Management Accounting 2: Control Report and Cost Analysis

This report covers the preparation of monthly control report and cost and revenue analysis of decision to set up own online shop or sell on Amazon in Management Accounting 2. It includes comment on Amana Ltd.'s performance during the year 2020 and recommendations for improvement. Course code and college/university not mentioned.

MANAGEMENT
ACCOUNTING 2

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
PART A...........................................................................................................................................3
(i) Preparation of monthly control report showing original, flexed budget and variance...........3
(ii) Comment on Amana Ltd.'s Performance during the year 2020.............................................4
(iii) Recommendation to CEO of Amana Ltd. on areas of improvement....................................6
PART 2............................................................................................................................................7
Cost and revenue analysis of decision to set up own online shop or sell on Amazon.................7
Evaluation of cost and revenue analysis......................................................................................8
Advise on which decision to go...................................................................................................9
CONCLUSION................................................................................................................................9
REFERENCES................................................................................................................................1

INTRODUCTION
Management Accounting is concerned with the preparation of financial reports to aid in
managerial decision - making for the future aspects of the business. With this, pursuing goals of
the business becomes easier due to the ability of MA in identification, measurement, analysis,
interpretation and communication of managerial information (Ismail, Isa and Mia, 2018). In the
present such reports meant for controlling variances in budgets will be prepared and assesses
with respect to Amana Limited which is family owned business operating in tourism industry of
England, United Kingdom. They are into the business of selling souvenirs to tourists which has
been produced by Chinese manufacturers as per their specifications. Therefore, monthly control
report will be prepared to indicate original and flexed budget along with variances taking place
therein and accordingly, the performance of the business will be reported for the period between
2020 and 2021. In the second part of this report, the decision of selling product online through
own platform or by using Amazon platform alternatively will be evaluated in terms of the
behaviour of costs incurred and revenue generated through these two decisions.
PART A
(i) Preparation of monthly control report showing original, flexed budget and variance
Particulars Original budget Flexed budget
(a)
Actual
(b)
Variances
(a) — (b)
No. Of units. 100000 80000 80000 —
Selling price 25 25 20 —
Sales Value (a) 2500000 2000000 1600000 400000
unfavourable
Variable expenses:
Material 250000
(100000 × 2.50)
200000
(80000 units *
2.50)
280000 80000
unfavourable
Labour 400000
(100000 units *
320000
(80000 units * 4)
440000 120000
unfavourable

4)
Overheads 150000
(100000 × 1.50)
120000
(80000 units *
1.50)
120000 0
Total Variable
expenses (b)
800000 640000 840000 —
Contribution (c) = (a)
— (b)
1700000 1360000 760000 600000
unfavourable
Fixed overheads:
Warehouse rentals 200000 200000 170000 30000
favourable
Insurance 100000 100000 100000 0
Full time warehouse
supervisor salary
50000 50000 35000 15000
favourable
Total fixed overheads
(d)
350000 350000 305000 —
Net Income (c) — (d) 1350000 1010000 455000 555000
unfavourable
(ii) Comment on Amana Ltd.'s Performance during the year 2020
Control report which is also known as variance between the actual and budgets helps the
company to identify the performance of the company. Identifying the performance based on the
gap between the flexed budget and actual is more significant and more accurately reflects the
state of finance. On the basis of control report prepared above, it can be said that the
performance of the Amana Ltd.'s business is poor and it might be because of the reduction in the
sales value and increase in the variable cost of production of souvenirs (Chiu and et.al., 2018).
First reason behind the poor performance of Amana Ltd.'s business is reduction in the
actual sales revenue as compared to flexed budget. The reduction in sales unit and selling price

of the Souvenirs is mainly because of the Covid-19. During pandemic and lock-down, the
business unable to sale its products to their customers as government imposed restriction on
movement of human and physical resources from one place to another place. The sales price of
the products of Amana Ltd.'s also get decreased because the company unable to sale its products
at high price (Wen and Siqin, 2020). It means the demand of the products of business get
decreased at the high price. It might be because of the reduction in the salary of the consumers.
Amana Ltd. think that if they will reduce its sales price then their sales unit will get increase but
in actual she fails in their decision and strategy.
Beside sales revenue, another reason behind the poor performance of the business in the
year 2020 is temporary closer of business due to lock-down imposed by government. Before
Covid-19, the raw material cost per units is estimated by organization is 2.50 but during
pandemic situation the organization has received raw material from the china which cost them
3.50 per souvenirs. Such, increase in the material cost of the product is also one of the major
reason behind the unfavourable gap between the actual and flexed budget. Further, it is also
analysed that the labour cost per units of the company is estimated to be 4 but in actuals its cost
them at 5.50 per unit. This indicates an increase of 1.50 per unit labour cost which causes the
decrease in the profit of the business during the year 2020. But on the other hand, the variable
overheads and fixed overheads of the business remain either same or decreases as compared to
the budgets (Nwaorgu and Alozie, 2017). It means that Amana Ltd.'s have the ability to manage
and control its fixed cost, but they do not have the ability or courage to manager & control its
variable cost especially material and labour.
So, on this basis it can be state that the main area behind the poor performance of Amana
Ltd.'s business in the year 2020 is sales price, units and variable cost. Also, this might be because
of pandemic and restriction on travelling. The sales of the souvenirs is directly linked with the
growth of tourism industry as if the people will travel England, then they will definitely buy
souvenirs in order to keep their memories associated with that place. But as the government has
imposed restriction, the tourism industry has faced huge negative impact over their business and
the impact of which the performance of Amans's business is also highly get affected. One more
reason behind the poor performance of the organization in the year 2020 is lack of digital
marketing and online sales (Adilli, 2020). It means Amana Ltd. has its presence in only online
stores so the consumers are not aware about their business and products. Promotion of products

