Smart Looks Limited Case Study

This assignment analyzes the financial performance of Smart Looks Limited, a textile company. It examines variances in direct material and labor costs, evaluates the company's profitability against its budgeted income, and explores reasons behind discrepancies. The analysis also delves into cost control methods and suggests recommendations for improving efficiency and profitability.

MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
QUESTION 1...................................................................................................................................3
1.1 Segregation of expenditures.............................................................................................3
QUESTION 2...................................................................................................................................4
Calculating total as well as unit cost of production................................................................4
QUESTION 3...................................................................................................................................5
Inventory or stock method for costing....................................................................................5
1. FIFO...................................................................................................................................6
2. LIFO...................................................................................................................................6
3. Weighted Average Method.................................................................................................7
Cost of goods sold for the month ending January for three stock valuation methods............8
QUESTION 4...................................................................................................................................9
Analysis of financial data such as cost...................................................................................9
QUESTION 5.................................................................................................................................11
A) Key performance indicators to measure and analyse business performance..................11
B) Ways to reduce cost and improve quality........................................................................14
QUESTION 6.................................................................................................................................14
A) and B) Budget along with its importance for firm..........................................................14
C) Methods or ways to prepare budget.................................................................................15
QUESTION 7.................................................................................................................................16
Preparation of different budgets for three months................................................................16
QUESTION 8.................................................................................................................................19
Preparation of cash budget in order to take decision............................................................19
QUESTION 9.................................................................................................................................19
A) Budgeted profit ...............................................................................................................19
B) Actual profit.....................................................................................................................20
C) Material and sub variances..............................................................................................21
D) Reconciliation Operating statement:-..............................................................................22
QUESTION 10...............................................................................................................................23
Report on budgetary for board of directors..........................................................................23

CONCLUSION..............................................................................................................................24
REFERENCES..............................................................................................................................25

INTRODUCTION
For every company it is compulsory to manage different financial and accounting data
and information to enhance its financial health. In the current case there is Smart Looks Limited
company is selected which is operating in the textile industry and produces cloths for different
retail firms. It shows about the classification of different kinds of expenditures which are
incurred for producing cloths. Apart from this, it describes about various methods for reduce
cost, enhance quality of products and assess business performance in the industry. Moreover, it
helps to analyse about importance of budget and various types of budget statements for the Smart
Looks company. At the last, report looks upon calculation of actual as well as budgeted and
standard profit.
QUESTION 1
1.1 Segregation of expenditures
A) Classification of cost:
In the business there are several kinds of costs and expenditures are occurred which
comes in different categories. In the current case the Smart Looks Limited is producing cloths
and for that number of costs are to be incur (Introduction to cost classification, 2017). Further,
various kinds of costs are comes under different types which are analysed as below:
 Fixed expenses: Those costs which are not changes and fluctuates as per the level of
production as well as outputs. In the business if there are units or cloths are reduced or
increase then fixed costs are not changes. In context to this, in the Smart looks there are
various fixed costs occurs which are like as salary to the supervisors of factory, rate of
the office and building as well as rent on the factory.

 Variable expenses: Apart from this, the costs which are varied and changes on the basis
of level of production and units. Further, if firm makes and produces 1000 units of cloths
previously and as of now it produces 1200 or 800 units then variable cost will be increase
or decrease respectively (Bowling, 2014). In the current case such kind of expenses are
like as material purchase amount, power used in sewing machine, packing expenses and
charges on telephone.
 Semi-variable expenses: The expenditures which are not fixed and not variable are
known as semi-variable costs. These are sometimes fixed and sometimes variable that
means in some cases changes as per the production level and in some case not varied. In
the smart looks company such type of costs are like as payment of the dealers and heating
charges of the factory and production process.
B) Other methods for classifying cost:
Apart from above mentioned various types of costs there are some other criterias also
used by the management. Furthermore, another methods to segregate costs are like as production,
prime, stepped fixed, stepped variable, direct and indirect, quality costs etc. The expenses which
are incurred in the production process as per the every phase and stage are known as stepped
expenses (Cheng and Roïz, 2015). Moreover, those cost which are directly as well as indirect
manner used are identified as direct and indirect which are such as direct material, labour, wages,
depreciation, insurance, tax etc.
Apart from this, there are several kinds if methods on the basis of which costs and
expenses are segregated and classified within the workplace of Smart Looks Limited. Other than
above discussed ways another are like as controllable and uncontrollable, normal and abnormal,
historical, production, service, predetermined, based on the functions like as IT, HR, finance,
marketing, operation, research and development, marketing etc. By considering such ways the
management easily able to classify and then analyse the expenses in appropriate manner.
QUESTION 2
Calculating total as well as unit cost of production
The management of Smart Looks Limited needs to take and compute cost of the total
production and units. For that different types of costs are necessary because on the basis of all
variable and fixed cost total expenses are to be calculated. For assessing cost of one unit total

