Management Accounting Fundamentals

This assignment delves into fundamental management accounting principles. It requires students to calculate and interpret various financial ratios (like Days Sales Outstanding, Gross Profit Ratio, Inventory Turnover Ratio, and Current Ratio), understand the concept of responsibility centers, and apply basic cost analysis techniques.

MANAGING FINANCIAL
PRINCIPLES AND TECNQUES

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
1.1 Sources of finance available to business..........................................................................1
1.2 Various methods of generating income for large chain restaurant...................................3
TASK 2............................................................................................................................................5
2.1 Elements of cost, gross profit and selling price of the products and services..................5
2.2 Evaluation of controlling cash and stock in the business.................................................6
TASK 3..........................................................................................................................................11
3.3 Process and purpose of budgetary control .....................................................................11
3.4 Analysis of budget variance...........................................................................................13
TASK 4..........................................................................................................................................15
3.1 Assessment of source and structure of trial balance.......................................................15
3.2 Adjustments in financial statements...............................................................................15
4.1 Ratio analysis..................................................................................................................18
4.2 Management report........................................................................................................20
TASK 5..........................................................................................................................................20
5.1 Category of costs............................................................................................................20
5.2 Computation of break even analysis on various alternatives.........................................21
5.3 Selection of alternative...................................................................................................23
CONCLUSION .............................................................................................................................24
REFERENCES..............................................................................................................................25

INTRODUCTION
Finance is a vital factor for the growth of any organization. If, there will be lack of
finance then, it will be difficult to perform operations in a proper manner. In the report, sources
of finance are discussed in detail. Along with this, various methods of generating income are also
explained for the restaurant business. After that, stock and cash control techniques are also
explained in detail in the report. In the middle part of report, ratio analysis is done and its results
are interpreted in a proper manner. At the end of report, break even analysis is done and the best
alternative is selected for the firm.
(Good)

1.1 Sources of finance available to business
External source of finance Equity- This is commonly available source of finance to the business firms. For this,
companies need to fulfill some of the criteria that are laid down by the regulatory
authorities. Hence, business firms can resort to this source of finance if they are eligible
to get listed in the primary market.
Advantage- The main advantage of this source of finance is that finance cost is adjustable
in nature.
Disadvantage- The main disadvantage is that control of existing shareholders gets diluted
in the firm. Debt- This is another source of finance that is used by the business firms. Companies can
finance their funds requirements by taking loan at cheaper rate (De Mooij, 2012). Hence,
this can also be used to finance the business operations.
Advantage- The main advantage of debt is that control of existing shareholders does not
get diluted in the firm.
Disadvantage- The main disadvantage is that finance cost may elevate if loan is taken at
the flexible interest rate. Debentures- It is a written acknowledgment of debt taken by the company from the
general public. In return firm pay an interest amount at the end of the year at a fixed rate.
On maturity firm is liable to pay principle amount. If it failed to do so then debenture
holders have a right sue firm for nonpayment of principle amount on time.
Advantage- The main advantage of debenture is that control of existing shareholders does
not get diluted in the firm (Baldvinsdottir, Mitchell and Norreklit, 2010). Apart from this rate of
interest is lower than divided rate. Hence, firm finance cost remain low in case of debentures.
Disadvantage- The main disadvantage of debenture is that debt burden on the firm
increases and in case of downturn in economy firm may face problem in paying its principal
amount to the debenture holders. If this happens then debenture holders may file a case against
firm and this may tarnish image of the company among the important stakeholders. Venture capital- This is a variant of equity and in this source of finance, firms does not
need to get listed in the primary market.

