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Table of Contents
ABSTRACT........................................................................................................................................... 4
PURPOSE OF THE ASSIGNMENT...................................................................................................... 4
BACKGROUND..................................................................................................................................... 4
INTRODUCTION................................................................................................................................... 5
TASK-(1) THE COST CONCEPTS IN DECISION MAKING PROCESS...............................................5
1.1 THE SIGNIFICANCE OF COSTS IN PRICING STRATEGY...........................................................5
1.2 THE COSTING SYSTEM THAT PROVIDES A PROFIT MARGIN OF 10% AT A SELLING PRICE
............................................................................................................................................................... 6
1.3 THE ABSORPTION COSTING SYSTEM FOR SETTING SELLING PRICE...................................7
THE ABSORPTION COSTING (1.2) SYSTEM STEPS INVOLVED WITH VARIOUS STEPS SUCH
AS ...................................................................................................................................................... 7
1.3 (A) HOW THE ABSORPTION COSTING AFFECT MANAGEMENT DECISION MAKING ON
REDUCTION PRICE.............................................................................................................................. 7
1.3 (B) PROPOSAL FOR IMPROVEMENTS IN ABSORPTION COSTING..........................................9
TASK-(2) THE FORECASTING TECHNIQUES TO OBTAIN INFORMATION FOR DECISION
MAKING................................................................................................................................................ 9
CONTRIBUTION FOCUSED TO THE PROFIT GENERATED ON INDIVIDUAL PRODUCTS.
THEREFORE IT IS USED TO DETERMINE HOW MUCH QUANTITY NEEDS TO BE SOLD TO
COVER BOTH VARIABLE AND FIXED COSTS................................................................................10
CONTRIBUTION PER UNIT = SELLING PRICE PER UNIT VARIABLE PRICE PER UNIT...........10
CONTRIBUTION PER UNIT = SELLING PRICE PER UNIT VARIABLE PRICE PER UNIT...........11
THEREFORE CONTRIBUTION
ABSTRACT
This assignment demonstrates the cost concept in pricing strategy,
forecasting techniques to obtain the information for decision making and
budgetary process of an organization. In addition it deals with recommending
the cost reduction techniques and management process in organizations.
Furthermore it deals the financial appraisal techniques to make strategic
investment decisions and interpret financial statements for planning and
decisions making process, besides that analyzing the sources of capital for
the organizations.
BACKGROUND
MARKS & SPENCER Ltd, the giant supermarket chain decided to manufacture
and sell low cost lunch boxes focused to sell international students in London.
On these circumstances they have consulted with PJ Consulting and by the
request of the line manager conducted this activities and prepared this report
and submitted.
INTRODUCTION
The role of both managing finance and applying cost concepts in
manufacturing process are significant to the organizations for the successful
launching and branding of the product among competitors and financial
control and success of the organization. In addition the application and use of
financial appraisals let organization to take wise decisions on long term
investments. The cost reduction and cost control leads the organization
survives financially sound.
1.3 (A) How the absorption costing affect management decision making on
reduction price
The declines in the financial environment and price reductions in the outlets
demands various pricing strategies in Marks & Spencer, therefore the various
absorption costing methods can practice by managers in the organization,
such as
also percentage of the product sales price. When producing large range
of different products with overall production cost, there is close relation
with products and the overhead cost, therefore the absorption cost will
be: direct material /total overhead
Percentage of the selling price This method used when products are
sold out through different outlets, such as a sales force, retailer chain
stores online sales or through agents. Therefore in this case there is
different discount from the list price and this method useful to establish
the maximum production cost of a product by using list price of a
competitors product and work reverse. For example FIG-2.