cost as well as production level is requires. Furthermore, calculation of total and unit expenses
are shown as below:
Total cost of production:
From the above table it can be analysed that to produce total cloths and units such as
15000, 20000 and 25000 total expenses incur which are like as 215000, 270000 and 325000
respectively. For computing total cost there are variable expenses such as material and labour are
included (Coad, Jack and Kholeif, 2015). Further, by adding variable and fixed cost total
expenditures for producing such units is to be determined.
Unit cost of production:
The cost which shows that to make one unit how much amount or expenses incur is
called as unit cost. In the current scenario cost to produce one unit is calculated on the basis of
below mentioned formula:
Unit cost = Total cost of production / Total production
In the first case cost of one unit is worth of 14 GBP. Apart from this, in the second and
third scenario cost incur to produce a unit is worth of 14 GBP and 13 GBP respectively.
QUESTION 3
Inventory or stock method for costing
For valuing and analyse level of inventory or stock there are different methods and ways
are used by the company. In the current case for stock valuation there are LIFO, FIFO and
weighted average method is to be used which is shown as below:

1. FIFO
Stock at the end of month 15600 units
2. LIFO
Stock at the end of month 12400 units

3. Weighted Average Method
 FIFO: The method helps to the firm to sell stock at the first time as it comes into
consideration at the workplace. The name FIFO stands for the first in first out which is
the mostly used by the firms for assessing actual value of stock (Hammad, Jusoh and Yen
Nee Oon, 2010). In the Smart Looks company there are value of stock on the basis of
FIFO is 15600 units.
 LIFO: According to the last in first out method stock value of the Smart Looks company
is worth of 18200 GBP. At this stage total production level is 700 units at which cost of
every unit is incurred worth of 26 GBP. As per the respective method the firm sell last in
stock at the earlier due to this business entities less uses it. The value of inventory under
stated method is 12400 units.
 Weighted Average approach: It shows average value of LIFO and FIFO both the values.
According to this, level of the stock at the workplace of Smart Looks is worth of 15800
GBP at which average production is 667 units. Apart from this the ending stock or
inventory is 600 units because from the total 2000 units there are 1400 number of units

are sold. Moreover, as per this method closing stock of Smart Looks Limited is like
14220 units.
Cost of goods sold for the month ending January for three stock valuation methods

In the firm for producing different costs comes into consideration along with different
expenses incur to sell produce units as well. In the current case, in the month of January total
cost incur worth of 47400 GBP. In the month of January at different dates like as 1st, 18th and 25th
total costs are such as 10000, 19200 and 18200 respectively. At the all costs number of
production units and cloths are to be multiplied and then cost for selling goods will be determine
(van der Steen, 2011). On the basis of above analysed report of cost it can be said that total and
average cost of good sold is worth 47400 and 15800 GBP respectively. Hence, it can be said that
for selling total 2000 units total cost of goods sold is worth of 47400 GBP.
QUESTION 4
Analysis of financial data such as cost
Total variable costs:

15000 20000 25000
0
50000
100000
150000
200000
250000
300000
165000
220000
275000
Fixed costs:
15000 20000 25000
0
10000
20000
30000
40000
50000
60000
50000 50000 50000
Total cost of production:

