Financial & Management Accounting: Profitability, BEP & Variances

This report provides a detailed analysis of financial and management accounting concepts, focusing on Stell Co ltd's profitability, break-even point (BEP) for DK machines, and variance analysis for Concorde Constructions. The profitability analysis includes calculations of gross and net profit, along with their respective ratios, highlighting a decline in Stell Co ltd's profits and exploring the reasons behind increasing cash flow problems. The report suggests strategies to improve Stell Co ltd's financial position, such as social media marketing, recovering outstanding payments, and lowering indirect expenses. The BEP analysis computes the break-even point for DK machines using the net contribution method and discusses its importance in setting profitable revenue targets. Activity-based costing is examined for its potential to improve goal setting and monitoring. Furthermore, the report computes significant variances for Concorde Constructions, assesses their possible causes and likely consequences, and suggests strategies for their elimination or correction. Finally, it evaluates the advantages and disadvantages of switching from incremental-based budgeting to zero-based budgeting.

Financial and Management Accounting

Table of Contents
QUESTION 1...................................................................................................................................3
1 Calculating Gross Profit and Net Profit...................................................................................3
2 Calculation of Gross profit and net profit ratios and its significance in profitability analysis 3
3. The reason for decline in profits and increasing cash flow problems.....................................4
4.Explaining three strategies that would be recommended to the firm to improve the financial
position........................................................................................................................................5
QUESTION 2...................................................................................................................................5
1. Computing BEP by using net contribution method ...............................................................5
2.How might break even analysis enables the company to set profitable revenues target........6
3.Explaining how activity based costing would improve ability to set and monitor goals ......7
QUESTION 3...................................................................................................................................7
1. Computing three most significant variances ..........................................................................7
2. Assessing possible causes of variances identified..................................................................8
3. Identifying projection of likely consequences for the business pertaining to each of the
variance chosen...........................................................................................................................8
4. Suggested strategies for elimination or correction of the variances ....................................9
5. Evaluation of advantages disadvantages of a switch from Incremental Based Budgeting to
Zero Based Budgeting.................................................................................................................9
REFRENCES.................................................................................................................................10

QUESTION 1
1 Calculating Gross Profit and Net Profit
Calculation of Gross Profit And Net Profit
2021 2020
Sales Turnover 612000 970000
Cost of Sales 212000 320000
Direct labour
costs 233000 212000
Gross Profit 167000 438000
Warehousing
Costs 30000 10000
Distribution Costs 55000 28000
Other overheads 35000 17000
Dividend paid 40000 60000
Total Expenses 160000 115000
Net profit 7000 323000
The Sales Turnover of Stell Co ltd is 612000 in the year 2021 and 970000 for the year 2020.
Gross profit is calculated by deducting cost of sales from sales turnover for both the years. Net
profit is calculated by subtracting warehousing costs, distribution costs, dividend paid and other

overheads from the gross profit. Both the gross profit and net profit of Stell Co ltd have declined
as compared to the previous year.
2 Calculation of Gross profit and net profit ratios and its significance in profitability analysis
Calculation of Gross Profit Ratio
Gross Profit 167000 438000
Sales Turnover 612000 970000
Gross Profit
Ratio 27.3% 45.2%
Calculation of Net Profit Ratio
Net profit 7000 323000
Sales Turnover 612000 970000
Net Profit Ratio 1.1% 33.3%
Significance
Gross profit ratios is important in analysis of the efficiency of the production process of
Stell Co ltd. Gross profit ratio is important in comparing performance of Stell Co ltd with its
competitiors on the basis of sales revenues. Only direct expenses are considered in the gross
profit ratio so it helps in eliminating the excess unnecessary expenditure incurred on direct
expenses. The health of the company is depicted by its gross profit. This ratio helps in pricing the
products at competitive level along with profit being earned. The gross profit ratio provides the
benchmark to the company for comparing its performance. The company's gross profit ratio has
fallen in comparison to the previous year (Sari and Sedana, 2020). The reason behind the
decreasing gross profit ratio is decline in the sales revenue of the firm and increase in the costs of
production.