Advantage- Under this source of finance the main advantage is that, private firm makes
an investment in the client company and in return, gets a shareholding in the client firm.
Disadvantage- The main disadvantage is that control of existing shareholders gets diluted
in the firm. Thus, companies can also use this source of finance.
 Loan syndication- This is a finance source in which debt is specifically taken for doing
international transaction. This loan is allocated by the more than one bank. These banks
create a group and fulfill fund requirements of the firms.
Advantage- The main advantage of this source of finance is that huge fund can be finance
through multiple banks. Hence, it is easy to get a loan amount (Bamber, Jiang. and Wang, I
2010).
Disadvantage- Lots of paper formalities are needed to raise fund through loan
syndication due to which huge time of the firm is spent for taking a loan.
 Consortium finance- This is opposite of loan syndication and under this loan is given for
domestic transactions. This is the main reason due to which consortium finance is gaining
popularity in nations like USA. The advantage and disadvantage of consortium finance
and loan syndication are same (Burritt, Schaltegger and Zvezdov, 2011).
 Short term loan- This sort of debt is taken by the firms to fulfill their working capital
needs. These loans could be secured or unsecured in nature.
Advantage- The main benefit of short term loan is that by using same short term working
capital needs of the firm is satisfied.
Disadvantage- The main limitation is that banks sometimes demand security of some
assets and firm is not in position to do so. Hence, they need to resort to business friends for
taking a loan.
Internal source of finance
 Retained earnings- It is an amount that comes in existence after deducting all expenses
from the income. There is no cost of this source of finance.
Advantage- The main advantage of retained earnings is that there is no cost of this source
of finance. Hence, finance cost does not changed due to retained earnings.
Disadvantage- There is no disadvantage of retained earnings. (Good)

Selection of the sources of finance for the firm
In order to purchase machinery worth of 50,000 some of the sources of finance that firm
can select are short term loan, retained earnings and venture capital. The amount of investment is
not so big and due to this reason aforementioned sources of finance are selected for the firm. Out
of these three, short term loan is appropriate for the firm because entire amount cannot be
financed from retained earnings (Dyreng, Hanlon and Maydew, 2010). Venture capital can be
used but this source of finance only when firm is prepared to make an investment for long term.
Here there is no news about long term investment. Hence, short term loan is considered better for
the firm.
(Good)

Sources of finance for working capital and building
For meeting working capital needs firm can use retained earnings and short term loan as
well as overdraft facility. For working capital small amount is required and due to this reason
this source of finance is recommended for the firm (Garrison and et.al., 2010). On the other
hand, for making investment in building huge amount is required and for same firm can use long
term loan. Apart from this, none of source of finance is appropriate for the firm in respect to
investment in building.
(Good)

1.2 Various methods of generating income for large chain restaurant Sales- Sales is one of the important methods that are used to generate income. Without
generating sales, no business firm can survive in the market. In this regard, firms can
market their products in unique ways in order to attract customer attention towards their
products. There are no disadvantage of sales but the main advantage of this method of
revenue is that it regularly generate income for the firm (Gow, Ormazabal and Taylor,
2010). Giving a place for specific occasion- Restaurants can give a specific space for
conducting small parties like birthday parties etc in order to earn revenue (Knight, 2012).
Apart from sales, this will be another source of income for the restaurants and it is its
major advantage. There is no disadvantage of this source of income. The main advantage
of this method of generating income is that it additionally generates revenue for the
restaurant. The only disadvantage is that in order to organize these occasions in better
manner restaurant manager needs to make sure that all arrangements are done in proper
manner. If event will not be organized in better way than poor image of the restaurant
will be created among the clients. Hence, it is one of disadvantage of this method
generating income. Home delivery service- Restaurants can provide home delivery service to the people. In
large cities, people do not have lot of time to cook food at home. Even many times, they
do not have time to travel some distance to fetch food. In such situation, people will
prefer to avail facility of home delivery service (Grabski, Leech and Schmidt, 2011). Due
to this reason it becomes good source of income for the firm. There is no disadvantage of
this source of income. So, it can be said that this is also an important source of revenue
for the restaurants. Investment in securities- Restaurants can make an investment in the shares, bonds and
mutual funds in order to generate extra income for the business. Hence, this is source of
earning extra income for the business and it is also major advantage of this source of
income. The main disadvantage of this source of income generation is that if investment
is not done in proper manner then entire amount can be loose by the firm. Thus, firm
needs to make investment with full caution.

