Financial Accounting and Decision Making

This document provides an overview of financial accounting and its role in decision-making. It covers topics such as break-even analysis, economic order quantity, and investment decisions. It also discusses theories of management and their relevance in the workplace. Additionally, it explores the concept of gross domestic value and the meaning of capital in accounting.

Business management
financial accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Part 1................................................................................................................................................3
Question 1....................................................................................................................................3
Question 2....................................................................................................................................5
Part 2................................................................................................................................................6
Question 4....................................................................................................................................6
Part 3................................................................................................................................................9
Question 5....................................................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES................................................................................................................................1

INTRODUCTION
Financial accounting play a vital role in tracking the whole operations of the business. It
helps in decision-making regarding whether the company need to launch new product in the
market or need to discontinue the existing product.
MAIN BODY
Part 1
Question 1
(a)
In the given case, it is assumed that the total number of hours available to produce classic
product is 1500 hours and to produce Jazz product is 1000 hours. As it is given that the
machining cost to produce one unit of classic product is 12 and one unit of jazz product is 18. It
is also given that the machining cost incurred to produce classic product is 9 per hour and to
produce jazz product is also 9 per hour. So to calculate the total hours required to produce one
unit classic and jazz product, divide the machining cost per unit by machining cost per hour.
Total hours required to produce one unit of classic= 12/ 9 = 1.33 hours
Total hours required to produce one unit of Jazz= 18/ 9 = 2hours
To calculate the total number of classic and Jazz unit production, divide the number of hours
available by total hours required to produce one unit of product.
Total number of classic units company can produced= 1500/ 1.33 = 1128 units
Total number of Jazz units company can produced= 1000/ 2 = 500 units
Particulars Classic Jazz
Annual Production 1128 500
Sales per unit €316 €396
Annual sales revenue 356448 198000
Less Variable Cost
Material -134232 -79000
Labour
Machining -13536 -9000

Assembly -4512 -1000
Polishing -1128 -500
Contribution 203040 108500
So, in the given case the most profitable production plan is classic product because the demand
of the classic product is higher than the jazz.
(b)
Calculation of break-even sales
Particulars Amounts(€)
Annual sales (1000 * 125) 125000
Less Variable cost (1000 * 65) 65000
Contribution 60000
Less Fixed cost 40000
Profit 20000
(I) Formula of contribution margin ratio = Contribution/ Sales* 100
€60000/ €125000 * 100
48%
Formula of Break-even sales = Fixed cost/ Contribution margin ratio * 100
40000/ 48 * 100
€83333
(ii) Formula of margin of safety(%) = Current sales – break-even sales/ current sales * 100
€125000– €83333/ €125000* 100
33.3336%
Formula of margin of safety in sales = Total current sales- Break-even sales
€125000- €83333
€41667
(iii) Calculation of sales revenue on profit of €50000
Let the sales per unit be X

Particulars Amounts(€)
Annual sales (X * 125) 125X
Less Variable cost (X* 65) 65X
Contribution 60X
Less Fixed cost 40000
Profit 50000
Sales revenue on the profit of €50000
60X – 40000 = 50000
X = 90000/ 60
1500
So, sales unit is 1500 and sales revenue to earn profit of €50000 is €187500 (1500* 125)
(c)
Break-even analysis is important because it helps in determining the impact of the change
in prices and demand on the profit of the company (Das and et.al., 2020). It also helps the
company to know the points whether they neither earn profit nor losses.
Question 2
(a)
(i) Calculation of Economic Order Quantity
Square root of 2* Annual demand* Ordering cost per order/ Holding cost per unit
Square root of 2* 60000* .08/ 1.4
261.86 unit
(ii) Formula to calculate total number of order in year
Annual demand/ EOQ
60000/ 261.86
229 order per year
(iii) Total ordering cost = Total order per year * ordering cost per year
229* .80
183.2
Total holding cost per year = EOQ/ 2* carrying cost per unit

