Accounting for Business Decision-Making for Strategic Planning

This report provides a comprehensive analysis of accounting techniques for business decision-making. It begins with financial statement analysis, including ratio calculations and qualitative factors to enhance business performance. The report then delves into cost-volume-profit (CVP) analysis, calculating the break-even point in dollar sales and units, and assessing the impact of product decisions on profitability. Short-term decision-making is explored through the evaluation of closing divisions, considering both quantitative and qualitative factors. Finally, the report examines standard costing and variance analysis, evaluating direct material and labor variances to assess overall performance and inform future decisions. The report concludes with recommendations based on the analyses conducted.

Accounting for business
decision-making
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Table of Contents
INTRODUCTION................................................................................................................................3
TASK 1 FINANCIAL STATEMENT ANALYSIS...............................................................................3
A. Calculation of ratios....................................................................................................................3
B. Qualitative information for enhancing business performance....................................................4
TASK 2 COS-VOLUME-PROFIT ANALYSIS...................................................................................4
(A). Calculation of break-even point in dollar sales........................................................................4
(B). (i) Calculation of break-even point in units for each product..................................................5
(ii) Calculation of overall profit of a company at BEP sales...........................................................6
(iii) Calculation of overall profit or sales at drop the Velcro and Metal products...........................6
(iv) Preparation of segmented income statement.............................................................................7
TASK 3 SHORT-TERM DECISION MAKING..................................................................................7
(A) Closing divisions decisions of Tiles..........................................................................................7
(B). Qualitative factors required for decision-making purpose.......................................................8
(C). Impact of Tile’s shut down decisions on Blocks and Brick’s sales..........................................8
TASK 4 STANDARD COSTING AND VARIANCE ANALYSIS......................................................9
(A) Direct material variance............................................................................................................9
(B) Direct labour variance.............................................................................................................10
(C) Actual cost of client application..............................................................................................10
(D) Analysis of the variance..........................................................................................................10
(E) Should the fertiliser services must be continue or not.............................................................10
CONCLUSION...................................................................................................................................11
REFERENCES...................................................................................................................................12
APPENDIX........................................................................................................................................13
Appendix: 1. Ratio analysis...........................................................................................................13
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INTRODUCTION
Over the years, globalization increased the volatility and uncertainties in the external
market, as now-a-days, firms are operate at international level which rises up the level of
competition. In the corporations, top-managers have power and authority to devise different plans,
strategies and policies in relation with proper and effective management of regular functioning.
They use distinguish financial techniques and tools for making viable decisions like costing,
budgeting, ratio analysis for the strategic financial evaluation, variance analysis and so forth. This
report is prepared to guide that how different tools can be used to construct smarter plans and
strategies for maximizing business performance and financial status.
TASK 1 FINANCIAL STATEMENT ANALYSIS
A. Calculation of ratios
Ratio evaluation technique is the most often used way to analyze various aspects of
company’s performance and financial position i.e. efficiency, solvency, liquidity and so on. It is a
quantitative analysis method that is helpful to evaluate the relationship in various components of the
financial statements; income statement and balance sheet as well.
Profitability ratios: This ratio provides a quick indication to the mangers about the
effectiveness of corporate functioning denoting that whether Senkyo Sdn Bhd has generated
positive return or not on their sales. In 2015, GP an NP ratio dropped down to 48.73% and 11.83%
shows that company needs to make cost-control and revenue maximization decisions through
marketing, quality assurance techniques and others to improve net return (Jami and Bahar, 2016).
ROSF and ROCE also came down to 30.93% & 18.77% which depicts that Senkyo Sdn. Bhd.
generated less return on shareholder equity & total capital employed.
Liquidity ratios: In 2015, Senkyo Sdn. Bhd’s CR and QR goes up to 5.50 & 1.26 times,
although improved ratio is good, still, CR exceed the standard of 2.00 which is a sign of ineffective
utilization of resources. However, quick ratio is around target of 1.00 to 1.26 due to very high
inventory balance, therefore, company’s manager needs to create decisions in relation with the
optimum resource utilization (Goldmann, 2017).
