Accounting for Decision Makers

Table of Contents
Question A.......................................................................................................................................3
Question B.......................................................................................................................................7
Question C.....................................................................................................................................10
Question D.....................................................................................................................................12
References......................................................................................................................................14
Question A
Part i

Accounting involves the systematic identification, documentation, measurement, classification,

verification, summarization, interpretation, and communication of financial information.
According to Achim and Chiş (2014), the major goal of accounting is to keep a detailed record of
all financial transactions. This provides users with the ability to comprehend day-to-day
activities in a logical manner and so obtain knowledge about the firm as a whole. The practice of
accounting helps to safeguard firm assets from unethical and unlawful usage. The information
shown above provides the proprietor of a company with assistance in minimizing the likelihood
of cash belonging to the company being left unused or underused. Accounting also makes it
easier to calculate the net profit or loss that a company has incurred as a result of its day-to-day
operations (Libby et al., 2002). This may be accomplished by maintaining detailed records of all
accounts, including those for revenue and expenses, for a certain time period. In addition,
accounting offers the owner of the firm financial information. This purpose is served by the
Income Statement as well as the Balance Sheet. A listing of the assets and liabilities of the
company as of a certain date is what is referred to as the Balance Sheet. This serves as a useful
instrument for determining the organization's overall financial health.

Part ii

A company's accounting policies are the collection of rules and regulations it follows to create
and report financial statements. These criteria are developed by the organization. Accounting
standards are important because they provide a framework that all businesses must comply to
(Hung, 2000). In addition, they give standard financial statements that are comparable and
consistent throughout a number of years and when compared to those of other firms. Accounting
standards are not only of the highest significance to a company compiling its financial
statements, but also to investors, the government, and other relevant parties for a variety of
reasons. All organizations should compile their financial accounts in compliance with either the
GAAP or the IFRS. It is a mechanism for the government to maintain control over financial
statements while preserving investors' interests. Accounting policies provide businesses with a
structure within which they may publish their financial information, ensuring that these reports
consistently adhere to a uniform format (Lambert et al., 2007). Suppose it is clear to investors
that the firm has attached to a particular set of accounting standards. In that case, investors will
have a higher level of trust in both the company and the figures, and it will be much simpler to
compare the statements to the financial statements of other businesses. It is required for a
corporation to declare the accounting procedures that they use. The policies each provide
guidelines for how information should be disclosed to investors, and businesses are expected to
adhere to the regulations governing sufficient disclosure.

The accounting policies used by Durdans Hospitals PLC are elaborated below.
Going Concerned

The firm's management has conducted an analysis to determine whether or not the business can
continue operating as a going concern, and they are sure that the company has the resources
necessary for the foreseeable future. After analyzing the potential and current impact that
COVID-19 will have on the company's and the group's business, the Board of Directors
concluded that the company, along with its subsidiaries and affiliates, will be able to continue
operations with the minimum amount of disruption caused by the regulation (Durdans Hospitals,
2020). These conclusions were based on a variety of factors, including the ability to differentiate
between capital expenses and debt repayments, the knowledge of different cost management
efforts implemented, the availability of cash reserves, and the confidence to source financing In
addition, the management of the Group is not aware of any substantial uncertainties that may cast
significant doubt on the company's capacity to continue operating as a going concern. As a
result, the financial statements of the Group continue to be issued based on a continuing concern
basis.

Business Combination

If control is transferred, the Group accounts for business mergers using the acquisition method.
The total cost of an acquisition is the sum of the consideration transferred at its fair value as of
the transaction date and the value of any non-controlling interests in the acquiree (Durdans
Hospitals, 2020). For each business combination, the Group chooses whether to value non-
controlling interests in the acquiree at fair value or as a proportionate percentage of the acquiree's
specified net assets. This judgment is made based on applicable accounting rules. After an
acquisition is completed, its costs are charged to expense and added to the total administrative
expenses.

Inventory Valuation

After making adjustments for items that are out of date or have a sluggish turnover rate,
inventories are valued at the lower of their cost or their net realizable value. The Weighted
Average Cost is what decides how much a list will set you back. This total includes the costs
incurred throughout the process of acquiring goods and moving them to their present location
and condition (Durdans Hospitals, 2020). The predicted selling price at which inventory may be
sold in the ordinary course of business is the starting point for calculating the net realizable
value. The projected expenditures of completion and sale then reduce this value.

