3.

1 Analyze budgets and make appropriate decisions

Budgeting
Budgeting is the process of creating a plan to spend your money. Creating this
spending plan allows you to determine in advance whether you will have enough
money to do the things you need to do or would like to do.
+The sale budget: Sales budget is the first and basic component of master budget and
it shows the expected number of sales units of a period and the expected price per
unit. It also shows total sales which are simply the product of expected sales units and
expected price per unit.
+Expense budget: Expense budget cover all of these costs, despite their respective
role in the daily operations. Preparing an expense budget for your business to ensure
you are spending as little as possible to operate without sacrificing quality to gain the
maximum profit for the business.
+Income budget: An income budget is a specific type of budget that only shows how
and where money is earned. This type of budget can be used for professional purposes
in a business or can be used for personal reasons, if a single person has various
streams of income. The income budget is used to make financial plans and pinpoint
which stream of income is the most lucrative at any given time.
The role of cash budgeting
The cash budget is managements approximation of cash on hand at the beginning of
a budget period and the estimated cash inflows and outflows.The importance of cash
budget in controlling projects actual activity
Cost
Cost is one of the central elements of the management of production and business
activities of the enterprise. Cost is recognized in many different angles. Costs are
understood abstractly as indicated by the amount of wasted labor and living labor
materialized incurred during production and business activities are within a certain
period.
Cash flow of the project and project appraisal
Cash flow
Cash flow is the movement of money into or out of a business, project, or financial
product. It is usually measured during a specified, limited period of time.
Measurement of cash flow can be used for calculating other parameters that give

information on a company's value and situation. Cash flow can be used, for example,
for calculating parameters: it discloses cash movements over the period.
The role of Cash Flow:

to determine a project's rate of return or value. The time of cash flows into and
out of projects are used as inputs in financial models such as internal rate of
return and net present value.
to determine problems with a business's liquidity. Being profitable does not
necessarily mean being liquid. A company can fail because of a shortage of
cash even while profitable.
as an alternative measure of a business's profits when it is believed that
accrual accounting concepts do not represent economic realities. For instance,
a company may be notionally profitable but generating little operational cash
(as may be the case for a company that barters its products rather than selling
for cash). In such a case, the company may be deriving additional operating
cash by issuing shares or raising additional debt finance.
cash flow can be used to evaluate the 'quality' of income generated by accrual
accounting. When net income is composed of large non-cash items it is
considered low quality.
to evaluate the risks within a financial product, e.g., matching cash
requirements, evaluating default risk, re-investment requirements, etc.
Cash flow notion is based loosely on cash flow statement accounting
standards. It's flexible as it can refer to time intervals spanning over pastfuture. It can refer to the total of all flows involved or a subset of those flows.
Subset terms include net cash flow, operating cash flow and free cash flow.

Steps in project appraisal

-NPV
-IRR
-Pay-back period

The importance of financial planning

To avoid the problem of shortage and surplus of funds financial planning is required
in financial management.Financial Planning involves designing the blueprint of the
financial operations of a firm. It ensures that just the right amount of funds are
available for the organisational operations at the right time and thereby, ensuring
smooth functioning of an organisation. The following are the points that highlight
the importance of financial planning in for financial management of an organisation.

Financial planning helps in forecasting the future . It involves planning

and analysing the blueprint of the financial operations of a business that
may occur in future. Therefore, it helps in smooth functioning of the
business by defining clearly as to what must be done in different
situations.
In case of surprises and shocks, financial planning helps an organisation
to detect and avoid such situations. It prepares the managers in advance
for adverse situations .
It helps in improving coordination between the various business
activities and functions . By providing a clear framework, it promotes
cooperation in work.

3.2 Explain the calculation of unit costs and make pricing decisions
using relevant information
The cost per unit is commonly derived when a company produces a large number of
identical products. The cost is derived from the variable costs and fixed costs incurred
by a production process, divided by the number of units produced.
The cost per unit calculation is:
(Total fixed costs + Total variable costs) / Total units produced
The cost per unit should decline as the number of units produced increases, primarily
because the total fixed costs will be spread over a larger number of units

Pricing Decision:
- Pricing Decision is an analysis process to take your product price, it is the basic
condition for your company can entry and dominate the market.
- There are 3 major influences on pricing decisions:

Customers influence prices through their effect on demand

Competitors influence prices through their actions
Costs influence prices because they affect supply.

