Overview of Chocolate Consumption in the UK

Chocolates has always been a part of western lifestyle for generations and is been widely used by everyone. The chocolate industry represents multibillion dollar market since the past decades and is expected to grow within the next few years. The UK chocolate market is the largest within the European Union covering 30% of the total market. Cadbury is the leading player in the chocolate market and the other major players are Nestle and Amul. The primary consumers of chocolates are the adults of UK eating £3.5 billion a year as compare to children and the youth (Euromonitor.com, 2017).

Chocograve chocolate company is a manufacturing company that deals in the production of chocolates. It will be in the confectionary business. It operates in United Kingdom and its targeted consumers are of all age groups. The product of the company is Fruit N Nut chocolate. The main aim of the company is to target the youth and children in order to increase their consumption of chocolates by providing them quality chocolates at reasonable prices. To achieve its aim, the business will increase the production from year 1 to year 2, keeping the selling price same. Also it produces additional units in first year and sell them at same selling price to see whether there are profits or loss. If the strategy earns profit, the plan will continue otherwise stop. The aim is to provide more chocolates at reasonable prices to make them affordable for youth and children. 

The techniques of management accounting provides businesses a tool to measure their profit margins and also helps in reducing their operating expenses. By applying the techniques carefully, companies are able to direct themselves in the right direction and enrich profitability (DRURY, 2013). Management accounting helps a company in performing its functions like planning, directing, motivating and controlling. There are various management techniques such as costing, budgeting, planning, performance management, decision making tools and many more (Atrill and McLaney, 2009).

The budgeting is a tool for preparing budgets for setting targets and providing a framework for control. Performance management measures deals with assessing the overall performance of organization. Strategic management accounting is a process of project appraisal, mainly used when capital equipment is purchased (Shim, Siegel and Shim, 2011). The Chocograve Chocolate Company will apply costing technique to its organization in order to achieve its strategic targets. Costing are of several types such as standard costing, marginal costing, absorption and activity based costing. As the main aim of the business is to provide chocolates to youth and children at reasonable prices so as to increase their consumption of chocolates. Costing technique will help in achieving the same as it helps in estimating and understanding the cost of raw materials and other products used in manufacturing process. 

About Chocograve Chocolate Company and its Strategic Aims

Costing is defined as the proposed or estimated cost of producing or undertaking something. However, taking cost as a basis for making decisions is not an easy task. There are numerous ways for classifying cost and apportioning the overheads. They can be categorized as fixed, variable, semi-variable, direct, indirect, sunk, relevant, historical costs and many more. The techniques of costing are standard costing, traditional costing, full or absorption, variable, marginal and activity based costing (Horngren, 2009). All these techniques are used for making important predictions regarding prices and profits and also for functions like controlling, planning and decision making. Costing systems provides a framework to the companies for estimating the cost for their products in order to conduct inventory valuation, profitability analysis and cost control (Banerjee, 2014). Only those costs and revenues should be taken which are relevant to the requirements and should be acknowledged and calculated on the basis of assumption. Selection of inappropriate and irrelevant data can result in reduction of profits. The weakness and strengths of costing techniques are as follows (Rajasekaran, 2010). 

Costing is one of the factor that can be used for analysing the business plan. It helps in determining the profitability. If no profit is earned, then continuing the same plan will be useless. Costing technique is used by the company for achieving its strategic aim. The main objective of the company is to sell their chocolates at reasonable prices in order to increase the chocolate consumption of youngsters and children and to make profits. By using costing techniques, questions like what number of units should be produced, how much should be the selling price, whether it’s profitable to increase the production level or not, what will be the breakeven point, how much close will be the market price and BEP and is the strategic aim viable.

One of the fact to be considered is that whether to produce additional units in first year or not. Will the increased units yield profits or make losses? Whether selling price remains same or not? What will be the costing for the additional units? Should the company sells the product at the constant sale price in year 2 also? What will be the profits or losses in second year? All these questions can be answered by using costing techniques.

Costs incurred by the business are allocated on the basis of the changes occurring in it over a period of time that is variable or fixed or by critically examining the past behaviours of cost, to determine the future costs behaviour. Costs like rent, insurance, salary and other are treated as fixed and the cost of all the raw materials used is considered to be variable as they will increase with the level of production. Hypothetical figures are taken for calculation such as number of units produced, selling price and many more. It is assumed that no external factors affect the selling price. (Appendix 1.1).

