Financial Management Accounting Exam - Profitability and Variances

This document presents a comprehensive solution to a financial management accounting online exam. The solution includes detailed calculations and analyses of key financial concepts. Question 1 focuses on profitability, examining gross and net profit ratios, identifying reasons for declining profits, and proposing strategic recommendations. Question 2 addresses breakeven analysis, setting profitable sales targets, and evaluating the switch to activity-based costing. Question 3 delves into variance analysis, calculating sales, direct material, and direct labor variances, explaining their causes, and discussing consequences for the business. Additionally, the solution explores strategies for correcting variances and evaluates the advantages and disadvantages of zero-based budgeting compared to incremental budgeting, supported by relevant references.

FINANCIAL
MANAGEMENT
ACCOUNTING [ONLINE
EXAM]

Table of Contents
Question: 1.......................................................................................................................................3
1.1 Gross and net profit...........................................................................................................3
Gross and net profit ratio.............................................................................................................3
Reason behind declining profit and increasing cash flow problems...........................................4
Strategic recommendations..........................................................................................................4
Question: 2.......................................................................................................................................5
Breakeven point of production....................................................................................................5
Company to set profitable sales revenue target...........................................................................5
Switch to activity based costing..................................................................................................5
Question: 3.......................................................................................................................................6
Calculation of three significant variances between budgeted and outrun figures.......................6
Causes of variances......................................................................................................................6
Consequences for the business and objectives of the business in calculating variances.............7
Strategies for correcting and eliminating above variances..........................................................7
Evaluating advantages and disadvantages of switching from incremental based budgeting to
zero based budgeting...................................................................................................................7
REFERENCES................................................................................................................................9

Question: 1
1.1 Gross and net profit
Particular 2020 2019
Sales 365000 530000
Less:
Cost of sales (128000) (230000)
Gross profit 237000 300000
Less
Labour cost (110000) (100000)
Warehousing cost (30000) (10000)
Other overhead cost (70000) (80000)
Net profit 27000 110000
Gross and net profit ratio
Gross profit ratio:
Gross profit ÷ sales * 100
2020
= 237000 ÷ 365000 * 100
= 64.93%
2019
= 300000 ÷ 530000 * 100
= 56.60%
Net profit ratio:
Net profit ÷ sales * 100
2020
= 27000 ÷ 365000 * 100

= 7.40%
2019
= 110000 ÷ 530000 * 100
= 20.75%
For analyzing profitability of the business both gross profit and net profit ratios are
considered to be of great significance for all organisation, so that correct assessment of business
profitability can be done in a required manner (Finkler, Smith and Calabrese, 2018). Gross profit
indicated the profits generated by the businesses out of their trading activities while on the other
hand net profit indicates the overall financial performance and profitability of the business. Gross
profit is helpful in the identification of potentiality of the business trade in generating profits for
the business while net profit determines the overall effectiveness of the business management in
managing the entire operations of the business.
Reason behind declining profit and increasing cash flow problems
Company is facing a major decline in its ability to generate profits indicated by its profit
margins. The reason that can be highlighted which is causing such decline can be due to Covid –
19 pandemic emerged in the year 2020 where most of the companies across the gloss has
experienced its vulnerable consequences in 2020 (Gabbi and Levich, 2019). Due to this, there is
a lockdown like situations in almost all countries of the world which has affected the financial
outcomes of the businesses in very ridiculous way. The issues related to cash so faced by the
company can be due to the increased overhead costs along with the company’s customer’s
inability to make timely payment of their dues accrue to the company. All these reasons so
identified are playing a great role in causing cash problems in the company and accordingly
company is facing challenges in maintaining required level of liquidity.
Strategic recommendations
Strategies like social media marketing can be utilized by the company in order to
promote its products. The second through which company can enhance their sales is by utilizing
e commerce platforms for making their products available online and accordingly selling them

through it. The third strategy that can be used by the company is to adopt the strategy of
discounted pricing in order to achieve more and more sale (Ameen, Ahmed and Abd Hafez,
2018). All these choices in the form of strategies available to the company is very much useful in
achieving higher returns for the business. The overall financial outcomes of the business can be
accordingly improved and thus would lead to increased profitability of the business.
Question: 2
Breakeven point of production
Breakeven point =
Fixed cost ÷ contribution per unit
= 125000 ÷ 22 (30 – 8)
= 5682 Units
[Contribution: sales - variable cost]
Company to set profitable sales revenue target
When all the costs incurred by the company is recovered by making sales at a certain
point, then this point of sale is known as breakeven point. This point results in no profit and no
loss situation for the company where by selling products company is just able to recover all the
costs associated with making these products in a ready to sale position (Siminica, Motoi and
Dumitru, 2017). Here by using this technique companies are able to frame strategies to achieve
its breakeven sales and then further decide upon how to maximize their sales and returns by
performing above this point. This techniques allows for speedy recovery of all the costs
associated with the production and other practices involved in the operations of the business
which is in some or the other way important in making product available for sale in the market.
The technique is regarded as an effective in terms of providing correct strategic directions to the
management of a concern.
Switch to activity based costing
When overhead cost incurred during the process of production are absorbed by including
them in the cost of the final products, then it is known as Activity Based costing (Vetrov,
Vandina and Galustov, 2017). The technique is proved to be useful and result oriented when

