Finance for Administrative Managers: Cost Accounting, Budgeting, and Financial Statements

This guide covers cost accounting, budgeting, and financial statements for administrative managers. It includes scenarios for decision making, techniques for budgetary control, and ratio analysis for profitability, efficiency, gearing, and liquidity. The guide also provides insights on financial statements prepared by Tesco Plc and their purposes.

Running head: FINANCE FOR ADMINISTRATIVE MANAGERS
Finance for administrative managers
Name of the student
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Table of Contents
Activity 1....................................................................................................................................2
Cost accounting and management accounting.......................................................................2
Cost information required for taking business decisions (Scenario 1)..................................2
Decision making through cost information (Scenario 2).......................................................3
Activity 2....................................................................................................................................4
Using of budget in business...................................................................................................4
Preparation of various budgets...............................................................................................4
Budgets and budgetary control...............................................................................................5
Limitations of budget.............................................................................................................6
Activity 3....................................................................................................................................7
Financial statements prepared by Tesco Plc..........................................................................7
Ratio analysis.........................................................................................................................7
Reference....................................................................................................................................9

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Activity 1
Cost accounting and management accounting
Cost accounting is the technique of recording, collecting, analysing and classifying
the cost related information. On the other hand, the management accounting is the
preparation of non-financial as well as financial information for the purpose of management
use. The main purpose of cost accounting is budgeting and planning, controlling the
organizational operations, making cost related decisions, allocation of resources and
evaluating the performances. On the other hand, the main purpose of management accounting
are analyse the financial information, preparing reports, planning the future needs of the
company and motivating and directing the employees for achieving the business objectives
(Hilton and Platt 2013).
Cost information required for taking business decisions (Scenario 1)
Business decision needs clear knowledge regarding various cost concepts. Different
kinds of costs differ with regard to their nature like fixed or variable and basis of allocation.
Taking into consideration the scenario of example 1, it can be suggested that before taking
final decisions regarding shutting down the furniture division of bespoke office the below
mentioned cost information shall be considered –
 Fixed costs that will be required to be spent even after shutting down the division.
 The depreciation expenses and maintenance cost of premises and equipment
 Payment to the long service staffs (Drury 2013)
Though the cost associated with furniture division of bespoke office is high and the
profits are also falling, before shutting down the management shall consider that the fixed
cost that are to be incurred even after closing down the division will results into negative

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profit. Therefore, rather than closing down the division the management shall try to control
the cost, wherever possible for increasing the profit. For instance, cost of production can be
controlled with new technology of machines (Eldenburg et al. 2016).
Decision making through cost information (Scenario 2)
(i) If production of the Director desk is stopped the resultant profit will be as
below –
Particulars Executive Director Manager Total
Sales £ 25,000.00 £ - £ 30,000.00 £ 75,000.00
Variable costs £ 15,000.00 £ - £ 17,500.00 £ 45,000.00
Contribution £ 10,000.00 £ - £ 12,500.00 £ 30,000.00
Fixed Costs £ 8,500.00 £ 9,000.00 £ 10,000.00 £ 27,500.00
Profit £ 1,500.00 -£ 9,000.00 £ 2,500.00 -£ 5,000.00
It can be found that if the company stops producing ‘The Director’ desk the loss of the
company will be amounted to £ 5,000 from profit of £ 2,500. Therfeore, the company shall not stop
producing ‘The Director’ desk.
(ii) Production of ‘Team’ desk module
Particulars Executive Team Manager Total
Sales £ 25,000.00 £ 25,000.00 £ 30,000.00 £ 75,000.00
Variable costs £ 15,000.00 £ 15,000.00 £ 17,500.00 £ 45,000.00
Contribution £ 10,000.00 £ 10,000.00 £ 12,500.00 £ 30,000.00
Fixed Costs £ 8,500.00 £ 12,000.00 £ 10,000.00 £ 27,500.00
Profit £ 1,500.00 -£ 2,000.00 £ 2,500.00 £ 2,000.00
It can be observed from the above calculation that if ‘The Director’ model is stopped,
producing the ‘Team’ desk model will result into profit amounting to £ 2,000. Therefore, it
would wold be worthwhile to produce ‘Team’ desk model for the business.

