Accounting Analysis Methods Example

Essays on Accounting Analysis Methods Assignment Accounting Table Of Content Accounting Table Of Content 2 Segmentation Analysis: Advantages and Disadvantages 3 2. Allocation method: An effective way 3 3. Contribution Margin and Common Statement Analysis 4 4. Suggestions: Things should be taken care of 4 Reference 5 Appendix 6 1. Segmentation Analysis: Advantages and Disadvantages Segmentation Analysis has advantages as well as disadvantages. Some advantages of this kind of analysis are articulated below. Enhanced strategy formation and well calculated decision making. More aimed marketing strategies yielding better results. The segments are taken into account individually, so each segment would be responsible for their own operations. Performance can be compared between these segments. Appraisals based on performance can be used to boost the efficiency of those segments. Disadvantages would include the following. Cost would be much higher as company would be carrying out its operation in different segments individually. Co-ordination can go off if not tackled properly. 2. Allocation method: An effective way The allocation method has been summarized under two heads called ‘Marketing corporate’ and ‘ administrative costs’ which is not an effective way to look at expenditures. Certain expenses as operating or manufacturing expenses, selling and distribution overheads and financial expenses are not taken into account or these have been taken into account under imperfect heads which makes it very difficult for the company to point out stages where they have been expending more ,thus loosing out on profits . 3. Contribution Margin and Common Statement Analysis Contribution margin is the amount by which annual sales revenue exceeds annual variable cost. This margin contributes to the annual fixed cost and if larger than fixed costs, to profit (Ehmke Miller, 2005). From the work sheet attached herewith, it is visible that contribution margin is much higher for Europe, second comes Asia. While if look in percentage terms the contribution margin as a percentage of sales is much higher for America is than that of Asia .Operation in Asia is having more variable cost against their sales ,thus implying inefficiency of the respective segment. An income statement where each account is expressed in terms of percentage of its sales head is called as Common Size statement. It lets an analyst to compare the financial condition of two or more companies with different sizes .The financial condition of a company in different periods also can be compared by this analysis thus letting towards more compact strategic decisions on financial ground. The common size analysis of the segments and the company as a whole are shown respectively in table 2 and 3. 4. Suggestions: Things should be taken care of Articulated below are the suggestions, made keeping in mind certain analysis. 1. BFBS has proved to be highly successful in the past primarily because of the strong personal attention given to the clients by the project managers .Personal attention was possible as the company itself divided its operation as well as its customers in different segments, thus catering them more effectively. So the company should carry forward its customized operations. 2. Declaring expenditures under two heads make decision making complicated. So its expenditures should be included under separate heads like operating or manufacturing expenses, administrative expenditures, selling and distribution overheads and financial expenses. Thus one can be clearer about the expenditures where they are loosing out money and lessening the same would let them to make their operation more effective. 3. Cost of goods sold in percentage terms is much higher for the region, Asia, thus making their contribution margin much lower .Even if we look at their total segment expenses , its around 106%, thus resulting in maximum loss .This region should work on to lessen their cost of goods sold. Reference Ehmke Cole Miller Alan (2005), Contribution margin, Estimating Breakeven Sales for Your Small Business, Retrieved December 09, 2009 from http://www.ces.purdue.edu/extmedia/EC/EC-725.pdf. Appendix Table 1. Table 2. Table 3. Common size analysis of the company as a whole. Â   Amount Amount (in %) Sales 1947000 100% Less segment expenses (traceable): Â   Â   Cost of goods sold 814000 42% Transportation expense 69000 4% Total Variable Costs 883000 45% Contribution Margin 1064000 55% Marketing 511000 26% Compensation 295000 15% Factory Utilities 29500 2% Depreciation on Equipment 82000 4% Total segment expenses 1800500 92% Segment Income (Loss) before allocated corporate expenses 146500 8% Â   Â   Â   Less allocated corporate expenses: Â   Â   Marketing Corporate 66000 3% Administrative Costs 135000 7% Total allocated corporate expenses 201000 10% Net operating Income (Loss) (54500) -3%