company has more than one product to be produced and sale and also includes overhead costs to
be absorbed in the cost of these products. And thus this technique of costing is proved to be
ineffective in case of companies with single product production.
Advantages:
 It measure the accurate product cost.
 Information regarding cost behaviour is also seemed clear under this technique.
 Tracing of activities for cost objective.
 It enables better decision making regard to cost controlling.
Disadvantages:
 This method is expensive and complex.
 Selection of driver is a huge challenge under this technique.
 Disadvantage for the small firms.
 Measurement difficulties are faced under this method.
Question: 3
Calculation of three significant variances between budgeted and outrun figures
Sales variance: actual sales – budgeted sales = £ 630000 - £ 900000 = £270000
unfavorable.
Direct material variance = budgeted direct cost of material – Actual cost of direct material =
£200000 – £245000 = £45000 unfavorable.
Direct labor variances = Budgeted labour cost - actual labour costs = £150000 – £220000 =
£70000 unfavorable.
Causes of variances
 Sales variance are likely to occur due to the reasons as mentioned like, competition from
other firms in the same industry due to the reduced price set for the product. Also, the
problem with the company is its inability to cope up with the high demand of their
products through attractive supply and distribution channels. These all factors are

responsible for company’s unfavorable sales variances (Finkler, Smith and Calabrese,
2018).
 Direct material variance may be caused due to the rise in the price of raw materials used
by the company in manufacturing its products. Or there may be the reason that company
is able to produce more which leads to higher cost of raw materials and consequently it
leads to unfavorable direct material variance.
 Direct labour variance too is unfavorable for the company which may due to increased
wage rate of the labor indulged in the process of manufacturing products.
Consequences for the business and objectives of the business in calculating variances
 Sales variance is very important for the business due to the many positive consequences it
have on the business performance. It depicts how the profitability of a concerned business
is fluctuating from the budgeted figures. So, management can be able to regularly track
the increase and decrease in profits of the business just by looking at its ability to sell
above and below the budget units to be sold (Gabbi and Levich, 2019).
 Direct material variances are calculated in order to determine how units of raw materials
used in the production process is changing. Unfavorable direct material variance allows
for minimizing the use and wastage of raw materials at an early hand, so that
management can save enough costs of the business.
 Direct labour variance indicates and helpful in identifying the reason of increasing or
decreasing cost of direct labour. Unfavorable variance indicates that the company has
paid above what it has expected to pay while preparing budgets.
Strategies for correcting and eliminating above variances
 Sales variance can be eliminated in many ways like by using appropriate model for
forecasting budgetary figures and by setting price of the products by undertaking a
thorough study of the market participants. Also, studying competitors strategies are
proved to be useful in eliminating sales variances (Ameen, Ahmed and Abd Hafez,
2018).
 For correcting and eliminating direct material variance, there are certain strategies like
using quality material and minimizing wastages by ensuring appropriate process and
movement of raw materials into the process of production can be done to avoid
unfavorable direct material variance.
 Direct labor variance can be eliminated by obtaining quality labor for producing
products, so that at a reasonable rate paid to the labor, management can ensure that the
products so produced will be of reasonable quality along with required level of
productivity of these labors.
Evaluating advantages and disadvantages of switching from incremental based budgeting to zero
based budgeting
Advantages of zero based budgeting over incremental based budgeting
In case of zero based budgeting all the factors are first justified in terms of cost benefit analysis
before taking them into the budgets, so a considerable amount of wastage can be avoided by
using this approach in budgeting and accordingly inefficiencies can be avoided. Also, time to

time changes can be effectively implemented in the budgets if prepared through ZBB techniques
while the same is not possible in case on incremental based budgeting technique (Siminica,
Motoi and Dumitru, 2017).
Disadvantages of Zero based budgeting over incremental based budgeting
Zero based budgeting is quite a complex activity and require a high level of managerial
expertise, more expenses and time. This make it inefficient as against the incremental based
budgeting system where sudden or frequent implementation of changes can be possible without
performing much efforts.

REFERENCES
Siminica, M., Motoi, A. G. and Dumitru, A., 2017. Financial management as component of
tactical management. Polish Journal of Management Studies, 15.
Ameen, A. M., Ahmed, M. F. and Abd Hafez, M. A., 2018. The Impact of Management
Accounting and How It Can Be Implemented into the Organizational Culture. Dutch Journal of
Finance and Management, 2(1), p.02.
Gabbi, G. and Levich, R., 2019. Controlling risks to ensure financial stability and reducing
volatility. Journal of International Financial Management & Accounting, 30(3), pp.183-187.
Finkler, S. A., Smith, D. L. and Calabrese, T. D., 2018. Financial management for public,
health, and not-for-profit organizations. CQ Press.
Vetrov, Y. P., Vandina, O. G. and Galustov, A. R., 2017. Strategic management accounting in
organizations’ cash flow control. Journal of History Culture and Art Research, 6(4), pp.425-435.