Stell Co Ltd Financial and Management Accounting Analysis Report

This report provides a detailed financial and management accounting analysis of Stell Co Ltd. It includes calculations of gross and net profit, ratio analysis, reasons for declining profits and cash flow problems, and strategies for financial improvement. The report also covers break-even point computation, uses of break-even analysis, and the adoption of activity-based costing. Furthermore, it calculates significant variances, explains their causes and consequences, recommends business improvement strategies, and presents the advantages and disadvantages of switching from incremental-based budgeting to zero-based budgeting. This student contributed assignment is available on Desklib, a platform offering a range of study tools and resources.

FINANCIAL and
MANAGEMENT
ACCOUNTING

TABLE OF CONTENTS
QUESTION 1..................................................................................................................................3
1 Calculation of Gross Profit And Net Profit by Stell Co Ltd in each accounting year............3
2. Calculating ratio.......................................................................................................................3
3. Providing the reasons for the company’s declining profits and cash flow problems between
2020 and 2021..............................................................................................................................4
4. Providing three strategies to improve the financial position................................................5
QUESTION 2..................................................................................................................................6
1 Computation of Break even point............................................................................................6
2. Explaining uses of Break Even Analysis to enable the firm to set profitable sales revenue
targets...........................................................................................................................................6
3. Outlining supply of more accurate management accounting information and the adoption of
the Activity Based Costing for accomplishing short and long term objectives...........................7
QUESTION 3..................................................................................................................................7
1. Calculating th three most significant variances:......................................................................7
2 Explaining the causes of these variances..................................................................................9
3. Identifying projection of likely consequences for the business pertaining to each of the
variance chosen............................................................................................................................9
4. Recommending strategies for business improvements..........................................................10
5. Presenting advantages disadvantages of a switch from Incremental Based Budgeting to ZBB
...................................................................................................................................................10
REFERENCES..............................................................................................................................11

QUESTION 1
1 Calculation of Gross Profit And Net Profit by Stell Co Ltd in each accounting year.
Profit and loss account
particulars 2021 2020
Sales Turnover 612000 970000
Cost of Sales 212000 320000
Direct labor costs 233000 212000
Gross Profit 167000 438000
Warehousing
Costs
30000 10000
Distribution Costs 55000 28000
Other overheads 35000 17000
Dividend paid 40000 60000
Total Expenses 160000 115000
Net profit 7000 323000
2. Calculating ratio
Gross Profit Ratio
Particulars Formula 2021 2020
Gross Profit 167000 438000
Sales Turnover 612000 970000
Gross Profit
Ratio
Gross
Profit/Sale
s
Turnover*
100
27.3% 45.2%
Gross profit margin is taken into consideration for evaluating that who effectively firm is
reducing cost to generate profits. From the evaluation of the gross profit it can be interpreted that

there is decreasing of profits which is indicating that company's revenue generating capacity in
current year as compared to the previous has declined. The other cause that can be articulated fro
the decrease in profitability is higher cost of goods sold. The gross profit ideal ratio is 10-20%
which is lower than articulated figure and previous year performance it is less. On the basis of
this, it can be said that firm needs to make improvement in overall performance. This allows to
ensure that cost structure is formulated properly to attract stakeholders for investment (Masdupi,
Tasman and Davista, 2018).
Net Profit Ratio
Particulars Formula 2021 2020
Net profit 7000 323000
Sales Turnover 612000 970000
Net Profit Ratio Net
Profit/Sale
s
Turnover*
100
1.1% 33.3%
Net profit estimating is related with assessing that how effectively firm is making the sales
revenue. On the basis of the computed figure it can be identified that firm's NP has decreased as
compared to the year 2020. The revenue obtained in present year is lower than the earlier
duration which is indicating that effectiveness to generate profitability has reduced that can
adversely affect firm. It is important as there are distinct form of the stakeholders who take it into
considerations for decision-making procedure. It is significant to attract investors, lenders,
suppliers, etc to connect with firm to have higher fund-raising capacity.
3. Providing the reasons for the company’s declining profits and cash flow problems between
2020 and 2021
There are various reason which has reduced the profitability of the company as
compared to the previous year. From the evaluation it can be identified that one of the main
cause that has negatively impacted the profitability of organization includes reducing of sales
revenue. It decreases the availability of cash flows in firm. The particular enterprise has received