15000 20000 25000
0
50000
100000
150000
200000
250000
300000
350000
215000
270000
325000
Interpretation
In order to produce various number of products and cloth different kinds of costs and
expenses incurred which are such as material, labour, variable and fixed (Islam and Hu, 2012).
Here total production units at different stages are such as 15000, 20000 and 25000 units. To
make such number of products total material and labour cost is worth of 300000 and 360000
GBP respectively. At the three levels of production total variable expenses are worth of 165000,
220000 and 275000 GBP respectively. Apart from this total fixed cost which incur to produce
such three kinds of production is worth of 50000 GBP at each stage. Furthermore, total cost of
production for 15000, 20000 and 25000 units is worth of 215000, 270000 and 325000
respectively.
QUESTION 5
A) Key performance indicators to measure and analyse business performance
When an organisation operating in the industry and market then it is very necessary to
analyse and measure performance of the business. On the basis of measuring business
performance company and management able to take decision for producing further production
and making effectual business strategies. There are various kinds of performance indicators are
used by Smart Looks limited business entity which highly helpful for it to assess business
performance. Key performance indicators are such as balanced scorecard, variance analysis,
benchmarking, quality, level of service, satisfaction level of the consumers etc. On the basis of

balanced scorecard management of Smart Looks firm is highly able to determine total four
perspective and aspects of the firm. Furthermore, such kinds of four perspectives analysed in
balanced scorecard are such as customer, financial, learning and growth as well as internal
business process (Burritt and et.al., 2011).
Apart from this on the basis of variance analysis management of Smart Looks can assess
performance of it in terms of various financial data such as material, labour, cost etc. by
comparing actual results with expected data. Further, when quality of fabric and cloths will be
higher, then customers will attract to purchase garments from it. By using quality of the products
and services also management of the Smart Looks can measure that in which direction company
performing. Moreover, profit level is also one of the key performance indicator which helps to
assess overall business performance as well as compare with competitors and industry average.
Customer experience:
Critical success factors:
1. Very basic factor regarding to the users is like quality of the garments and cloths because
it directly attracts to them.
2. Apart from this, other factor is physical evidence of the firm which lead to provide
comfort zone for held meeting to the customers or clients.
Key performance indicators:
1. The KPIs for measuring the business performance related to the customers experience are
like as use parameters of evaluating the quality of products as well as the stated evidences
must be highly attractive.
2. In the factor of physical evidence, this interior design of the company and store must be
of the modern and attractive.
Supplier and Product quality:
Critical success factors:
1. Highly strong compliance with the standards of the product and quality
2. Bonding with the suppliers in effectual manner which helps to provide high quality of
raw materials.

Key performance indicators:
1. KPIs are like availability of the unprocessed goods and raw materials on credit along with
higher quality.
2. Increasing customers through higher quality of the garments.
Operations efficiency:
Critical success factors:
1. CSF is providing training and development programs to the employees for utilising the
raw materials effectively.
2. Second CSF is reducing damaged products within operation department.
Key performance indicators:
1. KPIs is that, changes and increasing the efficiency.
2. Productivity of the production workforce as well as decline the total damaged products.
When level of wastage products and services decline that it is sign of enhancing its
efficiency within the textile industry.
Reducing maintenance spending:
Critical success factors:
1. To utilise the production equipments and machines in proper manner takes less
maintenance charges.
2. Check out within specific period of time is also one of the critical success factor for the
Smart Looks Limited firm.
Key performance indicators:
1. KPI for this factor is that enhance the life of equipments as well as machines in proper
ways and increase the productivity in proper manner.
2. Further, if production cost reduce then also it can be said that indirect cost like
maintenance are also decreased.