 Opening a bar- Restaurant can open a bar and can provide food and drink facility under
one roof. By doing so they can create their distinct image among the customers. The main
advantage of opening a bar is that every type of person will like to visit restaurant
because it is providing varied services to the customer's (Herman, 2011). The main
disadvantage of opening a bar will be that restaurant will need to make its service
management much stronger. If this will not be done then restaurant will not be able to
reap full advantage of opening a bar in its premises.
Summary of Task 1
Firm investment amount is not so big and due to this reason short term loan, retained
earnings and venture capital are assumed as appropriate source of finance for the firm. Due to
low amount of investment short term loan is suggested to the firm. There are many methods of
generating income and firm must consider advantages and disadvantages of each of them before
selecting an appropriate source of income generation.
(Good)

TASK 2
2.1 Elements of cost, gross profit and selling price of the products and services
Core elements of cost Material- It refers to anything that is purchased in order to manufacture goods and
services. These things are directly used in order to produce products at the workplace. Labor- These are those who work at the workplace in order to produce goods at the
facility. Labor also include those employees who are working at low level and provide
supplementary services to production and transportation of goods to the customer's. Cost- Elements of cost for Mark & Spencer are direct and indirect cost as well as fixed
and variable cost. Direct cost is those cost that are directly related to the production or
creation of service. Raw material purchase is the example of direct cost. On other hand,
indirect cost refers to the cost that is supplementary to supply of goods and services
(Bakan, 2012). Sales expenses are the best example of the indirect cost. These costs may
be fixed or variable in nature. Firms must try to reduce variable cost in order to earn more
profit on sales. Gross profit- Gross profit refers to the profit that remains after deducting direct expenses
from revenue. Due to this reason, its main components are sales and direct expenses. By
doing mentioned calculation, gross profit is computed by the managers.
 Sales price- Sales price is computed by adding all expenses. After doing same, specific
percentage is added to the cost in order to earn profit (Nussbaum, 2012). By doing same,
sales price is computed. Hence, expenses and mark up percentage are two components of
the sales price.
 Direct material- It is a materiel that is used for production. Hence, this cost is known as
direct material cost. Purchase of food items for preparing dishes is the direct material cost
for restaurant.
 Indirect material- It is a materiel that is not used in production process. Transportation
expenses for home delivery are the example of the indirect material cost.

 Direct labor- These are those labors that are directly involved in the production process.
Cost related to them is known as direct labor cost. Employees that are coking food in
restaurant are direct labors.
 Indirect labor- These are those labors that are not involved in the production process.
Cost related to them is known as indirect cost (Kaplan and Atkinson, 2015). Employees
that are engaged in transportation of goods are the indirect labors and cost related to them
is the indirect cost.
 Direct expenses-These are production related cost and thus formed cost of production for
the firm. Gas expenses are the best example of the direct expenses.
 Indirect expenses- It is an expense that is not related to production process. Due to this
reason it is known as indirect cost. Storage cost is an indirect expense for the firm.
 Fixed cost – It is a cost that never gets changed and remains fixed irrespective of
production of goods and services. If fresh investment is made then fixed cost of the firm
is increased. Investment in machines is best example of fixed cost (Lukka and Modell,
2010). Fixed cost cannot be controlled because their cost is fixed but by producing large
quantity their contribution to cost on per unit basis can be reduced to large extent.
 Variable cost- It is a cost that keeps on changing continuous and with increase in
production it reduced per unit. Purchase of raw material is the example of variable cost.
In order to control variable cost methods of generating economies of scale can be
employed. Like firm can purchase raw material in bulk and by doing so it will get a
discount which will lead to reduction in the purchase price of the raw material. Semi variable cost- It is a cost who’s some part remains fixed and some remains variable.
Company cannot alter fixed part of the cost but it can change the variable part of cost.
Firm is using other company’s machine in which for 8 hrs, firm needs to pay 1200 and
after that, if it makes use of machine then it will need to pay 300 per hour. Hence, cost of
use of machine is fixed and variable in nature.
(All is fine but explain Semi-Variable Cost)
2.2 Evaluation of controlling cash and stock in the business
Stock refers to the raw material that is stored in the firm for the production process. It
also refers to the goods that are produced by the firm and are not sold till the date to the
customer's.

