Financial Reporting and Ratio Analysis of Good Clothing Ltd

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Management Accounting

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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................4
Task 2.............................................................................................................................................10
Task 3.............................................................................................................................................20
Task 4.............................................................................................................................................22
Conclusion.....................................................................................................................................23
References......................................................................................................................................24

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Introduction
Main purpose of designing this report is to generate the practical understanding and knowledge
about different concepts and terminologies related to management accounting. This report will
demonstrate the understanding of management accounting and essential requirements of various
kinds of management accounting systems. In addition to this, the report will focus on critical
evaluation of management accounting and reporting systems in context of Good Clothing Ltd.
Further, the report will focus on defining key concepts like absorption cost and marginal costs. It
will also focus on calculation of costs under absorption and marginal costing techniques. In
contrast to this, the report will demonstrate practical understanding about ratio analysis
technique. It will also help to understand variance and types of variances in management
accounting. Next section of this report will emphasize on generating understanding or knowledge
about the concepts of budget, budgetary control and tools that are used as budgetary control tools
in an organization. Final section of this report will facilitate knowledge about comparative
analysis of the selected company with its competitor. It will also demonstrate the problems faced
in financial planning by companies. In addition to this, the report will evaluate that how the
financial planning tools contribute in the success of organizations.

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Task 1
Slide 1: Introduction
1.1: Definition of Management Accounting and Important Requirements of Various
Management Accounting Systems
Slide 2: Management Accounting

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Foot Notes:
Management Accounting:
Management accounting can be defined as the systematic process of collecting, recording,
managing of key business accounts and preparing financial reports for a business entity. It is also
known as managerial accounting. Management accounting contributes positively in the decision
making process of organizations. For instance, the management accounting provides useful
business data that are required by middle and upper level of management for strategic decision
making for the organization (Kaplan and Atkinson, 2015). One of the differences between
financial accounting and management accounting is that financial accounting emphasizes on
development and analysis of financial statement that is reported to external stakeholders of the
business like investors and creditors. In contrast to this, management accounting focuses on
creation and analysis key managerial accounts and development of financial reports that are
developed for internal users of the organization.
Slide 3: Requirements of Management Accounting Systems

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Foot Notes:
Essential Requirements of Different Types of Management Accounting Systems:
Cost Accounting System: Cost accounting system can be defined as the framework or field of
study, which helps in approximation of cost of product and inventory of the business. The cost
accounting deals in valuation and analysis of cost control, profitability and inventory valuation
(Maskell et al., 2016). Cost accounting system is helpful in ascertaining the production cost of
organization through addition of raw material and other input costs, and fixed costs like
depreciation on usage of assets etc.
Inventory Management: Inventory management can be defined as the technique of reviewing and
controlling storage, usage and ordering of different inventories within an organization. There are
different requirements of an effective inventory management system within an organization.
Example of these requirements includes barcode scanner, barcode printer, mobile devices,
desktop software for inventory management, stocks, goods and the warehouse (McLaren et al.,
2016). Main purpose of inventory management system is to determine current level of inventory
in organization and to avoid situations of under-stock and over-stock situations in business.
Job Costing System: Job costing system can be defined as the system that is helpful in allocation
of production cost to different batches or individual items of products. Job costing system is
appropriate for the products, which are processed different from each other. Example of different

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products, on which the job costing system would be applicable, involves production of different
truck models, construction of custom designed buildings, custom made machine tools and
machines (Kaplan and Atkinson, 2015). Three types of information are accumulated and needed
by the job costing system such as overheads, direct labor and the direct materials.
Price Optimization System: The price optimization system emphasizes on application of a
mathematical model in order to ascertain that how the customers respond to different levels of
pr9icing for a particular product or service over different channels (Maskell et al., 2016). Main
purpose of this technique is to determine best level of pricing that should be adopted by the
organization for its products in order to generate maximum level of sales.
Slide 4:Different Methods Used for Management Accounting Reporting
Foot Notes:
Following are different methods that are used for management accounting reporting in different
organizations including Good Clothing Ltd:
Performance Reports:
Performance reports are planned and designed by showing the actual revenue and expenditures
against the budgeted performance parameters. Performance reports are designed every year on
monthly and quarterly basis (Alam et al., 2016). The performance reports are highly helpful to

