Financial Analysis and Variance Calculation for Stell Co Ltd and Concorde Construction Company

QUESTION PAPER

Table of Contents
Question 1........................................................................................................................................3
1. Calculation of Gross and Net profit made by Stell Co Ltd in the year 2020 and 2021...........3
2. Calculation of Gross and Net profit to sales ratios of Stell Co Ltd for year 2020 and 2021...4
3. Reason of declining profits and increasing cash flow problems between 2020 and 2021 in
Stell Co. Ltd.................................................................................................................................4
4. Recommendations....................................................................................................................5
Question 2........................................................................................................................................6
1. Calculation of break-even point...............................................................................................6
2. Advantage and disadvantage of activity based costing...........................................................7
Question 3........................................................................................................................................7
1. Calculation of variance............................................................................................................7
2. Possible causes of sales, direct material and direct labour variance........................................8
3. Consequences of selected variance for the business and its objectives...................................9
4. Recommendation.....................................................................................................................9
5. Evaluation of advantage and disadvantage of switching from Incremental based budgeting
to Zero based budgeting.............................................................................................................10
REFERENCES................................................................................................................................1

Question 1
1. Calculation of Gross and Net profit made by Stell Co Ltd in the year 2020 and 2021
Income Statement
For the year ended 2020
Particulars Details Amount (£)
Sales Turnover 970000
Less Cost of sales Opening stock + Purchase –
Closing stock
(0 + 286000 – 34000)
(320000)
Less Direct labour cost (212000)
Gross Profit 438000
Less Warehousing cost (10000)
Less Distribution cost (28000)
Less Others overheads (17000)
Net profit 383000
Income Statement
For the year ended 2021
Particulars Details Amount (£)
Sales Turnover 612000
Less Cost of sales Opening stock + Purchase –
closing stock
(34000 + 265000 – 87000)
(212000)
Less Direct labour cost (233000)
Gross Profit 167000
Less Warehousing cost (30000)
Less Distribution cost (55000)
Less Others overheads (35000)
Net profit 47000

2. Calculation of Gross and Net profit to sales ratios of Stell Co Ltd for year 2020 and 2021
Formula of Gross profit to sales ratio:
Gross profit / Net sales * 100
Year 2020 = £438000 / £970000 * 100
= 45.15%
Year 2021 = £167000 / £612000 * 100
= 27.28%
Formula of Net profit to sales ratio: Net profit / Net sales * 100
Net profit / Net sales * 100
Year 2020 = £383000 / £970000 * 100
= 39.48%
Year 2021 = £47000 / £612000 * 100
= 7.67%
Importance of gross and net profit while analysing profitability of Stell Co. Ltd:
Profitability performance state the ability of the company to generate earnings from the
sales revenue after covering all the operating, administration and distribution cost. To analyse the
profitability performance of Stell company, the gross and net profit ratio is significant. It is
because the gross profit margin state the ability of company to reduce the production cost and
increase the sales revenue. While on the other hand, the net profit margin is important for the
company to measure efficiency of Stell to generate earning from sales revenue after bearing all
operating, production, marketing and finance related expenses (Miransyah and Dempo, 2021).
The gross profit helps the company to known whether they capable to manage and control its
production cost or not. While, the net profit helps company to control its overhead cost of the
business. By using this two ratio, the company able to analyse the overall financial health of the
business and identify the area which create loss within the business.
3. Reason of declining profits and increasing cash flow problems between 2020 and 2021 in Stell
Co. Ltd.
The reasons of declining and increasing cash flow problem are as follows: