Ratio Analysis and Overhead Calculation in Accounting

This document explains the concept of ratio analysis and overhead calculation in accounting. It includes the evaluation of different ratios such as profitability, efficiency, and liquidity ratios. It also explains the calculation of overhead absorption or recovery rates based on machine hours and direct labor cost. The document is relevant for finance students and professionals.

Accounting

FINANCE 1
Question 1:
A.
1. Profitability Ratio defines the earning power of the company.
2. Total Assets turnover and Debt to Assets ratios are used to evaluate the financial acquisition of
assets.
3. Account receivable ratio defines the ability to collect the debtor’s amount of the company.
4. Interest coverage ratio refers the ability of the company to cover its interest.
5. Inventory Turnover Ratio are used to define the length of time taken by the firm to sell its
inventory to consumers.
B.
Ratio's 2018
Profitability Ratio
Gross Margin Gross Profit 157500
Net Sales 850500 18.52%
Net Profit Net Profit 94500
Net Sales 850500 11.11%
Return on Equity Net Income 94,500
Average Shareholders’ Equity 401310 0.24
Efficiency Ratio

FINANCE 2
Inventory Turnover
ratio Cost of goods sold 56700
Average inventory 236250 0.24
Total Assets Turnover Net sales 850500
Average Total Assets 782775 1.09
Account Receivables Sales 850500
Average Account Receivable 284500 2.99
Interest Coverage
Ratio EBIT 157500
Interest Expenses 6300 25
Liquidity Ratio
Current Ratio Current Assets 570150
Current Liabilities 312480 1.82
Quick Ratio
Current Assets (Account Receivables
+cash) 318150
Current Liabilities 312480 1.02
Debt to Assets Total Debts 63,000
Total Assets
809,55
0 0.08

FINANCE 3
As per the above evaluation of the company, it has been found that the different ratio defines the
accounting position of the company. The financial position of the company is strong according to
the ability and capability of generating profit. The efficiency and liquidity ratio states the ability
of the organization to pay its all short or long term obligations. The firm has strong ability to pay
all liabilities as it has large amount of assets.
C.
As per the ratio analysis, it has been measured that the financial position of the company is not
good. The gross profit and net profit margin of the company is less than the net sales volume.
The ratio of net profit margin depict that the company has less ability to generate the profit as it
sells the large volume in the low cost. According to the sales price, the company has to generate
the revenue to improve the profitability position (Uechi, et. al, 2015). As per the evaluation of
liquidity ratio, it has been seen that the liquidity position of the company is strong. The current
asset of the company is high as compare to current liability which depicts the high ability of the
business to pay all short term obligations. It has been found that the company invested in current
asset rather than fixed assets so; that it can quickly convert the assets into cash. Investment in
current asset helps to improve the liquidity position of the company (Robinson, Henry, Pirie, and
Broihahn, 2015).
Question 2:
A.
Break Even Point in Unit Fixed cost 5,600
Contribution per unit 400

FINANCE 4
Breakeven Point in units 14
Contribution per unit Selling Price Per Unit 600
Less: Variable cost per unit 200
Contribution per unit 400
Break Even Point in
dollars Fixed cost 5,600
Contribution
percentage 66.67%
$
8,400.00
Contribution percentage Contribution per unit 400
Selling Price Per
Unit 600
66.67%
B.
Number of Children Fixed Cost + Desired Profit 16,000
Contribution per unit 400

FINANCE 5
Number of Children 40
Revised Contribution per unit
Total revised fixed cost + Desired
Profit
Desired Sales Units
C.
Revised Fixed Cost
Calculation:
Existing Fixed Cost 5600
Add: Increase in rent 3000
Add: Increase in field trip cost 1000
9600
Revised Contribution per unit 20,000
40
Revised Contribution per unit 500
New Selling Price Per Unit 700
Less: Variable cost per unit 200
Revised Contribution per unit 500
Net increase in fees per child 100

FINANCE 6
D.
Multi-product company is the company who operates the business in two or more products in the
market. It has been measured that the evaluation of break-even analysis of multi product is more
complicated as compare to break even analysis of one product. The main formula of the
calculating the multi-product break-even point is
Break Even Point= Total Fixed Expenses
Weighted Average Selling Price-Weighted Average Variable Expenses
For the calculation of break-even analysis of multi-product, it is required to have the information
of two or more products of the company so that the input or output amount has been filled in the
formula to evaluate the break-even point. The information of sales of products assists the
company to evaluate the weighted average selling price and weighted average variable expenses.
The average of weighted variable expenses per unit should be subtracted from weighted average
selling price per unit (Business Plan Hut, 2018). After evaluating the weighted average cost, the
company has to put the formula to evaluate the break-even point analysis of multi-product.
Question 3:
A.
Dept. A Total manufacturing overhead
Number of machine hours
Dept. A 162500

FINANCE 7
50000
Overhead rate per machine hour 3.25
B.
Dept. A
Overhead recovery Rate * Actual Activity Level
Overhead recovery Rate * Actual Machine hours
consumed
3.25*80
260
Dept. B
Applied overhead = Overhead recovery Rate * Direct Labor Cost Per Unit
1.25*180
225
C.
Total Cost of Job 145 Dept. A Dept. B
Direct Material 450 250
Direct Labor 120 180
Manufacturing
Overhead 260 225
Cost per unit 830 655

FINANCE 8
If 10 units are produced 8300 6550
D.
There are two factors that should be considered in the process of calculation of overhead
absorption or recovery rates. It has been found that the calculation of overhead is based on two
factors in the case study. These two factors are based on the manufacturing of products such as
machines and labors (Haroun, 2015). In the case study, there are two departments such as
department A and department B. In department A, the overhead cost is calculated on the basis of
machine hours as most of the work has been done by machines instead of labor that is why; the
calculation is depend on machine hours. In department B, the overhead cost is evaluated on the
base of direct labor cost as most of the work has been done with the help of labor instead of
machine work that is why; labor cost is taken as the base factor for overhead calculation.

FINANCE 9
References
Business Plan Hut. (2018) Break-even Point for Businesses Selling Multiple Products. [online]
Available From: https://www.businessplanhut.com/break-even-point-when-selling-multiple-
products [Accessed 13/09/19].
Haroun, A.E. (2015) Maintenance cost estimation: application of activity-based costing as a fair
estimate method. Journal of Quality in Maintenance Engineering, 21(3), pp. 258-270.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A. (2015) International financial
statement analysis. John Wiley & Sons, pp. 151-154
Uechi, L., Akutsu, T., Stanley, H.E., Marcus, A.J. and Kenett, D.Y. (2015) Sector dominance
ratio analysis of financial markets. Physica A: Statistical Mechanics and its Applications, 421,
pp.488-509.