ACCURATE INSTITUTE OF MANAGEMENT AND TECHNOLOGY
ASSIGNMENT OF BUSINESS RESEARCH METHODS
(Affiliated to AKTU and Approved by AICTE)
Submitted By: Submitted to:
Nikhil Kr. Rai Dr. Shivam Singh
MBA (AIMT)
2402250700029
Unit 1 – Management Accounting Basics
1. Components of Total Cost
Total cost refers to the complete expenditure incurred in the production and sale
of goods or services. It includes both direct and indirect costs and helps
determine the selling price, profitability, and efficiency of operations.
Understanding the components of total cost is essential for cost control and
decision-making.
A. Prime Cost: This is the sum of all direct expenses.
Direct Materials: Raw materials directly used in production.
Direct Labour: Wages of workers directly involved in production.
Direct Expenses: Specific expenses directly attributed to the product
(e.g., special equipment rental).
B. Factory or Works Cost: This is the prime cost plus factory overheads.
Factory Overheads: Indirect costs like depreciation, electricity, repairs,
and salaries of factory supervisors.
C. Cost of Production: Adding administrative overheads (related to
production) to factory cost gives the cost of production.
Administrative Overheads: Office salaries, audit fees, stationery, and
management expenses.
D. Cost of Sales or Total Cost: This includes selling and distribution overheads
added to the cost of production.
Selling and Distribution Overheads: Expenses for promoting, storing,
and delivering products, such as advertising, packaging, transportation,
and commissions.
Example:
Let’s say a company manufactures a bicycle.
Direct Materials = ₹1,500
Direct Labour = ₹500
Direct Expenses = ₹200
Factory OH = ₹300
Admin OH = ₹200
Selling & Distribution OH = ₹300
Total Cost = ₹3,000
Understanding each component allows the management to analyze cost
behavior, set competitive prices, and control unnecessary expenses.
2. Nature and Scope of Management Accounting
Management accounting refers to the process of preparing management reports
and accounts that provide accurate and timely financial and statistical
information to managers. Unlike financial accounting, it is primarily used for
internal decision-making.
Nature:
Future-Oriented: Management accounting focuses on forecasting and
planning for future operations.
Internal Use: It is designed for managers within the organization rather
than external stakeholders.
Flexible Format: There are no standard formats, allowing customization
as per business needs.
Non-mandatory: It is not legally required but extremely helpful in
decision-making.
Scope:
1. Cost Control and Reduction: It helps in identifying and controlling
unnecessary costs.
2. Budgeting and Forecasting: Prepares financial plans and projections for
future business activities.
3. Performance Evaluation: Assesses the performance of departments or
divisions.
4. Decision Support: Assists in decisions such as pricing, make or buy, and
product mix.
5. Financial Analysis: Uses ratio analysis, trend analysis, and comparative
statements to interpret financial data.
Management accounting integrates information from cost accounting, financial
accounting, economics, and statistics to aid in managerial decisions. It plays a
critical role in goal setting, performance monitoring, and achieving efficiency.
3. Types and Methods of Costing
Costing refers to the technique and process of ascertaining the costs of products
or services. There are various types and methods of costing used depending on
the nature of the business and its production process.
Types of Costing:
1. Historical Costing: Uses actual past costs. It is simple but not useful for
forward planning.
2. Standard Costing: Predetermined costs are used to identify variances
with actual costs.
3. Marginal Costing: Only variable costs are considered, and fixed costs
are treated as period costs.
4. Absorption Costing: Both fixed and variable costs are absorbed into
product costs.
Methods of Costing:
1. Job Costing: Used when work is executed against specific orders (e.g.,
furniture manufacturing).
2. Batch Costing: Costs are calculated for a batch of identical items (e.g.,
pharmaceutical companies).
3. Process Costing: Applied where production is continuous and in stages
(e.g., oil refining).
4. Contract Costing: Used in large-scale, long-term contracts (e.g.,
construction projects).
5. Operating Costing: Used for service-based industries (e.g., transport,
healthcare).
Each method helps in assigning and analyzing costs in a manner best suited to
the business model. It ensures proper control over expenses and supports
accurate pricing.
Unit 2: Cost-Volume-Profit (CVP) Analysis
1. Break-Even Point (BEP) Analysis
The Break-Even Point (BEP) is the level of sales at which total revenue equals
total cost, resulting in no profit and no loss. It is a critical tool in decision-
making and financial planning.
Formula (Units):
BEP= Fixed Costs/Selling Price per unit−Variable Cost per unit
Formula (Value):
BEP (₹)= Fixed Costs/Contribution Margin Ratio
Example:
Fixed Costs = ₹40,000
SP per unit = ₹100
VC per unit = ₹60
BEP = ₹40,000 / (₹100 – ₹60) = 1,000 units
A break-even chart can visually show the BEP. It includes a fixed cost line
(horizontal), a total cost line (fixed + variable), and a sales revenue line. The
point where the sales line intersects the total cost line is the BEP.
Significance of BEP:
Helps determine the minimum sales needed to avoid loss.
Assists in setting targets and pricing decisions.
Useful for assessing the viability of a new product or project.
BEP analysis does not consider changes in selling prices, fixed costs, or variable
costs, so it is best used for short-term and relatively stable conditions.
2. Profit Volume Ratio and Margin of Safety
These two concepts are important tools under CVP analysis.
Profit Volume (P/V) Ratio shows the relationship between contribution and
sales.
P/V Ratio=[Contribution/Sales]×100
Contribution = Sales – Variable Cost
A higher P/V ratio indicates better profitability. It helps in evaluating the impact
of sales changes on profit.
Margin of Safety (MOS) indicates how much sales can decline before reaching
the BEP.
MOS=Actual Sales−Break-Even Sales
Example:
Actual Sales = ₹1,50,000
BE Sales = ₹1,00,000
MOS = ₹50,000 or 33.3%
If the margin of safety is high, the business is secure even if sales decline. If
low, the business is at risk of incurring a loss.
These measures help in performance analysis, risk assessment, and strategic
planning.
3. Decision Making Using CVP Analysis
CVP analysis helps managers make decisions by understanding the relationship
between cost, volume, and profit. It enables evaluation of how changes in costs
and output levels affect profits.
Key Applications:
1. Make or Buy Decisions: Deciding whether to manufacture in-house or
buy from outside. If buying saves costs, it may be preferred.
2. Product Mix Decisions: Choosing products that offer higher contribution
margins to maximize profit.
3. Pricing Decisions: Assessing how price changes impact break-even and
profits.
4. Special Orders: Evaluating if accepting orders at a lower price still
contributes to covering fixed costs.
5. Shutdown Decisions: Whether to continue operations during loss periods
or temporarily close down.
