Analyzing Smart Look's Financial Performance

The assignment involves analyzing Smart Look's financial performance through the preparation and analysis of budgets such as sales, production, and raw material budgets. It highlights the use of different budgeting techniques to manage business performance in an external environment.

MANAGEMENT
ACCOUNTING

Lindholm, A., and et.al., 2017Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Q1................................................................................................................................................1
a) Classify costs into fixed, variable and semi-variable costs.....................................................1
b) Other ways of classifying costs..............................................................................................2
Q2................................................................................................................................................4
a) Compute the total cost and cost per unit at different level of unit..........................................4
b) Analyse cost using graphical presentation..............................................................................4
Q3................................................................................................................................................6
1. FIFO........................................................................................................................................6
2. LIFO........................................................................................................................................7
3. Average cost............................................................................................................................7
Q4 Prepare COGS report for FIFO, LIFO and Average cost.....................................................7
.....................................................................................................................................................9
Q5................................................................................................................................................9
CSF and KPI...............................................................................................................................9
b) ..............................................................................................................................................10
Ways to reduce Costs................................................................................................................10
Value and quality enhancement................................................................................................10
TASK 2..........................................................................................................................................10
Q6..............................................................................................................................................10
Define budget............................................................................................................................10
Budget purpose..........................................................................................................................11
Methods of budgeting...............................................................................................................12
Q7..............................................................................................................................................13
a) Sales budget..........................................................................................................................13
b) Production budget.................................................................................................................14
c) Raw material budget.............................................................................................................14
d) Labour budget.......................................................................................................................14
Q8 Cash budget.........................................................................................................................15

TASK 3..........................................................................................................................................16
Q9..............................................................................................................................................16
a) Budget profit.........................................................................................................................16
b) Actual profit .........................................................................................................................17
c) Material and labour sub variances........................................................................................18
d) Operating statement for reconciling budgeted and actual profit...........................................18
Q10 Recommendation...............................................................................................................19
CONCLUSION..............................................................................................................................19

Index of Tables
Table 1: Classification of costs........................................................................................................1
Table 2: Cost per unit and total cost................................................................................................4
Table 3: Closing stock of FIFO.......................................................................................................6
Table 4: Closing stock of LIFO.......................................................................................................7
Table 5: Closing inventory of Average cost....................................................................................7
Table 6: COGS report of FIFO method...........................................................................................7
Table 7: COGS report of LIFO method...........................................................................................8
Table 8: COGS report of Average cost method...............................................................................8
Table 9: Sales budget.....................................................................................................................13
Table 10: Production budget..........................................................................................................14
Table 11: Raw material budget......................................................................................................14
Table 12: Labour budget................................................................................................................14
Table 13: Overhead budget............................................................................................................15
Table 14: Cash budget...................................................................................................................15
Table 15: Budgeted Profit..............................................................................................................16
Table 16: Actual profit...................................................................................................................17
Table 17: Reconciliation statement................................................................................................18

INTRODUCTION
Management accounting role has increases with the changes takes places in the external
business environment as this focuses on offering both qualitative and quantitative information to
all its users. Smart Looks Ltd has been selected for the given project report that focuses on using
various management accounting tools in imp[roving the existing conditions of an entity. Current
project emphasises on using various costs such as fixed, variable and semi-variable costs
incurred in a business is required to be identified at initial stage.
TASK 1
Q1
a) Classify costs into fixed, variable and semi-variable costs
Table 1: Classification of costs
Participants Fixed costs Variable costs Semi-variable costs
Material for clothes B
Factory rent A
Power for sewing
machines
C
Factory supervisor's
wages
C
Packaging materials B
Telephone C
Office rates A
Delivery driver's pay C
Factory heating A
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In the above classification of cost into three important elements of costs according to the
behaviour. Costs is segregated into three important cost types such as fixed cost, variable costs
and semi-variable costs. The classification of all kinds of expenses incurred in the business gets
easy with the above presentation in which coding of the data is used using A, B and C which
denotes fixed cost, variable costs and semi-variable costs. Fixed cost is that cost which doesn't
get affected with the production activity of the business as it remains constant in the total amount
as this is not displayed in form of units (Yigitbasioglu, 2017). Different coding is used in order to
classify various kinds of cost incurred in an entity as the role of an enterprise owner is allocated
all the costs appropriately in the business in improving the existing conditions of the business.
b) Other ways of classifying costs
Cost is regarded as that kind of monetary aspect incurred in a firm that decreases the
strength of a business over a certain period. An employer is required to identify all its costs in
advance in order to minimise all kinds of costs in a business using various cost reduction
strategies.