Stages of stock Raw material – In the first stage raw material is purchased and it is kept at the specific
place as a stock. This raw material is further used for the production of goods at the
workplace. Processed raw material- when materials are processed they are passing through different
machines step by step. In this stage the processed raw material that is accumulated
considered as stock (Modell, 2010). Final goods- It refers to the stock of the final goods that comes in existence after
manufacture of the entire goods at the production facility. This is the final stage of the
stock.
Control of stock

 EOQ- In this technique by applying a specific formula, minimum quantity is determined
that needs to be purchased to produce specific amount of commodity. Due to this reason,
this method is widely used at the production place. Suppose firm decide that when raw
material units will come to 1000 it will place an order for raw material purchase then it
means that 1000 is an EOQ for the firm.
 Minimum quantity- By making use of old data, Mark & Spencer can determine
minimum quantity that needs to be purchased to produce specific amount of products at
the workplace (Davila, Epstein and Shelton, 2012). Thus, this technique is widely used in
the organization. Firm decide that it will purchase raw material when it will be reduced to
500 and it is a minimum limit. Hence, when raw material is above this limit firm place an
order for purchase of raw material. The main difference between minimum quantity and
EOQ is that in latter method minimum quantity is determined by using formula but in
Illustration 1: EOQ formula
(Source: Knight, 2012)

former method no formula is used for determining minimum required quantity. Firms
normally place an order when raw material reaches to minimum order quantity value. But
if due to some reason if failed to do so, then it place an order before raw material
available quantity is above minimum order quantity. In this way stock is controlled by
using both methods.
 Just in time- This is a method which is employed for stock control. In this method actual
requirement is estimated and accordingly order for purchase is placed. Due to this reason this
method is used by the firms. Firm stock is coming to end and firm immediately place an order
for purchase of 2000 units of raw material. It is an example of just in time method. This
technique is widely used in Japan because material is available to companies at short duration in
Japan.
 Recorder point (ROP) – This technique is employed for controlling manual as well as
visual environment (Parker, 2012). This is the main plus point due to which this method is
widely used by organizations at the production place. Firm set a limit of 500 units and when
stock will reach to this level firm will place an order for purchase of products.
 LIFO- LIFO means last in first out and it says that units that are produced at end must be
sold first so that its value does not deteriorate. Firm produce product three times and in first it
produce 500 units. In second and third stage it produce 600 and 700 units. Under LIFO firm will
sell 700 units first of all then it will sale 600 and 500 units.
 FIFO – This concept state that inventory of units that is produced first must be sold first.
Hence, inventory that remains at the end of a year is sod at the end of the year. Firm produce 500
and 700 units in first and second term. Under FIFO it will sale 500 units and then it will sale 700
units.
 ANTIPATORY- It is a method used to estimate inventory requirements that will be
required in future. Hence, this method is often used in the industry. RESPONSE- It is a system that is used to control stock when business situation gets
changed. With change in condition by using this system new inventory control targets are
determined. Firm review business conditions and demand in the market and accordingly it decide
that it will purchase 400 units (Vaivio and Sirén, 2010). After that it in next month again review
conditions and find out that demand is reduced. Hence, it purchases raw material units of 300. it
is a example of RESPONSE system.

