Financial Analysis of UCK Furniture and Woodworks

This assignment delves into the financial performance analysis of two companies, UCK Furniture and UCK Woodworks. It examines various financial ratios such as ROCE, Assets Turnover, and Operating Profit Margin to assess their profitability and efficiency. The report also explores the role of management accounting in improving financial performance by highlighting tools like benchmarking and KPIs. Additionally, it discusses the application of planning tools to mitigate financial problems faced by UCK Furniture. Finally, the assignment recommends using marginal and absorption costing methods for accurate product cost determination.

Management Accounting
Project 2

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
1.1: Application of marginal and absorption costing in the preparation of income statement. . .1
1.2: Application of management accounting techniques to produce financial report.................2
1.3: Merits and demerits of marginal and absorption costing method........................................2
TASK 2............................................................................................................................................3
2.1: Benefits and limitations of using planning tools..................................................................3
2.2: Estimation of expenses.........................................................................................................5
2.3 Cash Budget..........................................................................................................................5
TASK 3............................................................................................................................................6
3.1: Adaptation of management accounting systems to respond financial problems.................6
3.2: Contribution of management accounting in improvement of financial performance..........8
3.3: Application of planning tools to reduce financial problems................................................8
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Management accounting is the process of preparing financial report and statements which
gives financial and statistical information needed by the manager with the help of which they can
make an effective decisions in order to achieve desired goals and objectives of an organisation.
The accounting manager is required to maintaining records and details of all financial
transactions occurred on daily basis. The main purpose of preparing this report is to giving the
importance that how management accounting help company in achieving competitive advantage
in competitive market world. UCK furniture, a UK company which deals in providing quality
furniture products to the large number of customers. The project covers the marginal and
absorption costing methods, different planning tools of budgetary control and its merits and
demerits. There are various management accounting system which are also discussed under this
report (Stadler, 2013).
TASK 1
1.1: Application of marginal and absorption costing in the preparation of income statement
Cost: It means the value of amount which is incurred in the process of production in
order to produce quality products. The cost of products includes monetary evaluation of material,
efforts, risk, resources, time and equipments used etc.
Marginal costing: It refers to the cost which is incurred in producing extra unit of
product in order to meet the needs and demands of customers. It includes variable cost and
excludes fixed cost. This methods of costing mostly used by an organisation to determine the
effect on profitability due to change in the level of production (Stair and Reynolds, 2013).
Absorption costing: This methods of costing includes both fixed and variable cost which
are incurred in the process of production in order to produce good quality furniture product.
Marginal costing Absorption costing
In this costing method, only variable cost is
included in the price of product and fixed cost
in ignored.
In this method of costing, both variable and
fixed cost are included in the price of product.
Inventory is valued at total variable production
cost.
Inventory is valued at full production cost.
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PARTICULARS January February
Sales (35 per unit) 315000 402500
less:
Cost of Production (12+8+5) 275000 237500
variable selling overheads (1 per unit) 11000 9500
variable cost 286000 247000
Contribution 29000 155500
less:
fixed manufacturing overheads 20000 20000
Fixed Admin & selling cost 2000 2000
total fixed costs 22000 22000
NET INCOME AS PER MARGINAL COST 7000 133500
NET INCOME AS PER ABSORPTION COSTING:
Sales (35per units) 315000 402500
less:
Cost of Production (12+8+5+1.82) 295020 254790
Gross Profit 19980 147710
LESS:
Fixed and variable cost:
variable sales overheads (1 per unit) 9000 11500
Fixed selling cost 2000 2000
Total costs 11000 13500
NET INCOME AS PER ABSORPTION COSTING: 8980 134210
1.2: Application of management accounting techniques to produce financial report
It has been observed that both marginal and absorption costing cost are helpful in
analysing the cost of the product. Marginal cost methods helps in evaluation of the cost of
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product on the basis of variable only whereas the absorption costing methods helps in
determining the cost by including both variable and fixed cost. It helps in providing opportunity
to manager to make an effective planning and enhance their profitability of company as well
(Onyon and et. al., 2014).
1.3: Merits and demerits of marginal and absorption costing method
Marginal costing:
Advantages:
 It helps in providing useful information thus manager can able to make an effective
decision.
 It represents the relationship between cost, price and volume.
