Financial and Management Accounting: Gross and Net Profit, BEP, Variance Analysis

This article covers topics such as computing gross and net profit, BEP, variance analysis in financial and management accounting. It explains the significance of ratios and strategies for improving the financial position of the company. The article also discusses how BEP or CVP analysis can be used for setting profitable targets and how ABC can be used for setting and monitoring both short and long term objectives.

Financial and Management Accounting

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- from the above calculation it has been identified that with the help of gross
profit the company is able to measure about how efficiently it is working and also measure
whether they are doing an establishment uses labor. In addition to this, by using this calculation
the firm is able to make important decision which helps them to know about supplies for
manufacturing of goods (Nariswari and Nugraha, 2020). It has also been identified that gross profit
can figure out financial performance of the firm and also determine the profitability. Hence, it is
said that gross profit helps the firm to understand the costs needed in order to generate revenue
and this ratio is significant when analyzing profitability.
Net profit- by using this calculation, the firm is able to know about whether it is
generating enough profit or not from its sales. In addition, it is useful for investors so that they
can assess if a firm’s management is determining profitability or not and whether overhead costs
and operating cost are being contained. Based on that the firm can make important decisions.
Hence, it is noted that net profit ratio is significant when analyzing profitability and one of the
most essential indicators by which firm can find out about its financial health.

3. Using ratios outcome assessing reasons for the company’s declining profits and increasing
cash flow problems between 2020 and 2021?
From the above calculation, it has been noted that company have increasing cash flow problems
and declining profits in the year between 2020-2021.
Reasons- the company’s profit is the major source of cash and money. It usually comes in from
the payments done by customers, stakeholders and through selling assets. Due to low profits
earned in the 2020-2021 the firm won’t have enough cash on hand to cover all their outgoings.
This sometimes lead to borrow more cash the major reason behind that is the company have got
high and uncontrolled spending which needs to be in control and must improve productivity.
The company is spending and expanding too fast without having a concrete plan and
sufficient cash amount. Expanding too fast can also mean that the firm is growing its current
business operation too rapidly which needs to be taken into consideration through increasing
retail orders and using enough resources.
4. Advising 3 strategies for improving the financial position of the company
Every business needs to improve the financial position, for this the company have to
assess every aspect of business and identify areas that need to be improve immediately. With the
help of various factors, the company can know about its overall financial state and take
initiatives to improve its position.
Lower company’s unnecessary expenditure- one of the best way to develop and improve
financial situation is to eliminate or decrease unnecessary expenditure (Andarsari, 2019). This can
be done through keep track on expenses done and find cheaper alternatives for services,
equipment and supplies.
Sell unused or unwanted assets- the another way of improving the financial position is to
sell unused assets because they are just taking up space. Hence, selling them will provide support
to company and they can have immediate cash for future requirements.
Raise prices or lower prices- it is said that price is the only way to attract customers,
when it is feasible the company should lower the price and improve its business financial

position. While increasing its price without impacting customer base and their choices often
helps the firm to earn more profitability.
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
From the analysis above it can be interpreted that if DK Machines wants to be in the position of
no loss no profit then have need to produce at least 917 units (Tarore, 2021.)where profit or loss
would be zero. If it hikes its earnings from the BEP level then there would be profit and in case
of reduction then will generate loss.
2. Assessing how BEP or CVP analysis can be used for setting profitable targets
BEP or CVP analysis helps to know the stage of sales where entity is on the position of no profit
no loss. If it produces anything above BEP then would be generating profit. In this technique
manager can handily know the level of sales which is essential to maintain for his organization.
Manager can easily assess profit on different levels of sales and production which paves the way

