The Calculation Of Total Cost And Cost Drivers Accounting Essay
At first glance, accounting can appear in a way that extremely complicated and confusing and lead to the untrained eye may struggle to grasp the whole set of accounting even it is just an incomprehensible group of numbers. By doing so, accounting is much more important for a company that concern with the financial situation day-to-day or years-by-years activities of the company currently condition.
In task 1, this purpose is to describe the accounting users and their needs for Continental Limited financial statement. In accounting users have divided into two main categories of users are internal and external users. This two different of user has playing an important role and their needs for a company such as provider of finance to company, supplier or creditor, employees of the company, investor and customer or debtor. By doing so, it is also concern with the five regulatory characteristic of financial statement which is relevant, comparability, understandability, timely and reliability that engage useful information to users.
In task 2 & 3, it is concern with preparing the income statement and balance sheet of Continental Limited for years ending 31 Dec for the internal and external use. The internal use is the management of the company which may included employees, director, and owners, etc. External use is communicated with outside of the company to satisfy the needs of such difference users of accounting information.
In task 4, it is calculating the accounting ratio that to evaluate the relationships between the financial reporting items within one company with any others part of accounting organization. Accounting ratio is focuses on three main categories of ratios, which profitability, liquidity and solvency.
Financial statement for the financial years ending
In finding, internal and external users could be involved into Continental Limited financial information, whereas management and operating of a company to obtain their financial position with best suit its needs. The characteristic of financial statement is to provide useful statement to the users, include relevance, comparability, timely, understandability and reliability. Besides that, income statement and balance sheet for internal and external use in Continental Limited, where the company to summary on how the earned from the sale of product and expense resulting in profit or loss account within a period of time. At last, accounting ratio is to calculate the relationship between financial position item that classify over a period of time for a company or more to provide useful comparison.
2.1 User for financial statement and the characteristic
Accounting users can be divide into two main categories which is internal and external users. Internal users are the management of a company which will be involved in the daily affairs of the business that is in a position to obtain financial information in a way will best suit its needs. The management of a company can help in the production facility core needs to know whether the plant revenues are enough to cover its operating cost. External users, those who are not directly to involved in the operating of a business and need information that differs from that needed by the internal users. Furthermore, the capacity of external users would receive limited financial information from the internal users to inform them about the company economic position.
2.1.1 Five different users and their need for Continental Limited financial statement:
The Accounting-Simplified.com (2012) “Introduction to accounting” and Investment and business accountants (n.d) “Users of Accounting Information System” states that:
Providers of finance to the company:
Providers such as bank and others financial institutions that will be provide loan and overdrafts for the company to investment into the business activities. Therefore, the provider need for the financial information concern with the company financial situation and the ability whether to repay the amount of loan and interest payment. For example, before lending money, bank needs information because that info will help it determine the ability of Continental Limited Company are able to afford to repay loaned money plus the interest that would be due Therefore, a set of financial statement is a main ingredient in a loan proposal.
Suppliers or creditors:
These are people who make a transaction on goods or services to the company on credit. They need for accounting information to ensure that the ability of the company’s obligations that will pay when they become due. Suppliers most likely interested in company liquidity to pay with a short term obligation.
Employees of the company:
These are people who employed by the company that who will be engage the business activities. Employees need the accounting information or reports are interested in the company’s profitability and stability. These are the employees for making collective bargaining agreement, such as the ability of the company to pay salary, remuneration and discussing matters of promotion. For example, the employees of the Continental Limited Company also interested in the company’s of the financial ranking and performance to assess the possibility of company expansion and employment opportunities.
Customers or debtors:
These are people who consume goods or services and have the ability to decide between different products and suppliers. They have an interested in accounting information concern with the company financial condition to ensure that the company is continue existence or its stability of operations when there is a long-term involvement with or contract between the company and its customers.
These are the people who provided info whether to hold, sell or buy more share for the stockholder of corporations. Therefore, they need for the financial statement to assess the financial strength of a company that assess the risk as well
as potential gain of the company’s position in the stock exchange. By doing so, these could be helping them to decide in the logical investment decisions and enable the ability of the corporation to pay dividend. For example, the financial documents can be used by investors before they decide to invest in Continental Limited Company.
2.1.2 Five regulatory characteristic of financial statement
According to Helium, Inc (2012, Pg 1-2) “The four main qualitative characteristics of financial statements” state that:
The financial statement is considered relevant which adds value to the needs of the users when making economic decisions. This is because the relevance financial information is the capable of item to influence the economic decision of the users and make a difference in a decision making process, whether the information affects the economic decision of users and the nature of information affect relevance. These relevant information users are able to evaluate whether has moving into the right decisions making.
