Financial Decision Making and Analysis: A Case Study of Agros

This study delves into the crucial aspects of financial decision making, focusing on the UK-based company Agros. It examines how management costing techniques, particularly absorption costing and marginal costing, can aid in effective business decision making. The study further explores the significance of final accounts for various stakeholders, including investors, management, government, auditors, employees, creditors, and banks. It highlights how these accounts provide vital information for informed decision-making. Additionally, the study utilizes ratio analysis to evaluate the financial state of Tesco Plc, demonstrating the effectiveness of this technique in assessing profitability, liquidity, efficiency, and risk levels within a business.

BUSINESS ACCOUNTING

Table of contents
Introduction................................................................................................................................3
2.1 Evaluate the business decision using the techniques of management costing.....................3
3.1 Discuss the reasons for the importance of final accounts to the stakeholders of a business5
4.1 Evaluate the financial state of a business through the application of the techniques of ratio
analysis.......................................................................................................................................7
Conclusion..................................................................................................................................9
Reference list............................................................................................................................10
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Introduction
Financial decision making is a very crucial but a lengthy process. In the process of financial
decision making, the management of any organization needs to analyze and revaluate several
factors like, cost, profit, assets and liabilities, on which the financial state of the business
depends. In this study, the focus will be made on the financial decision making process at
Agros, which is an UK-based company. This study will aim to evaluate how the management
costing techniques can help the management of Agros in business decision making. At the
same time, it will also analyze the importance of final accounts to the stakeholders and the
usability of financial ratios.
2.1 Evaluate the business decision using the techniques of management costing
As stated in the introductory part of the study that financial or business decision making is a
crucial and lengthy process, it is obvious that this process involves several activities.
Management costing is one of the critical activities that play major role in the decision
making process (Herath and Lu 2017). The primary aim of management costing is to identify,
evaluate, analyze and control the costs of the business (Narasimhan 2017). It aims to maintain
the costs of the company at the lowest level. There are several techniques under the system of
management costing that are useful to the management of Agros. Some of the techniques are
discussed below:
 Absorption costing technique
 Marginal costing technique (Brierley 2017)
The use of these two management costing techniques in the business decision making can be
better understood with the help of the following example:
Using the absorption costing:
Example: Agros is selling 1000 units £30 each unit
Cost of direct material £10 per unit
Cost of labour £8 per unit
Variable overhead £4 per unit
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Fixed overhead £6000
Number of units produced 1100 units
Opening stock 50 units
Selling and distribution overhead £1800
Calculations:
Calculating the absorption cost:
Direct material £10
Direct labour £8
Variable overhead £4
Fixed overhead £6
Total absorption £28
Therefore, the operating income will be as follows:
Sales (1000 units * £30) £30000
Less cost of goods sold (1000 units £28) £28000
Gross profit £2000
Less: Selling and distribution overhead £1800
Operating income £200
Considering the above calculations, it can be stated that if the management of Agros uses the
absorption costing method, the business will generate total £200 operating income, which
will not be very high. Therefore, considering this management costing technique, the
management of the company may decide to control the costs of raw material and labour,
which are very high. At the same time, the management may also decide that they need to
enhance the sales quantity to generate more revenue.
Using the marginal costing technique:
Considering the same example, the marginal cost is calculated below:
Opening stock = 50 units * £28
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= £1400
Cost of production = 1100 units * £28
= £30800
Closing stock = 100 units * £28
= £28000
Therefore, marginal costs = (£1400 + £30800) - £2800
= £29400
Therefore, the operating income will be as follows:
Sales (1000 units * £30) £30000
Less: marginal costs £29400
Less: Selling and distribution overhead £1800
Contribution -£1200
Less: Fixed costs Nil
Operating income -£1200
Therefore, if the above calculations are considered, it can be identified that the operating
income under the marginal costing technique is negative, which means the costs of the
business are higher than the income level. It is indicating that the management of Agros
should decide how to control or reduce the cost level. The calculation is showing that the
selling and distribution costs of the company are very high and at the same time the marginal
cost is also high. Therefore, considering this particular management costing the managers of
the company may easily make decisions regarding the expense level.
