Finance Assignment 1: Watley's Cost Variance Analysis Report

This finance assignment analyzes the cost variances for Watley's, a furniture company, focusing on the years 2014 and 2015. The report includes a break-even analysis, demonstrating how increased variable expenses without corresponding sales price increases led to a higher break-even point in 2015. A contribution margin analysis reveals that the cost of sales and overheads increased as a percentage of sales, decreasing the contribution and net margin percentages. The conclusion recommends that the company either increase selling prices or reduce variable costs to improve profit margins and lower the break-even point, with a specific emphasis on reducing variable costs, which significantly impacted the net margin. The report uses financial concepts to evaluate the company's performance and suggests strategic recommendations.

Finance Assignment

1
By student name
Professor
University
Date: 25 April 2018.
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Contents
Background and Abstract............................................................................................................................3
Introduction.................................................................................................................................................3
Analysis and Discussion...............................................................................................................................3
Conclusion and Recommendation...............................................................................................................4
References...................................................................................................................................................4
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Background and Abstract
In the given assignment, a report has been given on what are the different issues and reasons that might
lead to the cost variance for the given company in question, Watley’s which deals in furniture. The steps
to be taken by the company in order to manage them effectively and efficiently has also been stated
clearly.
Introduction
There are different types of business costs which behave in a specific way and are one of the key factors
which enables the business to work out what should be the prices that should be charged for the
products such that the businesses are operating profitably (Alexander, 2016). Various costing and
accounting concepts like those of break-even analysis, relevant costing, budgeting, marginal and
standard costing, contribution margin analysis are being used in the business for decision making
purposes. All such concepts are applicable to Watley’s as well and hence the same has been discussed
about.
Analysis and Discussion
The break-even analysis has been done for Watley’s for the 2 given years 2014 and 2015.
Break even Analysis - Watley's
Particulars 2014 2015
Sales 3,290 3,520
Less: Variable costs
Cost of Sales (1,290) (1,500)
Overheads (1,480) (1,600)
Contribution 520 420
Less: Fixed Cost (120) (120)
Profit 400 300
Break Even point in %
=Fixed Cost / (Selling Price - variable costs) 0.23 0.29
Assuming 100 units sold in each year
Break Even point in units 23.08 28.57
From the above table it can be seen that the profit has declined in the year 2015 and in case it is
assumed that 100 units of goods have been sold in each year, the break-even point comes to 23 units
and 29 units respectively. This goes on to show that the variable expenses have increased considerably
without corresponding increase in the sales price and that’s the reason why more units of sale is
required to achieve the break even (Choy, 2018).
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In terms the contribution margin analysis is being done we can see the following output:
Contribution Margin Analysis - Watley's
Particulars 2014 2015 2014 2015
Sales 3,290 3,520 100.0% 100.0%
Less: Variable costs
Cost of Sales (1,290) (1,500) -39.2% -42.6%
Overheads (1,480) (1,600) -45.0% -45.5%
Contribution 520 420 15.8% 11.9%
Less: Fixed Cost (120) (120) -3.6% -3.4%
Profit 400 300 12.2% 8.5%
From the above table, we can see that the cost of sales has increased in 2015 as compared to 2014 by
nearly 3.4%, the overheads have also grown by 0.5% as a percentage of the sales and that’s the reason
why the contribution percentage as well as the net margin percentage both have declined over the
years. This is directly affecting the profit of the company (Linden & Freeman, 2017).
Conclusion and Recommendation
From the above discussion and analysis we can conclude that the company needs to either increase the
selling prices or reduce the variable costs in order to improve the profit margin and bring the breakeven
point down to the previous level which has increased in 2015 (Goldmann, 2016). Also, we can see that
the major reason behind the decrease in net margin percentage is the increase in the variable costs as a
percentage of the sales and hence it should consider reducing the same.
References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.
Ecological Economics, p. 145.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, 4(3), pp. 103-112.
Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business
Ethics Quarterly, 27(3), pp. 353-379.
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