Cost reduction and profitability increase:
Critical success factors:
1. Reduce those activities which are unproductive and not generate any kind of revenue.
2. Adopting process of product re-engineering these are critical success factors for the firm.
Key performance indicators:
1. KPI is that, reduce the total cost of products and services.
2. Another KPI is increase sales as well as profitability ratios at the end of year. Hence, by
taking base of cost and profit performance of Smart Looks can be measure appropriately.
B) Ways to reduce cost and improve quality
In the firm level of costs and expenses increases in some case and at that situation it is
necessary to reduce an overcome costs. In this case, there are different type of methods are use
by the company which highly helpful to control over costs. By using risk management
techniques the firm able to manage costs which helps to make it more profitable. For improving
quality of the cloths the company needs to use high quality of fabric long with effective and
updated technology. On the basis of updated and new technologies it able to increase quality and
which lead to control costs. Furthermore, the company such as Smart Looks limited has to use
six sigma, just in time, lean production etc (Meira and et.al., 2010). On the basis of lean
production method wastage products which not help in efficiency of it. When the wastage
products and fabrics are reduces then more number of productions will be produce with same
raw materials. In context to this, six sigma is a method under which quality of products is take
cares and analysed. On the basis of such quality approach proportion of defective products
occurs is 0.06% behind 1000 units of products and services. When the company apply and use
six sigma approach at the workplace then it will highly able to reduce and eliminate the products
which occurs in terms of wastage.
QUESTION 6
A) and B) Budget along with its importance for firm
Budget is the statement prepared and used by the financial and accounts manager for
determine financial and business performance of Smart Looks Limited for the current as well as
future accounting periods. There are several types of budgets which describes different types of

data and informations which are related to cost, income, expenses, sales or turnover, production
level, units, direct labour expenses, fixed and overhead costs etc. Budget is one of the most
important method for assessing future and current financial data and performance. On the basis
of highly efficient and effective strategies and plans are to be made by the firm to make financial
health of it more strong (Adams and Drtina, 2010). The statement such as budget is to be made
and prepared by the Smart Looks by taking base to the past financial informations and
statements. There are budget is the most important and significant tool for the each and every
firm whether it operates in the clothing or textile industry or any other. Significance or
importance of the budget is explained as below:
 It helps to Smart Looks Limited in order to know that business will perform in the future
in increasing trend or decreasing.
 On the basis of assessing future trend it able to make strategies, techniques and plan for
the future to enhance its financial performance.
 Helps to manage overall business entity and process in proper way.
 By this, financial resources are to be allocated in adequate manner to the different
organisational functions like as IT, marketing, finance, production, research and
development etc.
 After completion of the month and year for which budget is prepared actual results are to
be compared with the estimated and forecasted data (Hecht, 2016). By which level of
business performance is to be determined.
 Moreover, budget is helpful for Smart Looks in order to utilize available resources in
optimum and effectual manner.
C) Methods or ways to prepare budget
When management of business entity going to prepare budget then there are various
types of techniques and methods are to be used by it. Different budgeting methods are stated as
below: Zero based budgeting: The budget which prepares without taking any kind of base is
known as zero based budgeting method. When the firm is going to make the budget
statement then it not uses past data which are analysed and occurred in the past year. In

this, context it can be said that any types of amount and data are not carry forward in the
current and future year. Further, it totally ignores past business performance and financial
statements (Horngren and et.al., 2010). Fixed budgeting method: Another kind of method to make and prepare budget is fixed
where some data are remains constant and not changes and fluctuates year by year. When
the manager of Smart Looks business use the fixed method then financial resources are
allocated same as past years. In this, capital amount always remain same and carry
forward year by years. It is very less used by the firms because of not providing effective
and proper budgeted data.
 Variable budgeting method: Furthermore, the method in which values of all the aspects
and data changes then prepared budget is known as variable method. By using the
variable budgeting Smart Looks able to make changes in the income and cost level. In
addition to this, sales, production level, output etc (Lambert and Sponem, 2012). are also
become change which is effective and beneficial for it. Hence, it helps to make the firm
more profitable within the industry at where it operating.
From the above analysed methods to prepare budget the best way is variable budget
which helps to the company such as Smart Looks to make effective decisions. Hence, it can be
suggested to the management of selected company that it should used variable budgeting method
for prepare budget statement.
QUESTION 7
Preparation of different budgets for three months
A)
B)