Therefore, the above discussion is clearly showing how the management costing techniques
can be useful to the business decision making at Agros.
3.1 Discuss the reasons for the importance of final accounts to the stakeholders of a
business
Final accounts are the most important financial documents that are useful to almost every
stakeholder of the business. The term final accounts indicates mainly three financial
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documents and these are – trading account, profit and loss statement and balance sheet
statement (Geiszler et al. 2017). In the current scenario, the cash flow statement is also
considered as the important financial document under the final accounts of the company.
If the reasons for the importance of the final accounts are critically discussed and analyzed, it
can be identified that without using the final accounts the investment and other business
financial decisions are impossible. An investor is the stakeholder of the company. While
making an investment decision, the investor always verify the profitability, liquidity and
efficiency level of the business and at the same time, the investor also reviews the capital
structure of the company (Krishnan and Joshi 2017). This information is available in the final
accounts of the business. For example, in the profit and loss statement the investors get the
information regarding the profitability of the company. Similarly, in the balance sheet
statement, the information related to the liquidity, capital structure and efficiency level of the
business will be available (Reid and Myddelton 2017). Therefore, it can be stated that using
the information in the final accounts, the investors can easily decide whether or not the
investment in this particular company will be suitable.
Apart from the investors, the final accounts are also useful to the management of the
company. The management can review the financial performance or financial state of the
business with the help of the final accounts. At the same time, it can also be stated that using
the final accounts, the management can compare the financial performance standard of the
business between two years (Krishnan and Joshi 2017). This makes the decision making
process easier for the management. On the other hand, using the final accounts, the
government can easily decide the tax liability of the company in a particular accounting year
(Beams et al. 2017).
The final accounts are also important to the auditors of the firm. The auditors can check
whether or not the company has disclosed its financial position property (Titman et al. 2017).
The auditors can also identify the fraud cases using the final accounts. In the case of the
employees, it can be stated that using the final accounts they can understand the financial
position of the company on which their job security depends.
At the same time, it can also be stated that using the final accounts of the company, the
creditors and banks can decide, whether they should provide loan to the company or they
must refuse the loan applications.
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Therefore, from the above discussion, it can be clearly stated that the decisions of the
stakeholders mostly depend on the final accounts of the company and due to that these are
considered as the most important documents of the business.
4.1 Evaluate the financial state of a business through the application of the techniques of
ratio analysis
Financial ratios are the best ways to analyze the financial state of a business. With the help of
financial ratios, the management of a company can better understand the past and present
performance trend of the company and based on that trend, the future decisions can be taken
by the management (Burtonshaw 2017). The usefulness of the financial ratios can be better
understood with the help of the following example of Tesco Plc:
Profitability ratios: 2015 2016 2017
Gross profit ratio -3.87 5.27321 5.18983
Operating profit ratio -6.5876 1.98765 1.81877
Net profit ratio -6.6157 0.23919 -0.0966
Liquidity ratios: 2015 2016 2017
Current ratio 0.59952 0.80869 0.78366
Quick ratio 0.47626 0.67267 0.66403
Efficiency ratios: 2015 2016 2017
Inventory turnover ratio 24.3325 25.1395 27.3864
Assets turnover ratio 3.83902 3.67291 3.62697
Gearing ratios: 2015 2016 2017
Debt to equity ratio 1.80757 2.02205 3.12348
Debt to assets ratio 1.05031 1.18646 1.29947
(Source: Tesco PLC 2018)
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The above table is showing the financial ratios of Tesco Plc for the last three years.