It is the information which must be comparable to the previous financial statement from that entity and presented for other accounting periods. By doing so, the financial statement can be comparable with the previous financial statement of the same corporation. Therefore, the users are able to identify trends in the performance and financial position of the reporting entity.
The financial statement should be readily comprehensible to user’s financial statement. Therefore, these are the information reported in a simple manner in order to help in understanding and with a proper explanation and get a clear approach of financial statement that is able to more understand by reading it. By doing so, it does not mean that users should be professional accountants and the complex information which is material nature must be excluded from the financial statement on the basis; it could be either fault on the element of users or from the side of the entity preparing financial statement.
The financial statement is either relevant or not to the decision making by users, it rely on whether the financial position are made to performance information on time when it is needed for making decision. If the information is prepared on time, it will be relevant to decision making of the users. While if the information are not prepared on time which means that the information would not relevant to the users for decision making
Financial statements which meet the criteria of reliability are useful in comparative within the entity and decision making. It is linked with the faithful representation where the information is free of error, bias and fairly or consistently present about the performance and financial position of an entity. Definitely, the information should be reliable as well as relevant in order to more useful in decision making which may has assembly with many others factor that in order to contribution towards reliability of the financial statement. By doing so, users should be confidence in the financial information that without misleading and deliberately assemble in a way that presents the entity in a favorable light. It is worth of the auditing function is to reinforce reliability of the performance in financial statement.
Both accounting users is able to exist into the management of a company within a daily affairs of operating activities, which will be requirement the financial statement assess to obtain the company economic position. Moreover, the characteristic of the financial information is helping the user during making decision with a free-error useful statement.
2.2 Income statement and balance sheet of Continental Limited for internal use
Income statement is refer to as profit and loss account that to measure a company financial statement within a specific accounting period of time and assess to a summary on how the business revenue earned from the sale of product and the expense incur resulting in profit or loss account. In compare to a balance sheet, an income statement is to describe what has happened over a month, a quarter, or years. Balance sheet is showing the current liabilities, non-current liabilities, current asset and non-current asset to reporting the financial condition of company at a giving point in time. The income statement and balance sheet prepare for internal use are similar to the income statement of external reporting that both are preparing the same fundamental accounting principle.
2.2.1 Working for Task 2
Closing stock will be recorded the amount which is lower.RM 65000
Sales (Different) 5000 Purchase 4000
The receipt has no recorded from cash sales, therefore Sales, Purchase and Office electricity & Water from Trial Balance will be making some adjustment and record in income statement. Adjustment working below:
Stationary: RM 700
Office electricity & water: RM 7000+RM 300=RM7300
Accrued for Sales commission: RM 18000 current amount from TB + RM1500 accrued at the end of the years (recorded as Current liability in balance sheet) = RM 19500 (recorded as expense in P/L account of income statement).
Prepaid office salary: RM 28000 current amount from TB – RM 2000 prepaid at the end of the years (recorded as current asset in balance sheet) = RM 26000 (recorded as expense in P/L account of income statement).
2010 RM RM
Dec 31 Balance b/d 75000 (-) Bad debts 5000
Balance c/d 70000
Jan 1 Balance b/d 70000
Bad debt account
Debtor 5000 P/L account 5000
Provision for bad debt closing balance =10 % x Debtor closing balance RM 70000 =
Provision for bad debt account
2010 RM 2010 RM
Dec 31 Closing balance c/d 7000 Jan 1 Opening balance b/d 5000
Increase different 2000
Jan 1 Balance b/d 7000
e & f.
Balance b/d 300000 Vehicle disposal a/c (cost sold ) 50000
Balance c/d 250000
Balance c/d 250000
Provision for depreciation on vehicle account
RM 2010 RM
Vehicle disposal account 12500 Jan 1 Opening balance b/d 60000
(cost sold RM 50000x5%x5 years Depreciation as expense record 12500
From 1 Jan 2005 to 1 Jan 2010) in P/L account
(Vehicle closing balance
Dec 31 Balance c/d 60000
Jan 1 Balance b/d 60000
Vehicle disposal account
Vehicle cost sold 50000 Provision for depreciation 12500
on vehicle sold
Proceeds from disposal of 35000
Different for loss on disposal 2500
Of vehicle (As expense)
Provision for depreciation on premises account
RM 2010 RM
Balance c/d 54000 Jan 1 Opening balance b/d 40000
Depreciation as expense record 14000
in P/L account (Premises cost from TB
Balance b/d 54000
(As fixed asset in balance sheet)
Taxation charge RM 15300 is deducted from net profit at the bottom of income statement and will be recorded as accrued taxation RM 15300 as the current liability in balance sheet.
