Financial and Management Accounting Report: Stell Co. Ltd Review

This financial and management accounting report analyzes the performance of Stell Co. Ltd, comparing financial data from 2020 and 2021. It calculates gross profit and net profit ratios, identifies reasons for declining profits and increasing cash flow problems, and recommends strategies to improve the company's financial position. The report also includes a break-even analysis for DK Machines, discussing its utilization for setting profitability targets and the adaptation of activity-based costing. Furthermore, it computes variances for Concorde Construction, explores potential causes and consequences, and suggests corrective strategies, along with a comparison of incremental-based budgeting and zero-based budgeting. Desklib is a platform where you can find this and many other solved assignments.

FINANCIAL and
MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
QUESTION 1 ..................................................................................................................................3
1. Calculation of Gross Profit and Net Profit...............................................................................3
2. Calculation of Gross Profit and Net profit ratio ......................................................................4
3. Reasons for declining profits and increasing cash flow problems...........................................4
4. Three strategies for recommendations to improve financial position and increasing profit....5
QUESTION 2 ..................................................................................................................................6
1. Calculation of Break-even point..............................................................................................6
2. Utilization of break-even analysis for setting profitability targets..........................................6
3. Adaptation of activity based costing and more accurate management accounting information
......................................................................................................................................................7
QUESTION 3 ..................................................................................................................................7
1. Computation of variances........................................................................................................7
2. Possible causes of variances identified....................................................................................8
3. Projection of likely consequences of variances.......................................................................8
4. Strategies for correcting variances...........................................................................................9
5. Presenting advantages disadvantages of switching from Incremental Based Budgeting to
Zero Based Budgeting................................................................................................................10
REFERENCES..............................................................................................................................11

QUESTION 1
1. Calculation of Gross Profit and Net Profit
Calculation of Gross Profit And Net Profit of Stell Co. Ltd
2021 2020
Particulars £Amount £Amount
Sales Turnover 612000 970000
Cost of Sales 212000 320000
Direct labour expenses 233000 212000
Gross Profit 167000 438000
Warehousing expenses 30000 10000
Distribution expenses 55000 28000
Other overheads 35000 17000
Dividend paid 40000 60000
Total costs 160000 115000
Net profit 7000 323000
2. Calculation of Gross Profit and Net profit ratio
Calculation of Gross Profit Ratio of Stell Co. Ltd

Formula 2021 2020
Gross Profit 167000 438000
Sales Turnover 612000 970000
Gross Profit Ratio GP/Sales*100 27.3% 45.2%
Gross profit is the gross income which is calculated with the help of subtracting the cost
of goods that are sold from the total revenue (Husain and Sunardi, 2020). Hence, the gross profit
is the profit which only includes the variable costs of the organization. Gross profit ratio shows
that in comparison to 2020 the profit of the company has decreased significantly showing the
increase in the variable costs.
Calculation of Net Profit Ratio of Stell Co. Ltd
Formula 2021 2020
Net profit 7000 323000
Sales Turnover 612000 970000
Net Profit Ratio NP/Sales*100 1.1% 33.3%
Net profit is the profit which is calculated with the help of subtracting all the expenses
and costs from the income. This also includes the indirect expenses for the business. Hence, for
the calculation of the NP ratio shows a different factor of profit. In comparison to the GP ratio
the difference between the ratio of 2020 is higher than 2021. Therefore, the business has
increased its indirect expenses.
3. Reasons for declining profits and increasing cash flow problems
From the above reports that compares the financial data of 2021 and 2020 for Stell Co.
Ltd it can be found that the biggest reason due to which the business has faced the such fall in the
profitability ratios in 2021 in the fall diminished sales revenue. Due to the fall of the sales the
business has suffered negative impacts which has influenced the business to loss. Despite the
sales of this organization fell but the cost of sales was similar to that of the previous year. The
labour costs of the business also increases showing lack of efficiency of the organization. These
were the same factor that affect the cash inflow in the organization in the year of 2021. The