Apri.11
11-May
(+)
(-)
(+)
(+)
Variated price
0.9270
0.64675
0.153
0.2233
1.9501
3.04
1.0868
55.73
7000
21258
= 2.99
= 1.92
= 1.07
= 55.73%
=1.9501
= 1.09
= 3.04
Contribution per unit = selling price per unit variable price per unit
Therefore the selling price per unit = 2.99
Total direct variable expenses per unit = material + labor + overhead
= 0.90+0.65+0.15 = 1.70
That is, total variable cost per unit
= 1.70
Total fixed expenses cost per unit
= 0.22
So, contribution per unit
= 2.99 1.70 = 1.29
OR
Contribution per unit x number of units sold
= 1.29 x 7000 = 9030
OR
Contribution = Total sales total variable cost
Total sales = total units x selling price
Variable cost
= variable cost x total number of item sold
= 1.70 x 7000 = 11,900
Selling price per unit
= 2.99
Total units sold
= 7000
Therefore total sales
= 2.99 x 7000 = 20,930
Contribution
= 20930 11,900 = 9030
Apri.11
Particulars
Material
Labor
Overheads
Admin. Over
Heads
Total per unit cost
Selling price per
unit
Margin per unit
(% of per unit
margin)
Sales units in
April
Total sales in
pounds
Amount(
)
0.90
0.65
0.15
0.22
1.92
(+/-)
variation
(%)
3.00
0.50
2.00
1.5
%variatio
n
0.0270
0.0033
0.0030
0.0033
11-May
(+)
(-)
(+)
(+)
Vitiated
price
0.9270
0.64675
0.153
0.2233
1.9501
2.99
1.07
3.04
1.0868
55.73
55.73
7000
7000
20930
21258
Contribution per unit = selling price per unit variable price per unit
So, contribution per unit
OR
Contribution per unit x number of units sold
= 1.313 x 7000 = 9,121
OR
Contribution = Total sales total variable cost
Therefore contribution
Particulars
Total units sold
Selling Price per unit
Direct Variable Expenses
Fixed Expenses Cost Per Unit
Contribution Per Unit
Total Value of the Contribution
Total Value of the Variable Cost
Total Sales Value
Percentage of Margin
April-11
7000
2.99
1.7
0.22
1.29
9030
11900
20930
55.73
May-11
7000
3.04
1.727
0.2233
1.313
9121
12089
21280
55.73
= 3.04
= 1500/3.04 = 493.43
= 493 units
Selling price/unit in
May11
Monthly Increase
April- 11 Actual sales
Total Monthly Revenue
3.0
4
2%
2 % Increased sales up to
July(each month
April
MAY
JUNE
7000
7140
7283
21706
22140
Date
Apri.11
Apri.11
Apri.11
Apri.11
Apri.11
Apri.11
Particulars
Amount() (+/ -)variation(%) %variation11-May
Material
0.90
3.00
0.0270
(+)
Labour
0.65
0.50
0.0033
(-)
Overheads
0.15
2.00
0.0030
(+)
Admin. Over Heads 0.22
1.5
0.0033
(+)
Total per unit cost
1.92
Selling price per unit 2.99
Margin per unit
1.07
(% of per unit margin)55.73
Apri.11 Sales units in April 7000
JULY
7428
22583
Variated price
0.9270
0.64675
0.153
0.2233
1.9501
3.04
1.0868
55.73
7000
April
MAY
JUNE
JULY
August
Sept.
Budgeted sales
quantity
Add desired ending
inventory
Total required
quantity
less beginning
inventory
Required
production
Budgeted sales
quantity
Selling Price Per
Unit
Total Sales in
Pounds
7000
7140
7280
7428
7577
7140
7280
7428
7577
7729
14140
14420
14708
15005
15306
7000
7140
7280
7428
7577
7140
7280
7428
7577
7729
7000
7140
7280
7428
7577
2.99
3.04
21705.
6
3.04
22131.