Efficiency ratios: Stock turnover ratio declined to 0.93, as a result, inventory holding days
goes up to 391.07 which is a poor sign and reflects slow movement of stock into sales. However,
receivable turnover ratio goes declined to 14.20 which in turn increase collection days from 16.21
to 25.70 indicates slow collection from debtors which affect cash management strategies in an
adverse manner. Similarly, non-current assets turnover ratio came down from 6.76 to 5.07 times
reflects ineffective use of assets (Chiaramonte and Casu, 2016). Firm must make strategic decisions
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for enhancing the resource utilization efficiency for the growth and success.
Solvency ratios: Debt to equity ratio came down from 1.65 to 1.86 because firm repaid their
shareholders fund to a great extent in comparison to the repayment of long-term borrowings. It
indicates higher risk because of heavy debt uses and also it goes beyond the industrial standard of
0.50:1. Hence, first must minimize their debt use and maximize equity source for the effective
capital structure decisions (Ratio analysis, 2016).
B. Qualitative information for enhancing business performance
Ratio analysis only helps to analyze quantitative information, however, corporations like
Senkyo Sdn Bhd also needs to evaluate their qualitative performance in order to make viable
decisions for the growth & success. In such regards, following information is helpful for taking
better decisions, mentioned below:
Customer satisfaction: Senkyo Sdn Bhd can examine the satisfaction level of their clients.
It can be evaluated using customer compliant rate, satisfaction score and so on. Rising satisfaction
of the customers is a good sign of delivery of quality services whereas ineffective services indicate
negative performance (Yoke Mui, Ahmad and Nabavi, 2016).
Technological advancement: Using latest, new and upgraded technologies maximize
competitive strength of the business. Therefore, business needs to make growth plans and strategies
using latest techniques.
Employee satisfaction: Satisfied workers works at a high level of efficiency and serve top-
quality services to the customers. It is because; they are extremely motivated, inspired and
encouraged to give superior quality goods & services to the public.
Environmental performance: Senkyo offer their services in the society, therefore, it is a
social responsibility of the firm to minimize environmental hazards, like wastage and emission of
harmful gases by following environmental policies, standards and rules.
TASK 2 COST-VOLUME-PROFIT ANALYSIS
(A). Calculation of break-even point in dollar sales
Cost volume profit (CVP) analysis is a tool of marginal costing which is used to examine the
cost and profit relationship at different sales volume. Break-even point is the critical and most
important aspect of CVP technique that is helpful to determine that level at where sales becomes
equal to the cost at nil return (Bergo and et.al., 2016). In accordance with the stated scenario, Linen
Fasterners Sdn Bhd prepares three kinds of clothing fasteners, Velcro, Metal and Nylon in Klang at
different selling prices and variable cost. It is essential for the firm to identify the total sales volume
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at where its total generated revenues from the three items becomes equal to the amount of
expenditures incurred (Santos Almada, de Souza and Laia, 2016).
Break-even point (BEP) (In dollar) = Total Fixed cost/Profit volume ratio (PVR)
PVR/Contribution to sales ratio = Total contribution/total sales*100
Contribution = Total sales – Total variable cost
Velcro Metal Nylon Total
Sales (selling price * sales units) 165000 300000 340000 805000
Variable cost (Variable cost per
unit*total units) 125000 140000 100000 365000
Contribution (sales-variable cost) 40000 160000 240000 440000
PVR = 440,000/805,000*100
PVR = 54.66%
Calculation of Break-even point (BEP)
Total fixed cost (TFC) 400,000
PVR 54.66%
BEP ( In dollar value) (400,000/54.66%) = 731796.6
Linen Fasterners Sdn Bhd must generate minimum sales of 731,796.6RM through offering
the three products to achieve maximum capacity utilization efficiency and beyond this level, it will
generate favourable return.
(B). (i) Calculation of break-even point in units for each product
Items Sales Variable cost
Contribution
margin
Velcro 1.65 1.25 0.4
Metal 1.5 0.7 0.8
Nylon 0.85 0.25 0.6
Total 4 2.2 1.8
Calculation of fixed cost on each product
Items
Fixed cost on
each product
Common
fixed cost
Total
fixed cost
Contribution per
unit (CPU)
BEP units
(TFC/CPU)
Velcro 20000 240000 260000 0.4 50000 units
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Metal 80000 240000 320000 0.8 100000 units
Nylon 60000 240000 300000 0.6 100000 units
Total 160000 1.8 250000 units
According to the results, it is examined that to achieve break-even point, Linen Fasterners
has to sell 50,000, 100,000 and 100,000 units totalled to 250,000 units.
