Management Accounting: Profitability and Cost Computation of Louise's Business

Compute the profitability and cost computation of Louise's business based on the details provided in the question sheet. Also, get a report on Louise's business analysis and recommendations.

MANAGEMENT ACCOUNTING
SCENARIO 1-PART 1
In the present question, we are required to compute the profitability and cost computation of
business of Ms. Louise based on the details provided in the question sheet. The same has
been presented here-in-below:
(Amount in
AUD)
Sl. No. Particulars Adams Betz Chatham Dedham Elm Total
A Direct Cost of
sales 1,47,000 1,17,200 2,18,400 1,15,72
0
57,04
0 6,55,360
B Indirect costs of
sales
- Activity based
Overheads of
sale
8,51,00 1,36,160 2,21,260
47,099 38,001 84,127 34,802 17,23
1 2,21,260
-Balance over
head allocation 27845 22,466 42,526 17,592 8,710 1,19,140
C Total Cost 2,21,944 1,77,667 3,45,053 1,68,11
4
82,98
1 9,95,760
Further, the profitability analysis of the company has been detailed here-in-below:

(Amount in
AUD)
Sl.
No. Particulars Adams Betz Chatham Dedham Elm Total
1
Gross
Revenue
from sales 2,34,000 1,88,800 35,7,380 1,47,840 73,200 10,01,220
2
Direct Cost
of sales 1,47,000 1,17,200 2,18,400 1,15,720 57,040 6,55,360
3
Gross Profit
from sales 87,000 71,600 1,38,980 32,120 16,160 3,45,860
4
Indirect
costs of
sales
-Overheads
of sales 85,100 1,36,160 2,21,260
47,099 38,001 84,127 34,802 17,231 2,21,260
-Balance
over head
allocation 27,845 22,466 42,526 17,592 8,710 1,19,140
5 Discount 23,400 3,660 27,060
6
Net Profit
from sales -11,344 11,133 12,326 -20,274
-
13,442 -21,600
7
Business
wise result -211 -21,389 -21,600

PART 2
Dear Louise,
Hope you are in the pink of your health and enjoying the fine weather.
This has reference to our last meeting wherein you have asked us to conduct an analysis of
your business. In this regard, our analysis is here-in-below:
Report on Business of Louise Fairbern
The analysis has been carried out on the basis of detail provided by Ms. Louise .The analysis
deals with specific attention to cost incurred on each customer to generate revenue, profit
generated from each customer and profit generated from business line. The computation of
the same is enclosed herewith:
(Amount in
AUD)
Sl.
No. Particulars Adams Betz Chatham Dedham Elm Total
1
Gross
Revenue
from sales 2,34,000 1,88,800 35,7,380 1,47,840 73,200 10,01,220
2
Direct Cost
of sales 1,47,000 1,17,200 2,18,400 1,15,720 57,040 6,55,360
3
Gross Profit
from sales 87,000 71,600 1,38,980 32,120 16,160 3,45,860
4
Indirect
costs of
sales
-Overheads
of sales 85,100 1,36,160 2,21,260
47,099 38,001 84,127 34,802 17,231 2,21,260
-Balance
over head
allocation 27,845 22,466 42,526 17,592 8,710 1,19,140
5 Discount 23,400 3,660 27,060
6
Net Profit
from sales -11,344 11,133 12,326 -20,274
-
13,442 -21,600
7
Business
wise result -211 -21,389 -21,600
On reading of the above tabulation, it may be inferred that:-
(a) Gross revenue earned from sales is AUD 10,01,220/- and the cost incurred is AUD
6,55,360/- which represent 65% of the sales. Thus, contribution from business or gross
profits is AUD 345860/- which represents 35% of sales.

(b) Indirect cost incurred for generating revenue is AUD 3,40,400/- which represents 35% of
the sales value of Louise’s business. Further, these indirect cost has been allocated both
activity wise and turnover wise to derive the cost incurred for each customer to generate
the sales stated above.
(c) Post above, discount allowed by Louise has been deducted to derive the net profit of each
individual customer.
(d) After the above treatment, one can see that Louise’s business has incurred loss of AUD
21,600/- which represents 2% of sale;
(e) Further, analysing the profitability of business division wise one can see that the
consultancy service has incurred loss of AUD 211. On the other hand, window treatment
service incurred loss of AUD 21,389/. Thus, both division has incurred losses
Recommendation
(a) Stop offering discount to Mr. Adam and Elm;
(b) Focus on cost cutting
Conclusion
Business is incurring losses. Remedial steps have been proposed.