Q1 a

Prepare a report to the board of directors that discusses the performance of the business and
provide possible reasons why the ratios may have changed over the reporting periods. (In your
answer it is expected that you will calculate a minimum of 8 ratios)

Profitability Ratios 2019 2018

Gross Proft Margin Gross Profit / Sales 56% 58%

Operating Profit Margin Operating Proft / Sales 40% 43%

Net Profit Margin Ratio Net Profit / Sales 17% 29%

Return on Capital EBIT / Total Assets - Current 8% 9%

Employed Liabilities
Return on Assets Net Profit / Assets 3% 6%

Return on Equity Net Profit / Equity 4% 8%

Liquidity Ratios 2019 2018

Current Ratio Current Assets / Current Liabilities

1.42 1.79
Quick Ratio (Current Assets - Inventory) / CL
0.84 1.04
Net Working Capital Current Asset – Current Liabilities
4,780.00 8,428.00
Cash Ratio Cash + Marketable Securities/ CL 8% 11%

Effeciency Ratios 2019 2018

Receivable Turnover Credit Sales / Average A/C

Receivable 15.71 15.18
Payable Turnover Purchases or COGS / Average
Payable 11.37 10.33
Average Collection 365 Days / Receivable Turnover
Period in Days 23.23 24.04
Average Payment Period 365 Days / Payable Turnover 32.11 35.32
To: Board of Directors
Date: 18/03/2020
Subject: Business Performance Analysis Report
Profitability Analysis:
Gross profit margin and operating profit margin in 2019 declined from 58% and 43% to 56% and
40% respectively, which indicate that our cost of goods sold and our operating expense did
increased in 2019. In addition our sales revenues has declined by 10% ((151,556 –
136,400)/151,556) in 2019. As a result net profit has significantly declined from 29% to 17%.
Another reason for this is that the tax has increased significantly in 2019, resulting in a further
declined in net profit. efficiency ratio such as return on capital employed, return on assets, and
return on equity all declined as a result of a net profit decline.

Liquidity ratios:
The liquidity of the company were also declined in 2019, the current and quick ratio declined
significantly from 1.79 and 1.04 to 1.42 and 0.84 respectively, Net Working Capital has also
decreased by 43% ((8428 – 4,780 ) / 8,428), this is because the cash and cash equivalent has
decreased from 1,144 to 930 which is approximately 18.7%, at the same time current liabilities
have been increased from 10,666 to 11,470 which is approximately 7.5%. This indicates that the
liquidity of the company is declining in 2019.

Financial Leverage:

The financial leverage is lightly increased. The debt to equity ratio has increased from 28% to
29% and debt to capital employed has changed from 22% to 23% which means that the company
has more debt in 2019, this is because the deferred tax has increased in 2019 non current deferred
tax has increased from 2470 to 3790 and current deferred tax liability increased from 4500 to
6200 which result it in an increase in the financial leverage ratios. The equity multiplier has
increased as a result in increase in the debt. The finance cost remained the same which is 15,345,
however, the times interest earned decreased from4.22 to 3.57, and this is because the earnings
before interest and tax have declined.
Activity Ratios or efficiency ratios:

The account receivable turnover and payable turnover have slightly increased from 15.18 and
10.33 to 15.71 and 11.37 respectively, which indicate that our company became more efficient in
credit management and collection management, we collect our account receivable faster than
before, and we take less time to pay our suppliers. The average collection period has declined
one day from 24 days to 23 days, and average payment from 35 days to 32 days

Question 1: part B

Critically evaluate the differences between financial accounting and management account?

Difference between financial accounting and management accounting:

- Reporting:
Financial accounting prepared to report the financial performance of the company for
external users such as government, shareholders, suppliers, and creditors. Whereas,
management accounting it used for internal purposes to help management for decision
making process.

- Focus:

Management accounting tends to look at process rather than cash flows, profit or other
financial metrics. This would depends on the purview of the manager, for example sales
manger may be more concerned with revenues amounts in $ while production manger
could focus on labor hours needed to produce a certain volume of work and dollars
amount may be secondary or no concern at all. Management accounting may also focus
on short periods allowing managers to act fast on current business conditions, whereas,
financial accounting is about the financial health of the company (performance
evaluation) and it best evaluated by using IFRS or GAAP. It is a statutory requirement for
publicly traded companies. The financial statement is a reliable, accurate and comparable
way to evaluate a business, whether for investing or financing when prepared by
international standards.

