Financial and Management Accounting: Variances, Ratios, and Strategies

This article discusses financial and management accounting through variances, ratios, and strategies. It covers topics such as computing gross and net profit, break-even point, and significant variances. It also assesses the causes and consequences of variances and recommends strategies for improvement. The article includes tables and formulas to help readers understand the concepts better. The subject is relevant for students studying financial and management accounting, and the course code and college/university are not mentioned.

Financial and Management
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
CONCLUSION................................................................................................................................3
REFERENCES................................................................................................................................1

QUESTION 1
1. Computing gross and net (or Operating) profit made by Stell Co Ltd in each accounting year
Particulars 2021 (in £) 2020 (in £)
Sales Turnover (A) 612000 970000
Cost of Sales (B) 212000 320000
Direct labor costs © 233000 212000
Gross Profit
A – (B + C) 400000 650000
Indirect expenses
Warehousing Costs 30000 10000
Distribution Costs 55000 28000
Other overheads 35000 17000
Dividend paid 40000 60000
Total Expenses 160000 115000
Net Profit 7000 323000
2. Calculating Gross and Net Profit to Sales ratios for each year along with its significance
Gross Profit ratio
Particulars Formula 2021 2020
Gross Profit 400000 650000
Net sales 612000 970000

GP ratio GP / net sales * 100 27.3% 45.2%
Net profit ratio
Particulars Formula 2021 2020
Net Profit
Net sales 612000 970000
NP ratio NP / net sales * 100 1.1% 33.3%
Gross profit indicate about the trade profits generate by the organization. This ratio talk
about the profitability company could derive out of making a trade in business. Gross profit
further known as a trading profit which simply implies the level of profitability organization
could generate or derive out of making a trade transaction in the business. On the other ha net
profit is the overall profitability associated with the organization. This profit margin state the
ultimate business profit derive out of delivering the business operations. Both the net profit and
gross profit margin significantly indicate and demonstrate to the organization and the
management to know the actual outcome identified out of executing and delivering to the
business operations (Hutagalung and Siagian, 2022). Trading profits always justifies the
organization the net advantage arrived by the company in order to conduct and execute the
business operations in respective target market. Profitability are the sole indicator of the fact how
much the organization is able to derive or generate in order to execute and deliver the business
operations in respective target market. IN business it is important to analysis and assess both
these profit margin as they state the net outcome company could derive out of executing the
business operations. In accounting terminology if the company is able to derive or generate
profits than the venture has adopted the right business strategies and practices. In order to know
the value of the business strategies and tactics adopted by the venture this is necessary to know
and identify the net profit and gross profit margins ensured by the organization.

3. Using ratios outcome assessing reasons for the company’s declining profits and increasing
cash flow problems between 2020 and 2021?
The decline in the profitability of the organization is due to the low sales of the company.
IN recent time the pandemic situation has completed encounter to the society. In such a time this
is a high challenge for the company to enjoy better profit margin in the pandemic like situation.
This is probably one of the major reason behind decline in the profitability of business. Gross
profitability directly indicate the efficiency of the trading activity conducted by the organization.
On the other hand net profitability is totally demonstrate the net profitability enjoyed by the
company out of executing to the business operations. The decline in the gross profitability is
possibly the increased product prices in the market. The increased and aggressive level of market
competition many times become one of the major reason behind decline sales of the company.
On the other hand net profitability of the company also get to decline. This is probably the
increased operational cost of the company (Ferdian, Suryadi and Safitri, 2018). Overhead cost
also many times increases which contribute in rising the cost of operations and further to decline
the net profit margin of the company. Organization has witnessed both the profits gross as well
net profit lower than the previous financial years which clearly stated the fact that company is
not able to perform its operations as effective in comparison to the earlier financial year.
4. Advising 3 strategies for improving the financial position of the company
Company can focus over improving the liquidity in the business. This can be done by
managing debtors and creditors of company more effectively. Another strategy company can
adopt is related to marketing. Company can take on better social media and digital marketing to
improve the performance in respective target market. The third strategy which organization can
adopt is the discount strategy (Sintha, 2020). This involves offering quality discounts to the
customers so that they can buy the products offer by the organization. This strategy will allow
the organization to attract new potential customers along with the existing customer base in the
organization. All these tactics will support the company to improve its overall performance in
respective target market.

