Accounting Financial Analysis Report - Module ABC - University Name

This report provides a comprehensive analysis of accounting and financial analysis, divided into two key parts. Part A focuses on cost accounting, exploring different methods for calculating product or service costs, including traditional and activity-based costing (ABC), with practical examples of cost calculations using absorption and marginal costing techniques. Part B shifts to the financial analysis of Severn Trent Plc, a water and waste management company, calculating and interpreting key financial ratios to assess its performance. The report delves into the strengths and weaknesses of various costing methods, concluding that ABC is the most appropriate for complex manufacturing environments. It highlights the importance of accurate cost allocation and the insights gained from financial ratio analysis for effective decision-making.

Running head: ACCOUNTING FINANCIAL ANALYSIS
Accounting Financial Analysis
Name of the Student:
Name of the University:
Author’s Note

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ACCOUNTING FINANCIAL ANALYSIS
Executive Summary
The assignment is divided into two parts which is Part A and Part B. The first part of the
assignment deals with the concepts of cost accounting. The first part deals with how to calculate
a cost for a product or service and what are the applicable methods which a business can apply
for the same. The second past of the assignment will be analyzing the financial position of a
company. The company which is selected for this assignment is Severn Trent Plc which is
engaged in management of water and also waste management. This part will also be calculating
significant ratios of the business which shows financial performance of the company and analyze
the same. The second part of this assessment will be analyzing the significant ratios which are
calculated in the assessment.

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Table of Contents
Assessment A...................................................................................................................................3
Introduction..................................................................................................................................3
Traditional Vs Activity Based Costing........................................................................................3
Methods Used for Calculating Cost of a Product........................................................................4
Examples of Cost Calculation.....................................................................................................5
Findings.......................................................................................................................................7
Reference.........................................................................................................................................8

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ACCOUNTING FINANCIAL ANALYSIS
Assessment A
Introduction
Management Accounting may be defined as the process by which the managers of the
company uses the financial information of the business for the purpose of taking important
decisions by analyzing the same. Management accounting also deals with allocations of costs
and the costs which are incurred by the business. With the overall development of the business
environment, methods which are used in management accounting has also developed (Laitinen
2014).
With the introduction of Activity Based Costing system, the process of recognizing costs
and allocation of the same became a lot efficient (Hilton and Platt 2013). Most of the companies
nowadays are using Activity based costing techniques for measuring and allocation of the costs
of the business. However, there are still certain companies which uses Traditional system of
costing accounting.
Traditional Vs Activity Based Costing
Traditional costing techniques considers an average overhead rate which is for the
manufacture of the product. The overhead rate is the applied on the basis of cost drivers which
can be labour hours which are required to make the product (MITCHELL and NØRREKLIT
2017). The technique is very useful for business which have a low overhead cost as compared to
the direct cost which accrue to the production. Another major consideration of traditional costing
technique is that traditional costing system is inexpensive to implement (DRURY 2013). In
addition to this, the reports which are generated prepared following such a system of costing are
easier and simpler to understand for any external party.

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ACCOUNTING FINANCIAL ANALYSIS
The major limitation which the method faces is that the method does not give an accurate
picture of the cost to the business which is mainly due to the allocation of the overhead costs.
Overheads cost are not allocated to the product for which the overhead activities have actually
been incurred.
On the other hand, Activity Based Costing specializes in identification of overhead costs
which are associated with the manufacture of goods. The method fills in the gap of traditional
costing and gives the management an accurate view of the costs which the business has incurred
on the product and in addition to this, it segregates costs on the basis of different activities which
are undertaken by the business. The major difference between ABC model and traditional
costing is that the former pools the indirect costs on the basis of activities which can be allocated
to manufacture of specific products whereas the latter pools the indirect costs of the business and
simply allocate the same universally to all the products.
Though the application of ABC model provides an accurate picture of the costs of the
business, the cost which is related to implementation is high. In addition to this, it is considered
to be a bit complex to understand. The decision regarding whether to go for traditional method of
costing or ABC model of costing depends on the nature of the business and activities which are
carried out in the manufacturing process. However, Traditional method of costing is becoming
obsolete as the users demand more accurate presentation of the cost structure of the business.
Methods Used for Calculating Cost of a Product
The methods which can be used for measuring cost of a product can depend on the nature
of business, nature of the product and the policies which are followed by the management. The