for speculating the production quantity and can also reduce other sinking costs too. BEP or CVP
analysis broadly defines relationship between both variable and fixed cost so by using this
technique in a business their structure and relationship between the variable and fixed cost
factors can be easily assessed and which aids in drafting suitable policies to enhance
profitability. While setting targets one of the common error is disability of understanding effect
of cost and changes on efficiency which ultimately leads to profits, with this regard the technique
makes this relationship clear and by using the technique most appropriate and rational targets can
be set for the business and profit factor would also be maximized (Soleimani, 2018.)
3. Defining how ABB can be used for setting as well as monitoring both short & long term
objectives
ABC is a costing method in which distribution of indirect cost or overhead is made on the basis
of various cost centres and considering cost drivers. These methods pay attention to the
distribution or apportionment of indirect cost using the most appropriate methodology. In the
modern form of market in industries the share of indirect expenditure is getting higher with this
respect the method helps to set both short and long term objectives with more appropriateness
(Robbins, 2021)
Besides from setting objectives by using the ABC method monitoring on the cost centres also
becomes easy, Since while practising various factors like cost centres and their relationship with
cost drives are considered. Other aspects unit of work, even or tasks and activities are also paid
attention which makes the task of monitoring easier. Time to time on the basis of cost drivers the
costs can be pointed out which makes the task of monitoring for both short term and long term
objectives makes easier. ABC is considered more scientific method since traditional methods are
not suitable for distribution of indirect cost which ultimately create perils in deciding prices of
the products and in long run business bears bigger losses. So ABC not only eradicate those
problems but also incentivize the pricing system and operational efficiency of the organisation.

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
Marketing 20000 10000 10000 F
Premises Costs 175000 250000 -75000 A
The adverse figures of sales turnover, labour and storage&Delivery of Concorde Construction ltd
are depicting that the entity did not perform as it had intended or set the standards. The adverse
figures are showing poor performance of the organization where it did not achieve the aims it
had laid down. Cost factors like labour and storage had occurred more than intended and the
amount of sales for the period did not remain equal or above it was anticipated which led them to
be negative.
2. Assessing possible causes of variances identified
For adverse sales variance there can be many reasons like over estimation of sales figure. Price
may be another leading factor like while estimation the price which was considered has not
remained same and brought the variance (Du, Huang and Zhou, 2020)
Labour variances may be due to turmoil in the labour market like improper supply of labour can
hike their rate, may be labour rate estimation went wrong and other aspects like labour efficiency
is also another factor.
Storage costs went adverse the potential reasons are perhaps less sales than estimation so
need to keep in store. Estimation of per unit storage cost might inappropriate. And other aspects
like careless handling of material, poor maintenance, change in product design etc. for higher

cost of delivery causes like- cost of travel, packaging and improper transportation management
may be the reasons behind.
3. Identifying projection of likely consequences for the business pertaining to each of the
variance chosen
Sales is the key elements which enshrines profits so if it is adverse then definitely take the
business to occur losses. It also brings problem of cash and liquidity which causes perils like
poor operational performance, low working capital and may also trap the business in vicious
circle of loss (Jiang, 2018)
Other adverse variances of labour and storage would hike the cost of production which
ultimately affects the prices and products with higher prices would topple the sales so the
business. Higher labour cost is bigger issue since the human element is involved. Storage cost is
mainly affected by level of sales.
4. Recommending strategies for business improvements
Concorde Construction private limited is recommended to look back the estimation practice
since all the figures are having variances either positive or negative. Budgets are needed to be
adjusted so can be more realistic in nature. Business is suggested to go for separate analysis and
contemplation over the adverse figures so can prepare separate policies for each of them.
Factors like adverse labour and storage costs ultimately leads the sales turnover so with this
regard special pondering in essential. Operational efficiency and proper management of
resources are other aspects by their use strong performance can be fetched by the business. So
these are a few strategies which are recommended for better business performance.
5. Presenting advantages disadvantages of a switch from Incremental Based Budgeting to ZBB
Advantages-
 In IBB(Incremental based budgeting) former figures are used which create some
problems like dependency of resource allocation so in ZBB it can be avoided.
 In fast going market trends it is better to begin with zero rather than taking previous data
and making adjustments.

 ZBB also makes the task easier since without considering the previous data ones can
frame more suitable and rational plans for the business.
Disadvantages-
 Incremental budgeting provides data of previous term which paves the way for making
new budgets but ZBB starts from zero which needs more resources and efforts to make
the budget.
 ZBB is time taking and having unpredictable elements can mislead the budgeting process
and may be unrealistic figures (Debiasi, 2018)
 Incremental budgeting keeps previous data while drafting new one. Which brings
rationality factors and also eliminate subjectivity but ZBB brings more subjectivity in
decision-making that can be a disadvantageous factor for the business.

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