Financial and Management Accounting: Analysis and Strategies for Improvement

This study material provides an analysis of financial and management accounting of Stell Co Ltd, BEP computation, variance analysis of Concorde Construction Pvt. Ltd, and strategies for improvement. It also discusses the advantages and disadvantages of switching from incremental based budgeting to ZBB.

Financial and Management
Accounting

Table of Contents
QUESTION 1...................................................................................................................................3
1. Computing gross and net (or Operating) profit made by Stell Co Ltd in each accounting
year
.....................................................................................................................................................3
2. Calculating Gross and Net Profit to Sales ratios for each year along with its significance . .3
3. Reason for declining profits and increasing cash flow...........................................................4
4. Strategies in order to improve the financial position .............................................................4
QUESTION 2...................................................................................................................................5
1. Computing BEP by using net contribution method ...............................................................5
2. Evaluating how BEP or CVP analysis can be used for setting sales revenue targets.............6
3. Defining how ABB can be used for setting as well as monitoring both short & long term
objectives.....................................................................................................................................6
QUESTION 3...................................................................................................................................7
1. Computing three most significant variances ..........................................................................7
2. Explaining the possible causes of variances identified...........................................................7
3. Identifying projection of likely consequences for the business pertaining to each of the
variance chosen...........................................................................................................................8
4. Recommending the strategies for business for corrections.....................................................8
5. Evaluating the advantages and disadvantages of switching from Incremental based
budgeting to ZBB........................................................................................................................9
REFERENCES..............................................................................................................................10

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
Profitability ratio analysis of Stell co ltd for the year of 2020 and 2021 is as follows:
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%
The Gross profit ratio is the financial ratio that used to measure the performance of the
organization and also helps the organization to measure the efficiency by dividing the gross
profit with the net sales (Nofiana and Sunarsi, 2020). This ratio used to show the proportion of
the profits that is generated by the sale of the product and services before selling and
administrative expenses. By this it will help the company to identify and examine the ability of
the business in order to create he sellable product by having the cost effective method.
Net profit ratio
Particulars Formula 2021 2020
Net Profit
Net sales 612000 970000
NP ratio NP / net sales * 100 1.1% 33.3%
The net profit of the company helps the company and investors in order to assess if the
company's management is able to generate the profit. This profit helps the company to know that
they have done enough sales and the operating costs and overheads are attained or not. This
profit ratio is one of the best ratio that helps the company to indicate the overall financial health.
If the company is selling the high net profit margin that used to indicate that the business is
pricing the products correctly and having the good control in order to attain the profitability.
3. Reason for declining profits and increasing cash flow
With the help of the above calculation it is clear that there is drastic change within the
profitability of the company. Both the gross profit and net profit ratio of the company has
declined which is not good for the company. The major reason for the decline in the profit of the
company is reduction in the sales revenue of the company. This is the cause for the decline in the
profits as the sales have reduced and along with this the expenses of the company have increased
to a great extent. Hence, this is the only reason for the huge decline in the net profit of the
company as compared to the last year. In addition to this decline in profit is also caused by the
falling demand and as a result of this the sales of the company have reduced and resultant the
overall profit. Along with this there was also issue with the cash flow of the company because

the time provided for outstanding invoices was 28 days but average consumer takes 33 days and
some consumer took more than 90 days. This simply means that the company is receiving the
payment late and because of this there is issue in the cash flow management of the company.
4. Strategies in order to improve the financial position
There are various strategies that helps the business to improve its financial position which
is described as below:
1. Lowering the expenses: This is one of the best way that the cited organization
can use in order to improve its financial position in the market. The company can
have the alternatives for the suppliers which used to have the proper budgeting of
the expenses on the company.
2. By using new technologies: The organization can use the new and innovative
technology in order to increase its sales by producing more. By having new and
innovative technology helps the company to produce more and can generate the
good profit.
3. Lower the prices: The company must lower its price in order to sell more in the
market. By this the company will able to generate profit and have the good
financial position in the market.
QUESTION 2
1. Computing BEP by using net contribution method
BEP of DK Machines is enumerated below:
Break-Even analysis
Particulars Formula Figures
Selling price per unit 400
Variable cost per unit 100
Contribution per unit Selling price per unit - variable 300

cost per unit
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 above table it can be interpreted that the company in order to have the situation
of the break even point has to sell the 917 units. The company has to sell the some amount of
products in order to attain the situation of the break even point as it will help them in future to
attain the profitability.
2. Evaluating how BEP or CVP analysis can be used for setting sales revenue targets
The BEP is the situation where the trade for investment which is determined by
comparing the market price of the product with the original cost. The cost value profit helps the
company to analyse the changes done in the variable and fixed cost affect the profitability of the
organization. The organization can take the use of the CVP analysis in order to determine the
sales required in order to generate the profit (Kurmangaliyeva,Kaumenova and Tastemirova,
2021). By considering the break even point it will make the organization know that after how
many quantities sold the company will be earning the profits.
As this analysis helps the organization in order to determine the short term strategies to
the business so this will help the company to set the profitable targets for the short term. By
having the changes in the variable and fixed cost makes the company to set the sales revenue
targets. This will also help the organization to take into the considerations the cost of the running
business and selling of the products.