Role of Management Accounting and Costing Techniques in Achieving Strategic Aims

Traditional costing is an outdated technique which allocates overheads to labour hours. Absorption rate is been calculated by using this technique (Appendix 1.2). For this business plan, Full/Absorption costing is referred as “process costing”. The estimated total cost per pack (unit) is £60.96. (Appendix 1.3). This clearly represents that total cost per unit is lower than the average selling price of £70.00. However, some people who opposes absorption costing, says that only direct cost can be accurately traced to cost objects, therefore indirect cost should be ignored (DRURY, 2013).

To take better decisions, marginal costing technique can be more useful but this does not always covers all the costs (Arora, 2012). In (Appendix 1.4), it can be seen that contribution will increase from £2542 to £2643.68 as the number of unit increases from 50 packs to 52 packs in year 2. Because of this, profit will also increase from £452 to £553.68. This means that production of additional 2 units will increase the profit by £101.68, keeping the selling price per unit same. In marginal costing, selling at the average price of £70.00 would not cover the indirect and direct cost whereas changing the selling price to £140 in the first year would completely cover both the costs. If the selling price falls to £30, the contribution will be too low to cover both the costs.

Increasing the production by 2 units will increase the profits also. The break even value for the chocolate packs in year 1 is 41. The cash breakeven can also be calculated and it is lower because of not including non-cash expenses at 35 chocolate packs. In second year, the BEP is 39 packs with the cash BEP is 33 packs, both calculated for the planned production of 60 chocolate packs. It is said that higher the breakeven point, higher will be the risk. In year 1, there is a high BEP and the company earns profit in both the years, even when it sells the additional units at the same price. Margin of safety is the difference between actual sales and breakeven sales. It is the level of output which can fall before a business reaches to its breakeven point (Weygandt, Kimmel and Kieso, 2009). As calculated, MOS for the first year is 18% and for the next it is 35%. The costing calculations highlights the increased profits in both the year. 

All the costs and allocations are assumed for the start-up and can become more accurate and known as the business trades. As and when business diversifies, calculating the costs will become more important in order to assess the profit and loss. As it is a start-up, so calculation of targeted income will be unrealistic. Once the business achieve its strategic aim, target income will become a necessary calculation. The BEP can also be recalculated as and when the costs changes or the selling price fluctuates.

Different Costing Techniques and Their Strengths and Weaknesses

Activity based costing is not used, but it is the most commonly used approach than marginal for assigning overheads, as it find out the actual reason behind the overhead. ABC provides more and accurate information regarding costs as compare to the traditional absorption method (Kinney and Raiborn, 2012).  However, for a start-up plan, it is difficult to estimate cost and its drivers, but one the business runs, ABC can be applied to gather more accurate information about the profits and losses occurring within the organization. 

Conclusion

The management accounting provides a lot of useful information but it is not considered to be an exact science. Costing is a very important activity for a business which helps in determining the overall profitability of the company (Seal, 2011). Each and every technique has some advantages and disadvantages, but also provides useful information in achieving the strategic aim. The only manner in which cost can be accurately calculated is to wait till the year end, when the figures are known. Marginal costing, though it is complicated, but it does provide useful data which can be very helpful for the businesses (Alawattage, Wickramasinghe, and Uddin, 2017). Costing in the start-up business will be the most inaccurate one, as it is wholly estimated and does not have any past records. 

The costing technique applied by Chocograve Chocolate Company underlined the expenses that will occur in reaching the aim. It shows that even if the company sells its increased production units at the same price level, it will earn profits. Its strategic aim to increase the contribution of youth and children in consumption of chocolates can be achieved as it is selling more units without increasing the selling price in both the years. Costing will be the key exercise at ascertaining the future position of the business. 

References

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Arora, M.N., 2012. A textbook of cost and management accounting. Vikas Publishing House.

Atrill, P. and McLaney, E., 2009. Management accounting for decision makers. Pearson Education.

Banerjee, B., 2014. COST ACCOUNTING THEORY AND PRACTICE. PHI Learning Pvt. Ltd…

DRURY, C.M., 2013. Management and cost accounting. Springer.

Euromonitor.com. (2017). Chocolate Confectionery in the United Kingdom. [Online] Available at: https://www.euromonitor.com/chocolate-confectionery-in-the-united-kingdom/report [Accessed 3 Jan. 2018].

Horngren, C.T., 2009. Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Kinney, M.R. and Raiborn, C.A., 2012. Cost accounting: Foundations and evolutions. Cengage Learning.

Rajasekaran, V., 2010. Cost Accounting. Pearson Education India.

Seal, W., 2011. Management accounting for business decisions. McGraw-Hill Higher Education.

Shim, J.K., Siegel, J.G. and Shim, A.I., 2011. Budgeting basics and beyond (Vol. 574). John Wiley & Sons.

Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2009. Managerial accounting: Tools for business decision making. John Wiley & Sons.