Proposed divided which will be deducted from net profit at the bottom of income statement = 2%x RM 500000 Share capital from TB = RM10000 (recorded as current liability in balance sheet)
2.2.2 Income statement:
Income statement of Continental Limited for year ending 31 Dec 2010 for internal use
RM RM RM
Sales (refer to working for note (b)) 365000
Less return inwards 10000
Net sales 355000
Less Cost of sales:
Opening stock 50000
+Purchase (refer to working for note (b)) 204000
-Return outwards (15000)
+Carriage inwards 5000 194000
Less closing stock (refer to working for note (a)) 65000 179000
Gross profit 176000
Divided received 5000
Stationery (refer to working for note (b)) 700
Office electricity & water (refer to working for note (b)) 7300
Office salaries (refer to working for note (c)) 26000
Sales commission (refer to working for note (c)) 19500
Bad debt (refer to working for note (d)) 5000
Increase in provision for bad debts (refer to working note (d)) 2000
Loss on disposal of vehicle (refer to working for note (e & f)) 2500
Depreciation on vehicle (refer to working for note (e & f)) 12500
Depreciation on premises (refer to working for note (e & f)) 14000
Vehicle expenses 12000
Interest charges 3000 104500
Net profit 76500
Less taxation charge (refer to working for note (g)) 15300
Less proposed divided (refer to working for note (h)) 10000
Profit for the year 51200
Add retained earnings brought forward 100000
Retained earnings carried forward 151200
(Put under reserve added to share capital in balance sheet)
2.2.3 Balance sheet:
Balance sheet of Continental Limited as at 31 Dec 2010 for internal use
Fixed assets/ Non-current assets
Office premises at cost 350000
(-) Provision for depreciation on premises (54000) 296000
Vehicle at cost (refer to working for note (e & f)) 250000
(-) Provision for depreciation on vehicles (60000 ) 190000
Long-term investments 100000
Closing stock (refer to working for note (a)) 65000
Debtors (refer to working for note (d)) 70000
(-) Provision for bad debt (7000) 63000
Prepaid office salary (refer to working for note (c)) 2000 172000
Issued share capital
Share capital 500000
Retained earnings carried forward 151200
Shareholder’s equity 651200
Add Long-term liabilities/ Non-current liabilities
Add Current liabilities
Accrued sales commission 1500
Accrued taxation 15300
Proposed dividend 10000 51800
Income statement and balance sheet for internal use is to measure a business activities, where the business revenue earn from the target sale and what was happen within a month, a quarter, or years. Hence, they are able to report the financial statement of company with a giving point in time, included the current liabilities, non-current liabilities and current or non-current asset.
2.3 Income statement and Balance sheet of Continental Limited for external use
Income statement is showing the total actions of a company over a period whether a month, a quarter or a year, assess to how the business revenue earned and the expenses incurred outcome in a profit or loss account. However, balance sheet is a financial statement indicates a company’s asset and liabilities own by the company and how the funded is earn by shareholders or by debt. It is normally offered in two sections that must be the same total of amount according to the Graeme Pietersz (2012) “Balance sheet”.
2.3.1 Working below is taking from task 3:
Distribution costs Administrative expenses
Stationery - 700
Office electricity & water - 7300
Office salaries - 26000
Sales commission 19500 -
Bad debts 5000 -
Increase in provision for bad debts 2000 -
Loss on disposal of vehicle 2500 -
Depreciation on vehicles 12500 -
Depreciation on premises - 14000
Vehicle expenses 12000 -
Total 53500 48000
2.3.2 Income statement
Income statement of Continental Limited for year ending
31 Dec 2010 for external reporting
Turnover (Net sales from income statement of task 2) 355000
Cost of sales (179000)
Gross profit 176000
Distribution costs 53500
Administrative expenses 48000 101500
Operating profit 74500
Dividend received 5000
Interest charges (3000)
Profit on ordinary activities before taxation 76500
Taxation charge (153000)
Profit on ordinary activities after taxation for the year 61200
Proposed dividend (10000)
Retained profit for the year 51200
Retained profit brought forward 100000
Retained profit carried forward 151200
2.3.3 Balance sheet
Balance sheet of Continental Limited for the year ending
31 Dec 2010 for external reporting
RM RM RM
Premises (after deducted provision for depreciation 296000
from balance sheet of task 2)
Vehicle (after deducted provision for depreciation 190000 486000
from balance sheet of task 2)
Long term investment 100000
586000 Current Assets
Debtors (RM70000-RM 7000) 63000
Prepaid office salary 2000
Cash at bank 42000
Less Creditors: Amounts Falling Due Within One Year
Accrued sales commission 1500
Accrued taxation 15300
Proposed dividend 10000
Net current Assets 120200
Total Assets Less Current Liabilities 706200
Less Creditors: Amounts Falling Due After More Than One Year
Capital and Reserves
Called up share capital 500000
Profit and Loss account 151200
The income statement and balance sheet prepare approach for external uses are similar to the income statement of internal reporting that both are preparing the same fundamental accounting principle.