 It helps in understanding the effect of production and sales policies. It is simple to understand the different between the fixed and variable cost.
Disadvantages:
 This method uses historical data which may not useful in making decision for future
events.
 It ignores fixed cost while calculating production cost.
Absorption costing:
Advantages
 It provides the importance of fixed cost in production.
 This method is used in preparing financial accounts of company (Simkin, Norman and
Rose, 2014). This will help in showing less fluctuation in net profit when production remains constant
but sales fluctuate.
Disadvantages
 It becomes difficult for manager to make decision, control and planning as this method
focuses on total cost which includes variable and fixed cost.
 The relationship between cost, volume and profit has been ignored as the manager mainly
focuses on total cost.
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TASK 2
2.1: Benefits and limitations of using planning tools
Budget: It refers to an estimation of income and expenditures occurred in future business
activities which help manager in allocating resources in execution and completion future
activities in an effective and efficient manner. The company has prepared budget for five years to
maintain the effectiveness in business organisation.
Budgetary control: It is the process of controlling the wastage of resources through
using various tools and techniques in order to bring positive outcome to company. It helps in
allocating resources to different departments which contribute their maximum efforts in
achieving desired goals and objectives (Smith, 2017).
Process of Budgetary control:
Discuss with manager to make an effective strategy: It is the responsibility of managers
of different department to discuss with their employees regarding estimation of cost incurred in
future business activities before reaching to any decision in order to bring effectiveness in result.
Record the actual performance: in this, the manager of an organisation is required to
compare actual performance with past year performance so as to know that whether the business
activities are performed in better way as compared to previous year or not.
Compare of actual with planned: The manager is required to compare actual
performance with standard in order to find out the deviations if any,which help them in
evaluating the performance of an organisation.
Determine difference or other variances: Comparing actual with desired performance
help manager in identifying the deviations which restrict employees to perform better. For this,
the manger need to appoint one employee to determine the reason of occurring differences and
thus find out the corrective actions to overcome such differences (Haimes, 2015).
Respond immediately: This is the final step in which the employee appointed by manager
need to implement various planning tools which helps in resolving issues arises while
completing business activities.
Budgetary control tools:
Forecasting tools: With the help of this technique, the manager can able to forecast the
situation that may occurs in execution of business activities. Such situation can be related with
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demands, price of products and labour wages. It helps manager to make an effective strategy in
order to prevent future challenges of market in future. Advantages: It helps manager to ready to face future challenges that may restrict business
operation in future through adopting different strategies in order to control such issues on
time. Disadvantages: As budget is prepared on the basis of assumptions thus the chances of
getting positive outcome may be low (Capital Employed. 2016).
Scenario analysis tools: Through using such tools, the manager can able to determine the
uncertainties and complexity that will make an impact on an organisation. Such uncertainties
need to be analysed carefully by the manager in order to achieve desired goals and objectives in
an effective and efficient manner (Holsapple, 2013). Advantages: It help manager to adopt contingency plan and strategies which help in
dealing with risk that may faced by an organisation while achieving organisational gaols.
 Disadvantages: The result may comes in negative if the data and information gathered
are not accurate and reliable.
Contingency planning tools: With the help of this tool, the manager can able to monitor
different types of activities through adopting an effective contingency plan. It helps company-in
dealing with contingent environment while executing business activities. Advantages: It helps in reducing cost through monitoring excessive burden (Haimes,
2015).
 Disadvantages: The manager may found challenges in execution of business activities
due to contingent environment.
2.2: Estimation of expenses
Calculation of variable cost per unit using identifies high and low activity level:
Calculation of variable cost per unit using identified high and low activity level:
Total cost= (Expenses of high activity- expenses of low activity)/(Highest activity hours spent -
lowest hours spent)
Total expense per units = (9820-7410)/(795-505)=8.31
Total expenses for July:
650*8.31=5401.5
For August:
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750*8.31= 6232.5
2.3 Cash Budget
Cash budget Amount
Particulars September
Opening balance 9000
Cash sales 39000
Sale on account 5648
Total Cash collected 53648
Purchase -16800
Selling and administration expenses -13000
Equipment cost -18000
Dividend paid -4000
1848
Add: minimum cash balance 5000
Expected cash in the end of September month 6848
TASK 3
3.1: Adaptation of management accounting systems to respond financial problems
UCK furniture which deals in providing wide variety of furniture products and services to
the people of UK is essentially required to attain good financial position in market through which
they can able to adopt various management accounting systems with a motive of getting positive
outcome in near future (Hoye and et. al., 2015). Thus, financial conditions represents the
capability of an organisation regarding adoption of an effective techniques and tools in business
operations. Some times the company nay faces financial issues which are related with operating,
investing and financial activities due to which they suffered a lot. Thus it the responsibility of
manager of UCK furniture to eliminate such financial issues through using different tools and
techniques such as Key Performance Indicators, Benchmarking, financial governance etc. These
method help company in maintaining records and performance of employees as well as an
organisation due to which the financial condition may improved.
