Comprehensive Report: Financial & Management Accounting - Stell Co

This financial and management accounting report provides a detailed analysis of Stell Co Ltd's financial performance, including calculations of gross and net profit, gross profit and net profit ratios, and an assessment of the reasons for the company's declining profits and increasing cash flow problems. It offers strategic recommendations for improving the company's financial position, such as investing in marketing, reducing indirect expenses, and creating a robust account receivable policy. The report also includes a break-even point (BEP) analysis for DK Machines, demonstrating its use in setting profitable sales targets and highlighting the benefits of adopting activity-based costing (ABC). Furthermore, the report calculates significant variances in sales, direct costs (raw materials, labor, power, storage and delivery), and indirect costs (administration, advertising and marketing, premises costs), discusses the likely causes and consequences of these variances, and recommends strategies for their removal. Finally, it evaluates the benefits and drawbacks of switching from incremental budgeting to zero-based budgeting (ZBB).

FINANCIAL AND
MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
QUESTION 1...................................................................................................................................3
1. Calculating the gross and net profit........................................................................................3
2. Calculation of gross profit and net profit ratio and its significance........................................3
3. Reason for company decline in profit and increasing cash flow problems.............................4
4. Advising the strategies for improving the financial position of company..............................4
QUESTION 2...................................................................................................................................5
1. Calculation of Break- even point on basis of net contribution method...................................5
2. Use of BEP for setting up profitable sales target for company...............................................5
3. Explaining accurate use of management accounting information and adoption of Activity
Based Costing.............................................................................................................................6
QUESTION 3...................................................................................................................................6
1. Calculation of the three most significant variances................................................................6
2. Likely causes of each variance................................................................................................7
3. Possible consequences of variance for business objectives....................................................7
4. Recommended strategies for removal of the variance............................................................8
5. Evaluating the benefits and drawbacks of switching incremental budgeting to ZBB............8
REFERENCES..............................................................................................................................10

QUESTION 1
1. Calculating the gross and net profit
Calculation of Gross Profit And Net Profit for Stell Co Ltd
2021 2020
Sales Turnover 612000 970000
Less:
Cost of Sales 212000 320000
Direct labor costs 233000 212000
Gross Profit (A) 167000 438000
Less: Indirect expenses
Warehousing Costs 30000 10000
Distribution Costs 55000 28000
Other overheads 35000 17000
Dividend paid 40000 60000
Total Expenses (B) 160000 115000
Net profit (A- B) 7000 323000
With the help of the above calculation it is clear that net profit of the company as
compared to the last year is having drastic change which is not good for the company. also, the
sales of the company also reduced to a great extent since the last year and expenses have
increased.
2. Calculation of gross profit and net profit ratio and its significance
Gross Profit Ratio for Stell co ltd
2021 2020
Gross Profit 167000 438000
Sales Turnover 612000 970000
Gross Profit Ratio 27.3% 45.2%
Net Profit Ratio for Stell co ltd
2021 2020
Net profit 7000 323000
Sales Turnover 612000 970000
Net Profit Ratio 1.1% 33.3%
With the help of the gross profit ratio is clear that the ratio is declined and this affects the
working efficiency of the company. the ratio has almost become half in comparison to the last

year. Further with respect to the net profit ratio it is clear that earlier it was 33.3% and currently
it is 1.1% which is very less. This simply implies that the indirect expenses of the company have
increase to a great extent. While analysing the profitability the ratios are significant because it
helps the company in analysing the working in terms of percentage and this provides a common
base to the company for making the comparison as well.
3. Reason for company decline in profit and increasing cash flow problems
The reason for the decline in the profits of Stell Co Ltd is increase in the expenses of the
business. with the help of the above calculation it is clear that the total expenses o the company
has increases to a great extent. even though the cost of sales has reduced but then also the
indirect cost has increase and as a result of this there is high change in the net profit (Yusuf and
Surjaatmadja, 2018). Also, there is a problem relating to the cash flow because the payment by
consumers is extended by 33 days and some consumers are paying after 90 days which creates
problem in cash flow of the company.
4. Advising the strategies for improving the financial position of company
With the analysis it is clear that there is high requirement of making improvement within
the working of the company. hence, for this some of the suggestion for Stell co ltd are as
follows-
 The first strategy recommended to company is that they must invest more in the
marketing and particularly social media marketing. This is necessary for the reason that
when company will be promoting in better manner then this will be providing better
working to the company. also more consumer will be attracted and this will result in
increase in sales of the company.
 Further another advice is that company must try to reduce the indirect expenses. This is
particularly recommended to improve the net profit of the company. this is necessary for
the reason that when the indirect cost will be controlled then this will increase the net
profit and this will help company in improving the overall efficiency of the business to a
great extent.
 Along with this it is suggested to Stell co ltd that they must create good policy relating to
account receivable and credit period provided to consumer for paying the remaining
amount. This is necessary as consumer takes more time in making and payment and this

leads to cash flow problem and in case there will be strict rules then this issue will be
solved better.
QUESTION 2
1. Calculation of Break- even point on basis of net contribution method
Break-Even analysis for DK Machines
Particulars Formula
Figures (in
£)
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
With the help of the above BEP analysis it is clear that for DK Machines to be in no
profit no loss situation has to produce 917 gaming consoles. This is particularly because of the
reason that with help of break- even point it is clear that it is the point at which company is
having cost equal to the income which implies no profit no loss situation. Also in terms of
money, the BEP is £366666.7. This simply outlines the fact that after this point of time the
company will be in position to start earning profits as at this time the company has met all the
expenses and other cost and after this will be earning profit.
2. Use of BEP for setting up profitable sales target for company
The break- even is the point of sale at which the company is in no- profit no loss
situation. This is the situation where company is able to recover all the cost which is levied by
the business to run and produce the goods and services. The use of BEP or the cost- volume
profit ratio is the one which help companies in setting up the sales target which will be
profitable. With help of the BEP the company can calculate the minimum required sales both in