QUESTION 2 (500)
1. Computing BEP by using net contribution method
Break-Even analysis
Particulars Formula Figures
Selling price per unit 400
Variable cost per unit 100
Contribution per unit
Selling price per unit -
variable cost per unit 300
Fixed cost 275000
BEP (in units)
Fixed cost / contribution per
unit 917
BEP (in value or monetary terms)
BEP (in units) * selling price
per unit 366666.7
2. Assessing how BEP or CVP analysis can be used for setting profitable targets
Break even analysis is the one that indicate to the organization to know the point of sales where
the company will be able to recover its original cost. This is a no profit no loss kind of situation
which allow and favor to the organization to design a better strategies that can support the
company to achieve better sales in comparison to its break even point in the business. This
analysis allows the company to take a better control over foxed cost as well variable cost
incurred by the organization. Management get to formulate strategies that can support in
controlling both these cost especially to the variable cost that can further favor to the
organization to support better profitability in business. Controlling cost become a significant part
of every business to generate and maximize profits in the business. Break even point allow the
organization to make strategies that can support in controlling cost of operation and further to
increase profitability in business (Chartady and et.al., 2021). This tool is highly favorable for the

company not only to control the operation cost rather to also boost the sales and profitability in
the business. Once the break even point is achieved company can change its sales strategy where
it can provide extra discounts on the sale price. This will deduct the sales price of the company
that will further improve the profitability of the organization. Break even point is a stage where
company has already achieved all its cost hence, it can follow better discount strategy that can
support and favor to the organization to improve sales by offering extra discount and further to
boost profits in the business.
3. Defining how ABB can be used for setting as well as monitoring both short & long term
objectives..
The activity based costing is a technique of cost accounting that allow the organization to
allocate the overhead cost in different functional areas. This is a cost structure or a basis which
favor to the organization to easily segregate the total overhead cost incurred by the management.
Overhead is considered as an extra cost incurred by the organization due to errors and lacking in
framing proper strategies in business (Tahar and Eltweri, 2018). With the use of this technique
company can take a better control over segregating its overheads which can further create a more
positive impacts over achieving business objective. Companies also get to know its actual
overhead cost that has been incurred which will further favor to the organization to take better
actions to control such overhead cost.
QUESTION 3 (700)
1. Computing three most significant variances.
Particulars
Budget (in
£)
Actual (in
£)
Variances
(in £) Outcome
Sales Turnover 1560000 820000 740000 A
Direct Costs:
Raw Materials 400000 275000 125000 F
Labor 170000 240000 -70000 A
Power 70000 95000 -25000 A
Storage and Delivery 40000 50000 -10000 A
Indirect Costs
Administration 100000 130000 -30000 A
Advertising and 20000 10000 10000 F

Marketing
Premises Costs 175000 250000 -75000 A
2. Assessing possible causes of variances identified
Causes of sales variances:
 The biggest cause due to which sales variance occurs is the different in the price point at
which the business is selling its goods or services from the price expected by potential
customers. For instance, when the competition in the market increases, there is a need for
reducing the price of the product. Similarly, in case of Concorde Construction, there
margins have reduced significantly which indicates that the company has lower their
prices due to which the sales variance has occurred.
 Another reason for which the sales variance could occur is the lower number of units sold
by the business as compared to the budgeted units.
Causes of direct material cost variances:
 When a supplier applied discounts retroactively over the base-level purchase price at the
end of the year on the actual volume purchased.
 Also, if the supply of the material is in bulk in the market, then it leads to reduction in its
price and accordingly, there would be lower costs in terms of direct material.
 At last, if the supplier of direct material has been changed and the following supplier is
charging higher prices for its comparatively high quality material.
Causes of direct labour cost variance
 There may be more overtime and differential in terms of shifts against the budget labour
hours which leads to higher payment to the labor and accordingly, there were adverse
variances for the same.
 Also, if the national minimum wage rate has been increased by the regulatory body or
any other authoritative body raises the cost of hiring labor.
 At last, if there were inefficient hiring done by HR department, then it leads to hiring
more of skilled force than budgeted and accordingly, higher payments would be done to
skilled labor as compared to payment done to unskilled labor which leads to adverse
labor cost variance.
Similarly, rise in rate per unit with respect to power and other expenses leads to higher
direct expenses and accordingly, there would be adverse direct expense variance. At last, there

