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It is common for data to be checked by co-workers for
accuracy
Photograph: CIMA
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Objectives:
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To understand that management accounts come from a variety of sources
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To understand how to use past financial data to extrapolate future management
information
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To understand that all financial information has limitations
Costing
When companies cost out the setting up of a new product or service they use
several different sources to work out as accurately as possible all likely
future costs. It is essential that all relevant costs are included and that no
false costs are entered. From this information management will decide on:
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a range of possible prices for the product
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whether the product is viable
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the future budgets for the department running the project
Geeta Subramaniam, the Finance director, has already described the likely fixed and variable costs for the product.
Calculating cost structures and break-even
To calculate the cost structures it is necessary to work out all costs as a
percentage of sales (refer to profit and loss projections that you have made earlier). If the cost structure doesn't look very attractive think how you might reduce costs or increase revenue.
When we start to look at break-even we need to see how much contribution will be made by the sale of each console and each unit of software and then compare that contribution to the fixed costs.
At break-even
Sales revenue - variable costs = fixed costs
We know that the variable costs for a console will be £120 paid to Shinkendo and £1.50 variable overhead (£15 for ten). If we were to sell them for £150 each we would make £28.50 contribution per console. Simplistically, how many would we need to sell to cover our fixed costs of £40,000 general overhead a month and our marketing costs - which are also fixed?
At the point when fixed costs are covered, the company will be breaking-even and any further units sold will generate a profit. That profit will be equal to the contribution made from each additional sale x the number of units sold. Once you have done some of the earlier calculations you will be able to make those decisions.
Limitations of data
When projecting costs for the future you are dealing with uncertainty. No one
can predict what the next few years or months will hold, therefore it is only
possible to make a best estimate. Projected costs may also be affected by the
following:
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human error - it is normal in business meetings for co-workers to be checking
the accuracy of other workers' calculations, to check the accuracy of the data
and to confirm their understanding of the figures
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subjective judgments e.g. the author of the data unconsciously skews their
assumptions to fit the outcome they would like - it is therefore essential that
assumptions are closely scrutinised
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computer error - occasionally computers can generate reports that are corrupted
by a problem with the basic software that can take a long time to identify
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