(ii) Calculation of overall profit of a company at BEP sales
Calculation of profitability
Sales Units Sales price per unit Total sales
Velcro 50000 1.65 82500
Metal 100000 1.5 150000
Nylon 100000 0.85 85000
Total sales 317500
Less: Variable cost
Velcro 50000 1.25 62500
Metal 100000 0.7 70000
Nylon 100000 0.25 25000
Total variable cost 157500
Contribution 160000
Less: Total fixed cost 400,000
Profit/loss -240,000
As already discussed, that BEP is the point where firm has zero return because of equal
value of revenues and expenditures. It can be easily evident from the above statement as in this, at
BEP units of sales in each item, profit is computed nil. If company sell more units then it will
definitely generate return otherwise, will have loss (Dopson and Hayes, 2016).
(iii) Calculation of overall profit or sales at drop the Velcro and Metal products
Particulars Amount (RM)
sales 340000
Less: variable cost 100000
Contribution 240000
less: Fixed cost 300000
Profit/loss -60000
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If Linen Fasteners sell only Nyoln items and abundant both the other goods, then, it will
have business loss amounted to 60,000RM. Therefore, it can be suggested to the decisions-makers
not to drop the Velcro and Metal items and continue its production in future period.
(iv) Preparation of segmented income statement
Particulars Velcro (RM) Metal (RM) Nylon (RM) Total (RM)
Sales 165000 300000 340000 805000
Less: variable cost 125000 140000 100000 365000
Contribution 40000 160000 240000 440000
less: Fixed cost 20000 80000 60000 160000
Product margin 20000 80000 180000 280000
Less: common fixed cost 240000
Net profitability/loss 40000
As per the profitability statement, it becomes clear that firm will have a positive return of
40,000 RM at the current level of sales.
TASK 3 SHORT-TERM DECISION MAKING
(A) Closing divisions decisions of Tiles
Konstruck Sdn Bhd offers three kinds of products to the constructors that are blocks, bricks
and tiles. Its income statement has been provided and as per this, operating income for the reported
year is computed to 210,000RM. Out of three products, only blocks and bricks generated favorable
return of 150,000RM and 230,000 RM whilst Tiles brought loss worth 45,000RM (Ahmad, 2016).
This is the reason why managers are intending to disclose the production of Tiles as it will
encourage saving by dismissal of line supervisor’s salary of 35,000RM and depreciation of
10,000RM totaled to 45,000RM. The viability of the decision can be examined here as follows:
BEP at the total production
BEP (RM) = Total Fixed Cost (TFC)/Profit Volume Ratio (PVR)
= (125,000 + 245,000)/(580,000/1450,000)*100
= 370,000/40%
= 925,000RM
BEP after discontinuance of Tiles
= (125,000 + 190,000)/(570,000/1300,000)*100
= 315,000/43.85%
= 718,421RM
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As per the results, it become clear that if Konstruck Sdn Bhd’s managers eliminate Tiles
from its production portfolio than, it will drive upward change in PVR from 40% to 43.85%.
Moreover, BEP will come down from 925,000RM to 718,421RM. Lower BEP and high PVR
indicates favorable position for the firm, therefore, it is clear Tiles product can be eliminated as it
will drive good return to the business.
(B). Qualitative factors required for decision-making purpose
In removal of an item from the goods portfolio, companies not only need to consider only
the quantitative factors i.e. cost, profit, sales etc, managers also have to pay focus on the qualitative
factors before a decision on whether to keep or drop Tiles production, described hereunder:
 In case, where Konstruck’s customers are extremely satisfied from the Tiles product and
demand this in high volume, then, it becomes essential for the companies not to shut down
the goods because it will drop down its consumer base. More importantly, if such buyers
also purchase other goods like Bricks and blocks, then, it can be advised to the firm not to
drop the Tiles production (Yoke Mui, Ahmad and Nabavi, 2016). Thus, the impact of
discontinuing decisions on other products also must be examined by the management.
 If in case, it is a possibility that in future, Tiles demand will go up, then, although, currently,
firm is having loss, still, they must continue the production so as to get the benefits of larger
sales value in the forthcoming years.