Part iii

Profitability Ratios

Ratio 2021 2022

Gross Profit Margin (2257833382÷3518805279)* (3186323229÷

 100 5075574545)*100

64.1% 75.2%

Net profit margin (446118335÷3518805279)*1 (770550353÷3186323229)*

00 100

12.6% 24.1%

Return on assets (446118335÷7982676189)*1 (770550353÷9391660355)*

00 100%

5.5% 8.2%

Return on capital employed (453631720- 216541227÷ (902276478-

5037437641)*100 253212867÷5746945556)*
100
4.7%
11.3%

The profitability of the company has increased over the year from 2021 to 2022. It is
significantly shown in the net profit margin, which is doubled. The company follows proper
expense management (Drake and Fabozzi, 2012).

Liquidity Ratios

Ratio 2021 2022

Current Ratio 1160034334÷ 1469646637 1981341544÷1397608581

0.78 1.42

Quick Ratio (1160034334-450474703)÷ (1981341544-693571319)÷

1469646637 1397608581

0.48 0.92

Over the year, the company's liquidity position has increased by around 50%. It is an indication
of the proper working capital management of the company.

Efficiency Ratios
 Ratio 2021 2022

Inventory turnover 1260971897÷450474703 1889251316÷693571319

2.79 2.72

Average sales period 365÷2.79 365÷2.72

130 days 134 days

Accounts receivable 3518805279÷157209413 5075574545÷214955620

turnover
22.38 23.61

Average collection period 365÷22.38 365÷23.61

16 days 15 days

When the company's efficiency is considered, converting inventory into sales has dropped by a
tiny percentage, and the efficiency in collecting debt from trade receivables has also increased
slightly. Overall, much has stayed the same in efficiency from the last year.

Solvency Ratios

Ratio 2020/21 2021/22

Debt to total Capital 2945238548÷ 7982676189 3644714799÷9391660355

employed
36% 39%

Debt to equity ratio 2945238548÷5037437641 3644714799÷5746945556

58% 63%

The solvency of the company has decreased over the year and the proportion of debt compared
with the balance of equity has increased. It would increase the risk for the investors and the
chance of attracting investors would go down slightly (Sahu and Charan, 2013).

Part iv
The money a corporation makes by selling its goods and services is called its revenue. The net
amount of cash that is moving into and out of an organization is referred to as its cash flow. Cash
flow is more of a measure of a company's ability to manage its liquidity, while revenue reflects
how successful a company's sales and marketing efforts are. Investors and analysts will look at a
company's revenue and cash flow to determine how healthy the company's finances are (Kwon,
1989). In finance, a solid grasp of the distinction between profit and cash flow is of critical
importance. Cash flow refers to the amount of money entering and exiting a firm for a certain
period. In contrast, profit is the difference between a company's revenue and all the costs
incurred over a specific period.

When considering revenue and the profit that is created from revenue, an accounting method
known as the accrual basis is used (Tickell, 2010). This method requires that the amount about
the period be recorded, regardless of whether or not it has been received in cash. It makes no
difference whether you look at the profit or loss data. On the other hand, the cash basis of
accounting only records the amount of money received or given out in cash. This means that the
cash flow or cash balance can be determined using this method.

Question B
Part i

Direct costs are a company's expenditures that may be directly applied to producing a particular
cost item, such as a product or service. Expenses are often allotted to specific things known as
cost objects. For an aviation corporation, the gasoline utilized in the aircraft would fall under the
"direct materials." In the meanwhile, the pay expenditures of the pilot and the crew would be
considered direct labor. Expenses that apply to more than one company activity are indirect costs
(Ali, 2010). In contrast to direct costs, allocating indirect charges to individual cost items is
impossible. Indirect expenses for an airline include the wages paid to the ground crew and
expenditures associated with information technology and human resources.