Costs is classified into various segments that helps an entity owner in order to classify all
its costs according to various types such as historical costs that is related with the time. Financial
statements based on a historical cost will depict wrong information as the external changes are
taken into consideration in the financial statements prepared by an enterprise. Standard costing is
used by an enterprise owner in which current performance of the firm is compared with the
standard performance of an enterprise in order to rectify the overall business performance of an
entity within a given span of time.
There are various ways in which cost incurred in an entity can be classified into various
segments in order to facilitate all needs and expectations of all the users of business are given as
below:
Cost is segregated on the basis of controlling as costs is regarded as the negative factor
incurred in a business whose major objective is to minimise all the costs incurred in a business
concern. Negative factor in form of costs will be reduced by increasing the income and revenue
in a business. Revenue generated by an entity will get increases with the passage of time as the
burden of costs get reduces (Kaplan and Atkinson, 2015). In terms of control ability thee are two
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kinds of costs incurred in a corporation such as control and uncontrollable costs incurred in an
enterprise.
Control costs are regarded as that kind of costs that can be regulated by an entity owner
to take correct action in order to control to reduce the burden imposed on an entity within a given
span of time. On the other hand, uncontrollable costs can be compared with uncertain costs
which can be incurred in a business without prior notice as entity will be required to deal with all
unexpected costs incurred in their business as the desired role of business enterprise is to manage
all its costs by strengthening its power in relation to all its sales ad the revenue generated by
them within a particular span of time.
On the basis of normality the costs is classified again into two aspects such as normal;
costs and abnormal costs which is incurred in a business according to its existing business
conditions. Major role played by an enterprise owner is to identify all kinds of costs incurred
in their business as their basic motive is to eliminate all types of costs involved in their
business which is suppressing its capabilities and skills. Normal costs is that kind of costs that
is related with the normal business of an employer as this includes daily routine work
practices involved in a business which is used in order to generate higher sales and the
revenue within a given span of time (Fischer, 2016). Generating output in a less period shows
the performance of an enterprise as they can get higher market share in the external business
environment. Efficiency and effectiveness of all the business operations get increases by
emphasising on its core competencies. These core competencies of an entity are utilised in
order to generate higher output by feeding less input into system as optimum utilisation is the
ultimate aim of a business owner. This is used as one of the important weapon against all its
competitors located in the external business environment. On the contrary, the deficiency of
normal costs are incurred in form of abnormal costs as the spoilage of material, goods lots in
transit are fall under the category of abnormal costs which are out of control of a business as
these costs are comes under the category of uncertain costs. Costs incurred in a business can't
be regulated as the nature of costs is abnormal in nature which will affect the performance of
an entity in a particular financial year (Lindholm and et.al., 2017). Role of an entity gets
increases with the passage of time all minute details will be considered by an enterprise owner
in order to keep track on all its gods properly in order to reduce the impact of this particular
costs incurred in a business.
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Classification of costs is based on the basis of tie in which segregation of costs in an
entity on the basis of time factor as this shows the importance of time in an entity. Historical
costs is the basic costs of a particular product restricts a particular product by excluding
external changes takes places in a business enterprise. The financial performance of an
enterprise gets affected with poor use of costs information as this deflates an entity's
performance over a particular span of time. Consideration of costs is regarded as one of the
important factor in an entity as this will directly affects its overall performance that requires
external boosting. External boosters will be used by an entity owner by analysing its current
strength in order to generate higher sales and the revenue in capturing higher market share in
the external business environment (Kaplan and Atkinson, 2015). It is important for a business
user in considering the effect of all the external market users in the current business
performance as minute changes takes places in its external environment will directly affected
its overall market share. Costs will be properly monitored as the higher costs incurred in a
business higher will be its overall sale and the revenue generate by them in a particular span
of time.