Applied in Real Project: Heated Bricks Factory Plan

Project Goal:
Investment specialized in building factory semi-automatic producing Manhezi bricks
and alumina bricks are heated bricks resistant tiles on the
C, has a variety of

sizes to build steel rolling furnace, cement metallurgy, glass furnace, ... replace
imported bricks (mainly from China)
Technique information:
- Planned factory capacity: 2200 tons/year
- Maximum capacity: 2500 tons/year
- Total Cost: 14,394,000,000 vnd

Facility Set-Up
No.
1

Names

Cost

400 tons Presser

1,860,000,000

Masher

Mixer + colloidal Crusher

Drying Machine + Oven thermal

spray machine
276,000,000

Electric facilities

Computers

Shape machine
Machine

1500 tons Presser (Korea)

Forklift

10

25 tons Furnace

600,000,000
114,000,000

111,000,000
60,000,000
+

Weighting
363,000,000
3,630,000,000
270,000,000
270,000,000

11

Installation and Transfer Cost

12

3-phase electric transformers

195,000,000
645,000,000

Total

8,394,000,000

Facilities Cost

8,394,000,000

Building Factory Cost

6,000,000,000

Total Cost

14,394,000,000

Type of Capital Using:

Equity: 8.394.000.000 (58.3%)

Debt (47.3%) in Agribank, principals are paid annually, paid in second year,
preferential interest rates Agribank 10.1% / year

Operation Cost
Variance cost per 1 tons:
Variance Cost per 1 tons
Materials

2,760,000

Direct works

1,044,000

Inside Facilities Cost

600,000

Othes

450,000

Total

4,854,000

Fixed costs not-excluding depreciation 740

Fixed managing cost: 738.77 millions vnd (for manufacturing 1600 - 2500 tons)
Depreciation period of facilities: 5 years; of factory: 7 years
Income Taxs: 25%
Annual Depreciation:
- Facilitty Depreciation:

+ Depreciation time: 5 years

+ Annual Depreciation (Using Linear method)
D=

= 743,800,000

- Factory Depreciation:
+ Depreciation timee: 7 nm
+ Annual Depreciation (Using Linear method)
D=

= 328,571,429

We have the table:

Year 1

Year 2

Year 3

Year 4

Year 5

Facilitty Depreciation

1679

1679

1679

1679

1679

Factory Depreciation

857

857

857

857

857

Depreciation Total

2536

2536

2536

2536

2536
1714

Depreciation Overleft

Production:
Power production and consumption is expected to 2200 tons/year in which the first
year is expected to reach 80%, 2nd year 90% projected, 3rd year is expected to reach
100%
Planned Capacity: 2.200 tons/years
We have the table
Year

Year
1

Year
2

Year
3

Year
4

Year
5

Consumption rate

80%

90%

100%

100%

100%

1,760

1,980

2,200

2,200

2,200

Production (tons)

Operation Cost:
a. Fixed Cost:
- Fixed managing cost: 738.440.000 vnd
Cost
Weighted (Mil.
in Sales
Vn)

Portion

18.06

Social & Health Insurance

Marketing & Promotion

1.40%

200.00

Utilities

0.22%

30.66

Office Supplies

0.08%

10.71

Professional Fees

0.16%

23.10

Tools, materials

0.12%

16.91

Travelling
Equipment
Maintenance

0.09%

12.29

0.18%

25.73

Land Rental

2.76%

393.33

Miscellaneous

0.05%

7.67

Total

5.05%

738.44

&

Vehicle

- Depreciation: 2.536.000.000 vn
Year 1

Year 2

Year 3

Year 4

Year 5

Facilitty Depreciation

1679

1679

1679

1679

1679

Factory Depreciation

857

857

857

857

857

Depreciation Total

2536

2536

2536

2536

2536

Depreciation Overleft

b. Variance Cost:
+ Fixed Cost in 1st Year: 8.543 Millions Vnd
+ Fixed Cost in 2nd Year: 9.611 Millions Vnd