The quantity of output that is generated affects the variable costs that are incurred. No matter
how much or how little is produced, fixed expenses will always remain the same. A cost is
considered "fixed" in an airline firm if it remains the same whether or not flights are purchased.
The price is considered "variable" if adding another flight raises it. The purchase price of an
airplane, the expenses of financing the purchase, insurance, hangar rental or tie-down space, and
yearly inspection fees are all examples of fixed costs. The payments of gasoline, oil changes,
maintenance and repairs, landing fees, and airplane cleaning are some of the variable costs
associated with aircraft ownership (Liu and Tyagi, 2017).

Expenses that are pertinent to a choice are referred to as "relevant expenditures." If the choice in
question will have an effect on cash flow, then raising the matter is justified. Alterations in cash
flow may take many forms, such as an increase in the quantities to be paid, a reduction in the
amounts to be paid, an increase in the revenues to be gained, or a decline in the payments to be
made. Analyzing whether the sums that would show on a company's bank statement are raised or
lowered as a result of the choice is one way to determine whether or not a change in cash flow
has occurred (Okafor and Oji, 2021). This test is valid since banks record monetary transactions.
Past expenses, also known as sunk costs, are monies previously spent or promised to be used.
This cash flow will remain the same regardless of whether a new enterprise is launched, hence
sunk costs are immaterial. Cash flow is unaffected irrespective of the cost allocation technique
used in the company's management accounts provided total costs remain the same. Depreciation
depends on prior purchases and arbitrary depreciation rates and is not a cash flow. Book values
are derived from past expenditures (or historical revaluations) and depreciation, according to the
same logic. Hence, if an older product is terminated three years early to create place for a new
product, the revenue and cost reductions associated with the older product are significant, as are
the revenue and cost increases associated with the new product. The cost ramifications include
both variable and total fixed cost adjustments.

ii.

Contribution margin (per unit) = Selling price - Variable costs (per unit) = £ 100 - (20 + 30 + 25)
= £ 25

Break-even point (units) = 50 ÷ 25 = 2 (units)

This shows the remaining revenue left to cover the fixed costs is £ 25. However, the fixed costs
amount to £ 50. Therefore, there is a loss of £ 25.

Scenario a

Increased sales price = 100 * 25% = 25 + 100 = £ 125

New Contribution Margin = Revenue – Variable Costs = £ 125 - (20 + 30 + 25) = £ 50

Break-even point = Fixed costs ÷ Contribution margin (per unit) = £ 50 ÷ 50 = 1 (unit)

Scenario b

Variable costs per unit = Direct material + Direct labour + Variable overheads = 15 (lower-cost
material) + 25 (unskilled labor) + 20 (variable overheads) = £ 45

New contribution margin (per unit) = Revenue - Variable costs (per unit) = 100 - 45 = £ 55

New Break-even point = Fixed costs ÷ Contribution margin (per unit) = 50 ÷ 55 = 0.91 = 1 (unit)

Part iii
There may be a scarcity of manufacturing-related resources. In addition, the same quantity of
input may be necessary to produce a number of products with variable levels of output. Analysis
of limiting variables is a technique that may be used to determine ways to improve production
output despite the manufacturing process's various obstacles. It is crucial to do research in order
to discover the ideal combination of limiting factors that will result in the maximum return, as
the objective of any business is to maximize profits. Using the available resources effectively
may be a tough task (Landell-Mills, 1983).

The term Limiting Factor Analysis refers to a technique that can be found in management
accounting. This approach's purpose is to accomplish the objective of "maximizing profit by
effectively addressing limiting factors," which can be found in the phrase "achieving the aim of
maximizing profit." These are the inputs that determine the limits for both the amount and the
quality of the final products that are created. A few examples of such issues include a deficiency
in things like supplies, machine capacity, labor, financial resources, and so on and so forth. To
put it another way, a limiting factor is anything that hinders a firm from reaching its full potential
in terms of the amount of income it can generate. This might be because there is a limited
demand for the product or because there is restricted access to the manufacturing resources.
From a managerial point of view, financial resources are the single most important constraining
factor for every business. The truth of the matter is, however, that day-to-day capacity
restrictions are often the result of a lack of available manpower, machine hours, or resources.

