Accounting For Managers Essay

3085 words - 12 pages

INTRODUCTION1BREAK-EVEN1LEICESTER' LTD BREAK-EVEN POINT AND THE MARGIN OF SAFETY1EVALUATION OF ESTIMATED PLANS3LIMITATIONS OF BREAK-EVEN ANALYSIS4ACCOUNTING CONCEPTS: HISTORICAL COST, PRUDENCE, ACCRUALS, AND GOING CONCERN5ACCRUALS6PRUDENCE7GOING CONCERN8HISTORICAL COST10CONCLUSION11APPENDIX A12APPENDIX B13REFERENCES14INTRODUCTIONThe basis of financial decision-making is economic analysis. There are a number of evaluation tools currently offered to construction managers, including present worth analyses, benefit/cost analysis, equivalent annualized costs, cash flow analysis and break-even. Berryman & Nobe (1997)BREAK-EVENSome of the most significant decisions to be made in financial management are those concerning to pricing; the prices must be high enough to cover all costs and offer a profit. Cost-volume-profit analysis is used to help us how changing volumes of sales or revenue affect profits. The foundation of this analysis is the calculation of break-even point and understanding how profit will vary with a change in the volume of sales. Anon1 (2003)LEICESTER' LTD BREAK-EVEN POINT AND THE MARGIN OF SAFETY'The break-even point is defined as the point where sales or revenues equal expenses'. There is no profit made or loss incurred at the break-even point. This figure is important for anyone that directs a business since the break-even point is the lower limit of profit when setting prices and determining margins; if the break-even point is not achieved, that business will (or should) finally go out of business. Clearly the break-even point becomes very significant when calculating a strategy for net profit. Deal (1999-2003)The break-even point can be expressed:total fixed costsbreak-even point =contribution margin ratiowhereas:Total Fixed costs are the sum of the fixed costs. Fixed costs are those costs that throughout the forecast period, are unaffected by changes in output. Fixed costs take account of, but not limited, depreciation on equipment, interest costs, and general overhead expenses. Anon1 (2003)'The contribution margin is the selling price of the product less its variable cost. However, it is often helpful to deal with a ratio containing this information, rather than an amount of money. Not surprisingly, this ratio is called the contribution margin ratio. The contribution margin ratio is the contribution margin expressed as a percentage of sales revenue', Anon1 (2003). That is:contribution margin in totalcontribution margin ratio =total sales revenueThe margin of safety is the amount of sales above the break-even point. This measure specifies how far sales can fall before a loss takes place; it requires knowing when the buying price is low in absolute terms rather than merely relative to the market as a whole, Anon2 (2003). It is computed as follows:sales - break-even salesmargin of safety =salesLeicester Ltd. estimated profit statement for next year. Also, the Managing director and Sales director were asked to write up their...

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