The aim of this unit is to enable learners to understand how important management accounting is to all businesses. It looks at costing and budgeting, and how to use current or historical financial data to plan for the effective finances and costs of the business for the future.

Learning Outcomes

  1. 1 Understand how production costs are determined and used to calculate prices
  2. 2 Be able to use break-even analysis
  3. 3 Be able to use appropriate statistical information to review and predict business performance
  4. 4 Be able to use budgetary techniques
Criteria Detail Resources Assessment
P1. explain how an organisation can cost a product and determine its price at any activity level For P1, learners must explain clearly the main costs elements and the nature of those costs including variable, fixed and semi-fixed (semi-variable). They should give examples of costs relevant to the product in question. They should mention the absorption of overheads as well as marginal costs, although a distinction between traditional and modern absorption costing methods (ABC) is not required. They should describe at least two methods of setting the price, including cost.  

BTEC Command Verbs

Assessment Activity  

P2. carry out a break-even analysis for a selected organisation

M1. assess the implications of different activity levels using the results of a breakeven analysis for a selected organisation

D1. evaluate the reliability of break-even analysis in estimating budgeted activity levels for a selected organisation

For P2, learners should be given the relevant information in a case study and they will explain what is meant by break-even analysis. They will carry out break-even analysis, calculating the accurate break-even point from the information on direct costs, selling price and overheads, using the correct formula. They will also calculate margin of safety and target profit levels of activity. They will prepare a break-even chart to show the same results in diagrammatic form, labelling break-even point, budgeted activity level, margin of safety, area of profit and area of loss. P2, M1 and D1 are linked. P1 could be linked with P2, M1 and D1 using a larger assignment.

For M1, learners will work with the break-even figures calculated in the case study for P2 and will decide on an appropriate selling price for a product and an activity (production) level. Learners will make their decisions on the basis of appropriate cost mark-up, current market prices, break-even point and the required margin of safety. Other factors might be included in the information, but learners are expected to identify the most important ones when making their decisions.

For D1, learners will review the information used in carrying out break-even analysis and they will explain the limitations of these techniques. They should draw out any inaccurate assumptions the relationship between costs and income remaining the same at all levels of activity. They should also identify other limitations, such as assumptions that all units produced will be sold, that there is only one product and that all products make the same contribution. External factors such as the effects of inflation and interest rates might also be pertinent. 

  Assessment Activity 

P3. use accounting data and statistical information to measure business performance

P4. use budgetary techniques to prepare budgets for a selected organisation

M2. analyse the importance of accounting data and statistical information to assess and predict business performance

M3. analyse the impact on a budget of changes in costs and selling prices for a selected organisation.

For P3, learners will need to describe how an organisation’s previous years’ data on sales income and costs can be used initially to monitor current business performance and assess its relative success based on current data. They will also need to explain how historical data can be used to detect trends, through the use of moving averages and appropriate indices. They should explain how this statistical information is used in forecasting future trends and business performance. P3 links with P4 and M2.

For P4, learners will be given a case study with some historical accounting information as well as an appropriate price index. Learners will calculate any relevant trend and then apply that trend when calculating the budgeted figures for a future accounting period. The budget might be for sales, production or cash. Learners should prepare a budget in an appropriate tabular format and show evidence of having calculated the moving average accurately and applied a trend to the forecast figures. P4 links with criteria P3 and M2.

For M2, learners will identify the different factors that can influence the figures used in a budget including production, sales, costs and profits in previous accounting periods, changes over time, moving averages, seasonal variations, price indices and performance and trends detected in previous accounting periods. 

For M3, learners will identify the likely effects of changes that would occur in a budget if costs and selling price increased or decreased. Learners would base this on the budget prepared for P4 and would be expected to identify cost increases causing increases in overall costs and reductions in profits. They would also be expected to identify that an increase in costs might require a change to the selling price, where that price is based on cost plus. Learners might add that changes in costs would impact on the break-even point, necessitating an increase in budgeted activity levels to maintain profits

  Assessement Activity

P5. describe how budgets can be used to set targets, to monitor and control an organisation.

D2. evaluate the implications of budget variances for a selected organisation.

For P5, learners will describe clearly the target-setting nature of preparing budgets and the subsequent monitoring process involving comparing budgeted figures with actual figures. Learners will emphasise the importance of calculating and analysing the variances, by trying to understand their likely causes. They will need to describe how management action or decision making will follow in order to ensure budgetary control. P5 links with D2.

For D2, learners are expected to suggest possible budget variances, such as an increase in direct materials costs, and to consider likely causes such as the purchase of faulty materials causing wastage. Learners should then go on to suggest, for each possible variance, suitable management decisions or actions such as changing the supplier or buying better-quality materials. This criterion could be achieved through a case study where budgeted and actual figures are already given so that the learner has to calculate variances and make appropriate observations. Learners will be asked to work in groups and make a presentation. Learners must demonstrate a good understanding of the issues and the fact that this is probably the most important aspect of budgeting and budgetary control. 

  Assessement Activity