Management Accounting: cram pack

Formula sheets, the key method steps for every topic and 4 practice problems, with full solutions at the back.

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1Formulas and methods

Break-even analysis

Contribution margin
CM = p − v
Break-even quantity
QBE = FC/(p − v)
Target profit
Q = (FC + profit)/(p − v)
Profit
π = (p − v)·Q − FC
Margin of safety
(Q − QBE)/Q

2Practice problems

1.Break-even analysisMedium
Q€revenuetotal costfixed costQ = ?

A product sells for €50 per unit with a variable cost of €45 per unit. Fixed costs are €12 500 per month. How many units Q must be sold per month to make a profit of €6 000?

F = €12 500p = €50v = €45profit = €6 000
Q = units
2.Break-even analysisHard
F = €19 000, Q = ?sales mix2 × Ap = €14v = €103 × Bp = €20v = €10

A company sells two products. Product A sells for €14 with a variable cost of €10; product B sells for €20 with a variable cost of €10. They sell in a fixed mix of 2 units of A for every 3 of B. Fixed costs are €19 000 per month. Find the total number of units Q (A and B together) needed to break even.

pA = €14, vA = €10pB = €20, vB = €10A : B = 2 : 3F = €19 000
Q = units
3.Financial accountingMedium

A firm buys 200 units at €5 and 300 units at €6, then sells 400 units. Using weighted average cost, what is closing inventory?

  1. A€500
  2. B€560
  3. C€550
  4. D€600
4.Financial accountingHard

A company "sells" inventory to a bank and must buy it back later at a higher price, keeping the risks and rewards. How should it be accounted for?

  1. AAs a gain on disposal of inventory
  2. BAs a contingent asset in the notes
  3. CAs revenue on the date of transfer
  4. DAs a secured loan, not a sale

3Solutions

1.Break-even analysis

Answer: Q = 3700 units

Cost-volume-profit: each unit sold earns a contribution margin, price minus variable cost per unit. Profit = Q·(p − v) − F, where F is the fixed cost. At the break-even point profit is zero, so Q = F/(p − v).

Contribution margin per unit

p − v = 50 − 45 = €5

Units for the target profit

Q = (F + profit)/(p − v) = (12 500 + 6 000)/5 = 3 700

Answer

Q = 3 700 units
2.Break-even analysis

Answer: Q = 2500 units

Break-even with a sales mix: when products sell in a fixed ratio, use the weighted average contribution margin: weight each product's p − v by its share of units. Break-even units = F/(weighted contribution margin), split again in the mix ratio.

Contribution margins

cmA = €4, cmB = €10

Weighted contribution margin

(2·4 + 3·10)/5 = €7.60

Break-even units

Q = 19 000/7.6 = 2 500
A: 1 000, B: 1 500

Answer

Q = 2 500 units
3.Financial accounting

Answer: B · €560

Why this is the answer

Average cost = (€1,000 + €1,800) ÷ 500 = €5.60. Closing inventory = 100 × €5.60 = €560.

Answer

B · €560
4.Financial accounting

Answer: D · As a secured loan, not a sale

Why this is the answer

Control and risks stay with the company, so the transaction is in substance borrowing secured on inventory. The price difference is an interest cost.

Answer

D · As a secured loan, not a sale

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