There is a finite amount of resources. A company only has a certain amount of person-hours,
square feet, and machinery. A firm may increase its capabilities over several years, but it must
make significant decisions to maximize its profits in the short term. Companies with access to
just a certain amount of resources must make difficult decisions on which products to create and
in what quantities. When discussing the optimal product mix, it is essential to determine which
product would provide the most significant contribution margin per hour of limited resources and
then examine if there are additional restrictions, such as a limit on the number of units that could
be sold either product. This is because determining which product would provide the most
significant contribution margin per hour of limited resources is essential to the discussion (Lulaj
and Iseni, 2018).

One of the most crucial decisions that the management of a firm has to make is which products
to manufacture, which ones to scrap, and which ones to push back at some point in the future.
The aspects of the product mix that a company chooses to prioritize affect the company's sales,
profit, and cash flow (Steven, 2017). The desired goods help define the company's competitive
position concerning its competitive position concerning the selected products, currently
providing the cash that is essential to develop and produce future products. This may be of equal
significance.

For the purpose of determining whether or not the planned manufacturing of a product would be
profitable, a cost-volume-profit analysis is performed. The purpose of the cost-volume-profit
research is to define, based on the accounting data, the volume of sales needed to achieve a
particular profit margin and the number of sales necessary to reach "break even." The
management then evaluates the expected sales of a product to the sales volume required to
achieve the break-even point and the desired profit margin to determine whether or not the
product should be created.

Question C
Part i

The decision about investments, also sometimes referred to as the decision regarding capital
budgeting is the most crucial option that financial management will ever make. The choices that
a company earns about its capital budget have a substantial influence on the performance of the
company, regardless of whether the company's goal is to maximize profits or wealth. The
following outcomes are caused for the organization as a result of these decisions in investing.
They determine the strategic focus and direction that the company will take. New products,
services, or markets may emerge directly from the capital expenditures committed to financing
new projects (Baldwin and Clark, 1992). Options under the capital budgeting category often
need significant quantities of money and have extended payback periods. The decision to budget
for capital expenditures has a long-term impact on the organization's financial health. The time
during which the project will be carried out necessitates that the evaluation considers several
years' worth of potential events in the future; as a consequence, the accuracy of the assessment is
clouded by both complexity and complexity ambiguity (Jindrichovska, 2013. Financial
management in SMEs.). The bulk of the decisions made on the capital budget is non-reversible.
They need financial expenditures in plant and equipment, brand new software or technology, and
other such things. They often target a certain user group or sector of the business. If the project is
not carried out, it may be difficult to find purchasers for the assets, and the only other option
would be to write them off at a considerable loss. If the project is not carried out, it may be
difficult to find buyers for the assets. If the project does not progress further, it may be difficult
to identify clients that are interested in purchasing the assets. A lack of investment will lead to
inefficient operations, such as inadequate capacity and greater expenditures, as well as non-
competitive production and pricing, which will result in a strong market share and have severe
implications for the company's finances. These inefficient operations will lead to a good market
share, but they will also have severe repercussions for the company's finances (Harris and El-
Massri, 2011) Inefficiency in operations will lead to a loss of market share, which will have
severe implications for the company's finances. On the other hand, an overinvestment would lead
to higher depreciation and operating expenditures, in addition to liquidity difficulty. This would
be a negative outcome.

Part ii

Year Cash Flow Discount Factor (15%) Present Value

 0 (400) 1.000 -400

1 100 0.870 87

2 100 0.756 76

3 100 0.658 66

4 100 0.572 57

5 100 0.497 50

NPV -65

The NPV takes a negative value. That shows the sum of cash flows during the project lifetime
would not help to recover the initial investment. Therefore, the project is not acceptable.

Year Cash Flow Discount Present Discount Present

Factor (15%) Value Factor Value
(9%)

0 (400) 1.000 -400 1.000 -400

1 100 0.870 87 0.917 91.74312

2 100 0.756 76 0.842 84.168

3 100 0.658 66 0.772 77.21835

4 100 0.572 57 0.708 70.84252

5 100 0.497 50 0.650 64.99314

NPV -65 -11.03

IRR = ra + NPVa÷(NPVa-NPVb) * (rb-ra)

= 0.09+(-11.03)÷[(-11.03)+-(-65)]*(0.15-0.09)

