Magazine article Financial Management (UK)

Management Accounting Fundamentals: (Also Applicable to Paper P1.) Break-Even and Variance Analysis Techniques Can Be Used in Any Case Where a Standard Unit Cost and Selling Price Can Be Determined

Magazine article Financial Management (UK)

Management Accounting Fundamentals: (Also Applicable to Paper P1.) Break-Even and Variance Analysis Techniques Can Be Used in Any Case Where a Standard Unit Cost and Selling Price Can Be Determined

Article excerpt

You and your fellow CIMA students have been working so hard that you have decided to arrange a trip to the seaside to enjoy some welt-deserved rest and relaxation. The thought of a day off work, with champagne on the beach followed by a stroll along the promenade and a few amusement rides on the pier seems very appealing when you're studying every evening after a long day at work, as well as most of the weekend.

The plan is for everyone to travel to the seaside on a coach, gather on the beach for champagne, disperse to enjoy the day and return in the evening to catch the coach home. You have produced some detailed costings for the event, from which you hope to earn a small profit to donate to a local charity. At worst, you want to break even.

Your uncle has offered to let you use one of his 20-seater coaches at a cost of 175 [pounds sterling], including fuel and a driver. But he has asked that you should clean the interior of the vehicle before returning it. There will be no need to dean the exterior. Your younger brother is willing to do this job after the trip. He will charge 6 [pounds sterling] per hour and you estimate that the task will take him four minutes for each seat occupied. The only other cost associated with the coach will be the parking fee: you have booked a space in the coach park at a cost of 20 [pounds sterling].

Now you have to think about the cost of the champagne. You can obtain as many bottles as you require on a "use or return" basis from the local supermarket at a special price of 9 [pounds sterling] per bottle. You estimate that you will need an average of one bottle for each person, which should make some allowance for spillages. You also decide to include the cost of hiring deckchairs for the day: 60 pence per chair.

In order to add everything up, you simply need to summarise all your costings and work out whether you will make a profit. You estimate that 18 people will want to join the trip, paying a price of 25 [pounds sterling] each. You are delighted with the results of your calculations, because you conclude that this number of people will provide a sufficiently wide margin of safety and a profit of 75 [pounds sterling] for the day.

Did it all go as planned? The day went smoothly and a good time was had by all. But not all the costs and revenues worked out as you had calculated. The sale of the tickets got off to a slow start, so to drum up more custom you had to reduce the ticket price for everybody to 22 [pounds sterling]. This reduction had the desired effect and you ended up with a full coach of 20 passengers.

You paid your uncle the agreed 175 [pounds sterling], but you managed to save some money on the deckchair hire and the parking fee. Both these prices had been based on the cost of a weekend trip. Because you went on a weekday, the parking cost only 15 [pounds sterling] and the deckchair hire was only 50 pence per chair for 20 chairs.

You ended up paying for 22 bottles of champagne, but you managed to buy them at a discounted price of 8.80 [pounds sterling] each.

The cleaning of the coach caused a few problems. Some of your friends decided to eat candy floss on the way home and the result was a dreadful sticky mess. Your brother demanded an increased rate of 6.20 [pounds sterling] an hour for this unpleasant task and he took two hours to clean the coach.

Did you make a profit? Yes, but less than you'd expected. The ticket income was 20 x 22 [pounds sterling] = 440 [pounds sterling]. The total cost came to 175 [pounds sterling] (coach) + 12.40 [pounds sterling] (cleaning) + 193.60 [pounds sterling] (champagne) + 15 [pounds sterling] (parking) + 10 [pounds sterling] (deckchairs) = 406 [pounds sterling]. The difference of 34 [pounds sterling] you donated to charity.

You're probably familiar with calculating variances for manufacturing and selling tangible products, so let's see how we can apply the same methods to analyse the variances that occurred on the day out. …

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