 Before making a shut down decision, managers must evaluate that whether resources has
been utilized optimally or not. It is because, it may be possible that only the ineffective
utilization is the reason for loss incur, so, by putting necessary amendments in the policies
and strategies, firm can make better decisions and convert loss into profit without and drop
decisions.
(C). Impact of Tile’s shut down decisions on Blocks and Brick’s sales
As per the cited scenario, it is clearly mentioned that consumer buy all the items together,
therefore, if Konstruck Sdn Bhd does not produce Tiles, then they will buy the remaining items
elsewhere results in declining the Blocks sales and variable cost by 10% and Bricks by 8%.
Particulars
Keep Drop Differentiate
(If it keep)
Blocks Bricks
Tota
l Blocks Bricks Total
Sales 500 800 1300 450 736 1186 114
Less: variable cost 250 480 730 225 441.6 666.6 63.4
Contribution 250 320 570 225 294.4 519.4 50.6
Less: Direct fixed cost
Advertising 10 10 20 10 10 20 0
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Salaries 37 40 77 37 40 77 0
Depreciation 53 40 93 53 40 93 0
Total direct expenses 100 90 190 100 90 190 0
Product margin 150 230 380 125 204.4 329.4 50.6
Less: common fixed
expenses
125
125
255 204.4
According to the computed results, it can be seen that if both the other products sales
dropped down by 10% and 8%, then net operating income of the business will be 204,400RM
which is below the current profitability of 210,000RM. Thus, it is considered better advise to not to
shut down the production of Tiles and keep the Tile product line (Yoke Mui, Ahmad and Nabavi,
2016)
TASK 4 STANDARD COSTING AND VARIANCE ANALYSIS
(A) Direct material variance
Particulars Actual Standard
Type A Type B Type A Type B
Actual material qty (kg) 5000 10000
Material consumed 3700 7800 4240 8480
Actual material price 0.53 0.40 0.5 0.42
Type of variance Formula
Type of
variance
Material price variance
(MPV) Actual quantity used *(actual price -standard price )
Type A 3700*(0.53-0.50)
-111 Adverse
Type B 7800*(0.40-0.42)
-156 Adverse
Material quantity
variance (MQV) (Standard quantity-actual quantity)*standard price
Type A (5000-4240)*0.50
380 Favorable
Type B (10,000-7800)*0.42
638.4 Favorable
Material purchase price
variance
Actual quantity purchased*(Standard price- actual
price)
Type A (5000*(0.50-0.53)
150 Adverse
Type B 10000(0.42-0.40)
200 Favorable
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(B) Direct labour variance
Type of variance Formula
Type of
variance
Labor rate variance (LRV) (Standard rate - actual rate)*actual hours
(9-11.5)*165
-412.5 Adverse
Labor efficiency variance
(LEV) (Standard hour-actual hour)*standard rate
(212-165)*9
423 Favorable
(C) Actual cost of client application
Actual cost of client's application
Particulars Amount
Actual material cost
Type A 1961
Type B 3120
Total material cost 5081
Labor cost 1897.5
Total cost 6978.5
As per the scenario, total bill was reported to 40 per application means totalled to (40*53*6)
= 12,720RM whilst its cost derived to 6978.5. Thus, it is clear that project was successful that will
drive positive return amount to 5741.5RM.
(D) Analysis of the variance
On the basis of the founded results, it is clear that on both the fertilisers, firm paid exceeded
price worth 0.50 and 0.42/kg may be due to shortage of material in the market as a result, supplier
charged high prices. In contrast, effective utilisation of material help to reduce the actual quantity of
fertilisers to 3700 and 7800 kg respectively, as a result, favourable material quantity variance has
been derived to 270 and 285.6. In addition, Cahaya Enterprise paid higher wages to the labours for
spreading the fertilisers which caused negative LRV for Type A to 412.5. It indicates that firm must
put several techniques for cost control to get positive results (Ritter, Schmidt and Vance, 2016).
Customer complaints may be caused due to ineffective quality of fertilisers at high cost for weed
control.
(E) Should the fertiliser services must be continue or not
As per the findings, it must be suggested to the firm to find out the suppliers who offer
material at cheaper rates, so that, adverse MPV can be eliminated. Moreover, it must recruit the
required labor force at cheaper wages rate to produce goods at less cost. Further, cost-curtailment
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decisions required to be taken to achieve success.
