Financial and Management Accounting: Calculation of Profit, Breakeven Analysis, Activity Based Costing, Variances, and Budgeting

FINANCIAL AND
MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
QUESTION- 1.................................................................................................................................3
1. Calculation of the gross and net profit..................................................................................3
2. Calculation of the gross and net profit to sales ratio and their significance for the business
3
3. Reasons for company’s declining profit and increasing cash flow problems between 2019
and 2020.......................................................................................................................................4
4. Recommended strategies for the improvement of the financial position of the company. . .4
Question: 2.......................................................................................................................................5
Calculating the Break Even Point of Production for this new product........................................5
Setting profitable sales revenue target by using breakeven analysis...........................................5
Advantages and disadvantages of switching off to Activity Based Costing................................5
QUESTION- 3.................................................................................................................................6
1. Calculation of three significant variances between budgeted and outrun figures....................6
2. Causes of variances..................................................................................................................7
3. Consequences for the business of each of these variances......................................................7
5. Advantages and disadvantages to switch from Incremental budgeting to Zero based
budgeting......................................................................................................................................7

QUESTION- 1
1. Calculation of the gross and net profit
Particulars 2020 2019
Sales Turnover 425000 630000
(-) Cost of Sales -140000 -230000
Gross Profit 285000 400000
(-) Direct labor costs -135000 -100000
(-) Warehousing costs -30000 -10000
(-) Distribution costs -45000 -25000
(-) Other overheads -35000 -17000
Net Profit 40000 248000
2. Calculation of the gross and net profit to sales ratio and their significance for the business
Gross profit ratio= Gross profit / Sales turnover * 100
2020: 285000 / 425000 * 100
= 67.058%
2019: 400000 / 630000 * 100
= 63.492%
From the above calculations it can be inferred that the gross profit of the company has
increased in the year 2020 as compared to the year 2019. In the year 2019 such ratio was about
63.492% and on the contrary it increased to 67.058% in the year 2020. The significance of
calculating the gross profit ratio of the company is that it shall be calculating the operational
efficiency with which the company is executing the routine operations in the business. It shall be
showing the available profits with the company to cover the other non-operating expenses of the
company. It shows the difference between the costs of the production and the sales revenue that
is generated over and above in the form of the profit margin of the company.
Net profit ratio= Net profit / Sales turnover * 100
2020: 40000 / 425000 * 100
= 9.412%