2
3.04
3.04
23034.0
8
20930
22581.12
7729
Particulars
Total units sold
Selling Price per unit
Direct Variable Expenses
Fixed Expenses Cost Per Unit
Contribution Per Unit
Total Value of the Contribution
Total Value of the Variable Cost
Total Sales Value
Percentage of Margin
April-11
7000
2.99
1.7
0.22
1.29
9030
11900
20930
55.73
May-11
7000
3.04
1.727
0.2233
1.313
9121
12089
21280
55.73
Production budget
Production budget follows after the sales budget and it predict the required
quantity to be produced during the budgetary period to cover the sales
quantity to be produced during the budgetary period to cover the sales
quantity and predicted closing stock quantity. The production quantity
calculated as
Budgeted sales in units............................
Add desired ending Inventory................
2000
600
-------Total required quantity........................... 2600
Less Beginning balance inventory...........
400
-------Required production quantity................
2200
Sales Budget
Refers to (Accounting for Management, 2013), A sales budget is a detailed
schedule showing the expected sales for the budget period; typically, it is
expressed in both dollars and units of production. An accurate sales budget is
the key to the entire budgeting in some way. If the sales budget is sloppily
done then the rest of the budgeting process is largely a waste of time.
The sales budget is the beginning point of to prepare a master budget and the
other elements in master budget such as, production, purchase, inventories
and expenses that depend of affect it in different ways. A typical example
shows in Fig-5
PAYBACK PERIOD
It is the period of time to recover from the investment project to recouped the
initial investment and used to capital investment decision making rule and it
mentions that all the capital investment has a specified period of payback and
it should be a specified period of years or accepted years of period.
residual value of the asset and sensitivity analysis like sales volume, sales price,
operating costs and capital expenditures.
Cash
Flow
Stateme
nt
Year
0
1
2
3
4
5
TOTAL C.F
PROJECT 1
Cumulative
C.F
PROJECT -2
Cumulative
C.F
(90,000)
(90,000)
(90,000)
(90,000)
20000
(70,000)
10000
(80,000)
30000
(40,000)
20000
(60,000)
40000
40000
(20,000)
20000
20,000
60000
40,000
20000
110,000.00
40,000
50000
120,000.00
90,000
Investment
90,000.00
Payback
Period
NPV
IRR
3
3.33
4303.57
29846.59
13.932
21.697
T2
90,000.00
NPV
(+)
(-)
Projects
PROJEC
T1
PROJEC
T2
DECISION
Accept
Reject
Investment
NPV
90,000.00
4303.57
4.78
90,000.00
29846.59
33.16
Company value
No change
increase
decrease
The discounted cash flow at the cost of capital and the effect on present value shows the
relation like
1. Positive value = project returns more than the cost of capital
2. Negative value = project returns less than cost of capital
3. Zero value
= project returns cost of capital
Earning Based Measures
ARR
NPV
Gearing
IRR
BEP
Sensitivity of
estimated(a)Taxation(b)Inflation(c)Capital
Rationing
NPV
(+)
(-)
DECISION
Accept
Reject
Internal
sources
1 Own money
External sources
Ownership capital
2 Sale of
personal
property
1 Ordinary shares
2 Preference shares
1
2
3
Debentures
Bonds
Bank Loans
Overdraft
Hire purchase
4 Sale of
assets and
lease back
5 Cheque
discounting
Leasing
7
8
Trade Credit
Venture Capital
6 Working
capital
Arrangemen
t
Factoring
1
0
Franchising
3 Retained
profit
There is internal capital and external capital sources and the external sources
consist of ownership capital and non ownership capital. The entrepreneur can
contribute own money such as from his personal fund as capital, it may arise
from sale of personal property or other belonging like land, house, precious
metals or vehicles. The retained profit can also used if an emergency arises,
cheque discounting is also practice to manage the urgency, besides that the
wise management of working capital provides a source to generate fund.
The ownership capital like ordinary shares and preference shares can issue
and the can use it without any interest or financial charges. The non
ownership capital like debentures can issue for long term and also mortgage
debentures can also be considered. The bonds can issue to public with a
steady rate of interest for a long term. The bank loans with a flat rate also
suits, besides that overdraft from external sources through bank with daily
basis interest rate can consider too. The hire purchase like giving an initial
deposit to the seller and buy a high cost asset, raw-material or plant and avoid
other costly than this fund can be also practiced.