C)
Row Material Budget
April May June
Production in units 2,050 1,600 2,350
Material per unit 5 5 5
Production needs 10,250 8,000 11,750
Add desired end inventory 750 1,000 1,200
Total needed 11,000 9,000 12,950
Less beg inventory 500 750 1,000
Materials to be purchases 10,500 8,250 11,950
D)

E)

QUESTION 8
Preparation of cash budget in order to take decision
From the above stated budget it can be said that Smart Looks enterprise is not able to
generate better and appropriate income as compare to expenses due to which it incurs loss at the
month of April. Afterwards, net cash balance increase in the month of May and June and reaches
up to 27725 and 50837.5 GBP respectively (Arroyo, 2012). Overall performance of the is not
better due to having more amount of bank overdrafts.
QUESTION 9
A) Budgeted profit

B) Actual profit

C) Material and sub variances

D) Reconciliation Operating statement:-
From the overall production the company Smart Looks generate profit and loss from
direct material and labour respectively (Ward, 2012). Here actual profit generate by the firm is
worth of £35,140 whereas amount of budgeted income is worth of £47,500. In the current case

there are Smart Looks limited company is generating positive value and profit in terms of the
budgeted. Apart from this, in terms of the direct labour standard profit of Smart Looks is worth
of 90000 GBP which is low as compare to direct material. Furthermore, actual profit of the
Smart Looks firm is worth of 35140 GBP at the end of year.
On the basis of material variance the company Smart Looks is able to generate positive
return. Value of labour efficiency variance is worth of 8640 GBP (£95,040-84,400) which is
adverse situation for the firm and it shows that firm performing well in the industry.
From the above variances it has been found that Smart Looks business entity is highly
able to utilise the raw materials in proper and optimum manner. Due to this reason the material
variance is in the favourable situation. On the other hand side, because of not utilising the
available labour hours in appropriate and effectual manner such variances are in the adverse
condition. For this position the management of Smart Looks requires to utilise available labour
hours in proper ways within working environment.
The criteria which shows and describes that company is how much able to generate profit
after deducting all the operating expenses is identified as an operating statement. In the current
case performance of the Smart Looks Limited is good.
QUESTION 10
Report on budgetary for board of directors
To,
Board Of Director,
Smart Looks Limited,
Date: 7th April 2017.
The report describes about the business performance by comparing actual as well as
forecasted data. It can be found that company is performing well and profitable in the textile
industry because it able meet and grab the budgeted data which estimated in the budget. On the
basis of direct material variance the Smart Looks firm is in the favourable situation but in case
of direct labour it is in the adverse situation. In the current case study the company generates
actual profit worth of 35140 GBP which is lower than £47,500 as it was budgeted income. The
reason behind such condition is that management not able to do optimum utilisation of the raw
materials. Another accountable factor which lead to reduce the standard profit is related to the

cost control techniques and methods. At this position the company not adopts those strategies
which support to it in order to reduce total cost of production of cloths as well as garments. In
this cost responsibility centre plays very crucial role because it has ;the overall responsibilities
for managing and declining costing.
It can be recommended to the Smart Looks Limited company that, it should undertake and
apply cost control method which lead to decline the total costs. Along with this, the marketing
function requires to use effectual kind of advertisements which help to increase the users of its
garments. Moreover, the management needs to provide training to the employees and
specifically production staff by which they able to optimum utilise raw materials.
CONCLUSION
From the above analysed report of management accounting it can be summarized that
there are different kinds of costs incur to produce cloths in Smart Looks which are segregated
such as fixed, variable, semi-variable etc. It can be concluded that by using different types of
methods and approaches management is able to analyse performance as well as control cost and
enhance quality of the products such as garments. Furthermore, budget is highly important and
significant for the company to assess that what will be the financial situation of it in the future
FY. On the basis of cash budget overall performance of Smart Looks Limited is not well and
good. Moreover, it can be found that it able to utilize material in optimum and efficient way as
compare to labour.