Cost and Financial Statement Analysis of Erasure Externals Ltd

This report presents a comprehensive analysis of the cost and financial statements of Erasure Externals Ltd. It begins with an executive summary, followed by an introduction that outlines the company's use of managerial tools like budgeting. The report delves into the reasons for a deteriorating cash balance, examining cash inflows and outflows, and the impact of increased expenses and accounts receivable. It then explains the basis for charging overheads to individual production profit centers, detailing allocation methods for various indirect costs. The analysis continues with an investment appraisal, comparing NPV, IRR, and payback period to evaluate investment opportunities. The report concludes with recommendations for improved cash management and the implementation of cost accounting techniques, and includes a references and bibliography section.

Running head: COST AND FINANCIL STATEMENT ANALYSIS
Cost and Financial Statement Analysis
Name of the Student:
Name of the University:
Author’s Note:

1COST AND FINANCIAL STATEMENT ANALYSIS
Executive Summary:
This report aims at analyzing various costing information and financial statement information
of Erasure Externals Ltd for understanding their operational and financial performance.
Various financial statements can exhibit the actual operational and financial performance of
the organization and it can be compared with their budgeted figures. In this report such an
analysis has been done to compare the budgeted figures with the actual performance and to
show the reason behind differences and deviations. Lastly, the report concludes with some
recommendation for the company to use the appropriate methods of costing and to implement
such cost and management accounting tools and techniques, which will help the organization
to better manage the costs and to reduce the overall cost of production.

2COST AND FINANCIAL STATEMENT ANALYSIS
Table of Contents
Introduction:...............................................................................................................................3
Reason for deterioration of cash balance:..................................................................................3
Reason and basis of charging overheads to individual production profit centers:.....................4
Analysis of investment appraisal:..............................................................................................5
Recommendation:......................................................................................................................6
References and bibliography:.....................................................................................................7

3COST AND FINANCIAL STATEMENT ANALYSIS
Introduction:
Every business organization are having some mission and vision and they use certain
managerial tools and techniques to manage their day to day business activities aiming
towards achieving their mission and vision. Budget and budgetary control is such a
managerial tool, which can be implemented in a business organization to forecast the future
incomes and expenses and later on the control mechanism can be adopted comparing the
actual operational and financial results with the budgeted figures. In this report some of such
analysis have been done based on the information available from the budget and costing data.
Reasons behind some of such deviations of actual performances have been pointed out for
better understanding of the reader (Wang 2014).
Reason for deterioration of cash balance:
Cash budget is a management tool, which helps in planning, and projecting future
expected cash inflows and cash outflows. It also shows the ending cash balance as along with
a net change in cash positions. From the given cash budget statement of Erasure Externals
Ltd it can be observed that there are mainly cash sales and collection from debtors as the
sources of cash inflows and on the other hand, the purchases and payments various expenses
are the main applications of cash which requires cash outflows. The net change in cash has
been shown as the difference between the cash receipts and cash disbursements. Adjusting
the opening balance of the month, the ending cash balance has been shown. From the given
cash budget it can be observed that, although there is an increasing trend in the cash sales and
collection from debtors, payments for expenses has also been increased throughout the
budgeted period. Total cash receipts have been increased from £2,414,314 to £2,798,440,
which means there is a total increase in receipts for £384,126. On the other hand, the total
payments have also been increased and the main reason behind that is the increase in

4COST AND FINANCIAL STATEMENT ANALYSIS
operating expenses and administration costs. One more reason can be pointed out as the
increase in cash purchase. It can be observed that the cash purchase have been increased
drastically with the increase in volume of sales. It can easily be observed that, the accounts
receivables have been increased drastically which implies the deferment of sales revenue but
there is no such significant increase in the accounts payables. Therefore, the liquid fund has
been blocked in accounts receivables as a result the cash balance has been decreased (Harris
2017).
Reason and basis of charging overheads to individual production profit centers:
Direct material cost and direct labor costs are directly identifiable with the production
profit center and product unit and hence it is directly charged to the respective production or
profit center. Indirect materials, indirect labor and other indirect expenses are called the
overhead collectively. As those expenses are indirect in nature, those cannot be directly
identifiable with the production or profit center or product units (Harris 2017). Therefore, all
those overhead expenses needs to be charged to various productions or profit center based on
certain logical and reasonable basis for computation of actual cost of the product. The
overhead expense of Erasure Externals Ltd includes Indirect labor, Rent, Machine Insurance,
Heating, Machine Power and Machine Depreciation. In the overhead allocation statement as
given in the case study, in the first part the overhead have been allocated to all the production
center as well as the service units based on the consumption of the respective benefits of the
expense. It can be observed that the indirect labor costs have been allocated based on the
percentage of the direct labor costs. It can be observed that, indirect labor have been charged
as 15.12% of the direct labor costs. The insurance costs of machineries have been allocated
based on value of machineries of the respective departments and the heating costs have been
charged based on floor space occupied by the respective department. Machine power costs