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ACCOUNTING FINANCIAL ANALYSIS
methods which are used for the purpose of ascertaining the costs which are related to the product
are discussed below:
1. Traditional System: As explained above, the management can use traditional system
which treats material costs and labour costs similarly to ABC costing, but the overhead
costs are identified to a cost driver which may be labour hours and allocated on the basis
of the same. The method is not known to provide an accurate picture of cost which is
associated with the product (Fullerton, Kennedy and Widener 2013).
2. Activity Based Costing: This system treats the overhead costs on the basis of the
activities which are carried out by the business and the costs are allocated to specific
products. The method is known to provide an accurate view of the costs which are
associated with the business.
3. Marginal Costing: In case of marginal costing techniques only the variable costs of the
business are considered as a part of the cost of the product and the fixed costs are written
off (Fisher and Krumwiede 2015).
4. Absorption Costing: In the case of Absorption costing both fixed costs and variable costs
are considered to be a part of the products cost.
Examples of Cost Calculation
Absorption Costing

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Particulars Jan Feb Mar Apr May June
Variable Cost per Unit £6 £6 £6 £6 £6 £6
Production Units 150000 150000 150000 150000 170000 140000
Variable Cost £9,00,000 £9,00,000 £9,00,000 £9,00,000 £10,20,000 £8,40,000
Fixed Manufacturing Cost £3,00,000 £3,00,000 £3,00,000 £3,00,000 £3,00,000 £3,00,000
Total Cost £12,00,000 £12,00,000 £12,00,000 £12,00,000 £13,20,000 £11,40,000
Product Cost per Unit £8.00 £8.00 £8.00 £8.00 £7.76 £8.14
Units Sold 150000 120000 180000 150000 140000 160000
Closing Units 0 30000 0 0 30000 0
Value of Closing Inventory £0 £2,40,000 £0 £0 £2,32,941 £0
Product Cost per Unit under Absorption Costing:
As per the table which shows the product cost computation considering the absorption
costing techniques. The cost of the products which are taken above are on the basis of
assumption. The variable cost of the product is shown to be $ 6 per unit and number of units for
the first four months is considered to be 15000 units. The total cost of production is shown to be
for the product is $ 12,00,000 for the first four months and then in month of May the cost
increases. Thee product cost per unit is shown to be $ 8 per unit for the first four months and
then it is $ 7.76 per unit in month of May due to the increase of production.
Marginal Costing
Particulars Jan Feb Mar Apr May June
Variable Cost per Unit £6 £6 £6 £6 £6 £6
Product Cost per Unit under Marginal Costing:

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ACCOUNTING FINANCIAL ANALYSIS
The above table shows product cost under marginal costing which only considers the
variable costs as the part of the cost of product. The variable cost per unit is shown as $ 6 per
unit for the products.
Findings
The above discussions make it clear that the absorption and ABC model of costing is
better than marginal and traditional method of costing. The most appropriate method for
allocating costs in a business where there are a variety of products manufactured. The ABC
method of costing is identified to be the best practice which a business can apply for measuring
and recording the costs.

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Reference
DRURY, C.M., 2013. Management and cost accounting. Springer.
Fisher, J.G. and Krumwiede, K., 2015. Product costing systems: finding the right
approach. Journal of Corporate Accounting & Finance, 26(4), pp.13-21.
Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2013. Management accounting and control
practices in a lean manufacturing environment. Accounting, Organizations and Society, 38(1),
pp.50-71.
Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic
business environment. McGraw-Hill Education.
Laitinen, E.K., 2014. Influence of cost accounting change on performance of manufacturing
firms. Advances in Accounting, 30(1), pp.230-240.
MITCHELL, F. and NØRREKLIT, H., 2017. Introduction. In A Philosophy of Management
Accounting (pp. 15-34). Routledge.