261.86/ 2* 1.4
183.302
(b)
It has always been noticed that commercial organizations used to hold inventory in their
business’s warehouse due to the following reasons:
 The first and foremost reason of holding inventory is to cope up with the demand. If there
are possibilities of sudden rise in demand due to the nature of business and its products,
then it may become compulsory for businesses to hold enough inventory in advance to
supply in the market whenever the demand rises (Kayvanfar, Zandieh and Teymourian,
2017).
 Another reason for which businesses hold inventory is to avoid the problem of under
stocking in the business which leads to the interruption in the process of production and
accordingly the business can suffer losses which affects its sales and profit.
 Also in order to reduce the frequent cost incurred on ordering inventory can be
minimized and the business can avail the volume discounts by purchasing inventories in
high quantity. This is helpful in reducing overall cost of production and per unit cost of
production.
(c)
The difference between just in time approach and economic order quantity approach is
that the just in time approach is a focus in providing the stocks to the customer at right time and
with right quantity and quality. The main aim of the just in time approach is that it reduces the
process inventory and carrying cost and also aim at increasing the profitability of the company.
By implementing the JIT approach of inventory control, the company efficiently uses the
employees skills and make a good relationship with the supplier (Barletta, Despeisse, and
Johansson, 2018). While on the other hand, the economic order quantity of the inventory control
shows the order quantity where the inventory cost and the holding cost is remains equal. The
main aim or focus of EOQ is that, it reduces the cost of the inventory management. EOQ
maintains the fixed amount of material in the warehouse.
(d)
JIT approach create risk for the company, in case if there is a shortage of raw material in
the warehouse and also delay in shipment of next order which leads that the business start losing
their customer if there is delay in the delivery of products (Hilorme and et.al., 2019).

Part 2
Question 4
(a)
(i)
Years Machine 1 Cumulative cash
flows
Machine 2 Cumulative cash
flows
Year 0 -260000 0 -340000 0
Year 1 110000 110000 110000 110000
Year 2 100000 210000 120000 230000
Year 3 70000 280000 110000 340000
Year 4 60000 340000 105000 445000
Year 5 60000 400000 130000 575000
Pay back period of Machine 1 =
2 years + (260000 - 210000/ 280000 – 210000)
2 years + 50000/ 70000
2 years + 7 months
2.7 years
Pay back period of Machine 2 =
In 3rd year machine 2 recover its initial investment of 340000, so the pay back period of machine
2 is 3 years.
(ii)
Formula to calculate Net Present Value= Total of discounted cash flows – Initial investment
Years Machine
1
Discounting
rate @ 13%
Discounted
cash flows
Machine 2 Discounting
rate @ 13%
Discounted
cash flows
Year
0
-260000 1 -260000 -340000 1 -340000

Year
1
110000 0.89 97900 110000 0.89 97900
Year
2
100000 0.78 78000 120000 0.78 93600
Year
3
70000 0.69 48300 110000 0.69 75900
Year
4
60000 0.61 36600 105000 0.61 64050
Year
5
60000 0.54 32400 130000 0.54 70200
Total
NPV
33200 61650
(iii)
Formula to calculate Internal Rate of Return =
Lower rate + ( NPV at lower rate/ NPV at lower rate – NPV at higher rate * Higher rate – Lower
rate)
Years Machine 1 Discounting
rate @ 20%
Discounted
cash flows
Discounting
rate @ 18%
Discounted
cash flows
Year 0 -260000 1 -260000 1 -260000
Year 1 110000 0.83 91300 0.85 93500
Year 2 100000 0.69 69000 0.72 72000
Year 3 70000 0.58 40600 0.61 42700
Year 4 60000 0.48 28800 0.52 31200
Year 5 60000 0.4 24000 0.44 26400
Total NPV -6300 5800