5COST AND FINANCIAL STATEMENT ANALYSIS
have been charged based on machine hour run in the respective department and lastly the
depreciation of machineries have been charged based on value of machineries of the
respective department (Harris 2017).
In the second part, the total costs of service departments have been charged to the
production departments. The costs of maintenance have been charged based on the machine
hours and the cost of administration department have been allocated based on the number of
employees in each of the production departments. Lastly, the total overhead costs of the three
production departments have been divided by the machine hours to get the overhead recovery
rate per machine hour and applying that rate the overhead can be charged to the different
product units (Megginson Ullah and 2014).
Analysis of investment appraisal:
Investment appraisal is the technique of evaluating the investment opportunities
available to a business organization. It uses various tools and techniques to make project the
expected costs and benefits of the investment opportunities and to take conscious investment
decision. There are various such tools, such as NPV, IRR, and Payback period and so on. The
acceptance criterion for NPV is to accept the investment with positive NPV and for multiple
investment options to select the investment option with higher NPV. It can be observed that
the Quicklift is having the greater NPV that the Safeload and hence the Safeload should be
selected based on the NPV. IRR is another tool for investment appraisal where the cash flows
are discounted by such a rate, which equates the present value of the cash inflows with the
initial investment. It can be observed from the case study that, the Safeload is having greater
IRR of 11.69%. Therefore, in this the Safeload should be selected. Based on the payback
period also the first option is more preferable than the second option (Baum and Crosby
2014).

6COST AND FINANCIAL STATEMENT ANALYSIS
Hence, it can be observed that there is a contradiction between the results of these
investment appraisal methods. It is because of difference in initial investment and cash flows.
NPV being superior to the other investment appraisal methods, the results of the NPV should
be accepted and given more priority over the results of the other investment appraisal
methods (Baum and Crosby 2014).
Recommendation:
From the above discussion and analysis, it can be observed that, there are various cost
and management accounting tools and techniques, which can be applied and implemented in
a business organization for better management of costs and for helping in various important
managerial decisions making. It can be recommended to manage their accounts receivables
more efficiently so that the accounts receivable is realized quickly and as a result, the cash
balance could be increased.

7COST AND FINANCIAL STATEMENT ANALYSIS
References and bibliography:
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley & Sons.
Coleman, C., Crosby, N., McAllister, P. and Wyatt, P., 2013. Development appraisal in
practice: some evidence from the planning system. Journal of Property Research, 30(2),
pp.144-165.
Davis, A. and Chati, A., Verizon Patent and Licensing Inc, 2014. Virtual machine allocation
in a computing on-demand system. U.S. Patent 8,850,442.
Gorokhov, A., Khandekar, A., Borran, M.J., Prakash, R. and Palanki, R., Qualcomm Inc,
2013. Methods and systems for processing overhead reduction for control channel packets.
U.S. Patent 8,374,200.
Harris, E., 2017. Strategic project risk appraisal and management. Routledge.
McCoy, J.W., Dehner, L.G., Kotecha, J.H. and Mundarath, J.C., Apple Inc, 2014. Uplink
control channel allocation in a communication system and communicating the allocation.
U.S. Patent 8,724,556.
Megginson, W.L., Ullah, B. and Wei, Z., 2014. State ownership, soft-budget constraints, and
cash holdings: Evidence from China’s privatized firms. Journal of Banking & Finance, 48,
pp.276-291.
Moran, N., Glendinning, C., Wilberforce, M., Stevens, M., Netten, A., Jones, K., Manthorpe,
J., Knapp, M., Fernández, J.L., Challis, D. and Jacobs, S., 2013. Older people's experiences
of cash-for-care schemes: evidence from the English Individual Budget pilot projects. Ageing
& Society, 33(5), pp.826-851.

8COST AND FINANCIAL STATEMENT ANALYSIS
Odoyo, F.S., Adero, P. and Chumba, S., 2014. Integrated financial management information
system and its effect on cash management in Eldoret West District Treasury, Kenya.
Smith, J.A., Bi, H., McBeath, S.M., O'connor, J.M., Pinckley, D.T. and Reed, J.D., Google
Technology Holdings LLC, 2015. Apparatus and method for automatic repeat request with
reduced resource allocation overhead in a wireless VoIP communication system. U.S. Patent
9,065,651.
Wang, X.S., 2014. Financial management in the public sector: tools, applications and cases.
Routledge.