Financial and Management Accounting: Calculation of Profits, BEP, Variances, and ZBB

This article discusses the calculation of profits, BEP, variances, and ZBB in financial and management accounting. It explains the causes of variances and recommends strategies for business improvements. It also presents the advantages and disadvantages of switching from incremental based budgeting to ZBB.

FINANCIAL
AND
MANAGEMENT
ACCOUNTING

Question No 1:
1 Calculation of Gross and Net Profit of Shell limited in each accounting year: -
Particulars 2021 (in £) 2020 (in £)
Sales Turnover (A) 612000 970000
Cost of Sales (B) 212000 320000
Direct labour 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 Calculation of Gross profit and net profit to sales ratios of each year along with significance of
these ratio:
Gross Profit ratio:
The gross profit ratio is important because it shows that how an organisation is performing
during the year of operation. It is important to note that such ratio helps in identifying the
performance of the corporate and such ratio if positive indicates that they are effectively
and efficiently utilising the resources in an effective manner.
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:

The net profit ratio indicates the profits earned by the enterprise during the accounting
year. Such profits will arrive after deducting all the expenses from the sales figures.
Particulars Formula 2021 2020
Net Profit
Net sales 612000 970000
NP ratio NP / net sales * 100 1.1% 33.3%
3 Reasons for decline the profits of the company and increasing the cash flow problem between
2020 and 2021:
The reason for the decline in profits of the company would be the increase in the operational cost
of the corporate and that must be maintained to an acceptable limit so that profits will got
increase of the organisation. It is important to note that revenue should be increases by selling
the units at the higher rate so that sales figures get increased and ultimately the expenditure that
the entity is incurring to make such product will be recovered. It is necessary of the organisation
to adopt those measures so that making o their product will become easier and unnecessary cost
engaged will be avoided. The cash flow increase only with the reduction in the expenses of the
organisation and if such expense will not lower than the cost of running the business will not
recover. The profits of the company will increase only due to reduction in the indirect cost faced
by the organization.
4 Strategies that would be recommended to director to improve the financial position and detail
explanation on how the profits would increase in next year:
The strategies the business would implement to improve their financial position:
 Lower Your Expense: One of the best ways to improve the financial position is to reduce
expenses. Take a look at every area of the business and see if entity can find cheaper
alternatives for supplies, equipment and services. Find better terms for bank accounts and
insurance policies. For larger expenses, find out if entity can arrange periodic or deferred
payments to keep more cash available for them.
 Recover Outstanding Payments: Unpaid Expenses can really harm the cash flow and the
overall health of business’s finances. If this is a recurring problem for business, it may be
time to use a debt collection agency. In the meantime, make sure business regularly

remind debtors of their obligations. Also, when making sales agreements, make sure the
terms are clear about when the payment is due and terms for overdue payments.
 Sell Unused or Unwanted Assets: Do the business have items that they dont no longer
need that are just taking up space. If they are paying for storage, that also save money on
this expense. If they have a large number of such items, consider putting them up for
auction. There are auction houses that specialize in business items.
 Consolidate Debt: When seeking ways to improve business finances, it’s important to
look at current business. If business have significant debt, it may be advantageous to
consolidate it. It’s often simpler and more economical to refinance the debt into a single
payment.
 Lower the product prices and cost: When it’s feasible, lowering the prices is always a
good way to drum up business and improve business’s financial position. However, in
some cases, even a slight markdown helps make the products or services more appealing
to customers.
 Raise the Prices: While lowering prices often helps business get more customers, in some
cases, the opposite strategy is a better option. Some businesses offer prices that are below
market, perhaps because they haven’t adjusted them in a few years. If they can increase
their prices without losing too many customers, they may find that this is a good way to
improve their financial business position.
 Give Customers Multiple Payment Options: The more options customers have to pay; the
more chances business has to make sales. In addition to credit cards, some people prefer
to pay via personal checks or payment systems such as PayPal.
Question No 2
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. How might the use of either Break Even Analysis or Cost Volume Profit Analysis enable the
company to set profitable sales revenue targets: -
Ans. In the above question it discuss about which method is most suitable for the organization to
use either break even analysis or cost volume profit analysis. In the above question it also says
that how this method help organization for achieving the sales targets and earn profit for the
company. So, basically it important to know what is break even analysis and cost volume profit
analysis. BEP (Breakeven point) it helps the firm to find the fixed cost and variable so it can set
the prices accordingly and predict when your company will become in a profitable situation. In
every business break-even point is the point in which income is equals to the expenses. They
should take a strong watch at all its costs like rent, labour and material as well as its price
formation. Now, it shows about the calculation of breakeven analysis and the formula are:
Break even points (units) = fixed costs / (revenue per unit – variable cost per unit)
The above formula show how the company calculate the value of breakeven analysis in units
with the help of fixed costs, variable cost a revenue cost. The fixed cost is the cost which do not
change it always fixed and the revenue is the price in which you sell the product and on the other
hand variable cost is the cost which changes simultaneously.
Cost volume profit: It means is a direction to find out the change in variable and fixed cost
which affect the organization profits. Basically company use this method to check how it affect
the profit in the business. Here is formula to calculate this method.
Cost volume profit = revenue – costs