terms of units and amount and it will guide them to set the target more than the BEP. This is
particularly because of the reason that after the BEP point sales only the company will start
earning the profit (Fuksa, 2021). Hence, as a result of this more profit will be earned and this will
help the company grow and develop. Along with this with help of the BEP analysis company can
also set the different prices as it will help to know that at what price level the company will be at
which BEP level.
3. Explaining accurate use of management accounting information and adoption of Activity
Based Costing
The supply of more accurate information and adoption to the Activity Based Costing will
be helpful to the company for improving the long term and short term objectives of the company.
the activity based costing is being defined as the method through which company assigns the
overhead and indirect cost of the company to the cost of the product or the service. This method
is based on the activities incurred and this increases the understanding of overhead and other cost
drivers. Along with this the use of ABC will help DK Machines in improving the working
efficiency of the company (Mohammed, 2021). Also the benefit of this method for DK Machines
is that it will help in setting the accurate product cost including all the realistic cost being levied
at time of the production of the goods. Moreover, another benefit to the company after
implementation of ABC is that this method provides more information relating to the cost
behaviour and this is helpful for the company in order to analyse and set the cost.
QUESTION 3
1. Calculation of the three most significant variances
Variance analysis for
Particulars
Budget
(£)
Actual
(£)
Variances (£) (Budgeted –
Actual)
Outcom
e
Sales Turnover 1560000 820000 740000 A
Direct Costs:
Raw Materials 400000 275000 125000 F
Labour 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. Likely causes of each variance
With the above analysis it is clear that there are different types of the variance being
present within the company wherein some are favourable and some adverse. The three major
variances outlined involves sales, premises cost and labour. The possible causes which might
have led to the adverse variance is as follows-
 The first and foremost reason for the variance might be that company was not able to find
good set of consumer within the private sector. This might have resulted in the high
variance and the budgeted turnover was not being attained. Due to this reason there is
high variance in sales revenue that is 740000.
 Along with this another possible cause for high variance is the inflation as it may be high
and as a result of this Concorde construction cost has been increased. This is particularly
because of the reason that inflation cannot be controlled by the company and as a result
of this the premises cost have increased. Resultantly there was high variance within the
indirect cost of the company.
 In addition to this, cause of another variance that is labour is also high and this might be
because of the reason that the estimated labour rate might be high at time of actual
working as compared to the budgeted.
3. Possible consequences of variance for business objectives
With the analysis of the above variances it is clear that adverse variance generally creates
the negative impact over the company. The major consequence of the variance within the
turnover is that the profit of the company will be reduced. This is not good as the overall
profitability of the company will be declining and it will affect the working efficiency.
Further the consequence of labour variance is that the company will be having less people
to work and as a result of the quality and on time completion of the work will be affected. Also,
another consequence will be that company might have to pay more as in case rate will be high.
Moreover, the variance within the premise cost also results in consequences over the
profitability of the company. This is particularly because of the reason that when the cost will be

increased then automatically it results in decline in the profits of the company. Hence, this is the
major consequences within the company and ultimately it will impact the objective attainment of
the business.
4. Recommended strategies for removal of the variance
With the above analysis it is clear that company is having many adverse variance and
because of this the performance of the company has reduced. Hence, some of the suggestion for
the company to improve the working and reduce the variance is as follows-
 The recommended strategy for eradicating the sales variance is to work in use of good
promotional and marketing strategies. This is necessary for the reason that when the
company will promote the goods and services of company then this will be improving the
working efficiency of the company resulting in increase in sales.
 Along with this it is advisable to the company that for managing the labour variance that
company must provide good training and development facility and other attractive
benefits such that labour works in better manner (Hijal-Moghrabi, 2019). This will attract
the labour towards the company and will work in efficient manner.
 Another suggestion for Concorde Construction is that before finalising the premises the
company must evaluate the different premises and conduct the cost benefit analysis. After
this analysis, the most suitable alternative must be selected so that less cost is being
incurred.
5. Evaluating the benefits and drawbacks of switching incremental budgeting to ZBB
Currently Concorde Construction is using the incremental based budgeting and it is
having different drawback and because of this company is switching over ZBB. The major
drawback of incremental budgeting is that it promotes unnecessary spending and because of this
the overall cost of the company is increased. Hence, for this reason the company is shifting over
ZBB and its benefits and drawbacks are as follows-
Benefits of ZBB Drawbacks of ZBB
The most common benefit is that it assists in
efficient allocation of the resources and
reduced the redundant activities.
The drawback of using ZBB is that it is very
time consuming as the budgeting starts from
scratch and no past information is being used.

REFERENCES
Books and Journals
Fuksa, D., 2021. Innovative Method for Calculating the Break-Even for Multi-Assortment
Production. Energies. 14(14). p.4213.
Hijal-Moghrabi, I., 2019. Why Is it So Hard to Rationalize the Budgetary Process? A Behavioral
Analysis of Performance-Based Budgeting. Public Organization Review. 19(3). pp.387-
406.
Mohammed, S. J., 2021. Integration Between The Target Costing and activity based-budgeting
in generating value added/field study. Tikrit Journal of Administration and Economics
Sciences. 17(53 part 1).
Yusuf, M. and Surjaatmadja, S., 2018. Analysis of financial performance on profitability with
non performace financing as variable moderation. International Journal of Economics and
Financial Issues. 8(4). p.126.