Net Profit Ratio is used in measuring the overall profitability of the Stell Co ltd. It
indicates the amount of profit earned by the firm from every pound of sales that has made by the
firm with the deduction of all the expenses that were incurred in the process to earn the revenue.
The efficiency of the company over time is indicated through net profit ratio. The net profit ratio
of the Stell Co ltd has experienced a drastic decline.
3. The reason for decline in profits and increasing cash flow problems
The reason for decline in company's profit is poor sales and increase in total expenses
incurred by the company. The reasons for increasing cash flow problems for Stell Co ltd are low
profits earned by the company. Over investment by the company for expanding on fast phase.
High overhead expenses and unexpected expenses by the company are also the main reason
behind the company's increasing cash flow problems. High dividend being distributed by the
company. The product pricing of the company may not be properly set. The financial planning of
the company is weak and company also overstock the inventories. Late payments by the
company are also the reason behind its poor cash flow. The declining profits for the company is
majorly due to its excessive expenses.
4.Explaining three strategies that would be recommended to the firm to improve the financial
position
Use of social media marketing: The firm should use more of social media marketing
channels to promote it business and services to large number of people. Furthermore, it would
also improve the asset position the company as with more funds the company would be able to
diversify its operations and generate more revenues for the business. Moreover, with the use of
the social media marketing the company would also reduce the unnecessary expenses so that
financial situation might be improved to the greater extent.
Recovering outstanding payments: The company should also focus on recovering
amounts from the unpaid invoices so that more money might be brought into the business that
would help in improving financial position. Also, at the tine of sale agreements the firm need to
know clearly about the due payment date and the terms of the overdue payments.

Lowering indirect expense : It is another strategy that might be used by the firm where
all the indirect expense that are incurred by the firm might be reduced so that financial position
is improved in the best manner and the losses might be recovered all the future undertakings.
QUESTION 2
1. Computing BEP by using net contribution method
Break-Even analysis
Particulars Formula Figures
Selling price per unit 400
Variable cost per unit 100
Contribution per unit
Selling price per unit -
variable cost per unit 300
Fixed cost 275000
BEP (in units)
Fixed cost / contribution per
unit 917
BEP (in value or monetary terms)
BEP (in units) * selling price
per unit 366666.7
The Break even point is calculated to find out the number of units that the firm must sell to reach
the situation of no profit and loss. It is also expressed in monetary terms as the volume of sales
that is needed for a firm to reach break even point. The break even point of DK machines in units
is 917 and in monetary terms is 366666. It means that the firm have to sell 917 units for 366666
to reach its break even point.

2.How might break even analysis enables the company to set profitable revenues target
Break even analysis tool helps the firm in analysing the no profit and no loss situation of
the firm. Moreover, it is the best tool that help the company to set the best profitable targets in
the future through following ways:
Pricing : It is valuable technique as it shows number of products to be sold in order to make
the desired profit for the business (Sintha, 2020). Also, it helps the firm in understanding
whether it would be good decisions or not of the firm to sell particular product in the market.
Gaining funds: When the company need to collect various finances for the business than it can
said that break even analysis is very effective as it shows whether the funds would be made
easily available or not. Moreover, low break even point will ease the firm in getting the extra
debt and financing.
Helps in identifying goals: It is very useful tool as it helps in determining the precise goals for
the team. Thus, when the company had the precise goals and time frame in mind than it provide
ease for the firm to decide the revenue goals.
3.Explaining how activity based costing would improve ability to set and monitor goals
Activity based costing is very good as it allows in giving realistic and more accurate
production cost for the specific items. Thus, it helps in giving the clear understanding of
manufacturing cost and also it can be said that process of the gathering data in activity based
costing is also easier. Moreover, through this type of costing specific overhead costs might be
assigned to more expensive products . Also, this method allow the managers to assign values to
the indirect costs treating them as direct cost (Amin and Nengzih, 2021). Thus activity based
budgeting would allow managers to evaluate on things like efficient processes, management
influence and overall cost of the different departments. Moreover, activity based costing would
help the firm in getting more accurate data for the profit margins so that important decision
might be taken by the firm easily. Furthermore ,this type of costing might be used by all the
industries unlike other traditional costing methods that does not work efficiently in the
industries like services that have minimal amount of direct costs.