business had to pay extra for all the expenses that had a negative impact on cash inflow of the
organization. This lead to the business facing cash out flow more than the cash inflow. Total
costs of the organization increased by 45000 and its sales decreased by 358000. This shows the
actual reason for the fall of profit and poor cash flow for Stell Co. Ltd.
4. Three strategies for recommendations to improve financial position and increasing profit
In order to increase the business operations Stell Co. Ltd needs to utilize the following
strategies that will lift up the financial positioning of the organization.
Lowering Expenses :
The business of this organization has been affected negatively due to the increased
expenses in 2021. Hence, the best practices for this organization would be the decrease the total
costs of the organization in order to improve the financial position. It is going to be very
important for the business to find cheap alternatives from the suppliers, equipments and services.
This is the factor that is helpful for the arranging the periodic deferred payments.
Selling unused or Unwanted Assets :
In general it has been seen that the business pay more and earn less when they have an
asset which underperforms. Hence, for the organization it will be very important to sell this asset
and buy new for achieving the operational efficiency.
Lowering prices :
This organization needs to increase its sales in order to improve the sales turnover this is
due to the customers tendency to buy more if the price of the product is less. Hence, it is going to
be very important for the organization to manage the prices and keep it lower and competitive.
For increasing the profit of the organization there are multiple ways for the business to
adapt such as,
 Increasing the sales needs to be the biggest priority for this business.
 Improving on the operational efficiency of the resources of this business. This would
allow the organization to be more cost-efficient.
 Increasing the productivity of the employees can allow the business to develop new
strategies and influence the growth in the organization (Atoyebi, Bello and Owolarafe,
2022).
 Utilization of methods like bench-marketing and KPI for monitoring the operations of the
resources will allow the business achieve the growth that is required.

QUESTION 2
1. Calculation of Break-even point
Break-Even analysis of DK Machines
Particulars Formula Figures
Selling price(S.P) per unit 400
Variable cost per unit 100
Contribution per unit
S.P / unit -
variable cost / unit 300
Fixed cost 275000
BEP (in units)
Fixed cost /
contribution per
unit 917
BEP (Monetary terms)
BEP (in units) *
S.P per unit 366666.7
Break-even analysis in the following table helps in the calculation of the point of sales at
which the business is neither earning profit or loss. This means that if the business is able to
reach the sales revenue of 366666.7, it will be in the condition of neither profit nor loss. Hence,
increasing the sales of the business above this point will mean profit for the DK Machines. This
table also indicates the minimum number of units the business would need to sell in order to
avoid the loss which is 917.

2. Utilization of break-even analysis for setting profitability targets
Break-even analysis is the calculation of the examination that is the margin of safety for
the entity that collects and associates costs. This method has been considered to be very effective
for the analysation of the sales that pays the costs for doing business. Break-even analysis can
help the company establish a product price for better results that changes the sales prices. This is
helpful for DK Machines to achieve maximum profit without having to increase the price. Break-
even analysis is used for the determination of the unused capacity of the company after it reaches
the break-even point. Business can use this point as the point which it needs to reach before
thinking of earning any kind of profit. Hence, this is the best way in which the business can set
its target for the profit it wants to earn with the projected revenue (Wegmann, 2019). This is
helpful for the determination of the changes in the profits in the price of product that is being
altered at the same time.
3. Adaptation of activity based costing and more accurate management accounting information
The management accounting information are very important as they help in making both
short-term and long-term decisions that involve the financial health of the company. For the
directors it is very important for having the accurate management accounting information as it
helps them to make operational decisions which have the intention to increase the company's
operational efficiency. This is very important for the company for making any kind of long term
investment decisions. It is very important for the business to adapt the activity based costing for
improving their ability to set fir monitoring the abilities and achieving the long term objectives.
The activity based costing is considered to be the one that provides the managers more accurate
production costs that can help the business to make more information that is about the product
and develop new methods of production.
 This method is helpful for the realization of the more accurate production costs.
 It is also helpful for assigning a specific overhead costs for more expensive products.
 This is helpful for the evaluation of the efficiency of production and making
improvements.