Cash control techniques
Cash has due importance for the firm because transactions are completed in cash.
Without them, it is not possible to do business transactions in proper manner. Hence, cash has
very high importance to the business firms. In order to control cash, Mark & Spencer can follow
a cash management strategy under which it will centralize its payment system but will
decentralize its payment receipt system. This will reduce speed of cash outflow and will boost
cash inflow. Due to decentralization in payment receipt, system collection process of cheque will
be speed up. While, on the other hand, centralization of payment system will delay payment
through cheque to the creditors (Ward, 2012). Bank reconciliation is a technique that is used to
make sure that all entries that are done by the firm in its books of accounts are accurate and
matched to the firm bank statements. There is a cash outflow of the 20,000 in the firm books and
same in cash book is 22000. Manager will reconcile this mismatch by using invoice copies and
identify transaction which is not entered in to the firm books of accounts.
Bank reconciliation statement is a method that is used to ensure that all accounting entries
are done in accurate value in company’s books of accounts. If any difference between company’s
cash book and bank pass book is observed then managers identify the transactions in which
wrong value was entered. For this, all entries of pass book and cash book are matched with each
other and rectification is done on entry. Suppose, sales of 50,000 were made as per company
cash book but actual sale as per pass book is 51000, then this is the gap in values. After
identification of gap, entry in which 1000 amount is wrongly entered will be identified and
rectified by the manager.
(Explain Bank Statement Reconciliation with example)
Summary of Task 2
There are many types of costs and these costs can be controlled by using many
techniques of the economies of scale. By reducing the cost, firm can reduce its cost of
production. There are many stock control techniques and reorder point as well as EOQ method
are simple to apply in comparison to other stock control methods. In order to manager cash it is
necessary to use cash management strategies. By using these tactics cash can be used in most
appropriate way. Along with this bank reconciliation method is also important which is used to
make sure that accurate entries are made in the company books of accounts. Hence, it can be said
that firm by doing all these things can make its management better.

(Good)

TASK 3
3.3 Process and purpose of budgetary control
Process of budgetary control is as follows: Preparation of budget- In this stage, budget is prepared and in this regard, managers
evaluate certain budget preparation techniques. By selecting appropriate technique, a
budget is prepared and under this, allocation of amount is done among various expenses. Measurement of performance- In this stage, performance of the firm is measured in
monetary terms in specific unit (Dekker and et.al, 2013). These units may be currency
and KM or any other thing. After measurement of performance the next step is to
compare e same with the predetermined standards. Comparison with standard and taking corrective action- This is the last step in which
actual results are compared with standards and corrective actions are taken where
required. This is done to make sure that such mistakes will be never committed again.
Purpose of budget Cost control- In order to control cost, budget is prepared. Managers try to keep expenses
within the determined limit (Kim and et.al, 2010). Hence, cost control is the main
purpose behind preparing a budget.
 Employees’ motivation- Employees get a target to control expenses and due to this
reason, they get motivated to work hard. Hence, employee motivation is another main
objective of preparing a budget.
 Evaluation- By using budget performance of the firm is evaluated and it is determined
that firm give a good or poor performance. Hence, it is best way of evaluating a firm
performance.
a) Process of budgetary control:
 Communicating details of budget policy and guidelines to those people responsible
for the preparation of budgets- It is the stage in which top management provide
guidelines document to those who are responsible for preparing a budget. By following
these guidelines employees prepare a budget in proper manner.
 Determining the factors that restricts output and taking action to sort those out- In
this stage factors that are affecting company sales and production will be identified and
on that basis projections will be made,

 Preparation of the sales budget- after making projections sales budget will be prepared
and communicated to the managers.
 Initial preparation of various budgets- on the basis of approval of managers about
projection the budget value will be sub divided and various budgets will be prepared on
the basis of allocation.
 Negotiation of budgets with superiors- after preparing budget employees will discuss
same with the superiors and will make necessary changes in same.
 Coordination and review of budgets- finally budget will be reviewed and changes will
be made where needed.
 Final acceptance of budgets- In this last step budget will be finally accepted by the top
managers.
 Ongoing review of the budget- after preparation of budget same is implemented and in
order to make sure that all expenses are in line to determined values budget must be
reviewed. By doing so some of the necessary changes can be made in the budget with
change in business conditions.
Budgetary control cycle:
Budget control cycle is as follows: Responsibilities- In this stage of budgetary control responsibilities of each and every
employee’s will be determined which will be responsible for controlling all expenses that
are listed in the budget (What is a responsibility center, 2016). This help in ensuring that
firm will make all expenses within determined line. Action plan- In this stage of budget control an action plan is prepared which will be used
to keep all expenses below the determined values. The effective implementation of these
plans will help mangers in achieving their objectives. Adherence- In this stage, managers will be strictly adhere to the determined plan and will
implement same in the way which is determined in the above stage. Monitoring- In this step, performance of firm is monitored and actual performance is
compared with the determined standards in order to identify variance. Hence, it can be
said that this step is very important for the firm.