and channels where the products of business are available to customers are one of the major
factor which affects the sales of the business. Along with this, the strategy of the owner
regarding the price of the product is also one factor which affect the performance of Amana
Ltd.,s business.
(iii) Recommendation to CEO of Amana Ltd. on areas of improvement.
On the basis of control report and performance report, the following ways advisable to
the CEO of the business which helps them in improving their business even in uncertain business
environment. The ways are as follows:
 Firstly, it is advisable to the organization that they have to adopt the online channel for
the sale of its products name souvenirs. It is because in the present time the consumers
basically uses internet for making their purchase decision. Further, the organization also
make sure that their products have strong brand awareness among the people who are
visiting England (Sola and et.al., 2021). For this, they have to implement the digital
marketing strategy within their business in which they have to launch various marketing
campaigns at social sites. The company can also enter into the agreement with the online
shopping channel in order to increase their customer base and sales. The increase in the
sales of the business helps in increasing the profitability of the business to the large
extent.
 Another recommendation available to the CEO of Amana Ltd. is that they have to adopt
the proper pricing strategy such as value-based pricing strategy. It means that the
company have to stick to their selling price of product which is valuable in the market
rather than decreasing it based on the demand of the business. Beside decreasing price, it
is advisable to the company that they should provide discount and other schemes facility
to consumers. The online payment facility is also one of the best way to attract the
customers as people in the present time wants to purchase from only that business which
provide them comfort (Parasuraman and Elumalai, 2021).
 One of the major steps that recommended to the Amana Ltd. business is starting their
own production department. This means that Amana Ltd. business sales the souvenirs
products which is produce by the Chinese manufacturers but which is designed by their
own design team. The production of goods within the business will reduce the transport,

tariff and many other cost of the business which further leads to the high profitability of
the business. The company have to make the decision regarding in-house production of
goods because it does not affect the price of goods offered by supplier. The supplier of
goods changes the price as per the change in situation which cost them high expenses.
 Lastly, one more steps which is recommended to the organization which require deep
improvement is labour cost. The cost of labour must be improved by business in order to
increase the contribution margin of business. So, for this it is advisable to the Amana Ltd.
business that they have to implement the training and development program for their
workers and employees (Iswari, Budiardjo and Hasibuan, 2021). The training will helps
the staffs in increasing their productivity and performance level which is most important
for the business performance improvement. Beside this, it is also advisable to the Amana
Ltd. CEO that they should implement the employee's feedback strategy that must for the
satisfaction of the consumers. The feedback will allow the employees to share their issues
with the higher authority so that they can further resolve it in order to keep staff satisfied.
PART 2
Cost and revenue analysis of decision to set up own online shop or sell on Amazon
Decision to set up own online shop Decision to sell on Amazon
Particulars Amount in £ Particulars Amount in £
Cost of setting up delivery
network
£150,000 Amazon fulfilment fees £50000
Cost of website up - gradation £50,000 -
Initial investment £200000 Initial investment £50000
Expected revenue generation 100000 * 20
= 2000000
Expected revenue generation 65000 * 20
= 1300000
Less: Variable costs (100000 *
10.5)
1050000 Less: Variable costs (65000 *
10.5)
682500
Contribution 950000 Contribution 617500