= 0.077737632 = 7.7%

The IRR should be greater than the required rate of return, which is 15% in this project.
Therefore, the project is not acceptable.
Question D
In its most basic form, a budget is a financial plan that arranges an organization's resources.
Establishing budgets primarily serves the purpose of directing resources toward a specific
objective. A business budget is a dynamic financial plan that forecasts an organization's
anticipated revenue and expenditures for the next period. A business develops a monthly,
quarterly, or yearly financial plan. It should be dynamic and flexible so that it may be adjusted
when business plans and market circumstances change (Ali, 2010). A realistic and thorough
budget is one of the most critical business operation tools. A budget provides essential
information for operating within one's means, overcoming unanticipated difficulties, and
producing a profit. A solid budget will identify available capital and anticipate expenditures and
income. Company owners must often return to their budget to compare expected budget figures
to actual budget performance to understand where adjustments must be made. Budgets may take
on a variety of shapes and are used for a wide variety of purposes, including establishing the
framework for precise sales targets, employment forecasting, stock manufacturing, capital
investment, financing, and capital spending. Budgets can also take on a variety of forms. Budgets
allow managers to convey prospective details with shareholders and creditors, serve as
benchmarks against which actual results can be evaluated and define corrective actions, provide
managers with "pre - approval" for the execution of spending plans, and provide managers with
"preapproval" for the implementation of spending plans. When trying to convince financial
institutions and other creditors to provide credit, budgets are absolutely necessary (Bolojan,
2011).

While they do not guarantee success, budgets significantly reduce the risk of failure. In order to
translate general ideas into specific, action-oriented objectives and goals, a budget is required. It
is predicted that the outlined goals and objectives will be accomplished if the budgetary
constraints are adhered to as strictly as possible. It is crucial to be aware that a large business is
made up of a number of different people as well as different components. These components
need to be synchronized in order for the whole thing to work properly. The budget is the
instrument that communicates the intended objective and provides a comprehensive plan for the
arrangement of all of the many components. When things do not go as planned, the budget offers
a framework for identifying and focusing on deviations from the plan. This is made possible by
the budget (Gerema, 2017). The budget provides benchmarks that may be used to assess whether
or not the goals have been achieved, and it also enables rapid corrective action to be taken.
Often, responsibilities and activities are dispersed across a variety of industries and levels of
management. This elucidates the meaning behind the phrase "taking responsibility." According
to this strategy, the units and the managers of those units are the ones who are held accountable
for the transactions and events that they directly effect.
WMP utilizes a top-down budgeting technique. The top-down budgeting strategy stresses
historical trends and corporate growth goals at the highest level. Senior management determines
the purposes for the following year. Using the previous year's budget as a benchmark, they
examine how each department used its funds and contributed to revenue. They will also assess
the existing market conditions to estimate the necessary budget to meet the company's objectives.
After establishing the statistics, the finance department analyses the data and projects the goals
against expected growth trends (Bolojan, 2011). While growth may be broken down into various
components, such as team expansion, revenue remains essential. For instance, if the size of the
marketing team doubled to six members, there may be a propensity to double it again to reach
sales goals.

 Advantages

This budget focuses on the expansion of the company as a whole.

It makes departments aware of the high expectations of management.

It expedites budget planning and simplifies interdepartmental conflict resolution.

It also saves time for lower management. Instead of creating the budget from scratch, each
department is given a predetermined objective. This conserves both time and materials.

In top-down budgeting, management prepares a single budget rather than letting each department
develop its own and merge them. So, this process is less laborious.

 Disadvantages

Managers may need more incentives to ensure their success if they are included in the budgeting
process.

Due to their unfamiliarity with the daily operations of the departments, upper-level managers
may establish unreachable goals. This makes it difficult for lower-level managers to achieve their
goals.

This kind of budgeting often results in an overallocation or under allocation of resources.

Bottom-up budgeting, the opposite of top-down budgeting, is one of the alternatives to the
preceding technique, in which department managers write plans based on their strategic
requirements and objectives and then propose them to senior management and executive leaders.
This method is often more time-consuming than the top-down method (Bolojan, 2011). Yet, a
collaborative approach may improve the precision and consistency of budget suggestions.