 Correction- This is very important step in which corrective actions are prepared by the
managers after doing due discussion with subordinates (Zimmerman. and Yahya-Zadeh,
2011). Thus, it is decisive step in the budget control process.
 Approval and variance- In this stage, corrective actions are sent to the top management
for approval along with details of positive and negative variance. If managers pass these
corrective actions then same are implemented in order to make sure that variance will not
again come in existence at the workplace.
(Good)

3.4 Analysis of budget variance
Table 1: Comparison of budgeted performance with actual performance
Budgeted Actual Variance
Units sold 100000 75000 -25000
Material 15000 22500 -7500
Direct labor 22500 24375 -1875
Table 2: Variance of direct material and labor
Material labor
Price/rate variance -4500 3750
Usage/ efficiency variance -3000 -5625
Total variance -7500 -1875
Units sold variance
Due to low sale of the units, expected variance is negative. Due to higher unemployment
and inflation rate, people have low savings and due to this reason, firm is failed to make target
sales.
Labour rate variance- It is variance that compares actual rate at which labours are paid and
budgeted rate at which firm intends to pay to its workforce. Labour rate variance is
negative and it means that labours are employed at the higher wage rate then the rate
that was earlier determined in the budget. In order to make sure that such variance will
not comes in existence firm can make accurate estimate of the labour rates that will be
needed to pay to them in order to retain them at the production place.
Labour efficiency- It is a variance that is used to check whether firm is efficiently using its
employees at the workplace for production. Labour variance is negative and this means
that Yuri overuses labor for the production of goods and services. This happened
because firm make an accurate estimation about the labors that are required to produce
target units. Hence, firms must review its past production units and number of labours it
employed earlier. On that basis it will be able to keep its labor efficiency within budget.

Material price- It is a variance that indicate that firm buy raw material at a higher or lower price
relative to the price at which firm intends to purchase raw material. This variance for
material is negative and this means that materials are purchased at higher price then
budgeted. Due to lack demand and slowdown in economy, price for material gets
increased. Firm can purchase material in bulk in order to keep cost in control
Material usage- This variance is used to identify that firm use material with determined budget
or not. Negative variance indicates that firm excessively use materials for the
manufacturing of goods and services. Firm can evaluate its earlier production numbers
and material used for manufacturing same. On the basis of evaluation firm will be able
to make accurate estimate and variance will not comes in existence.
Sales Volume- It is a variance that indicate the actual sales that firm made relative to budgeted
sales. The sales volume is negative because firm make an overestimation of the sales.
Hence, firm can do demand analysis and forecasting by using reliable techniques.
Sales Price- This variance indicates the actual sales price and budgeted sales price. Here price in
the budget and actual are same. Hence, there is no issue on sales price of the product.
(Good)

TASK 4
3.1 Assessment of source and structure of trial balance
Information for trial balance is taken from the ledger account. It is a statement in which
different accounts are prepared related to the personal and real account (Davies and Crawford,
2011). By taking final balance of the ledger accounts, a trial balance is prepared. It is trial
balance by using which final statements are prepared. These statements are used for final
decisions making by the managers. In trial balance there are two sides one is debit and other is
credit and balance of both sides remain same. Hence, in this accounts are verified.
3.2 Adjustments in financial statements
Table 3: P&L statement of R.riggs
Particulars
Sales 157165
Illustration 2: Format of trial balance
(Source: Davies and Crawford, 2011)