Less: Fixed overheads Less: Fixed overheads
Warehouse rental 170000 Warehouse rental 170000
Insurance 100000 Insurance 100000
Full - time warehouse
supervisor salary
35000 Full - time warehouse
supervisor salary
35000
Profit 645000 Profit 312500
Additional cost of going online 35000 Additional cost of going online 50000
Net Profit 610000 Net Profit 262500
Material cost per unit = 280000 / 80000 = 3.5
Labour cost per unit = 440000 / 80000 = 5.5
Overhead cost per unit = 120000 / 80000 = 1.5
Total variable cost per unit = 3.5 + 5.5 + 1.5 = 10.5
Evaluation of cost and revenue analysis
From the above cost and revenue assessment, it has been determined that if Amana will go for
selling through their own online shop, then they need to make initial investment of £200000
which in turn would give the net profit equivalent to £610000 (Pasch, 2019). On the other hand,
if the online selling will take place through Amazon platform, then the initial investment of
£50000 will be necessarily made for making payment of fulfilment fees and in return the profit
that is expected to be generated by facing cut - throat competition from other brands would be
equivalent to £262500. Therefore, it is clear that with the excess initial investment of £150000
(£200000 - £50000), the excess profitability that could be generated by Amana by selling
through their own online shop would be £347500 (610000 – 262500). Accordingly, by
comparing the costs and profits resulting from these two decisions, it can be said that the
decision to sale through own online selling shop is more profitable than the decision to sale
through Amazon platform as the profit generated from the former decision is twice higher than
the excess initial investment needed to be done for it. Like by making excess investment by
£150000, the resulting excess profit of £347500 is two folds that is, £150000 is half of £347500
on approximate basis.

The net profit in the given scenario has been calculated by taking into consideration all
the variable costs and fixed overheads that is expected to be incurred for both the decisions (Le
and et.al., 2020). The variable cost has been changed for the two decisions on the basis of
differentiating sales that is expected to be generated while the fixed costs or overheads has been
kept constant for both the decisions as these costs as nothing to do with the level of activity and
the mode of distribution that is, whether it is online or offline selling.
The poor profitability from the Amazon online selling platform has a potential
opportunity to be grown with the increasing demand in the market which could lead to higher
sales and profitability accordingly, However, it has been given that there is no control over the
pricing and return policy while going for selling online through Amazon platform. Therefore, if
there is no control over the price, then with the reduction in the price of other competitive brands
product, Amana has to reduce the price of their products as well to remain competitive and
ensure their sustainability in the marketplace (Cuzdriorean, 2017). Accordingly, with the
reduction in prices there would be decreased sales revenue for the company despite increasing
demand for its product and thus, the overall profitability can't be enhanced from certain level
which indicates that there is a restriction on making more profits by selling more or at higher
prices as well. Furthermore, no control over return policy means the business can't provide such
additional after sales services to their customers while competing with other brands selling their
products through same platform. This would result in providing no additional services or
facilities to customer to encourage higher sales and thus, again it would act as an obstacle for
getting higher activity level.
Advise on which decision to go
By analysing, both the decision on the basis of both financial and non – financial factors,
it would be recommended to Amana Limited to go for selling their products online through
setting up their own online shop. The reason behind this recommendation is that the excess
investment needed for this decision results in generating excess profit by two folds (Azudin and
Mansor, 2018). Also, there would be less competition that the business would face and also it
provides for freedom in setting price and return policy for encouraging their sales and increasing
profitability.

CONCLUSION
The report has covered the two main aspects of management accounting and that is
control or budget report and decision-making. The report has prepared the control in which the
original budget, flexed budget along with the variance is computed. Further, the report has cover
the comment over the performance of Amana Ltd. The report has also recommended the various
steps and ways with the help of which they can improve its business performance. These
recommendations will also help the business to increase their customer base of the company. In
addition, the report has cover the decision-making strategy in which it is recommended to
Amana is that they should adopt the first option. As per first option, the company need to start
their own online shops rather than through Amazon. It is because the company are able to cover
its cost and also earn double profits with the implication of own online shops.

REFERENCES
Books and journals
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platforms with risk considerations? A mean-variance analysis. International Journal of
Production Economics. 224. p.107544.
Nwaorgu, I. and Alozie, C. E., 2017. Budget Evaluation and Government Performance: A Case
of the Nigerian Economy. Journal of Economics, Management and Trade, pp.1-17.
Adilli, A., 2020. The Flexible Budget as a Development Tool: Evidence From the Personal
Preparation Course. Available at SSRN 3539720.
Sola, D. and et.al., 2021. On the Use of Knowledge Graph Completion Methods for Activity
Recommendation in Business Process Modeling.
Parasuraman, D. and Elumalai, S., 2021. Hybrid Recommendation Using Temporal Data for
Accuracy Improvement in Item Recommendation.
Iswari, N. M. S., Budiardjo, E. K. and Hasibuan, Z. A., 2021. E-business applications
recommendation for SMES using advanced user-based collaboration filtering. ICIC
Express Letters. 15(5). pp.517-526.
Azudin, A. and Mansor, N., 2018. Management accounting practices of SMEs: The impact of
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Cuzdriorean, D. D., 2017. The use of management accounting practices by Romanian small and
medium-sized enterprises: A field study. Journal of Accounting and Management
Information Systems, 16(2), pp.291-312.
Le, T., and et.al., 2020. Factors affecting the application of management accounting in
Vietnamese enterprises. Uncertain Supply Chain Management, 8(2), pp.403-422.
Pasch, T., 2019. Essays on the design of the management accounting system: Determinants,
components and effects. Utrecht University.
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2