Q2
a) Compute the total cost and cost per unit at different level of unit
Table 2: Cost per unit and total cost
Particulars Cost per unit 15000 units 20000 units 25000 units
Material £5 £75000 £100000 £125000
Labour £6 £90000 £120000 £150000
Fixed costs £50000 £50000 £50000 £50000
Total costs £215000 £270000 £325000
Cost per unit £14.33 £13.5 £13
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b) Analyse cost using graphical presentation
15000 units 20000 units 25000 units
0
50000
100000
150000
200000
250000
300000
350000
Cost analysis
Variable costs
Fixed costs
Total costs
Interpretation
Data is regarded as raw facts and figures which are analysed by a user by applying
appropriate techniques and tools in order to generate outcomes from collected data. Results
generated by an entity by analysing various set of data are presented in form of graphs and
figures in facilitating various needs and expectations of several business users. Column chart
used in the above scenario depicts three pillars which is denoting three costs incurred in a
business such as fixed cots, variable costs and summation of these two important costs are shown
in form of total costs incurred in a business. The performance of an entity is analysed in relation
to the total costs incurred in a business enterprise as investor ill easily trace out the efficiency of
a business who will manage all its costs within a particular year in generating higher output for
them in terms of higher returns produces over a particular span of time (Fischer, 2016). Costs are
analysed using important parameter in form of production activity level as the existence of
variable costs in an entity is due to the existence of activity level of unit as if zero units will incur
in a firm then zero variable costs as both these variable costs and unit of production have direct
proportion among each other. It also shows parallel relationship as the increase n one aspect
shows its clear impact on the performance of other factor. The total costs is affected with the
changes takes places in the variable costs as the fixed costs remains the same on all units of
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production as it is not affected with the changes created in the units produced in a business
concern.
0.5 1 1.5 2 2.5 3 3.5
0
50000
100000
150000
200000
250000
300000
350000
Cost analysis
Variable costs
Fixed costs
Total costs
Interpretation
Relationship among various flavours of costs can be easily identified with the help of
above mention chart in which three lines are depicting different picture. Variable costs and fixed
costs incurred in business reflecting a true business performance over a particular time. It can be
evident from the above mention chart that fixed costs is less effective costs in an entity as it
remains the same in zero or more units produced in a business. On the other hand, variable cost
is opposite costs incurred in a business which gets changes wit the changes takes places in an
organisation structure of a business. Small, medium or large scale business structure directly
affected the existing performance of an entity in terms of units produced in these three different
status of business which in turn created lots of changes in the actual business performance in a
given span of time.
Q3
1. FIFO
Table 3: Closing stock of FIFO
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2. LIFO
Table 4: Closing stock of LIFO
3. Average cost
Table 5: Closing inventory of Average cost
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Q4 Prepare COGS report for FIFO, LIFO and Average cost
Table 6: COGS report of FIFO method
Table 7: COGS report of LIFO method
Table 8: COGS report of Average cost method
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Q5
CSF and KPI
Customer experience strategy is managing all customer interactions and their needs or
expectations from the company, from both the attributes time and quality. Active Listening is
one of the important critical success factor, that says listen first, act second. Once, the customer
is satisfied about their situation is heard properly they will be sure about receiving the correct
solution to their problem (Borghaei and et.al., 2017). Another factor is dependability, customer is
dependent upon the company, must not leave on customer to follow up whether the problem is
solved or not, reply to them with whatever the situation is don't leave them hanging.
Once the customer has made a purchase the company requires keeping customer loyal for
life. Improving retention is first step to improve performance of organisation. Along with
customer retention and satisfaction company has to acquire new customers to achieve long term
goal.
Analysis of organisational activities or mailed questionnaires are the critical factors that
will lead to supplier and product quality, the customer feedback is important to the organisation
to improve for future, key performance indicators for supply and product quality are product
availability, responsiveness or organisational costs etc.
Organisation should benchmark its performance with other rivals in the industry and
identify the wastes in production try to eliminate them. KPIs for operational efficiency are True
Downtime cost and Downtime performance, as a small percentage decrease in downtime may
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save company's million dollars. Capacity utilization should be verified with the utilized capacity
to what could be produced.
To reduce maintenance costs management should optimize equipment to make most of it
and ensure that it is used for what purpose designed review training practices, to ensure workers'
safety, so that management may not cost more than one way (Maas, Schaltegger and Crutzen,
2016). Scorecards and performance reporting are the KPIs in reducing management costs
spending
b)
Ways to reduce Costs
Outsourcing can be the best measure to reduce costs, though in short term it may cost
higher but in long run surely it will result in reduced production costs. Shift of responsibility of
areas like advertising and marketing will save money and generate best results. Further, Embrace
technology, ask three questions: what should be known to do really well?, is it good spending
inordinate time on any week? And if the most time consuming task will be off the plate, what
would it be?. Answers to these questions will indicate, on what technology management should
rely.