3. Defining how ABB can be used for setting as well as monitoring both short & long term
objectives
Activity based budgeting is the budgeting method that used to record, research and
analyse the activities that helps the company to lead in the market. As every activity in the
organization used to incur the cost so this budgeting helps the organization to have the proper
record and analysis of the activities done in the market(Emerling and Wojcik-Jurkiewicz,
2018) . This budgeting helps the company to set and monitor the short and long term objectives
as it used to improve the budget control. By using this budgeting method it used to eliminate the
waste and helps in proper control and record in order to attain the objectives. This costing
method is basically used in order to grasp the better cost and this also used to allow the company
to from the better strategy in order to set the both shot and long term objectives.
QUESTION 3
1. Computing three most significant variances
Variance analysis of Concorde Construction Pvt. Ltd. is enumerated below:
Particulars
Budget (in
£)
Actual (in
£)
Variances
(in £) Outcome
Sales Turnover 1560000 820000 740000 F
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

2. Explaining the possible causes of variances identified
The company is having the favorable outcome on the sales turnover, raw material and the
advertisement and marketing. However, the organization has the adverse outcome on the some
variances which has affected the profitability of the company which are as describe below:
1. Labor: The budgeted cost of the company is more than the actual budget because
the organization has not provided the proper training and development methods to
their employees which used to cause in the variance.
2. Premises control: The adverse outcome on this variance is caused as the company
has not made the proper assumptions for the certain things that will happen in the
future. As this used to deal with the macro environment the organization must
have focus on this variance.
3. Storage and delivery: The adverse outcome on storage and delivery is caused as
the company has not made the proper warehouse and the transportation facility of
trading the products and services in the market.
3. Identifying projection of likely consequences for the business pertaining to each of the
variance chosen
The consequences for the business in order to pertain the chosen variances are as
described below:
1. As the cited organization has not provided proper training to their labor which
used to result in increase in the budgeted cost of the labor and affect the
profitability. As labor is the crucial part of the business which must be properly
trained by the organization.
2. The budget cost of the premises control is more and this used to result by
affecting the profitability of the business. This may be happened as the company
has chosen the high cost element of producing the product in the premises.
3. The budgeted cost of the storage and delivery is more than the actual budget by
this it was lead to have the decrease in the profitability of the company.

4. Recommending the strategies for business for corrections
Labor: In order to overcome from this variance the organization can provide the training
and development to their labor. This will help them to improve the productivity and profitability
of the company. By providing them training this will also improve the efficiency of the labors.
Premises control: As this variance was having the adverse outcome the Concorde
Constructive Plc. So it is suggested to the company that they can use the cost effective way of
managing the premises cost for in order to survive in the market. The cited organization can also
use the social media websites which is very cost effective for them in order to do advertisements
and marketing.
Storage and Delivery: As the budget cost is more than the actual so the company must
have the big warehouses in order to maintain the goods. It is also suggested to the cited Plc. that
must also have the good transportation services which helps them to have the proper delivery of
the products.
5. Evaluating the advantages and disadvantages of switching from Incremental based budgeting
to ZBB
Incremental based budgeting refers to the traditional budgeting method in which the
budget is prepared by using the current year budget or the actual performance. The incremental
amount are than added to the new budget made by the company. There are various disadvantages
of the incremental based budgeting which lead to have switch to the zero based budgeting are as
follows:
From the above disadvantages it is better to switch from the incremental based budgeting
to the zero based budgeting. The advantages of the zero based budgeting is the flexible budget
which helps the department to have the changes accordingly (Beredugo, Azubike and Okon,
2019). It also helps in minimizing the needles expenses and have the smart decision by making
the better allocation of resources.
However the ZBB is having some disadvantages as it used to take lots of time in order to
manage the ZBB. This is more subjectivity in order to make the decisions and this may be
detrimental to the long- term financial goals.

REFERENCES
Books and Journals
Beredugo, S. B., Azubike, J. U. and Okon, E. E., 2019. Comparative analysis of zero-based
budgeting and incremental budgeting techniques of government performance in
Nigeria. International Journal of Research and Innovation in Social Science. 3(6). pp
Emerling, I. and Wojcik-Jurkiewicz, M., 2018. The risk associated with the replacement of
traditional budget with performance budgeting in the public finance sector
management. Ekonomicko-manazerske spectrum. 12(1). pp.55-63.
Kurmangaliyeva, A., Kaumenova, A. and Tastemirova, Z., 2021. Break-even Analysis of
Industrial Enterprises in the Regions of Kazakhstan. In 3rd International Conference
Spatial Development of Territories (SDT 2020) (pp. 109-115). Atlantis Press.
Nofiana, L. and Sunarsi, D., 2020. The Influence of Inventory Round Ratio and Activities
Round Ratio of Profitability (ROI). JASa (Jurnal Akuntansi, Audit dan Sistem Informasi
Akuntansi). 4(1). pp.95-103.