3. Outline and explain to the Directors how the supply of more accurate management accounting
information and the adoption of the Activity Based Costing would improve their ability to
set and monitor both short and long term company objectives
The activity based costing will provide the business the systematic approach to allocate the cost
in the systematic way so that cost reduction can be takes place accordingly. This approach helps
the business in ensuring that all the cost that has been incurred in the respective division must be
allocated using the cost drivers.
Question No 3
1
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
2. Assessing possible causes of variances identified:
It can be seen that there are various changes between the different types of variances such as
sales revenue, direct material, direct labour, and other expenses. The variances observed in the
table have both the effects that is the adverse and positive. The variance in sales revenue can be
seen at 47.44 which is a negative situation for a business. The reason behind this can be the
unavailability of a product due to the problems in manufacturing and delivery or there might be
the changes in the customer taste and preference. The another change can be seen in case of raw

material which is less than the budgeted one, it shows that it has a positive effect the reason for
the same can be that the company has used its resources in an appropriate manner.
An increase in the labour can be seen which shows that the company is unable to use its
manpower in an efficient way. It shows the adverse effect by -41.18%. With this there is a
negative effect on business because of both the power and delivery this states that the company is
making more expenses which is not a good sign.
The indirect cost like administration and premises cost reflects the adverse effect because it is
more than the budgeted cost. This means that the company is spending more on the indirect
expenses.
3. Identifying projection of likely consequences for the business pertaining to each of the
variance chosen
4. Recommending strategies for business improvements
To increase the revenue, the company must focus on its objectives and start aligning with them
and it must focus on its repeated customers. It can also provide some additional services with the
existing commodities and offer the discount and rebates. It can also use the effective marketing
strategies like announcing the promotional offers.
To control the administration costs, the company can challenge its employees to identify the
ways by which a firm can save its money. It can opt for the Be Greener techniques like avoiding
the wastage of paper and put solar systems to cut down the electricity expenses.
To control the labour costs, the business enterprise can provide employees with the predictable
work schedules by giving advance notice, providing ample rest time. It can also reduce the
labour costs by optimizing the schedules.
5. Presenting advantages disadvantages of a switch from Incremental Based Budgeting to ZBB
Merits of Zero Based Budgeting
 This makes the evaluation on the cost benefits – In it everything that is recorded on the
books are appropriately justified and it makes low possibilities of the chances in order to
generate any error and this is also helpful to understand and does not include things
which is not making any required return on the invested capital. In this budget, in depth

evaluation of the expenditure as well as income in comparison to the other fiscal model
which inherit more info and this is for the longer time period as well.
 ZBB assist to focus on prioritizing the effectual and efficient resources – In this budget
resources can be utilised with more effectual way.
 ZBB evaluates as well as identifies the opportunity and also the more different effectual
methods of the cost saving practices.
 ZBB detect the inflation of money – When budget of month showing inefficiency then
ZBB will detect the error.
 ZBB promotes entire control on to the budget.
Demerits of Zero Based Budgeting
 Time consuming activity – This budget majorly focuses on the in depth recording on the
budget and a account manager also observe the budget more closely at the month end.
 ZBB is not useful having an changeable income – If the revenue is fluctuating every
month so the ZBB is one of the most suitable because this is not a regular revnue a person
cannot uphold their loss as well as profits.
 Require large number of manpower – For in depth evaluation in any particular field a
person need to concentrated on all the practices from it, as this consumes more time as
well as more number of the working staff.
 Lack of specialization – In ZBB all the practices are essential for it all the workers need
appropriate training in order to explain the expense.

REFERENCES
Books and Journals
He, D., Ren, S. and Zeng, H., 2022. Environmental labeling certification and firm environmental
and financial performance: A resource management perspective. Business Strategy and
the Environment, 31(3), pp.751-767.
Hendayani, N. and et. al. 2022. Best Practice of Financial Management in SMEs Operation in
Digital times. Budapest International Research and Critics Institute (BIRCI-Journal):
Humanities and Social Sciences, 5(1), pp.3350-3361.
Othuon, D. and et. al. 2022, April. The role of working capital management on financial
performance of small-scale coffee processors in Embu County, Kenya. In Egerton
University International Conference.
Papadamou, S., Papadopoulos, S. and Pitsilkas, K., 2022. The Distorting Effects of Corruption
on Financial Stability and Economic Growth: Evidence from Russian Banks Using a
PVAR Approach. Eastern European Economics, pp.1-25.
Serido, J. and et. al. 2022. Becoming self-sufficient: a longitudinal person-centered analysis of
financial identity and adult status during emerging adulthood. Applied Developmental
Science, pp.1-16.
Wang, G. and et. al., 2022. An investigation on the risk awareness model and the economic
development of the financial sector. Annals of Operations Research, pp.1-23.