Value and quality enhancement
To enhance the value, customers should be given strong guarantee, so that they know the
management will stand by the products offered to them. Package the products with bonus, to
increase the perceived value to customers and they feel that they are getting more than their
money.
Identifying customers' needs and requirements is important ton enhance the product
quality, what they are expecting like if they want a product which is cheap, it's of no use heavily
engineering the product, and if they need a high performance over price than plan accordingly.
TASK 2
Q6
Define budget
In current business world, Complexities imposed on an entity is increasing with every
external market changes takes places in the external market which enhances the scope of
budgeting in a business. A budget prepared in an enterprise is regarded as the monetary
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statements that covers all important financial information about the business as costs are
identified in advance in order to improve the current business performance of an entity within a
given span of time. Budget prepared in an enterprise is act like a guiding statements that provides
right direction to an enterprise towards the proper management of all the resources takes places
in an entity (Maas, Schaltegger and Crutzen, 2016). Expenditures and income and equally
included in a budget as the desired motive of an employer is to reduce all its expenditures by
increasing its income and returns within a given span of time. True status of an enterprise will
be identified by emphasises on the existing business nature and all its operations as the business
practices are increases in order to gain higher competitive advantage in the external business
environment. Various kinds of budgets focuses on the increasing capabilities of an enterprise
over a certain period as the enterprise owner emphasises on increasing its cash flows by
eliminating higher cash outflows incurred in a business (Borghaei and et.al., 2017). Liabilities
and income are equally recorded in these particulars as an entity owner will manage all kinds of
costs takes places in the business in relation with all income and revenue generated by them
within a given span of time. Planning in the organisation can be made that focuses on increasing
the existing quality of financial information included in depicting true performance of an entity
by eliminating al negative factors incurred in a business concern.
Budget purpose
Basic need of preparation of any kind of budget in an entity is to meet the external
complexities imposed on an entity as he desired role played by an enterprise owner is to grab
higher market share by improving their current performance. Forecasting is the basic objective of
a budget as it helps in predicting the future performance of an entity by analysing its existing
business resources as all kinds of financial resources included in a business are properly analysed
in relation to its primary aims and targets framed by the (Borghaei and et.al., 2017). Variables
are defines as dependent or independent in order to apply the forecasting tools and techniques in
generating higher business outcomes. In the analysing process, current resources incurred in the
business are properly analysed in accordance with all the objectives developed by an enterprise
to be completed in less period as compared to the external market deadline. Delivering quality
oriented services to all the external market users get easy with the preparation of variety of
budgets in an entity as the business concern focuses on providing right amount of services in
enhancing its brand image in front of all the stakeholders of an enterprise.
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Another objective of budgeting is monitor the financial performance if an entity like
Smart Looks Ltd which deals in providing various services of selling ready-made as well as
customised furniture according to the needs and expectations of various users of the market.
Current performance of an entity will be managed easily by emphasises on existing needs and
expectations of all the users especially customers who get satisfied with variety of services
offered by an enterprise owner. Business operations of smart looks Ltd are properly monitored
by applying appropriate inventory management software in which goods purchased or sold by
them will be recorded in the current system which in turn will be helpful for the business in
keeping track on all the business operations of an enterprise.
It is also regarded as one of the important approach of communication in communicating
important information about the current business with the top management. New policies
decisions are taken by the senior level management so it is essential to convey all information
about the budgets to them in order to implement various policies for the betterment of the
business concern.
Methods of budgeting
Different kinds of budget prepared in an entity is according to various aspects covered in
a business as the business owner will emphasise on the desired aims and targets of its business
concern in relation to variety of goals and the objectives. There are different forms of budgets
that can be prepared by an employer according to its current needs and expectations are given as
below:
Zero-based budgeting- It is that kind of budget in which each and every budget prepared
without any base as every budget starts as fresh piece which doesn't consider any carry forward
of its past budget. It comes into existence in order to overcome the deficiency of traditional or
incremental budgets which are carry forwarding past facts and figurers to the next stage which
affected the overall financial performance of a business over a certain period. Use of this kind of
budget swill benefit an enterprise as it helps in proper allocation if all the resources incurred in
the corporation (de Treville, Cattani and Saarinen, 2017). Focus of an entity lies on generating
higher return without relying on its past performance as every budget creates new records by
eliminating higher expenses in relation to higher amount of sales and the revenue targeted by an
entity in a particular financial year.
