Comprehensive Analysis of Cost Variances, Budgeting, and Profitability

This assignment provides a comprehensive analysis of cost variances, budgeting techniques, and profitability assessment through a mock paper solution. It covers calculating variances from projected and actual outcomes, identifying potential causes, and evaluating commercial effects. The solution also explores strategies for reducing disparities and suggests improvements to costing models, including the advantages of zero-based budgeting over incremental budgeting. Furthermore, it computes gross and net profit, analyzes reasons for declining profit and increasing cash flow problems, and recommends financial performance improvements. The assignment also computes the break-even point for a product, discusses the pros and cons of Activity Based Costing (ABC), and recommends how adopting ABC could help maintain profitability. Desklib provides access to this solved assignment and many other resources for students.

Mock Paper

Contents
Question 1..................................................................................................................................4
1. Calculate the variances from the projected and actual outrun..........................................4s
2. Describe the possible causes of these variances................................................................4
3. Give an overview of the potential commercial effects of such deviations, as well as the
variations' goal.......................................................................................................................5
4. Strategies for reducing such disparities, as well as suggestions for changing the current
costing model.........................................................................................................................5
5. Give the advantages of zero – based budgeting over incremental based budgeting..........5
Question 2: Watson C. Ltd.........................................................................................................6
1. Compute the gross and net profit of Watson Co. Ltd........................................................6
2. Reasons of declining profit and increasing cash flow problems........................................6
3. Compute Gross profit and Net Profit Margin, by explaining that why these ratios are
significant for analyses of profitability..................................................................................6
4. Recommendations of improving the financial performance..............................................7
Question 3: Biker Corporation...................................................................................................8
1. Compute Breakeven point using the method of net contribution for the production of
‘Fast and Furious’..................................................................................................................8
2. How can a break-even point study assist a business in determining profitable sales
revenue goals?........................................................................................................................8
3. Explain the pros and cons of Activity Based Costing and give some recommendation to
the directors of Biker Corporation Also give an explanation of how moving to ABC could
help the organisation maintain profitability...........................................................................8
REFERENCES.........................................................................................................................10

Question 1
1. Calculate the variances from the projected and actual outrun.
Budget Actual (outrun) Variance Variance %
£ £
Sales Turnover 1,90,000 1,63,000 -27,000 -14.21%
Direct Cost:
Material 32,000 36,500 4,500 14.06%
Labor 25,000 32,000 7,000 28.00%
Power 18,000 18,500 500 2.78%
Packing and Distribution 14,000 15,000 1,000 7.14%
Indirect Cost :
Administration 16,000 19,000 3,000 18.75%
Advertising 4500 4500 0 0.00%
Premise Cost 28,500 39,000 10,500 36.84%
Net Profit 52,000 -1,500 -53,500 -102.88%
Direct labour costs, indirect costs related to the buildings, and indirect administrative
overhead are the three most major differences that the company is currently confronting.
These values are higher than estimated costs and must be continuously monitored in order to
enhance profit volume proportionately (Hacioglu and Aksoy, 2021).
2. Describe the possible causes of these variances.
 The first cause could be that the company is up against stiff rivalry from its
competitors, and they are unable to meet demand when it is higher.
 The corporation bakes the product on rented premises, and the rent for such premises
is more, which is why the difference exists. The happy day must concentrate on
purchasing a location for its company so that such additional costs can be avoided in
the future.
 Another difference is in the administration cost, which could be due to the fact that
the entity has hired too many people and is paying them too much in salary and
compensation, which must be reduced if the customer's demand is not being met.