IRR of Machine 1
18 + (5800/ 5800 - -6300 * 20- 18)
18 + (5800/ 12100 * 2)
18 + .96 = 18.96%
Years Machine 2 Discounting
rate @ 20%
Discounted
cash flows
Discounting
rate @ 21%
Discounted
cash flows
Year 0 -340000 1 -340000 1 -340000
Year 1 110000 0.83 91300 0.83 91300
Year 2 120000 0.69 82800 0.68 81600
Year 3 110000 0.58 63800 0.56 63800
Year 4 105000 0.48 50400 0.47 49350
Year 5 130000 0.4 52000 0.39 50700
Total NPV 300 -3250
IRR of Machine 2
20 + (300/ 300 - -3250 * 21- 20)
20 + (300/ 3550 * 1)
20 + .08 = 20.08%
(b)
In the given case, Mr. Shaw must invest the funds in the machine 2 as the IRR of
Machine 2 is higher than the Machine 1. It is because IRR is the best method while taking
investment decisions because it considered the value of money in the calculations.
Part 3
Question 5
(a)
(i) Theory X and Theory Y is the two management style in which theory X is authoritarian
and theory Y is participative. In case if the employees of the company are less motivative
and dislikes the works then company must use theory X. And if the employees take pride

in work and also take it as challenges, then company must go with theory Y (Umanailo
and Basrun2020).
(ii) Theory X and Theory Y is dependent upon the nature of work because theory x says that
people don't like the work for example time clock and theory y says that people like's the
work for example artist on contract to produce art.
(b)
(i) Inferior goods are the goods whose demand decreases with the increase in the price of the
goods (Takahashi, 2019). For example, instant noodles, pizzas etc.
(ii) Recession is a time period in which the economic growth of the company is negative
(Chazan, 2019). For example, high unemployment, global recession 2008 etc.
(iii) Economic model is a theoretical representation of economic processes and shows
the relationship between the variables and logical sets. For example, supply and demand
model (Ryan and Deci, 2020).
(c)
In the specific period-of-time, when the market value of the goods and services is
visualized into the monetary term is known as gross domestic value (Aum, Lee and Shin, 2021).
It is the financial measurement of the country's total economic activity.
(d)
When money raised from issue of debt and equity is known as capital in accounting term.
While on the other hand, when money is needed to cover the unexpected risk or losses is known
as economic capital.

CONCLUSION
The decision of the company is depends on the market demand and profitability of the
product. The report concludes the different budgets preparations, investment decisions, product
keep or drop decision etc.

REFERENCES
Books and journals
Aum, S., Lee, S. Y. T. and Shin, Y., 2021. Inequality of fear and self-quarantine: Is there a
trade-off between GDP and public health?. Journal of Public Economics. 194.
p.104354.
Takahashi, S., 2019. Demand functions with inferior goods: The implicit function
approach. Hitotsubashi Journal of Economics, pp.79-105.
Chazan, N., 2019. An anatomy of Ghanaian politics: Managing political recession, 1969-1982.
Routledge.
Jiang, Aum, S., Lee, S. Y. T. and Shin, Y., 2021Takahashi, S., 2019Chazan, N., 2019Jiang,J.
andAum, S., Lee, S. Y. T. and Shin, Y., 2021Takahashi, S., 2019Chazan, N.,
2019Jiang, et.al., 2019. An integrated technical-economic model for evaluating CO2
enhanced oil recovery development. Applied energy, 247, pp.190-211.
Ryan, R. M. and Deci, E. L., 2020. Intrinsic and extrinsic motivation from a self-determination
theory perspective: Definitions, theory, practices, and future
directions. Contemporary Educational Psychology, 61, p.101860.
Umanailo, M. and Basrun, C., 2020. Dominance of Economic Capital. International Journal Of
Scientific & Technology Research Volume, 9(01), pp.1-4.
Hilorme, T. and et.al., 2019. Human capital cost accounting in the company management
system. Academy of Accounting and Financial Studies Journal, 23, pp.1-6.
Barletta, I., Despeisse, M. and Johansson, B., 2018. The proposal of an environmental break-
even point as assessment method of product-service systems for circular
economy. Procedia Cirp, 72, pp.720-725.
Kayvanfar, V., Zandieh, M. and Teymourian, E., 2017. An intelligent water drop algorithm to
identical parallel machine scheduling with controllable processing times: a just-in-
time approach. Computational and Applied Mathematics, 36(1), pp.159-184.
Das, S. C. and et.al., 2020. An application of preservation technology in inventory control
system with price dependent demand and partial backlogging. Alexandria
Engineering Journal, 59(3), pp.1359-1369.
Online
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Management and financial accounting. 2021 [Online]. Available
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