2.4 Calculation ratio for year ending 31Dec 2010
Accounting ratios is a relative scale of two selected numerical values taken from a company financial statement where assess to relationship between financial position item that can be identify trend over period of time for one company or more in order to provide a useful comparison. Accounting ratios has divide in three basic types of ratios, which is profitability ratio, liquidity ration and solvency according to the Business Dictionary.com. “For further info refer to appendix B1-B2”
2.4.1 Table of ratio calculation
Ratio with formula
Ratio calculation of year 2010
Percentage of gross profit on sales:
Net of sales X 100
355000 X 100
Percentage of operating profit on sales:
Net sales X 100
355000 X 100
Return on capital employed (ROCE):
Net profit before interest and taxation
Capital employed X 100
758000-51800 X 100
Current liabilities X 100
51800 = 3.32:1
Stock turnover period:
365days/12 weeks/12 months
Stock turnover in number times
Stock turnover period in days:
365 days/3.11 times= 117.36 days
Debtors collection period:
Debtor ratio x 365 days/ 52 weeks/ 12 months
63000 = 0.117 :1
Debtor collection period in days:
= 0.117 x 365 = 64.6 days
Creditor payment period:
Creditor ratio x 365 days/ 52 weeks/ 12 months
25000 = 0.132: 1
Creditor payments periods in days:
= 0.132 x 365 =48.18 days
2.4.2 Compare calculation ratio with industry average to assess profitability and liquidity of Continental Limited
22.214.171.124 Profitability of Continental Limited
Gross profit margin of Continental Limited decrease from 49.58% to 30% and the decrease of operating profit margin from 20.99% to 18 % compare with the industry average, indicating that Continental Limited has lower gross profit earned from the sale made and engage a higher cost of purchase by making the purchase from the suppliers. It is showing that company is ineffective and inefficient in purchasing from suppliers and also ineffective use of material and labor to reduce its production cost causing to reduce the gross profit. Therefore, the ineffective and inefficient controlling in use of material and labor during the production, indicating the lower net profit generated from capital employed for ineffective use of capital employed in production and business activities to reduce production and sale volume to reduce the net profit earning as well. This is evidence decrease return on capital employed from 11.26% to 9% compare with the industry average.
126.96.36.199 Liquidity of Continental Limited
Current ratio of Continental Limited decrease from 3.32:1 to 2:1which is equal to the ideal ration 2:1 compare with the industry average, indicating that Continental Limited is a neutral of financially stable because yet has the larger amounts of current assets that is able to finance current liabilities and finance its short-term debts.
Creditor payment period increase from 48.18 days to 60 days, indicating that Continental Limited has obtained longer credit time for owing and paying to creditor. Therefore, creditor is accumulated to be larger amount and not payable in short term for avoiding short-term financial problem.
Stock turnover period of Continental Limited decrease from 117.36 days to 90 days compare with the industry average, indicating that slow stock turnover in business where the goods purchased are kept for a long time and then slowly taken out for resale. Therefore, the stock is accumulated to tie up money and causing short-term of financial problem. The decrease in stock turnover period was due to decrease debtor collection period indicating that Continental Limited has given shorter credit time to allow debtor owing. Therefore, Continental Limited is able to collect money from debtor within a shorter time taken and the debtor balance is not accumulated at the same time money is not tied up with debtor. This is evidence the debtor collection period decrease from 64.6 days to 45 days.
Accounting calculation ratios is relations of two selected numerical values come from a company financial information to which assess to relationship between financial position items that can be take into account over period of time for a company or more to provide a useful comparison. Accounting ratios has divide in three basic types of ratios, which is profitability ratio, liquidity ration and solvency according
Conclusion and recommendation
In a summary, accounting is very important for a company to recording the financial situation activities that either day-to-day or years-to-years of incomprehensible group of number. By doing so, it is also reporting how the business is earn from sale volume and expenses incurred in profit or loss account by recording the income statement and balance sheet. Moreover, with the accounting ratio which can indicate of a company how they effective and efficiency controlling in material and labor to reduce its production cost.
In my recommendation, I have learned from this thesis about the important of financial statement information needs by the internal and external users for a company. Moreover, I also have learned about on how a company to estimate the business activities by recording the financial statement in income statement and balance sheet within a specific period of date. At last, in the accounting ratio this can learn about how the company is effective and efficient in purchasing from suppliers and making decision to reduce its production cost. By doing so, these can be effecting the current ratio, stock turnover and profit margin and operating gross profit by controlling and manage the material and decision are make by the internal and external users.
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