CONCLUSION
Above research report concluded that Senkyo Sdn. Bhd needs to control their direct as well as
indirect cost & effectively advertise their product and create a right pricing policy for sales maximization.
Moreover, right mix of debt and equity will assist firm to manage their solvency position to repay their long-
term borrowings on right time. Moreover, it has been inferred that Linen Fasterner’s managers must sell
50,000, 100,000 and 100,000 units totalled to 250,000 units. Further, Konstruck Sdn Bhd’s
managers have been suggested to eliminate Tiles from its production portfolio to increase PVR
from 40% to 43.85% and lower down the BEP from 925,000RM to 718,421RM. Lastly, it is
founded that Cahaya Enterprise paid higher wages to labor and high material prices also which
caused negative variance. Therefore, it has been suggested to contact suppliers who are ready to
deliver material at less cost and recruit workers at less wages rate to attain the budgeted targets.
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REFERENCES
Books and Journals
Ahmad, R.L.R., 2016. THE IMPACT OF COST AND PROFIT EFFICIENCY ON OF REGIONAL
BANK’S STOCK RETURN: A SURVEY ON BANK BJB.Journal of Management and
Collaboration. 3(4). pp.16-39.
Bergo, G.S.Z. and et.al., 2016. Multiproduct Cost-Volume-Profit Model: A Resource Reallocation
Approach for Decision Making. Journal of Cost Analysis and Parametrics. 9(3). pp.164-
180.
Chiaramonte, L. and Casu, B., 2016. Capital and liquidity ratios and financial distress. Evidence
from the European banking industry. The British Accounting Review.
Dopson, L.R. and Hayes, D.K., 2016. Managerial accounting for the hospitality industry. Wiley
Global Education.
Goldmann, K., 2017. Financial Liquidity and Profitability Management in Practice of Polish
Business. In Financial Environment and Business Development. Springer International
Publishing. pp.103-112.
Jami, M. and Bahar, M.N., 2016. Analysis of Profitability Ratios to Evaluation of Performance of
Indian Automobile Industry. Journal of Current Research in Science. 2(1). pp.747-839.
Ritter, N., Schmidt, C.M. and Vance, C., 2016. Short-run fuel price responses: At the pump and on
the road. Energy Economics. 58(12). pp.67-76.
Santos Almada, M.A., de Souza, P.C. and Laia, A.O., 2016. Application of variable costing and
cost-volume-profit analysis in the animal feed industry: a case study. CUSTOS E
AGRONEGOCIO ON LINE. 12(4). pp.72-89.
Yoke Mui, L., Ahmad, Y. and Nabavi, F., 2016. Causes of high variance in building conservation
tenders in Malaysia. Structural Survey. 34(2). pp.98-116.
Online
Ratio analysis. 2016. [PDF]. Available through: <
http://dosen.narotama.ac.id/wp-content/uploads/2013/02/Chapter-9-Ratio-Analysis1.pdf>.
[Accessed on 18th March 2017].
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APPENDIX
Appendix: 1. Ratio analysis
Senkyo Sdn bhd. (Amount in
RM)
Particulars Formula 2014 2015
Profitability ratios
Gross profit 233000 173000
Net profits before tax 85000 42000
revenues 473000 355000
Gross profit margin (Gross profit/sales)*100 49.26% 48.73%
Net profit margin before tax (Net profit before tax /sales)*100 17.97% 11.83%
Operating profit 100000 52000
Capital employed Total assets - current liabilities 297000 277000
Net profit after taxes 55000 30000
Shareholder equity 112000 97000
Return on capital employed
Operating profit/capital
employed*100 33.67% 18.77%
Return on shareholder equity
(net profit/shareholders
equity)*100 49.11% 30.93%
Liquidity ratios
Current assets 289000 253000
current liabilities 62000 46000
Inventory 220000 195000
Current ratio (Current assets/current liabilities) 4.66 5.50
Quick ratio/acid test ratio
(Current assets-stock)/current
liabilities 1.11 1.26
Efficiency ratios
Creditors 62000 46000
Cost of sales 240000 182000
Inventory 220000 195000
Accounts receivables 21000 25000
Non-current assets 70000 70000
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