1 WJEC Applied Business A level ABUS 1 and ABUS 5 Additional information: formulae, layout and terminology

ABUS 1 and ABUS 5 Accounting terminology A number of the terms used in Accounting are changing, and are included in some of the following formulae. Students should be made familiar with the following changes, which will be introduced gradually into the papers: Cost of sales (formerly Cost of goods sold) Financial statements (formerly Final accounts) Income statement (formerly Trading, profit & loss account) Inventory (formerly Stocks) Non-current assets (formerly Fixed assets) Non-current liabilities (formerly Long-term liabilities) Profit, or Profit for the year (formerly Net profit) Receivables and Payables, or Trade receivables and Trade payables (formerly Debtors and Creditors) Revenue (formerly Sales or Turnover) Statement of cash flows (formerly Cash flow statement)

2 Financial ratios Ratio Current ratio Acid test Return on capital employed Profit in relation to revenue ('NP margin') Gross profit margin Inventory (stock) turnover ('stockturn') Receivables collection period ('debtor days') Payables collection period ('creditor days') Asset turnover (ABUS 5) Gearing (ABUS 5) Formula Current assets Current liabilities Current assets - inventory (stock) Current liabilities Operating profit 1 x 100 Capital employed 2 Net profit x 100 Revenue Gross profit x 100 Revenue Cost of sales Average stock 3 (= times per period) 4

Receivables 5 x 365 Credit sales Payables 5 x 365 Cost of sales 6 Revenue Net assets Non-current (long-term) liabilities x 100 7 Capital (ie, equity + non-current liabilities)

Notes 1 Profit before interest and tax (or 'net profit' or 'profit' unless otherwise stated) 2 Calculate either by a) Capital and reserves + Non-current liabilities ('long-term liabilities') b) Total assets - Current liabilities (ie, the Net assets figure) 3 Opening stock + closing stock, divided by 2 (use a single stock figure if that is given) 4 Alternative to 'times per period' is: Average stock x 365 (gives number of days stock) Cost of sales 5 'Receivables' = debtors; 'Payables' = creditors; the closing debtors and creditors amounts may be used if average figures cannot be calculated 6 Purchases may be used if cost of sales figure is not available 7 Alternative formulae for companies Non-current liabilities (Long-term liabilities) Equity (Capital and reserves)

3 Cash flow forecast layout The following layout will normally be used in the question, or expected from candidates (other layouts are acceptable if the question does not stipulate the layout to be used): Receipts a b Payments c d e f xxx xxx xxxx

xxx xxx xxx xxx xxxx xxx xxx xxx

Net cash flow Opening balance Closing balance

4 Breakeven analysis: formulae and layout Item Contribution per unit Breakeven (units) Breakeven () Achieving a required profit Formula/layout Unit selling price - Variable cost per unit Total fixed costs . Contribution per unit x Unit selling price Total fixed costs Contribution per unit Total fixed costs + Profit required Contribution per unit Sales xxxx less Variable costs xxx Total contribution xxx Less Fixed costs xx Profit xx

Layout showing contribution and profit

5 ABUS 5: additional information on formulae/layout Section 5.1 Time series/sales forecasting a) Finding the trend by moving averages A typical layout is as follows: Year 2011 2012 2013 2014 (etc) Sales (units) 5 000 5 200 5 450 5 550 Moving total of (eg) 3 years' sales Moving average of 3 year's sales

b) Forecasting using time series A typical layout plus formula is as follows (see also A2 Guide): Past sales period 1 2 3 4 Sales () xxx xxx xxx xxx Seasonal variation* (000) +x -x -x +x

(additional information to be given similar to the following) The business/the person uses the formula Actual minus Trend to calculate the seasonal variations.

6 Section 5.2 Economic order quantity (EOQ) formula The formula that will be given in the question is: 2od h ie: "the square root of the following: 2 times o times d, this total divided by h"

where: o is the cost of Ordering a consignment of stock d is the annual Demand for the stock h is the annual cost of Holding one unit of stock. (Alternative letters may be substituted for o, d or h but the formula itself will not be altered)

Section 5.3 Layout illustration for marginal costing decisions The following is a typical layout for one type of marginal costing decision (whether to stop producing an 'unprofitable' line) Product A Sales Fixed costs Variable costs Profit / (Loss) xxx xxx xxx xxx Product B xxx xxx xxx xxx Product C xxx xxx xxx (xxx)

(additional information to be given similar to the following) The owners of the business are planning to stop selling product C because these results show that it is making a loss.

7 Section 5.3 Formulae for calculating variances Direct materials Material total cost variance: the difference between the total actual material cost and the total standard material cost for the actual quantity Material price variance: the difference between the standard price and the actual price, for the actual quantity of material AQ x (AP SP) Material usage variance: the difference between the standard quantity specified for actual production and the actual quantity used, at standard purchase price: SP x (AQ SQ) Direct labour Labour total cost variance: the difference between the standard labour cost and the actual labour cost, incurred for the actual production Labour rate variance: the difference between the standard and actual labour rate per hour for the actual hours worked AH x (AR SR) Labour efficiency variance: the difference between the standard hours for the actual production and the hours actually worked, valued at the standard rate SR x (AH SH) Other approaches are acceptable for calculating variances.

8 Example A product has the following standard costs: Materials 5 kg at 8 per kg Labour 2 hours @ 15 per hour Budgeted production is 1 000 products a month. Actual production for a month: Number made and sold Materials 5 320 kg Labour 2 040 hours Material variances Total: actual 42 500; standard = 1 060 x 40 = 42 400; Price: 5 320kg: actual 42 500; standard (5 320 x 8) 42 560; Usage: actual 5 320kg; standard (1 060 x 5) 5 300kg; 20kg x 8 = Labour variances Total: actual 31 000; standard (1 060 x 30) 31 800; Rate: 2 040 hrs: actual 31 000; standard (2 040 15) 30 600; Effic.: actual 2 040 hrs; standard (1 060 x 2) 2 120 hrs; 80 hrs x 15 = 800 F 400 (A) 1 200 F 100 (A) 60 F 160 (A)

40 30

1 060 42 500 31 000

9 Section 5.4 Decision trees See January 2010 paper for diagrammatic layout

Critical path analysis Typical table layout for calculating the critical path and/or total float for a project: Time required (working days) x x x x x x x x

Activity (letter + description) A. B. C. D. E. F. G. H. xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx xxxxx

Preceding activity A A, B C C, D E F G

10 Section 5.4 Investment appraisal

ARR Suggested formulae: the two commonly occurring formulae are: Average annual return ('average profits') Initial investment Average profits Average investment as a percentage

as a percentage

'Average investment' = initial investment + residual value 2 DCF/NPV Typical layout for calculating NPV

Year

Cash flow ()

Discount factor

Present value ()

Net present value

Students will be expected to be able to adjust profits or cash flows for depreciation (straight-line calculation). For example: The investment will be replaced after X years, at the end of which time it is not expected to have any residual value. Depreciation has been allocated equally to each year and is included in the profit figures above