Financial problems in UCK Furniture
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Profit level: The profit of company depends on the performance of departments of an
organisation thus if any department fails to contribute maximum efforts which makes negative
impact on the profit of company which arises financial issues. Delay in payment by customers
may also rises financial issues which affects the business operation of company as well.
Product and service quality: Due to ineffective management approaches implemented by
company, the quality of their goods and services may reduced which affects their sales figure as
well. Thus the revenue will also goes down which brings existence of company may comes in
danger (Kanellou and Spathis, 2013).
Tools to overcome from financial problems
There are various tool and techniques which the company need to adopt in order to
resolve their financial problems or issues. Some of the tools are as determined as below:
Key performance Indicator: It can be of two types which are related with financial and
financial indicators. Financial indicator are such as income statement, profit and loss accounts
etc. Whereas non-financial indicators includes customers relations, employee engagement etc.
Both type of indicators help company in finding out the accurate financial information with a
motive of improving actual performance.
Benchmarking: It refers to the standard set by manager for their workers after
identifying and analysing the strategies of their competitors. It becomes the liability of
employees to work according to the standards and principles so as to achieve desired goals and
objectives within limited period of time (Kouvelis and Yu, 2013).
UCK Furniture UCK Woodwork
While manufacturing furniture products, the
company may faces extra wastage of financial
resources which need to be controlled as soon
as possible. Thus KPI tool help them in
understanding the expenses and the outcome
they received from such business activity in
near future. It provides manager an opportunity
to monitor and control irrelevant cost incurred
in production process.
There are various external factors which can
affect the profitability of company. Thus, using
financial governance helps company in
complying with rules and standards of different
countries in order to achieve positive result.
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Sometimes the goals are clearly defined
towards the employees thus the employees are
not able to identify their roles and
responsibilities to perform. Thus, SMART
objectives need to be fixed by company in
order to improve the coordination among
different departments.
The company provides goods and services to
different countries thus able to set standards for
their employees to achieve positive outcome.
Benchmarking tool will be suitable technique
for them which improves the performance of
employees as well as an organisation.
Ratios Formula UCK furnitures UCK woodworks
ROCE(Return on
capital employed):
Operating profit/Capital
employed*100
5890+3600/23100+
31930*100
=9490/55030*100
=17.24%
6955/81230*100
=8.56%
Assets turnover Revenue / Net assets 13000+24900/2310
6+31930
=0.68 times
8150/81230
=0.100 times
Operating profit
margin
Operating profit / sales *100 9490/13000+24900
*100
=25.03%
6955/81230*100
=8.56%
3.2: Contribution of management accounting in improvement of financial performance
The contribution of management accounting in improvement of financial performance of
both UCK furniture and UCK woodwork are as follows:
 It helps in bringing improvement in the strategic plans and polices which supports in
achieving growth and success.
 Such systems helps in improving the strategy relate with reporting which help company
in providing financial as well as non-financial information (Bennett and James, 2017).
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3.3: Application of planning tools to reduce financial problems
Applying different planning tool by manager help company in identifying the financial
problems or issues which may faced by UCK furniture. The information gathered by such
planning tools are helpful in making an effective decision in order to achieve growth and profit
of company. This will help them in giving financial position of company which help manager in
making corrective measures on time so as to achieve positive result to company (Galliers and
Leidner, 2014).
CONCLUSION
It has been concluded from the above project report that it is essentially required for
company to adopt different accounting systems which help them in proper functioning of
business. Using benchmarking, KPI, financial governance etc. which help company in resolving
all financial issues. In order to determine the actual cost of products, the company should
required to calculate cost through using marginal and absorption costing methods.
REFERENCES
Books and Journals
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