QUESTION 3
1. Computing three most significant variances
Particulars
Budget (in
£)
Actual (in
£)
Variances
(in £) Outcome
Sales Turnover 1560000 820000 -740000 A
Direct Costs:
Raw Materials 400000 275000 125000 F
Labor 170000 240000 -70000 A
Power 70000 95000 -25000 A
Storage and Delivery 40000 50000 -10000 A
Indirect Costs
Administration 100000 130000 -30000 A
Advertising and
Marketing 20000 10000 10000 F
Premises Costs 175000 250000 -75000 A
2. Assessing possible causes of variances identified
The possible reasons for variance in labour cost are poor estimates, it may happen that the
estimated rates for labour predicted by the management was lower than the ideal estimation. The
estimates may be based historical figures which are incapable in the current scenario. The reason
can also be the complexities in the future environment.
Advertising and marketing costs' adverse variances could be selection of wrong medium
for advertising and marketing. The variance can be corrected in future by adapting to a cost
effective medium of advertisement and marketing.
The variation in the storage and delivery expenses can be because of the unfavorable
events such as increase in fuel prices, taxes and import duties. The variance in storage can be
because of the increase in the rent of the warehouses or may be due to unforeseen circumstances
like change in the location of warehouse.

3. Identifying projection of likely consequences for the business pertaining to each of the
variance chosen
The consequences that the organization will likely suffer are that first the profits
generated by the firm will be affected negatively. Net profit is net total sales subtract total
expenses. The adverse variances in labour costs, advertising and marketing, and storage and
delivery expenses means that the actual expenses incurred on these areas is more than the
expected ones. Increase in expenses mean less profit earned by the firm. Concorde Constructions
will have less money for investment, expansion, dividend distribution purposes. Increase in
labour cost will increase the cost of services provided by the company so customers will more
likely tend towards the more cost effective alternative companies. The sales of the company will
decline. Increase in advertising and marketing costs will increase the indirect costs of the
company resulting in lower net profit.
4. Suggested strategies for elimination or correction of the variances
For above variances in labour it can be said that appropriate training and development
programs might be developed so that labour is able to acquire new skills and competencies
required to carry out the business. Furthermore, through developing the proper incentive plans
the firm would be able to retain the best quality labour within the workplace that would
achieve certain targets of the business in well defined manner reducing the variances
Moreover, in the advertising and marketing head the firm might use the cost benefit
analysis through using current costing model so that estimated growth of the business might be
analysed well in advance . Furthermore, through analysing total cost the firm might than be able
to conduct various promotional activities in the well defined manner.
Also, for storage and delivery it can be said that company should install new
technologies in the business so that faster delivery and change in operations might be done to
correct this variance.
5. Evaluation of advantages disadvantages of a switch from Incremental Based Budgeting to
Zero Based Budgeting
It there is switch from the incremental based budgeting to zero based budgeting than
major advantages is that it promotes optimization in the business process management in terms

of efficiency, cost reductions and much more. Also, using this type budget the strategic growth
and transparency of the business is also increased through promoting the innovation and
minimising the waste of the business (Al-attara, Mashkourb and Hassanc, 2020). However ,even
though zero based budgeting is good in some aspects but the major disadvantages is that it can
be quite complex and expensive budgeting method to the company as extra training is required to
be provided by the company regarding the software , workflows etc. Also, it is resource
intensive process as it would take lot of time and effort to closely review and justify all the
budget elements. Moreover, there are higher chances that it is manipulated by the savvy
managers so that more resources might be get into the department.

REFRENCES
Al-attara, H.A., Mashkourb, S.C. and Hassanc, M.G., 2020. Zero-based budget system and its
active role in choosing the best alternative to rationalise government
spending. International Journal of Innovation, Creativity and Change. 13. pp.244-265.
Amin, M.N. and Nengzih, N., 2021. Proposed Application of the use of Activity-based
Budgeting (ABB) Method for Cost Control of Daily and Casual Workers (A Case Study
at PT XYZ). Saudi J Econ Fin. 5(9). pp.411-420.
Sari, I. A. G. D. M. and Sedana, I. B. P., 2020. Profitability and liquidity on firm value and
capital structure as intervening variable. International research journal of management,
IT and Social Sciences. 7(1). pp.116-127.
Sintha, L., 2020. Importance of Break-Even Analysis for the Micro, Small and Medium
Enterprises. International Journal of Research-Granthaalayah. 8(6).