Considering this particular table, the financial state of Tesco Plc can be easily understood. If
the profitability ratios mentioned in the above table are considered, it can be identified that
the profitability position of the company in between 2015 to 2017 was very poor. The gross
profit ratio of the company has improved, but the net profit ratio and operating profit ratios
were still very low. The company could not meet the industry averages also. The lower level
of the profitability ratios for the last three years is indicating that the management of Tesco
Plc is failure to control the direct and indirect costs of the business. The profitability ratios of
the company are clearly indicating weak financial state of the business.
On the other hand, if the liquidity ratios of the company that are mentioned in the above table
are considered, it can be identified that the liquidity position of the company was also very
poor. The current ratios and the quick ratios are showing that the short-term assets were not
enough for meeting the short-term liabilities of the firm. The liabilities of the company were
so high, which has made the financial state of the business weak. This is also indicating that
in the near future, the company may face huge trouble in meeting its liabilities, which will
affect its long-term sustainability also.
The efficiency ratios of the company that are inventory turnover ratios and the assets turnover
ratios are indicating that the efficiency level of Tesco Plc was also very poor. The inventory
turnover ratios during the last three years were fluctuating, which denotes that the sales level
of the business was also bit fluctuating. At the same time, it also denotes that the management
of the company was not capable of maintaining the sales level during these years. On the
other hand, the assets turnover ratios are showing that the capacity of the company to utilize
its assets was very poor. The company could not generate much revenue by using its assets.
In the other words, it can be stated that the contribution made by the assets of Tesco was very
low in the revenue of the company.
Lastly, the gearing ratios of the company are indicating that the risk level in the capital
structure of the company was very high in between 2015 to 2017. The risk level was high
because the ratio of debt capital in the capital structure was much higher than the ratio of
equity capital. Inclusion of more debt capital has enhanced the risk level in the capital
structure. On the other hand, the debt to assets ratios for the three years is showing that the
company has used much debt capital in the assets of the business. It means that the assets of
Tesco Plc are riskier, which is not good for the future sustainability of the company.
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Therefore, from the above example of Tesco Plc, it can be easily stated that the financial
ratios of a company are enough for understanding the state of the company in the current
market.
Conclusion
In this study, it has been identified that the management costing techniques are very useful
for understanding the performance standards and making the future decision for the company.
The study has proved how the absorption costing and marginal costing techniques can help
the management of Agros in developing better decisions for the business. At the same time,
the study has also concentrated on the discussion regarding the usefulness or the importance
of the final accounts of the company and it has been determined that the final accounts of the
companies are important to internal as well as external stakeholders for various reasons.
While analyzing the usability of the financial ratios, the study has determined that the
financial ratios are very helpful in the context of understanding the profitability, liquidity and
other financial state of the business.
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Reference list
Beams, F.A., Brozovsky, J.A. and Shoulders, C.D., 2017. Advanced accounting. Pearson.
Brierley, J.A., 2017. The domination of financial accounting over product costing. Cost
Management, pp.32-40.
Burtonshaw-Gunn, S.A., 2017. Risk and financial management in construction. Routledge.
Geiszler, M., Baker, K. and Lippitt, J., 2017. Variable Activity‐Based Costing and Decision
Making. Journal of Corporate Accounting & Finance, 28(5), pp.45-52.
Herath, H.S. and Lu, X., 2017. Inference of economic truth from financial statements for
detecting earnings management: inventory costing methods from an information economics
perspective. Managerial and Decision Economics.
Krishnan, A. and Joshi, P.L., 2017. Evolution and development of management accounting
practices in Thailand. The Routledge Handbook of Accounting in Asia, p.95.
Narasimhan, M.S., 2017. Absorption vs. Marginal Costing.
Reid, W. and Myddelton, D.R., 2017. The meaning of company accounts. Routledge.
Tesco PLC. 2018. Tesco plc. Available at: https://www.tescoplc.com, 1 March 2018, from
https://www.tescoplc.com
Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and
applications. Pearson.
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