3. Give an overview of the potential commercial effects of such deviations, as well as the
variations' goal.
The following are some of the possible commercial ramifications of such variations:
 On the revenue side, the variances are about 14.21 % negative, indicating that they
will be not matching demand, and if they are not meeting goal sales income, they will
not be able to cover their fixed costs on time, putting them in a position to incur
bigger debts.
 The labour cost variances are roughly 28%, indicating that they are being overpaid yet
their productive output does not match the demand that comes during peak times. This
must be continuously monitored, and those individuals who are skilled and productive
must be retained, while others must be fired (Kostini and Raharja, 2019).
 The company is paying a higher premise cost of 36.84 percent, indicating that more
costs have been incurred that must be lowered by purchasing the premises so that
ownership may be preserved. Because such costs are fixed and cannot be mitigated,
they must be offset by increasing revenue.
4. Strategies for reducing such disparities, as well as suggestions for changing the current
costing model.
The methods to nullify such variances is as follows:
 The modifications that the company wants to accomplish are to make budgets on such
a different departmental basis rather than on an average scale, so each department's
progress could be efficiently handled and deviations can be dealt with appropriately.
 Another idea for the organisation is to establish buffer stock in advance, if possible, so
that supply and demand may be matched appropriately during peak times and
management is not overburdened.
5. Give the advantages of zero – based budgeting over incremental based budgeting.
 It offers a method for evaluating various activities and ranking them in terms of
priority for the management of assets (Levy, Bouheni and Ammi, 2018).
 It guarantees that the organization's many functions are vital to the attainment of its
goals and are carried out as efficiently as feasible.
 It enables managers to allocate funds for diverse tasks only after a detailed cost-
benefit analysis has been completed. As a result, the possibility of arbitrary boosts and
cutbacks is reduced.

Question 2: Watson C. Ltd.
1. Compute the gross and net profit of Watson Co. Ltd.
Particulars 2019 2020
Sales Turnover 63500 46500
Less: Opening Stock - 17000
Less: Cost of Sales 33000 22800
Add: Closing Stock 17000 24000
Gross Profit 47500 30700
Less: Direct Labour Costs 15000 21000
Less: Other overhead Costs 7000 6000
Warehousing Costs 3000 4000
Net Profit 22500 -300
2. Reasons of declining profit and increasing cash flow problems.
 One of the most evident explanations is a £17000 decrease in sales revenue during
2019 to 2020, which accounts for the profit distance between two years.
 The company's direct labour costs have risen by £7000, affecting profitability. This
cost must be contained by constantly monitoring the employees' and labour’s work
efficiency (Martin, Keown and Titman, 2020).
 The cash flow difficulty they are experiencing is due to not getting payments from
creditors in a timely manner, as seen by the fact that payments are occasionally
received after 90 days, which has a direct impact on the company's profitability. It
will also effect the organization's working capital cycle, and if payment has been
received on schedule, the creditor will be paid accordingly.
3. Compute Gross profit and Net Profit Margin, by explaining that why these ratios are
significant for analyses of profitability.
Gross Profit Margin: (Gross Profit / Sales) * 100
Year 2019 = (47500 / 63500) * 100
= 75.80 %
Year 2019 = (30700 / 46500) * 100
= 66.02 %

Net Profit Margin: (Net Profit Margin / Sales turnover) * 100
Year 2019 = (22500 / 63500) * 100
= 35.43 %
Year 2019 = (-300 / 46500) * 100
= -6.45 %
 Gross Profit: The data produced from determining gross profit might be used as a
budgeting tool. The company determines the level of stock they must maintain based
on gross profit margin calculations in order to meet the projected sales volume.
Companies could also determine the worth of its closing inventory sales value,
acquisition, and opening inventory levels. They can also be used to show how well a
company's administration generates profits throughout a fiscal period. It is indeed
useful for comparing margins over years and between firms in the same sector so that
growth and performance may be evaluated appropriately (Mitchell and Calabrese,
2019).
 Net Profit: The net profit margin assists the investor in determining if the firm is
producing sufficient profits out of its sales and whether operating costs are adequately
covered. These are the most crucial measures of the business's performance.
4. Recommendations of improving the financial performance.
 Cutting costs must be one of the strategies. They are reliant on a single source and
must hunt for other suppliers who can deliver goods at lower prices, lowering costs.
 The outstanding payment must be managed to recover as soon as possible because it
has a direct impact on the company's cash flow statement. It is critical that they send
timely reminders to debtors to make payments within the payment term granted by the
corporation.
 Non-contributing assets should be sold as quickly as feasible because selling them
will immediately pump cash flow into the business.
If the corporation follows through on the aforementioned proposal, the company's
profitability will improve the next year.