The method of budgeting known as zero-based budgeting, or ZBB for short, is one in which all
expenditures for a new period or year need to be justified beginning from zero, as opposed to
starting with the baseline budget and modifying it as needed. ZBB is a highly effective technique
for business planning that enables a company to pinpoint and get rid of expenditures that aren't
required, keep spending under control, and focus on activities that will provide a high return on
investment. The budgeting process, which includes ZBB, is the operationalization of the strategic
plan of an organization (Hamdan, 2020). To fulfill the financial and operational goals defined in
the strategic plan, an organization must translate its long-term strategy into a particular set of
anticipated revenues and expenses that can be used as a success indicator. They are subject to
revision and modification to keep the firm on track to fulfill its business objectives.

References

Achim, A. and Chiş, A., 2014. Financial Accounting Quality And Its Defining Characteristics.
Practical Application of Science.

Ali, U., 2010. Cost and management accounting practices: a survey of manufacturing companies.
Eurasian Journal of Business and Economics.

Baldwin, C. and Clark, K., 1992. Capabilities and capital investment: New perspectives on
capital budgeting. Journal of Applied Corporate Finance.

Barnes, P., 1987. The analysis and use of financial ratios. Journal of Business Finance and
Accounting.

Bolojan, F., 2011. Bottom-up/top-down budgeting. Defense Resources Management in the 21st
Century.

Drake, P. and Fabozzi, F., 2012. Financial ratio analysis. Encyclopedia of Financial Models.

Durdans Hospitals, 2022. Annual Report 2021/2022, s.l.: s.n.

Durdans Hospitals, 202. Annual Report 2020/2021, s.l.: s.n.

Durdans Hospitals, 2022. The Durdans Story. [Online]

Available at: https://www.durdans.com/the-durdans-story/

Emmanuel, C. H. E. and Komakech, S., 2010. Towards a better understanding of capital

investment decisions. Journal of Accounting & Organizational Change.
Gerema, P., 2017. An evaluation of the budgeting process and its impact on the performance of
small restaurants in Harare Central Business District. s.l.:s.n.

Greenwood, R., 1994. Incremental budgeting: antecedents of change. Journal of Public Policy.

Guidry, F. and Horrigan, J., 1998. CVP analysis: a new look. Journal of Managerial Issues.

Hamdan, M., 2020. Decision Aid in Budgeting Systems for Small & Medium Enterprises. s.l.:s.n.

Harris, E. and El-Massri, M., 2011. Capital investment appraisal. Review of management
accounting research.

Horrigan, J., 1995. Some empirical bases of financial ratio analysis. The Accounting Review.

Hung, M., 2000. Accounting standards and value relevance of financial statements: An
international analysis. Journal of accounting and economics, 30(3), pp.401-420.

Jindrichovska, I., 2013. Financial management in SMEs.

Klinefelter, D. and McCorkle, D., 2008. Financial management: Cash vs. accrual accounting.
Texas FARMER.

Kwon, Y., 1989. Accrual versus cash-basis accounting methods: An agency-theoretic

comparison. Journal of Accounting and Public Policy, pp. 267-281.

Landell-Mills, P., 1983. Management: A limiting factor in development. Finance and

Development.

Libby, R., Bloomfield, R. and Nelson, M.W., 2002. Experimental research in financial
accounting. Accounting, organizations and society, 27(8), pp.775-810.

Liu, Y. and Tyagi, R.K., 2017. Outsourcing to convert fixed costs into variable costs: A
competitive analysis. International Journal of Research in Marketing, 34(1), pp.252-264.

Lulaj, E. and Iseni , E., 2018. Role of analysis CVP (Cost-Volume-Profit) as an essential
indicator for planning and making decisions in the business environment. European Journal of
Economics and Business Studies.

Nuhu, M., 2014. Role of Ratio Analysis in Business Decisions: A Case Study NBC Maiduguri
Plant. Journal of Educational and Social Research.

Okafor, U. I. and Oji, R. N., 2021. Management Accounting Practices and Performance of Small
And Medium-Scale Enterprises In Nigeria. International Journal of Business and Management
Invention.
Sahu, P. and Charan, P., 2013. Ratio analysis is an instrument–For decision making-A study.
Asian Pacific Journal of Research.

Tickell, G., 2010. Cash to accrual accounting: One nations dilemma. International Business &
Economics Research Journal (IBER), 9(11).