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Fixed budgeting- In this kind of budget changes are not entered in the statements as once the
information recorded in these statements remains the same without using any kind of external
changes incurred. For example, commission charged on the sale charged at a specific percentage
in order to boost the current sales are comes under the fixed budget as this ratio will not get
changes with the time. It can be compared with static budget which remains unaffected with the
increase or decrease in the current level of sales incurred in a business. This budget is rigid as
this doesn't get changes with the time as no external market changes are taken into consideration
in the current budget.
Variable budget- Flexible budgets are opposite fixed budget in which changes are form part of
the current budget as this comes into existence in order to improve the existing business
performance of an enterprise. Role of an entity gets increases with the passage of time as they
will focus on all minutes changes takes places in the external business environment. Variable
budgets are prepared in an entity in analysing he current performance of an entity owner which
gets suppressed with the introduction of threats in a business (Lindholm and et.al., 2017).
Increasing or decreasing units of sales will affect the overall financial performance of the
business enterprise within a given span of time. Loopholes found in these kinds of budgets will
be easily rectified by the management by improving only that part which is affecting the current
financial performance of an entity over a particular time. Efficiency of a particular business
process will get improved with the passage of time as the desired aim of an entity is identified all
its weaknesses in order to generate higher sales and the revenue.
It can be recommended to Smart Looks to consider zero based budgeting as one of the
most important budget that enhances the quality of current business operations which in turn
creates additional value of the business in front of the external business environment. It is the
best suitable for Smart Looks as current business operations of an entity will get improved as the
focus of an entity has wider than compared to other businesses located in he similar sector in the
external business environment.
Q7
a) Sales budget
Table 9: Sales budget
Particulars April May June
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Sale units 2000 1500 2500
Sale units 30 30 30
Sale £60000 £45000 £75000
b) Production budget
Table 10: Production budget
c) Raw material budget
Table 11: Raw material budget
Particular April May June
Units to be produced 2050 1600 2350
Direct material 5 metre 5 metre 5 metre
Direct material need 10250 8000 11750
Add: desired closing
raw material
750 1000 1200
Less: Opening raw
material
500 750 1000
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Direct material
purchase
10500 8250 11950
Cost per unit £7.50 £7.50 £7.50
Cost of direct material £78750 £61875 £89625
d) Labour budget
Table 12: Labour budget
e) Total overhead budget
Table 13: Overhead budget
Q8 Cash budget
Table 14: Cash budget
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TASK 3
Q9
a) Budget profit
Table 15: Budgeted Profit
Particulars Amount
Direct material (6mtr@£5) £30
Direct Labour (3 hrs. @£6) £18
Total cost £48
Cost@25% £12
Sale price £60
Sale unit 5000
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Sale £300000
Cost of sales
Direct raw material(£30) (£150000)
Labour(£18) (£90000)
Fixed production costs (£12500)
Budgeted profit £47500
b) Actual profit
Table 16: Actual profit
Sales units 4800 units
Sales unit £60
Sale £288000
Cost of sales
Direct raw material(£30) (£141360)
Labour(£18) (£99000)
Fixed production costs (£12500)
Actual profit £35140
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c) Material and labour sub variances
Illustration 1: Material and labour variances
d) Operating statement for reconciling budgeted and actual profit
Table 17: Reconciliation statement
Q10 Recommendation
In the current case scenario, Actual profit is less than compared to the budget profit
generated by Smart Looks Ltd. Reasons for decreasing actual profit in comparison to the
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budgeted profit are identified by the management in order to suggest the best suitable techniques
in improving the existing business performance of an entity.
Actual profit is less than compared to the budgeted profit shows the fewer efforts applied
by an employer in achieving its desired aims and targets in a stipulated time period. Efficiency of
an entity has decreases in Lindholm, A., and et.al., 2017particular financial year needs to be
increases by using appropriate tools and techniques. Cost per unit needs to be increased as total
effect is created on the basis of this thing which needs to be improved in order to gain sustainable
competitive advantage on its existing market rivals.
CONCLUSION
It can be articulated from the above study that Smart Look's financial performance is
stable which has revealed in form of various budgets prepared by an entity such as sales,
production and raw material budgets. This report emphasises on using various budgeting
techniques in managing the existing business performance of an entity in the external business
environment.
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