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the upper management of companies for planning of future budget and production increasing
according to possible market demand in coming time period.
Budget Reports:
Budget report is a major part of management accounting. The budgets are prepared by the
managers of organization for planning of budgets for different departments of the organization
(Fleming, 2015). The budget for current year is planned by the accounting managers of
organization on the basis of historical budgets and current year’s funding needs in business.
Slide 5: Continued…
Foot Notes:
Cost Reports:
Cost reports are prepared within the management accounting for valuation of cost of different
products produced by the company. The cost estimation is done in cost reports through addition
of different types of costs faced in the production of products like cost of raw material, cost of
labor and other overheads. This cost report also divides the total cost obtained by total number of
products produced by the organization (Abbey, 2012). With the help of cost reports, the
accounting managers and other managers stay able to do comparison between total cost per unit
and selling price per product. This is helpful in evaluating profit per unit of product.
Slide 6: Conclusion

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Slide 7: References

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Task 2
Definition of Marginal and Absorption Cost:
Marginal cost can be defined as the cost that is incurred by a company with the production of an
additional unit of the product (Gupta, 2012). Following formula is helpful to calculate marginal
cost of a product for a company:
Marginal Cost = Direct Labor + Direct Material + Direct Expenses + Variable Overheads
Absorption costing can be defined as the costing system that is taken into account for valuation
of inventories in an organization. The absorption costing system includes labor cost, raw material
cost, fixed and the overhead production costs (Gupta, 2012).
Calculation of Cost Using Marginal and Absorption Costing:
Cost Determination under Marginal Costing:
Cost Determination Under Marginal Costing Method
Total Cost
(£)
Cost per Unit
(£)
Direct Material 400000 40
Direct Wages 300000 30
Direct Expenses or Variable
Expenses 100000 10
Marginal Cost per Unit 80
Cost Determination under Absorption Costing:
Cost Determination Under Absorption Costing
Method
Description
Marginal Cost:
Direct Material 400000

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Direct Wages 300000
Direct Expenses or Variable Expenses 100000
Total Marginal Cost 800000
Add: Fixed Expenses
Administrative 150000
Sales and marketing 50000
Total Fixed 200000
Total Cost 1000000
Total Units Produced 10000
Total Cost per Unit £100
Designing Financial Reporting Documents for the Appendix B:
In general, there are two types of financial reports that are prepared for the organizations for
purpose of financial reporting for any business year. Example of these financial documents
involves statement of income and loss and the statement of financial position. Statement of
income and loss is also known as profit and loss statement. At the same time, statement of
financial position is also termed as balance sheet of the organization. Income statement of an
organization is helpful to evaluate profitability position of an organization (Ruppel, 2016). The
income statement summarizes the revenues and different types of expenses faced by the
organization in a business year. At the same time, statement of financial position or balance sheet
is a helpful document to evaluate and ascertain financial position of an organization in terms of
assets, liabilities and net shareholder’s equity.
Ratio Analysis:
Ratio analysis is an important financial analysis technique that can be taken into account for
producing the financial reports based on the key financial statements of companies like income

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statement and the statement of financial position (Stout and Wang, 2017). The financial analysis
through application of ratio analysis technique for Good Clothing Ltd is as below:
(i) Profitability Ratios
Profitability ratios are calculated and interpreted for purpose of evaluating the financial position
of a company. The valuation and interpretation of different profitability ratios for Good Clothing
Ltd are as below:
Return on Capital Employed or ROCE:
ROCE or return on capital employed can be explained as the financial ratio that helps in
measuring and evaluating efficiency of the organization to make profits from utilization of its
capital employed. The following table depicts valuation of return on capital employed for Good
Clothing Ltd:
Name of Ratio Formula of Ratio 2016 2015
Profitability
Ratios:
ROCE EBIT/ Capital Employed -0.2373 0.08782
Earnings before Interest and Tax or
EBIT -5792 2631
Capital Employed 24409 29958
Capital Employed Total Assets - Current Liabilities 24409 29958
Total Assets 44214 50164
Current Liabilities 19805 20206
On the basis of above table, it is evidential that value of return on capital employed ratio of Good
Clothing Ltd has declined significantly from 0.087 in 2015 to – 0.237 in 2016. It means the
efficiency of Good Clothing Ltd Company to make profits from utilization of capital employed
has d3eclined significantly from 2015 to 2016 (Stout and Wang, 2017). This kind of situation
can negatively affect the brand reputation and cre3ditworthiness of company financial and
capital markets. The company should focus on improving its ROCE ratio through increase in
sales and cost control techniques.