Scanned By CamScanner 853675

Scanned By Camscannerscanned By Camscannerinsert Title Here 2running

Analyze financial ratios, classify manufacturing costs, and prepare cost of goods manufactured and sold statements based on multiple data sets for Business Solutions, a computer services and manufacturing company, covering periods ending in March and January 2016.

Paper For Above instruction

This paper provides a comprehensive analysis of financial ratios, cost classification, and production costing for Business Solutions, a proprietorship specializing in computer services and manufacturing, during early 2016. The analysis involves calculating key financial metrics from provided income statements and balance sheets, classifying manufacturing costs as variable or fixed and direct or indirect, and preparing detailed cost of goods manufactured and sold statements. This report aims to demonstrate understanding of managerial accounting principles through practical application of ratio analysis, cost classification, and cost accounting procedures, contextualized within the company's operations.

Introduction

Managerial accounting provides essential tools for evaluating a company's financial health and operational efficiency. Critical components include ratio analysis, which offers insights into profitability, liquidity, and solvency; cost classification, fundamental for accurate product costing; and production costing statements, vital for managing manufacturing operations. Business Solutions, a burgeoning proprietorship launched in October 2015, exemplifies the need for meticulous financial analysis as it navigates both service provision and manufacturing activities. This paper addresses specific financial ratios and cost classifications based on the company's data from March and January 2016, illustrating core accounting concepts in a practical context.

Financial Ratio Analysis

1. Gross Margin Ratio

The gross margin ratio indicates the percentage of revenue remaining after the cost of goods sold (COGS). It is calculated as:

Gross Margin Ratio = (Sales - COGS) / Sales

Given the total sales and revenue of $44,000 and COGS of $14,052, the gross margin ratio is:

Gross Margin Ratio = ($44,000 - $14,052) / $44,000 = $29,948 / $44,000 ≈ 0.681 or 68.1%

Without services revenue, considering net sales ($18,693) and COGS, the ratio is:

Gross Margin Ratio (excluding services) = $18,693 / $18,693 = 1.0 or 100%, since we would need more specific data to separate service and product margins accurately. However, if only products are considered, the calculation focuses on the provided net sales and COGS.

2. Net Profit Margin Ratio

The net profit margin ratio measures net income as a percentage of total revenue:

Net Profit Margin = Net Income / Total Revenue

Given net income of $18,833 and total revenue of $44,000:

Net Profit Margin = $18,833 / $44,000 ≈ 0.428 or 42.8%

Thus, approximately 42.8% of total revenue remains as net income, illustrating strong profitability.

3. Liquidity Ratios

Current Ratio

The current ratio assesses liquidity by comparing current assets to current liabilities:

Current Ratio = Current Assets / Current Liabilities = $95,568 / $875 ≈ 109.2 or 109.2:1

Quick Ratio (Acid-Test Ratio)

The quick ratio measures immediate liquidity using quick assets (cash, marketable securities, accounts receivable):

Quick Ratio = Quick Assets / Current Liabilities = $90,924 / $875 ≈ 103.9 or 103.9:1

These high ratios suggest the company has ample liquidity to meet short-term obligations.

4. Leverage Ratios

Debt Ratio

The debt ratio indicates the proportion of assets financed through debt:

Debt Ratio = Total Liabilities / Total Assets = $875 / $120,268 ≈ 0.0073 or 0.7%

Equity Ratio

The equity ratio shows the percentage of assets financed by owners' equity:

Equity Ratio = Total Equity / Total Assets = $119,393 / $120,268 ≈ 0.992 or 99.2%

The company is primarily financed by equity, with minimal debt exposure.

5. Asset Composition

Percentage of assets that are current:

Current Assets / Total Assets = $95,568 / $120,268 ≈ 79.4%

Percentage of assets that are long-term:

(Total Assets - Current Assets) / Total Assets = ($120,268 - $95,568) / $120,268 ≈ 20.6%

Thus, the company is largely current-asset focused, supporting liquidity and operational flexibility.

Classification of Manufacturing Costs

Cost Classification

To classify manufacturing costs as variable or fixed and direct or indirect, we analyze the nature of each cost component:

  • Monthly flat fee to clean workshop – Fixed, Indirect
  • Laminates for desktops – Variable, Direct
  • Taxes on assembly workshop – Fixed, Indirect
  • Glue for assembly – Variable, Direct
  • Wages of desk assembler – Variable, Direct
  • Electricity for workshop – Variable, Indirect
  • Depreciation on tools – Fixed, Indirect

Cost of Goods Manufactured and Sold

Cost of Goods Manufactured

The formula is:

Beginning Work in Process (WIP) + Direct Materials Used + Factory Overhead + Direct Labor – Ending WIP = COGM

Given the data:

  • Direct materials = $2,200
  • Factory overhead = $490
  • Direct labor = $900
  • Beginning WIP = $0
  • Ending WIP = $540

Calculations:

COGM = $0 + $2,200 + $490 + $900 – $540 = $3,050

Cost of Goods Sold

The COGS is calculated as:

Beginning Finished Goods Inventory + Cost of Goods Manufactured – Ending Finished Goods Inventory = COGS

Thus:

0 + $3,050 – $350 = $2,700

This represents the cost of goods sold for January 2016, reflecting the manufacturing expenses allocated to sold items.

Conclusion

The financial analysis of Business Solutions reveals a highly profitable and liquid company with minimal leverage. The high gross margin and net profit margins indicate efficient operations, while the predominance of current assets facilitates operational flexibility. Proper classification of manufacturing costs enables accurate product costing, critical for managing production and profitability. The cost of goods manufactured and sold calculations demonstrate the company's manufacturing efficiency and cost control. Overall, these insights provide a solid foundation for strategic decision-making, ensuring sustainable growth and operational effectiveness.

References

  • Hansen, D. R., & Mowen, M. M. (2018). Cost Management: A Strategic Approach. Cengage Learning.
  • Drury, C. (2018). Management and Cost Accounting. Cengage Learning.
  • Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2018). Managerial Accounting. McGraw-Hill Education.
  • Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2014). Introduction to Management Accounting. Pearson.
  • Williams, J. R., Haka, S. F., Bettner, M. S., & Carcello, J. V. (2017). Financial & Managerial Accounting. McGraw-Hill Education.
  • Kaplan, R. S., & Atkinson, A. A. (2018). Advanced Management Accounting. Pearson.
  • Anthony, R. N., Hastings, M. D., & MacLellan, C. (2015). Fundamentals of Management Accounting. McGraw-Hill Education.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2019). Principles of Managerial Financing. Wiley.
  • Siegel, G. B., & Shim, J. K. (2014). Financial Management for Nonprofit Organizations. Wiley.

Related Assignments