Financial leasing and operating leasing or grants from local governments,
trade promotion agencies or government agencies or trade credit or more
credit period to settle the invoices also considered. The venture capital like
money invested by private parties with designed rate of interest and run up to
agreement period or factoring of invoices or signed work agreement contracts
with effect of the interest rate of concerned bank. Franchising is another
source of raising capital and it bring to practice like allow an external party to
run the same type of business under the same flagship and can collect the
franchise money. In addition in new generation environment, there are various
other situations exist to raise the fund like credit.
5.3 RECOMMENDATIONS OF THE VARIOUS PROJECT INVESTMENTS
The various organizations have different aspects that affected in legal terms,
authority and bankruptcy. The rules and regulations connected with the
concerned government and all organizations have its own responsibility and
obligations to legislature, stake holders and government, besides that it has
its own advantages and disadvantages also limitations when implementing the
external and internal capital or fund.
5.4POST AUDIT APPRAISAL TECHNIQUES
Post audit is the comparison between actual incomes yielded in a capital
project with predicted income in appraisal techniques. Therefore the
investment decision making is significant in organizations. The expenditures
in the investment project and the operating capability of organization also the
ability to face the changing environment decide the long term operations of
organization. The level of productivity at a maximum required to run the long
term investment projects. The post audit and appraisal required to understand
the performance and level of quality and performance in the production of the
organizations.
TASK-(6) INTERPRETATION OF FINANCIAL STATEMENTS FOR PLANNING
DECISION MAKING
The financial statements of an organization provide the historic financial data
and information. The financial statements consists of detailed and accurate
record of assets and liabilities, income statement and cash flow statements.
These are quantitatively written records and explain the financial status of an
organization. Therefore, the historical performance of the organization's
information available to the stakeholders It is constructed in a standardized
format and financial based historic records. The use of financial statements
used to recognize why there is no excess fund available, is the financial entity
sound or not, is there any possibility to generate funds and is there any funds
available to meet the predicted demand.
Operating cycle
Liquidity
Profitability
Activity
Financial leverage
Shareholders ratio
Return ratio
Liquidity Ratio
Current ratio = current assets / current liabilities
= 1520.20/1890.50 = 0.804126
Quick ratios = current assets - inventory/current liabilities
= 1520.20 - 613.20/1890.50 =0.479767
Net working capital to sales ratio = current assets current
liabilities/sales
=1520.20 1890.50/9536.60 =
-0.03883
Profitability ratio
Gross profit margin = gross income/ sales
= 523.0/9536.60 = 0.054841
Operating profit margin = operating income/ sales
= 852.07/9536.60 = 0.089347
Net profit margin = net income/ sales
= 288.70/9536.60 = 0.030273
Efficiency Ratios
Efficiency ratios are used to analyze the organizations assets and liabilities
usage in internally and it analyses how efficiently it manage the receivables,
repayment of liabilities, the quantity and usage of the equity, besides that the
usage of s\inventory and machinery. The common ratios of efficiency ratios
are Accounts receivable turn over
Fixed assets turnover
Sales to inventory
Sales to net working capital
(It measures the capacity utilization and the quality of fixed assets)
3. Accounts payable turnover ratio = purchase / average accounts receivable
= 77.20 / 281.40 = 0.274343
(Purchases = closing stock opening stock = 613.20 536 = 77.20)
(Indicate the liquidity of the firms payable)
CONCLUSION
Managing Finance with decision making process of cost concepts allows to control the
market by fair price, when competition and financial fluctuations take place, besides
that it let control the cost of production and overall performance of an organization.
The forecasting techniques allow managers not only to take acceptable decisions but
also lead the organization profitably. The both budgetary process and cost reduction
techniques allow to control over the expenses and smooth flow of management process
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