Less Cost of goods sold: 94520
Gross profit 62645
Discounts received 160
Interest received 50
GP 62855
Less Expenses:
Wages and salaries 31740
Rent 3170
Discounts allowed 820
Van running costs 687
Bad debts 730
Doubtful debt provision 91
Depreciation 1630
Accrued expenses 200
Net Profit 23787
Table 4: Balance sheet of Riggs
Fixed assets
Office furniture & Van 7175
Less depreciation 1630
5545
Current Assets
Stock 2400
Debtors 12316
Less provision for doubtful debts 496
11820
Prepaid expenses 230
Cash at bank & hand 4274
18724

Total Assets 24269
Current liabilities
Creditors 5770
Accruals 412
6182
Financed by:
Capital 11400
Add net profit 23787
Less drawings 17100
18087
24269
By following adjustments, changes are done in the given financial statements. Following
are the entries for the given business transactions:
Adjustment entries
Furniture A/C 525
To Mr X 525
Cash A/C 50 (Interest was received in the bank)
To interest 50
Accrued expenses A/C 200
To cash 200
Impact of entries on assets, liability and profit
 Furniture- With the purchase of furniture assets, cost of the firm is increased and due to
this reason, asset side of the relevant financial statement gets increased by 525. On the
other hand, transaction does not affect liability side of balance sheet. There was no
impact on profit of the mentioned firm.

 Interest- Due to receipt of interest, cash amount increases in the balance sheet. There was
no change in the liability side of balance sheet. Interest amount is also shown in income
statement and as a result, net profit gets increased by 50.
 Accrued expenses- Accrued expenses of 200 are shown in the balance sheet and due to
this reason; liability of the firm gets increased. Accrued expenses are also included in
income statement. On the other hand, net profit gets increased by 200. Hence, profit and
liability of the firm both get increased.
(Good)

4.1 Ratio analysis
 Gross margin ratio- This ratio reflects the proportion of the sales covered by the gross
profit (Gross margin ratio. 2015). This ratio also indicates the firm capability to control direct
expenses. Gross profit ratio of the R. Riggs is 39.86% and this reflects that firm is earning good
gross profit on sales.
 Net profit ratio- Net profit ratio indicate the firm capability to control indirect expenses.
It also reflects the firm capability to control indirect expenses. Net profit ratio of R. Riggs is
15.23% and this indicate that firm is earning good amount of net profit on sales.
Interpretation
 Current ratio- current ratio of R. Riggs is 4.22 and this reflects that for every one pound
of current liability there is a 4.22 pound of current assets. This reflects that liquidity position of
R. Riggs is good.
 Liquid ratio- This ratio gives more clear view of the firm liquidity (Lima, McAloon and
Boateng, 2008). This ratio is 3.75 and this indicates that there is a small proportion of prepaid
expenses and stock in the R. Riggs current assets. Results are indicating that firm is performing
well and have good liquidity position.

Interpretation
Debtor collection period indicate the time period within which firm is recovering debt
amount from its debtors. On the other hand, creditor collection period reflects the time period in
which firm is giving payment to its creditors. Debtor collection period is higher then creditor
collection period which is not good and R. Riggs needs to reduce this gap.
Table 5: Ratios of R.Riggs
COGS 94520
Inventory 2400
Inventory turnover ratio 39.38
Debt 5245
Equity 11400
Debt equity ratio 0.46
Net income 23937
Total assets 5020
ROA 4.77
Interpretations

 Inventory turnover ratio- Inventory turnover ratio indicate the number of times stock
turn in to sales (Inventory turnover ratio. 2016). Stock of the firm is converting 39 times
in to sales and it can be said that firm give a better performance.
 Debt equity ratio- It indicate the capital structure of R.Riggs and its value is 0.46. this
means that for every one pound of equity there is a 0.46 pound of debt. Hence, it can be
said that firm is good position and proportion of debt is low in the balance sheet.
 ROA- It is also known as return on asset ratio and its value is 4.77. This is good value of
the ratio and it can be said that firm is giving good performance.
(Good)