QUESTION 3
1. Computation of variances for Concorde construction
Computation of variances for Concorde construction
Particulars
Budget (in
£)
Actual (in
£) Variances (in £) Outcome
Sales Turnover 1560000 820000 -740000 A
Raw Materials 400000 275000 125000 F
Labour 170000 240000 -70000 A
Power 70000 95000 -25000 A
Storage and Delivery 40000 50000 -10000 A
Administration 100000 130000 -30000 A
Advertising and Marketing 20000 10000 10000 F
Premises Costs 175000 250000 -75000 A
The three variances which are the most significant for the business are,
Sales Turnover:
The sales revenue of this organization was budgeted higher than it actually was and
hence it is adverse.
Administration:
In the administration expenses of the business has incurred more expenses than it actually
planned hence it is also adverse.
Advertising and marketing:
For the advertising and marketing expenses of the organization the business has spent
less than it actually budgeted therefore the outcome of this variance is favourable.
2. Possible causes of variances identified
The three variance which have been identified in the business of Concorde construction
can happen due to the following causes,
 Adverse effects of sales turnover indicates that there was an over estimation of the sales
turnover in the budget. This can happen due to the different factors which play an
important role in influencing the sales. This can be due to the change in preferences of
the customers. Due to the decrease in the advertising expenses in comparison to the
budget this might have been the reason for the decrease in the sales turnover.

 Administration expenses are expenses when depends on the management and their
efficiency of the work. Hence, it can be a result of poor management which has increased
the estimated expenses.
 Lack of capital or liquidity can be the reason for not spending on the advertising
expenses.
3. Projection of likely consequences of variances
The chosen variance can have the following impacts on the business of the organization,
Sales Turnover Due to sales turnover variance having adverse result the business
will face major impacts on its profitability. The decrease in the
sales can also lead the business to the situation of loss. This can
impact the growth of the organization and might affect the future
of this business. Facing losses can have negative impacts to the
employees and management of the organization.
Administration Having adverse affects on the variance of administration
expenses shows that the business has spent more on the
administration/operational activities of the business. This can
help the business to gain efficiency and enhance the productivity
of the organization in the future.
Advertising and Marketing Favourable variance of the marketing and advertising means that
the business has spent less on the organization therefore can
result in decrease in the sales.
4. Strategies for correcting variances
This organization needs to adapt to strategies in-order to rectify the variances that has
occurred in its budget.
Sales turnover:
 To increase the marketing expenditure.
 To understand the target customers.
 Increase efficiency for gaining competitive advantages.

 Offering special promotions and discounts can help the business to influence its sales
turnover.
Administration:
 Limiting the expenses which are made for unproductive measures.
 Elimination of unnecessary subscription and memberships. Utilization of digital methods of storing data for cutting the paper and stationary costs.
Advertising and Marketing:
 The marketing of this organization needs to be improved by utilization marketing
campaign.
 Utilization of digital marketing practices can bring more efficiency to the marketing
practices of the business.
 Increasing the marketing in different platforms for achieving greater results for the
business.
5. Presenting advantages disadvantages of switching from Incremental Based Budgeting to Zero
Based Budgeting
Incremental based budgeting is the process is not as affective because it has been known
to be the method that leads to the organization doing extra spendings. This method is not very
flexible in nature and hence does not consider any kind of change in the organization. It does not
provide a proper review of the budget. Due to this method being based on unreal assumptions
switching to Zero-based budgeting has been considered to be the factor that would help the
business to build on the own cost-benefit analysis that has been known to be justified for an
easier. This method has been known for better and most efficiency allocation of resources. It
provides the organization with the promotion of the business process management (Ibrahim,
2019). It is also the strengths of the strategic growth and transparency that is helpful for
improving the organizational benefits. This method considers the changes and has been known to
be more versatile.

REFERENCES
Books and Journals
Atoyebi, J. O., Bello, S. A. and Owolarafe, O. K., 2022. A case-study approach to profitability
assessment in fermented African locust beans (iru) production using break-even
analysis. Agricultural Engineering International: CIGR Journal. 24(1).
Husain, T. and Sunardi, N., 2020. Firm's Value Prediction Based on Profitability Ratios and
Dividend Policy. Finance & Economics Review. 2(2). pp.13-26.
Ibrahim, M. M., 2019. Designing zero-based budgeting for public organizations. Problems and
Perspectives in Management. 17(2).
Wegmann, G., 2019. A typology of cost accounting practices based on activity-based costing-a
strategic cost management approach. Asia-Pacific Management Accounting Journal. 14.
pp.161-184.