                        490                        432                        58 ADV

Materials                        192                        200                        8 ADV

Direct labour                        96                        105                        9 ADV

Power                                4.8                        4                        0.8 FAV

Fixed production costs        50                        48                        2 FAV

Marketing                        10                        5                        5 ADV

                                352.8                        362                        FAV

Planned profit                137.2                        70                        67.2 ADV        


Benefits of the variance analysis/ standard costing

There are several benefits of the variance analysis; the variance analysis compares actual

costs against budget.  If actual performance is better than standard there is said to be a

favourable costs variance.  


If standard labour cost is £36 but actually works out to be £32 there’s a favourable

difference of £4.  This means that the costs are lower than expected.  However if actual

performance is worse than standard this is said to be an adverse or unfavourable variance.

Variances are a method of control and can show if the firm is running efficiently. Variances

can also be a motivating factor for the staff as if an adverse exists staff must work hard to

change the adverse into a favourable in the future.

Variance analysis is also classed as a method of appraisal as staff can easily know if they

have done well when the variance is favourable.  Staff can monitor their progress and assess

how well they are performing.    

Variance analysis helps and is a tool of,

*Planning function

*Control function

*Motivating function

The variance analysis can be used on any expenditure of the business.  There are a  number

of advantages of using this techniques.  By calculating variances a firm such as JCC can

identify areas of weakness and inefficient practice.  If a variance appears to be too high than

it can be investigated using an approach called management by exception.  This can allow

tolerance in the control system.  Some firms only investigate variances if they are more than

5 to 10% different from the standard .          

Disadvantages of the variance analysis/ standard costing

It can be difficult sometimes to forecast as obtaining the numbers can be difficulty and costly.  

Variance analysis can also de motivate staff as it could restrict permanent improvements as

the worker might achieve goal and not do more.  Variances could also restrict the idea of

continuous improvement as just meeting targets and not doing more could de motivate staff

and company performance.  In some cases to carry out standard costing it can require a

business to gather large amount of information.  The process can be time consuming and in

some cases expensive.  Most firms use standards costing as an ongoing process so the costs

are ongoing.  There are some unforeseen consequences with standard costing.  A member

of staff in order to achieve a favourable variance might purchase cheap poorer quality

materials.  This would bring the costs down but it could effect sales as product made with

poor material.  This could damage the reputation of the firm and losses as low sales.  


The variances have occurred due to many factors such as the decline in sales, material costs,

labour costs and even the marketing of the product.        

The variances have occurred as the market is in decline and the firm is only aiming its

product at the older segment and not at the younger age as they are more interested in

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computer games.  The product is not targeted at the new market but only for those in there

40 - 60s.  

Another cause that I believe has resulted in the poor variances is the special order being lost

probably due to the firm not meeting production deadlines so as a result the variance has


I believe is the main reason why the variances have occurred and this is because of the

machinery is said to be old and not reliable and also the variance targets could be set too

high or even too ...

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