Question 3: Biker Corporation
1. Compute Breakeven point using the method of net contribution for the production of ‘Fast
and Furious’.
The break-even point is calculated using the formula:
= Fixed cost / (Revenue per unit + Variable cost per unit)
Fixed Cost = £ 123200
Variable Cost = £ 80 per unit
Selling Price = £ 300 per unit
Breakeven Point = 123200 / (300+ 80) = 324 Units of bike of Fast and Furious.
2. How can a break-even point study assist a business in determining profitable sales revenue
goals?
The following are some of the advantages of break-even analysis:
 It will assist in determining the profits or losses that an organization may generate at
various levels of output of manufacturing and sales, allowing the corporation to adjust
its operations as needed so that company is not inhibited.
 It aids in forecasting the impact of output and selling price changes.
 This strategy will benefit the organisation because it will help them know the relation
between the fixed and variable costs they acquired as during fiscal year, allowing
them to set revenue targets that are appropriate for the costs (Nizam and et.al., 2019).
 It aids in predicting the impact of changes in the cost of producing goods and services,
as well as changes in efficiency on the company's financial performance.
3. Explain the pros and cons of Activity Based Costing and give some recommendation to the
directors of Biker Corporation Also give an explanation of how moving to ABC could help
the organisation maintain profitability.
Pros of Activity Based Costing:
 Overheads are organised into activity cost pools and are tied to activities.
 Because costs are linked to activities, they are more realistic.
 Because activity-based cost drivers are simple to identify, cost allocation will be
simplified.
 Cost objects will be assigned a cost.
 Essential tasks can be simplified, while extraneous activities can be eliminated, such
as customers, products, services, and departments. As a result, the relevant

expenditures are lowered or eliminated, and ABC can be considered a cost-control
tool.
Cons of Activity Based Costing:
 It takes time and money to set up an ABC system, and it costs money to keep it
running.
 The final reports produced as a result of this method do not follow generally
recognised accounting rules.
 Because traditional costing methodologies are used, the information obtained may
contradict with management performance requirements (Sebestova, Majerova and
Szarowska, 2018).
 It is not appropriate for businesses where overhead costs are low in contrast to overall
operating costs.
Switching to the ABC approach would assist the organisation ensure that all lines are
profitably priced:
Switching to these strategies benefits the organisation because it allows them to
decide which items or consumers to cut or keep for their business. The downside to this
approach is that managers don't often recognise it as a big organisational transformation
initiative, and as a result, it is frequently rejected in the workplace. However, if effectively
implemented, it will ensure that the organisation generates profit because all of the activities
and costs associated with them are clearly apparent in the business structure, making it easier
to eliminate superfluous costs. As a biker firm transitions to introducing new products such as
Fast and Furious, if the ABC technique is used, the costs connected in their manufacturing
could be easily measured and cost variances may be rectified. The ABC method of costing
can also be used to calculate the basis for all of the organization's cost operations. As a result,
this strategy helps all product lines to distribute costs evenly. This will help managers in
guaranteeing that the all product lines earn profit in accordance with their capabilities and are
not harmed by cost absorption.

REFERENCES
Books and Journals
Hacioglu, U. and Aksoy, T. eds., 2021. Financial Ecosystem and Strategy in the Digital Era:
Global Approaches and New Opportunities. Springer Nature.
Kostini, N. and Raharja, S.U.J., 2019. Financial strategy of small and medium businesses on
the creative industry in Bandung, Indonesia. International Journal of Economic
Policy in Emerging Economies, 12(2), pp.130-139.
Levy, A., Bouheni, F.B. and Ammi, C., 2018. Financial Management: USGAAP and IFRS
Standards, Volume 6. John Wiley & Sons.
Martin, J.D., Keown, A.J. and Titman, S., 2020. Financial management: principles and
applications. Prentice Hall.
Mitchell, G.E. and Calabrese, T.D., 2019. Proverbs of nonprofit financial management. The
American Review of Public Administration, 49(6), pp.649-661.
Nizam, E. and et.al., 2019. The impact of social and environmental sustainability on financial
performance: A global analysis of the banking sector. Journal of Multinational
Financial Management, 49, pp.35-53. Nizam, E., Ng, A., Dewandaru, G., Nagayev,
R. and Nkoba, M.A., 2019. The impact of social and environmental sustainability on
financial performance: A global analysis of the banking sector. Journal of
Multinational Financial Management, 49, pp.35-53.
Sebestova, J., Majerova, I. and Szarowska, I., 2018. Indicators for assessing the financial
condition and municipality management. Administration & Public Management
Review, (31).