4.2 Management report
To
The directors
Date- 10th February 2016
On analysis of figures it is find out that R. Riggs position on current and liquidity ratio is
good. Its performance on gross and net profit ratio is also good. But there is a gap between
debtor and creditor receivable days. Firm is paying to its creditors in short duration but
receiving cash from debtors in long time period. This may negatively affect firm financial
position. Hence, here R. Riggs needs to work out and under this it can follow a cash
management strategy. In this tactics firm will make all payments by cheque. This will delay
cash reduction in the bank account for some time period. It can decentralize its payment receipt
system in order to reduce debtor collection period. By doing so the gap between debtor and
creditor days can be adjusted easily by the R. Riggs.
(Good)

TASK 5
5.1 Category of costs
Following are the categories in which costs are divided.
 Fixed cost – Fixed cost refers to the cost that never gets changed during lifetime of the
firm. In order to reduce fixed cost proportion in cost of production firm can increase its
production (Shepherd, 2015). With increase in number of units proportion of fixed cost per unit
will be reduced to large extent. Hence, firm earning per unit will increased. Purchase of building
is an example of fixed cost.
 Variable cost – It is a cost that keeps on changing steadily. In order to reduce cost of
production firm can generate economies of scale. By doing so company can reduce variable cost.
Ultimately, cost of production for the firm will decline. This will lead to elevation in the
company profitability. Purchase of raw material is the best example of variable cost.
 Semi variable cost – Semi variable cost refers to the cost whose some part remain fixed
and some remain variable (Shephard, 2012). Company can focus on reducing its variable cost.
By doing same profitability can be increased to some extent by the firm. On a machine up to
certain limit, fixed amount is charged and after that, at a specific rate, cost is determined. Hence,
it is an example of fixed and variable cost. (Give examples of each source)

5.2 Computation of break even analysis on various alternatives
Number of units required to sell for achieving desired profit:
Desired profit = (Fixed cost + desired profit) / Contribution
Desired profit = (300000 + 20000) / 1 = 50000 units
Interpretation- In this case firm sales price decline by 10% and it is the reason due which
contribution is just 1. In order to identify number of units required to earn a profit of 20,000
50,000 units needs to be produced. This is computed by applying a formula which is fixed cost
plus desired profit divided by the contribution.

Desired profit = (Fixed cost + desired profit) / Contribution
Desired profit = (30000 + 20000) / 3 = 16667 units
Interpretation- In this case, sales price plunged by 10% and due to this reason sales
price become 11 per unit. If compared with above case then it can be seen that price of the
product get increased. Due to increase in sales price contribution also elevated to 3. By applying
a formula it is identified that firm needs to produce 16,667 units in order to earn profit of 20,000.
In comparison to above case due to increase in sales price firm needs to produce less quantity of
goods at its workplace.
Interpretation
In this case, sales price is not changed and instead of this variable cost of the firm is
increased by the specific percentage. As a result, contribution is one and firm needs to sale more
units in order to earn profit of 20,000. By applying a formula it is identified that company needs
to sale 1,00,000 units in order to achieve a target. This is a huge target and hence option is not
viable for the firm.
5.3 Selection of alternative
Break even analysis indicate the point where there is no profit no loss. This level indicate
a point beyond which if sales gone firm will start earning profit. On the basis of analysis of all
options it is find out that first option is best for an organization because sales price is reduced in

this option. Due to fall in price sales target can be achieved. In the second option sales price is
increased which may send negative message among target customer's. It become difficult to
achieve a target. Third option is not viable and it is reflect by the 1,00,000 units. Hence, first
option is selected for the firm.
CONCLUSION
On the basis of above discussion it is concluded that firms must select an appropriate
source of finance in order to finance their projects. Selection of wrong project may increase
finance cost for the firm. Which ultimately will lead to reduction in profitability. It is also
concluded that firms must try to identify ways that can be adopted in order to generate
economies of scale. If same will be done then cost of production will fall and firm will earn a
good profit. Techniques like break even analysis must be used widely in order to take sound
business decisions.
(Good)

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