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Activity 2
Using of budget in business
Budget is the projection of expenses and revenues over the specific period of time in
future. It is compiled and re-assessed on periodic basis. On the other hand, budgetary control
is the technique under which the actual spending and incomes are compared with the
projected spending and income. Based on the deviations among the actual and projections the
management make changes in the plans (Kwakye and Owoo 2014). Budgetary control
techniques used for planning and controlling the finances are cash budget, sales budget,
production budget and capital budget. Requirements of efficient budgetary controls are –
 Quick reporting – subordinates shall send the performance reports on time. The
managers shall immediately analyse the report and take necessary actions.
 Effective organization – the responsibilities and concerns of each managers shall be
organized efficiently
 Reward and punishment – the employees who performs as per the budget shall be
rewarded and the underperformed employees shall be punished accordingly.
 Support from the top management – top management shall have clear idea regarding
the budgetary control and must implement that for infusing the sense of seriousness
among subordinates (Brigham et al. 2016).
Preparation of various budgets
Details of various budgets used to control and plan finance and relationship among them
are as follows –
 Cash budget – it reveals the projected payments and receipts under the budget period
and determines the cash position of the company. It shows the requirements of cash at

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different times under the budget period and assists the management in arranging and
planning the payments required for business operation. Therefore, it assures that the
business operation never suffer the shortage of cash. Apart from this, cash budget
assists in coordinating and controlling the cash payments and cash receipts (Chen,
Weikart and Williams 2014).
 Sales budget – the sales budget provides idea regarding the plan and programme of
comprehensive sales for the specific period. It reveals the potential of sales with
regard to values, quantities, products and period. Sales budget plays important role in
preparing other budgets. Various factors taken into consideration while preparing the
sales budget are purchasing power of the customers, competition level, economic
status, past sales records and demand trend for the product.
 Capital budget – it gives the projections regarding the capital resources of the
business. It reveals the plans of projected cost for the purposes of replacement,
expansion and investment. Therefore, the capital budget plays important role in
planning the capital expenditure (Hashim and Piatti 2016).
 Production budget – the production budget that is also known as the output budget is
prepared on the basis of production budget. It shows the estimated cost for carrying
out plans associated with production. The production budget is segregated further
into material budget, labour budget and overhead budget.
Budgets and budgetary control
Details of various budgetary techniques used to control and plan finance are as follows –
 Variance analysis – under the variance analysis the actual payments or receipts are
compared with the budget and the variances are found out. The variance can be
favourable as well as unfavourable. For instance, if the actual usage of raw material is
more than the budget it will have unfavourable variance. On the contrary, if the actual

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usage of raw material is less than the budget it will have favourable variance (Glantz,
Slinker and Neilands 2016).
 Zero based budgeting – it is one of the most popular budgetary control techniques as
the next period’s budget is prepared on zero bases. Therefore, the difference among
the actual and budget will be nil. If any excess is fount that is adjusted. With the help
of this budget every dollar that is spent can be controlled. It is based on the current
year’s income (Callaghan, Hawke and Mignerey 2014).
Limitations of budget
Limitations of budgets are as follows –
 It only provides estimates and therefore, the outcomes cannot be measured reliably
 It can be used as a technique to hide the inefficiencies of the management. Boosting
the expenses deliberately and ignoring the important items are common practice.
 Budget put psychological pressures and therefore restricts the freedom of action.
 It leads to inflexibility as the mentioned figures are not the final figures. With the
changes in price there is change in estimation (Schick 2015).