are higher storage and delivery cost against the budgeted cost which indicates that there may be
more purchase and sale of inventory took place which demands for higher costs in terms of
storage and delivery respectively.
Causes of indirect costs variance
 the cause of variances occurring in the costs may be due to unmet expectations, changing
business conditions and errors in carrying out the operations and processes of the
business. Errors may be due to the inaccuracy in forecasting demand or availability of
reliable data on the basis of which budgets are created. In the given case, it has been
known that Concorde Construction is having very little reliable data related to the cost
which creates issues in determining the accrued overheads or problems associated with
cash flows which could affect the smooth functioning of the business.
3. Identifying projection of likely consequences for the business pertaining to each of the
variance chosen
Consequences of sales variance
The sales variance may lead to lower profitability of the business if the reason for the variance is
lower prices offered for the goods and services. If the variances are occurring due low volume of
sales, then the consequences are such where business might be losing its customers or market
share due to the prevalence of cut - throat competition.
Consequences of direct cost variances
Higher direct costs in terms of direct labor, power and storage and delivery means lower proft
margins for the business.
4. Recommendations
The strategies which is recommended to Concorde construction for the elimination or correction
of these variances are as follows:
 It is recommended to the organization that they should adopt Zero based budgeting rather
than incremental budgeting in order to eliminate variance because incremental budgeting
is based on unreal assumption and also do not consider changes. While the zero based
budgeting consider change and update the same in budget. So, in order to reduce or
eliminate variance, it is advisable that the company should opt for Zero-based budgeting.

 Further, it is advisable to the company that they should hire cheap labour from the
international market in order to reduce the labour cost of the business. The company
should provide employee with the predictable work schedule in order to reduce the
overall labour cost of the business (Farzanegan, Hassan and Badreldin, 2020).
 It is also advisable to the construction company that they should adopt Just in time
inventory management system in order to reduce the storage and delivery cost of
company. With the help of this strategy, the company can order majority of material to
construction sites rather than company (Chiu and et.al., 2018). Thus, this helps the
company to reduce the delivery cost of business that is basically incur by company at the
time of transportation of goods from supplier to company and then company to
construction site.
 Lastly, it is also recommendable to the company that they should opt for training and
development program to employees to reduce variance.
5. Presenting advantages disadvantages of a switch from Incremental Based Budgeting to ZBB
The biggest advantage of switching from incremental budgeting to zero based budgeting is of
highly flexible budget where costs are lower due to efficient allocation of resources and focused
operations and disciplined executions.
The disadvantage of switching to zero base budgeting is that it leads to conflicts among
managers because manipulation could arises due to savvy managers and biases towards short
terms planning. Also, there are chances of resource intensiveness. Furthermore, extra training
and efforts are required for creating budgets through zero based budgeting technique which in
turn raises costs automatically from other sources.

REFERENCES
Books and journals
Hutagalung, L. and Siagian, H., 2022. The Effect of Gross Profit, Operating Profit and Net Profit
on Future Cash Flow Prediction at the Company of Telecommunications Sub Sector on
IDX in 2014-2019. Ekonomis: Journal of Economics and Business. 6(1). pp.348-358.
Ferdian, R., Suryadi, E. and Safitri, H., 2018. Analisis Dividend Payout Ratio (DPR), Gross
Profit Margin (GPM), dan Net Profit Margin (NPM) Terhadap Harga Saham Indeks
PEFINDO-25. Jurnal Produktivitas: Jurnal Fakultas Ekonomi Universitas
Muhammadiyah Pontianak, 5(1).
Sintha, L., 2020. Importance of Break-Even Analysis for the Micro, Small and Medium
Enterprises. International Journal of Research-Granthaalayah, 8(6).
Chartady, R. and et.al., 2021. Determination of Hotel Room Rental Rates during Low Season
with the Break-Even Point Analysis Method at Aston Hotels International. Budapest
International Research and Critics Institute (BIRCI-Journal): Humanities and Social
Sciences. 4(3). pp.7364-7373.
Tahar, A. R. and Eltweri, A., 2018. Factors Affecting ABB Implementation in PLCC. Journal of
Modern Accounting and Auditing. 14(9). pp.431-438.
Farzanegan, M. R., Hassan, M. and Badreldin, A. M., 2020. Economic liberalization in Egypt: A
way to reduce the shadow economy?. Journal of Policy Modeling. 42(2). pp.307-327.
Chiu, C.H. and et.al., 2018. Optimal advertising budget allocation in luxury fashion markets with
social influences: A mean‐variance analysis. Production and Operations
Management. 27(8). pp.1611-1629.
Broto, B., Bachoc, F. and Depecker, M., 2020. Variance reduction for estimation of Shapley
effects and adaptation to unknown input distribution. SIAM/ASA Journal on Uncertainty
Quantification. 8(2). pp.693-716.
Kes, Z. and Kuźmiński, Ł., 2019. Application of extreme value analysis in the assessment of
budget variance risk. Econometrics. 23(2). pp.80-98.
Adilli, A., 2020. The Flexible Budget as a Development Tool: Evidence From the Personal
Preparation Course. Available at SSRN 3539720.
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