- Time Periods:
Financial accounting reports past transactions (actual transactions) of a past period, as
well as processing of data in the current periods. The accounting cycle is crucial to
financial accounting standards and processes, ensuring that data is compiled and reported
 in a consistent way, so that anyone who’s familiar with accounting general practices can
understand. Financial accounting includes no future projection or predictions, whereas,
management accounting it used future information’s to help the management in decision
making.
- Main focus:
Financial accounting focuses on past, whereas, management accounting focus on future.

- Reporting Details:
Financial accounting reports tend to be aggregated, concise, and generalized. Information
is simultaneously more transparent and less revealing. This is not normally the case with
managerial accounting as there are many reasons to do things a specific way for each
company. Managerial accounting reports are highly detailed, technical, specific, and
often experimental. Firms are always looking for a competitive advantage, so they
examine a multitude of information that could seem pedantic or confusing to outside
parties.
 Question 2

How many customers must be attracted to each event if the company is to make a profit of
£4,000 by organising this event?

Event 1  
   
   
Selling Price 6
Variable Cost - Food 3
Contribution Margin 3
Total Contribution (3*3000) 9,000
Fixed Cost  
Mascot Cost 1000
Stall Rental 5000
  6000

Event 2  
   
   
Selling Price 7
Variable Cost - Food 3
Contribution Margin 4
Total Contribution (4*2700) 10,800
Fixed Cost  
Mascot Cost 1000
Stall Rental 4000
  5000

Total Fixed Cost 11000

Contribution mix (9000+10800)/(3000+2700) =
3.4736

Target Profit = (11,000 + 4000)/ 3.4736 = 4318

customers
 Even 1 (4318 *(3000/5700)) 2273
event 2 (4318 * (2700/5700)) 2045
Total 4318

What will be HaggisNeepsnTatties profit (or loss) if the estimate number of people expected to
visit each event turned out to be accurate and which would provide better profitability?

Net Income
  EVENT 1 EVENT 2 Total
Total Contributon Margin 9,000 10,800 19,800
Fixed Cost 6000 5000 11000
Net Income 15,000 15,800 30,800

Event 2 is more profitable than event 1

Fatfit Limited has two production departments, Machining and Assembly. The Machining
department has a monthly capacity of 1,650 machine hours and the Assembly department a
monthly capacity of 2,000 direct labour hours. This production capacity cannot be increased
within the current premises

Products A B C Total

Unit Selling Price 150 210 180  

Variable Cost 90 130 130  

Contribution Margin 60 80 50  
 Product A B C Total

Demand 300 100 50  

Constrains        

Machine - Time Per Unit 4 4 5  

Total Machine Hours Needed 1200 400 250 1850

Assembly Time Per Unit 2 6 6  

Total Assembly Time Needed 600 600 300 1500

The capacity available for machining hours is 1650 and the total machine hours need per month
is 1850, thereofore the maching hours is a biding constrain (Bottleneck).
The capacity available for labour hours is 2,000 hours per months, and the total aseembly time
needed per month is 1,500, so there is no shortage in labor hours, and thus it is not a biding
constrain

Product A B C Total
Limiting Factor - Machine Hours 4 4 5  
Contribution Margin Per
15 20 10  
Limiting Factor
Ranking 2 1 3  

Production that will maximize the profits with the labor hours constrain.
  A B C Total
Labour Hours Needed Per
Unit 4 4 5  
Production 300 100 10  
Total Labour Hours Needed 1200 400 50 1650
         
 Machine Hours Needed Per
 
Unit 4 4 5
Total Machine Hours
1200 400 50 1650
Needed

Net Income using contribution margin format:

Products A B C Total

Unit Selling Price 150 210 180  

Variable Cost 90 130 130  

Contribution Margin 60 80 50  

Demand 300 100 10  

18, 8, 26,
Total Contribution Margin
000 000 500 500
Less: Fixed Cost       15,000

Net Income (for the mix) 11,500

Describe what is meant by a sunk cost and an opportunity cost and discuss when each should
be considered in the management accounting decision making process?
Sunk cost and opportunity cost:

A sunk cost differs from future costs that a business may face, such as decisions about inventory
purchase costs or product pricing. Sunk costs are excluded from future business decisions
because the cost will remain the same regardless of the outcome of a decision.
Sunk costs are those which have already been incurred and which are unrecoverable.
In business, sunk costs are typically not included in consideration when making future decisions,
as they are seen as irrelevant to current and future budgetary concerns.
Sunk costs are in contrast to relevant costs, which are future costs that have yet to be incurred.

Opportunity costs represent the benefits an individual, investor or business misses out on when
choosing one alternative over another. examples: The opportunity cost of the funds tied up in
one's own business is the interest (or profits corrected for differences in risk) that could be earned
on those funds in other ventures. opportunity cost can be explicit or implicit and should be
considered (relevant) when taking business decisions.