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Activity 3
Financial statements prepared by Tesco Plc
Main financial statements prepared by Tesco Plc and their purposes are as follows –
 Income statement – it reports the expenses and revenues of the company. The costs of
sales are deducted from revenue to show the gross profit. Further the operating
expenses, financial expenses and tax expenses are deducted from the gross profit to
show the net profit or loss for the period.
 Balance sheet – it shows the assets of the company along with the liabilities and
owners equity of the company. The assets and liabilities are segregated among current
and non-current. As the balance sheet is prepared on particular time period it states
the financial position if the company at particular period of time (Tesco plc 2018).
 Statements of changes in equity – this statement presents the shareholder’s equity
along with the payment of dividend. This statement is used to see whether the asset of
the company is majorly financed through equity as against debt.
 Cash flow statement – cash flow statement of the company is segregated into
operating activities, investing activities and financing activities. It shows the cash
inflows and cash outflows of the company which is important to plan the payment
structure and allocation of cash resources for major expenses (Tesco plc 2018).
Ratio analysis
Ratio Formula 2017 2016
Profitability ratio
Gross profit ratio Gross profit/sales*100 5.19 5.27
Net profit margin Net profit/sales*100 -0.10 0.24
Efficiency ratio
Account receivable ratio sales/average receivables 38.82 28.93

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Inventory turnover ratio COGS/Average inventories 22.41 18.97
Gearing ratio
Debt equity ratio
Total liabilities/shareholders
equity 6.15 4.10
Liquidity ratio
Current ratio Current assets/current liabilities 0.79 0.82
Profitability ratio – it is used to measure the profit earning capability of the company after
meeting its expenses from the revenues. The gross profit margin of the company is reduced
from 5.27% to 5.19% over the years from 2016 to 2017. On the other hand the company was
not able to generate positive income for the year 2017 that led to negative net profit margin
(Tesco plc 2018).
Efficiency ratio – it is used to measure the ability of the company to utilise the assets and
managing the liabilities efficiently. Both the efficiency ratios of the company are better in
2017 as compared to 2016. Therefore, the company has increased its efficiency (Vogel 2014).
Gearing ratio – it states the proportion of the assets raised through borrowing and the
proportion raised through owner’s equity. If 0.40 portion of assets or lower than that is raised
through debt the company is considered as lower leveraged. However, the company is
significantly leveraged as the debt equity ratio has been increased from 4.10 to 6.15 (Tesco
plc 2018).
Liquidity ratio – it reveals the ability of the company to meet the short term obligations with
the short term assets. It can be identified that the liquidity position of the company has been
deteriorated as the current ratio has been reduced from 0.82 to 0.79 (Delen, Kuzey and Uyar
2013).

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From the ratio analysis it is further analysed that as the company is highly leveraged,
further borrowing can lead the company to unsustainable position. Therefore, in case of fund
requirement it shall raise through equity instead of debt.

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Reference
Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment:
Theory And Practice, Canadian Edition. Nelson Education.
Callaghan, S., Hawke, K. and Mignerey, C., 2014. Five myths (and realities) about zero-
based budgeting. McKinsey & Company, p.2.
Chen, G.G., Weikart, L.A. and Williams, D.W., 2014. Budget tools: Financial methods in the
public sector. CQ Press.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios:
A decision tree approach. Expert Systems with Applications, 40(10), pp.3970-3983.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Eldenburg, L.G., Wolcott, S.K., Chen, L.H. and Cook, G., 2016. Cost management:
Measuring, monitoring, and motivating performance. Wiley Global Education.
Glantz, S.A., Slinker, B.K. and Neilands, T.B., 2016. Primer of applied regression &
analysis of variance. McGraw-Hill Medical Publishing Division.
Hashim, A. and Piatti, M., 2016. A Diagnostic Framework to Assess the Capacity of a
Government's Financial Management Information System as a Budget Management Tool.
Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Kwakye, J.K. and Owoo, N., 2014. Righting the Ills of Budget Preparation, Implementation
and Oversight in Ghana.

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Schick, A., 2015. The road to PPB: The stages of budget reform. In Public Budgeting (pp. 39-
56). Routledge.
Tesco plc. 2018. Tesco PLC. [online] Available at: https://www.tescoplc.com/ [Accessed 21
Jun. 2018].
Vogel, H.L., 2014. Entertainment industry economics: A guide for financial analysis.
Cambridge University Press.