Management Accounting and Financial Analysis Report

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Management Accounting
1

Table of Contents
Introduction...........................................................................................................................................3
LO2.......................................................................................................................................................4
Part 1.................................................................................................................................................4
Part 2.................................................................................................................................................6
Conclusion...........................................................................................................................................10
References...........................................................................................................................................11
Appendix.............................................................................................................................................12
2

Introduction
Management accounting tools require the management to analyse the already compiled data
and hence to process such data to arrive at a more meaningful data relevant for the
management purposes. Such a process helps the company to provide them with the
appropriate tools and knowledge which help them in the decision-making process and hence
formulate long term strategies.
3

LO2
Part 1
Production of units:
Particulars May June
Sales (Units) 400,000 360,000
Production (Units) 400,000 400,000
Opening Stock (Units) - -
Closing Stock (Units) - 40,000
Cost Sheet as per Absorption Costing:
Particulars
May June
Amount (£) cost pu Amount
(£) cost pu
Direct Material 550,000 1.375 550,000 1.375
Direct labour 750,000 1.875 750,000 1.875
Prime Cost 1,300,000 3.25 1,300,000 3.25
Fixed Overheads 600,000 1.5 600,000 1.5
Cost of Production 1,900,000 4.75 1,900,000 4.75
Less: Closing Stock - - 190,000 4.75
Cost of Sales 1,900,000 4.75 1,710,000 4.75
Profit 2,300,000 5.75 2,070,000 5.75
Sales 4,200,000 10.5 3,780,000 10.5
Cost Sheet as per Marginal Costing:
Particulars
May June
Amount (£) cost pu Amount
(£) cost pu
Sales 4,200,000 10.50 3,780,000 10.50
Less: Variable Cost
Direct Material 550,000 1.375 550,000 1.375
Direct labour 750,000 1.875 750,000 1.875
Less: Closing Stock - - 130,000 -
Total Variable Costs 1,300,000 3.25 1,170,000 3.25
Contribution 2,900,000 7.25 2,610,000 7.25
Fixed Overheads 600,000 1.5 600,000 1.5
Profit/Loss 2,300,000 5.75 2,010,000 5.75
4

Purpose of the absorption costing is to assess the cost structure of the organisation, and
hence, the motive is to record and report thee manufacturing activities of the organisation for
the given period. Marginal costing's purpose is to analyse the profitability of the company
and hence make decision-based on such analysis (Robinson et al., 2015).
The difference in the profit for the June month is because of the difference in the valuation
treatment of the closing stock. In absorption costing stocks are treated as per the cost of
production, whereas in the marginal cost the same is valued at the variable manufacturing
cost of the company (Prahlad et al., 2015).
5

Part 2
Memo
To: ABC PLC
From: XYZ Consultancy
Subject: Financial Performance of the Aon PLC
In the given assignment, there is a requirement for the performance analysis of the company,
and hence, for that specific purpose, a UK based company is chosen for the analysis Aon
PLC has been taken.
Profitability
Ratios:
Particulars 2017 2018
Return on Assets
(%) 4.65 4.32
Return on Equity
(%) 24.38 25.97
Operating Margin
(%) 9.8 14.3
Payout Ratio (%) 31.2 47.2
Profitability ratios help in the analysis of the profit earning capacity of the organisation and
hence the financial performance and stability for the year. Company has shown an increasing
trend in the profitability of the company such that the operating margin has shown a marginal
increase over the year, suggesting an increase in the operational efficiency of the company.
Return on Equity has increased, suggesting that the company is generating more return on the
amount invested by the investors and thus increasing their value. Return on the asset has been
constant over the year. The pay-out ratio has shown a slight increase suggesting that the
company is paying out more of the profits (MORNINGSTAR, 2019).
6

2017 2018
0
5
10
15
20
25
30
35
40
45
50
4.65 4.32
24.38 25.97
9.8
14.3
31.2
47.2
Profitability Ratios
Return on Assets (%) Return on Equity (%)
Operating Margin (%) Payout Ratio (%)
7

Efficiency Ratios:
Particulars 2017 2018
Receivables
Turnover 3.95 4.11
Fixed Assets
Turnover 15.05 18.7
Asset Turnover 0.38 0.41
Efficiency ratios involve commenting on the operational efficiency of the company
operations and processes over the year. Increase in the receivables turnover ratio suggests that
the company has been collecting its debts more frequently, and hence, the blockage of funds
has reduced in this regards (Aon, 2018). There is also an increase in the fixed assets turnover
ratio, suggesting that the company has been employing the assets of the company in a more
efficient manner than before. Asset turnover talks about the overall efficiency of the company
and hence an increase suggests that the overall efficiency of the company has increased over
the year.
2017 2018
0
2
4
6
8
10
12
14
16
18
20
3.95 4.11
15.05
18.7
0.38 0.41
Efficiency Ratios
Receivables Turnover Fixed Assets Turnover Asset Turnover
8

Liquidity Ratios:
Particulars 2017 2018
Current Ratio 1.07 1.08
Quick Ratio 0.31 0.28
Debt/Equity 1.27 1.48
Financial Leverage 5.69 6.37
Liquidity ratios comment on the liquidity position of the company, such that it analyses the
debt-paying capabilities of the company for the period. The current ratio of the company has
been constant over the year suggesting that the company has been able to maintain the
liquidity level of the company and is in a safe position to pay off its debts as and when
required. Quick ratio analyses the capability of the company to pay off its debts on more
short notice and hence only considers quick assets (cash and cash equivalents, debtors and
bills receivables) for the calculation purposes (MORNINGSTAR, 2019). The purpose is to
analyse if the company will be able to generate funds in an emergency or in the situation of
urgent requirement of the funds. Debt Equity ratio analyses the capital structure of the
organisation and to determine which source of funding is employed more by the company.
Such dependence is termed as Gearing, and hence, it can be seen that the company has been
gearing on the debt fund over the year. This will increase the burden of finance cost over the
coming years. Financial Leverage also calculates the ability of the company to pay finance
costs with the profits earned over the year. It can be seen that the company has been
performing well and hence been able to earn profits to cover its finance costs.
2017 2018
0
1
2
3
4
5
6
7
1.07 1.08
0.31 0.28
1.27 1.48
5.69
6.37
Liquidity Ratios
Current Ratio Quick Ratio
Debt/Equity Financial Leverage
9

Conclusion
Task 2 requires the application of appropriate tools and methods for analysing the various
operational and performance aspects of the business operations and processes. Such tools
help the company in assessing the profitability and the performance of the company and thus
formulate and implement the management policies and thus set a path for the future goals of
the company.
10

References
 Aon. 2018. Annual Report. [Online] Aon. Available at:
https://s2.q4cdn.com/545627090/files/doc_financials/2018/annual/2018-Annual-
Financial-Report.pdf [Accessed on 10 July 2019]
 MORNINGSTAR. 2019. Unilever PLC ADR. [Online] MORNINGSTAR. Available
at: https://www.morningstar.com/stocks/xnys/aon/quote.html [Accessed on 10 July
2019]
 Prahlad, A., Kavuri, S., Madeira, A.D., Lunde, N.R., Bunte, A.G., May, A. and
Schwartz, J.A., CommVault Systems Inc, 2015. Systems and methods for storage
modeling and costing. U.S. Patent 9,111,220.
 Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International
financial statement analysis. John Wiley & Sons.
11

Appendix
12