low profitability due to decrease in cash flow which has impacted its ability to conduct the
divided efforts. In order to attract the investors the organization require paying attention on
having relevant level of satisfaction providing efforts in turn better customers to incline
profitability can be exerted by form. The other set of reasons for decreasing profitability due to
lower revenue is changing trend in market, ineffective quality performance, customer
dissatisfaction, rise of substitute products, etc which result in negatively affecting the momentary
condition of business.
There is increase of the cost in the overall structure of firm as both the direct and indirect
expenses of enterprise has inclined which is reducing its profit margin. In order to get he higher
profitability as compared to the previous year firm need to focus on developing such effective
strategy of lowering the expenditure of enterprise in turn higher margin can be established. On
the basis of this it can be interpreted that firm has uncured higher level of expenses for increasing
its revenue generating capacity but failed. The failure in inclining revenue and decreased the
cash flow as compared to previous year which ha adversely affected the financial condition of
the enterprise.
4. Providing three strategies to improve the financial position
 It is recommended to the company to execute cost leadership strategy for the purpose of
reducing the expenses. This can be effectively exerted by identifying the irrelevant
aspects which are not significant contributing to profitability so that can be eliminated.
The particular approach can aid in attaining the organization objective of having
effective ability to decline expenses so that profits can be increased to boost financial
condition.
 This is advised to the organization to apply price optimization system in turn customer
responses for the changing price level can be identified in order to attract buyers via
setting relevant price. It can provide assistance in receiving higher revenue to uplift
monetary condition.
 It is suggested to the firm to give emphasis on implementing the variance analysis and
KPIs for gaining the information about standards so that motivating employees to meet
this so that higher potential can be derived. This can permit in increasing performance of
firm by having effective results to gain competitiveness.

QUESTION 2
1 Computation of Break even point
Break-Even analysis
Particulars Formula Figures
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
From the evaluation of the above computed BEP it can be identified that at this point
firm will reach to the position where there is no profit or loss. After selling the units such as 917
and generating revenue of 366666.7 firm will start generating the profits. This is helpful in
decision making procedure for the organization.
2. Explaining uses of Break Even Analysis to enable the firm to set profitable sales revenue
targets
There are different ways in which break even analysis is helpful for the organization.
The one of the significant reason for which BEP analysis is taken into consideration that includes
determination of selling price so that desirable profit can estimated (Patkar and Mukkawar,
2021). This contributes in setting the fix sales volume to cover given return on capital employed.
Forecasting costs and profits has as result of change in volume can be determined with help of
the break even analysis. Managing the size of units to be sold, budgeting and setting targets,
managing the margin of safety, monitoring and controlling cost and helping to design pricing
strategy can be done by taking BEP analysis into procedure.

On the basis of this, it can be interpreted that organization with help of break even
analysis can forecast cost, setting appropriate targets for profits, etc so that enable to get effective
position in achieving significant ability to set profitability margin to meet revenue standard.
3. Outlining supply of more accurate management accounting information and the adoption of
the Activity Based Costing for accomplishing short and long term objectives
In order to achieve short and long term objectives it is important for the firm to give emphasis
on having effectual data insights so that prevailing lacking areas can be identified. Accurate
management accounting information gives ability to assess the crucial parts which can highly
contribute in attaining the organizational goals such as attracting customers, higher profitability,
sustainability, etc. Activity based budgeting is related with recognizing the practice that are
leading expanses to firm so that proper decision-making procedure to get desirable outcomes can
become possible (Wahab, Mohamad and Said, 2018). There are various advantages which can be
received by applying ABC that involve sh better insights of operational costs, adding competitive
edge, management of budget, improved budgetary control, improving relationship, etc so that
attaining short & long term objective can be done effectively. On the basis of this, it is
interpreted to adopt ABC so that the set of advantages can be received.
QUESTION 3
1. Calculating th three most significant variances:
Labor variance= Standard cost of labor – actual cost of labor
= 170000-240000
=- 70000
Storage and Delivery = Standard cost of Storage and Delivery– actual cost of Storage and
Delivery
= 40000- 50000
= -10000
Power= Standard cost of power - actual cost of power
=70000-95000
=-70000
Working note:
Budget £ Actual varianc varian Outco

(outrun) £ e
analysi
s £
ce in
%
me
Sales Turnover 1560000 820000 -740000 -
90.24
%
A
Direct Cost
Raw Materials 400000 275000 125000 31.25
%
F
Lab-our 170000 240000 -70000 -
41.18
%
A
Power 70000 95000 -25000 -
35.71
%
A
Storage and Delivery 40000 50000 -10000 -
25.00
%
A
Indirect Costs
Administration 100000 130000 -30000 -
30.00
%
A
Advertising and Marketing 20000 10, 000 10000 50% F
Premises Costs 175000 250000 -75000 -
42.86
%
A

2 Explaining the causes of these variances
Variances occurs in the company due to deviation arriving because of higher or lower cost as
compared to the estimated outcomes. From the evaluation of the calculated figure of variances it
can be interpreted that company is performing effectively in which positive outcome has been
derived such as raw material which is indicating that firm is performing good by reducing its
expenses in current time.
 From the evaluation of the given information regarding the variance of labor it can be
identified that firm has failed to coordinate with the estimated expenditure. The main
reason behind is ineffective outcome generating capacity of employees, inappropriate
forecasting of labor cost, etc which is resulting into unfavorable performance.
 Storage and Delivery cost of company is deviating in negative manner as compared to
the standard estimation of the expenses. The main reason behind the ineffective
performance of enterprise is due to careless handling of components, poor maintenance,
abnormal waste, etc. these are causing the firm to incur more expense in order to affect
firm adversely.
 Power is one of the significant part of the direct cost that is required to be managed
effectively but particular organization failed due to certain causes such as adopting
defective wastage h of material by untrained workers, loss due to poor quality of material
utilized in usage of power, etc.
3. Identifying projection of likely consequences for the business pertaining to each of the
variance chosen
From the evaluation it can be interpreted that particular firm will face the adverse impact
from the of the selected variance.
 The consequence of labor variance can highly affect the overall cost structure of firm so
that can adversely influence the profit margin of business. It can affect the overall
efficiency level of production processes that can result in low products' formulation
which can majorly imbalance market force meeting capacity of firm.
 Storage and delivery is essential part of supply chain of enterprise that has major
influence on the functioning on firm which can loss the effectiveness to meet the market
forces. Higher cost can affect the irrelevant formulation of customer dissatisfaction as
quality of product can be adversely get impacted.

 Power cost increase can reduce the firm's financial resources so that overall growth&
development can get affected. It can lead to create the threat in employees to work
effectively in working areas. Price stability and mitigation o revenue can arise due to
inclination of higher expenditure of managing power.
4. Recommending strategies for business improvements
 It is suggested to the company to implement the training and development which can
allow the employees to get the significant position to incline their efficiency in turn
accomplishing the role and responsibilities with opium utilization of resources can
become possible.
 This is suggested to have the inventory management system in the procedure for
managing the storage and delivery expenses as it allows to avoid the situation of over or
under stocking. These can enable the firm to receive higher productiveness with
minimizing related cost.
 It is advised to the organization to execute appropriate technology utilization which can
optimize power and decrease waste to gain higher desirable outcomes.
5. Presenting advantages disadvantages of a switch from Incremental Based Budgeting to ZBB
Incremental based budgeting is related with taking the current year budget by adding
increments for formulating new budget. There are few impacts that is faced by the company due
to implementation of increment that are both positive and negative. The one of the crucial benefit
include easiest budgeting approach but lacking areas involves promoting unnecessary pending,
discourage innovation, etc.
Zero based budgeting is related with formulating the budget from the scratch which aids
to offer the benefits like higher accuracy & efficiency, coordination & communication, reduction
in redundant activities, budget inflation (Beredugo, Azubike and Okon, 2019.). On the other
side, lacking areas includes time-consuming procedure, may be expensive, high manpower
requirements e and lack of expertise. On the basis of this, it can be articulated that ZBB method
implementation can offer these benefits and drawbacks to the specified organization.

REFERENCES
Books and Journals
Masdupi, E., Tasman, A. and Davista, A., 2018. The influence of liquidity, leverage and
profitability on financial distress of listed manufacturing companies in
Indonesia. Advances in Economics, Business and Management Research. 57(1).
Wahab, A. A., Mohamad, M. H. S. and Said, J. M., 2018. The implementation of activity-based
costing in the Accountant General’s Department of Malaysia. Asian Journal of
Accounting and Governance. 9. pp.63-76.
Beredugo, S. B., Azubike, J. U. and Okon, E. E., 2019. Comparative analysis of zero-based
budgeting and incremental budgeting techniques of government performance in
Nigeria. International Journal of Research and Innovation in Social Science. 3(6). pp.238-
243.
Patkar, A. and Mukkawar, S., 2021, November. Break even analysis & response of longer span
frames with or without post-tensioned beams in multipurpose hall. In IOP Conference
Series: Materials Science and Engineering (Vol. 1197, No. 1, p. 012011). IOP
Publishing.