1714

+ Fixed Cost in 3rd Year and more: 10.679 Millions Vnd

We hae the table:

Fixed expenses
Variance expenses
Total Expenses

Year
1

Year
2

Year 3

Year
4

Year
5

3,882

3,882

3,730

3,579

3,427

8,543

9,611

10,679

10,679

10,679

12,425

13,493

14,409

14,258

14,106

Price:
We have the table of production cost per unit of product annually as follows:
Year
1
Production Cost/Unit

Year
2

7.5209 7.2246

Year
3

Year
4

Year
5

6.9876

6.9876

6.9876

From a manufacturer's perspective, the enterprise profit aims is 25%. Therefore the
selling price of the company is:
Year
1

Year
2

Year
3

Year
4

Year
5

Production Cost/Unit

7.52

7.22

6.99

6.99

6.99

Prices (Mil vnd/ton)

9.40

9.03

8.73

8.73

8.73

However, considering the perspective of competitors in the industry, reference price

of similar products:
Thai Nguyen Fired Materials JSC
No.
1
2
3
4
5
6
7
8
9

Names
Alumin Brick (AL2O345-50%) Std. (230 * 114 * 65) H1
Alumin Brick (AL2O345-50%) T72 + rolling pin hangs
Alumin Brick (AL2O345-50%) deformities series 3 kg
Alumin Brick (AL2O345-50%) deformities series 2 kg
Alumin Brick m (AL2O3 45-50%) deformities series 15-30 kg
Alumin Brick (AL2O3 45-50%) deformities series TL 31-44 kg
Alumin Brick (AL2O345-50%) deformities series TL 45 -60 kg
Alumin Brick (AL2O345-50%) deformities series TL 61 kg
Alumin Brick (AL2O351-55%) Std. (230 * 114 * 65) H1
Average

Price
(vnd/ton)
6,149,000
7,370,000
8,338,000
9,020,000
8,690,000
8,690,000
8,965,000
9,790,000
7,183,000
8,187,300

Hung Dao Fired Industrial Bricks JSC

No. Name
Price (vnd/ton)
Alumin Brick AL2O3 : 50 - 55%
6,490,000
1
Alumin Brick AL2O3 : 50 - 55% deformities series (Quan. > 7tons/ 1
2
Unit)
7,150,000
Alumin Brick ( AL2O3 : 45-50%)
5,390,000
3
Alumin Brick: 45 - 55% (China)
5,747,500
4
Alumin Brick: 60 - 65% (China)
9,050,800
5
Alumin Brick > 75% (China)
10,780,000
6
Alumin Brick >75% Std. (Quans > 10 tons/unit)
14,850,000
7
Average
8,494,043
Realizing that the original price 9,000 higher than others companies operating in the
market on the same one, so, in short, to be able to enter the market and be able to
compete with the similar, especially for the little difference characteristics as
refractory bricks, the company should set a lower price than other companies. Here
are selected price is 8.1 million vnd/ ton.
In the long term, prices are generally more difficult to put other companies due to the
company's products have the high mass. So choose the company remains competitive
pricing strategy is mainly, at the same time improving quality and increasing selling
prices up 8.2 million / ton to improve profitability, to achieve 25% profit as the
company industry enterprises to reduce production costs. We have cost objectives of
the company:
Year 1

Year
2

Year
3

Year
4

Year 5

Production Cost

7.24

6.97

6.76

6.69

6.62

Planned Price

8.10

8.15

8.15

8.20

8.20

Aim Cost

6.86

6.70

6.56

6.56

Reduce Level

1.59%

2.33%

2.09% 0.00%

Realize: This is a relatively reasonable price and can be done

. Annual Sales:
- Assuming the company's inventory every year to remain stable and produces bricks
sold in a year, the price on the table we have annual revenues of the company are as
follows:
Year

Year
1

Year
2

Year
3

Year
4

Year
5

Consumption rate

80%

90%

100%

100%

100%

Consumption (tons)
Price (mil vnd/tons)
Sales

1,760

1,980

2,200

2,200

2,200

8.10

8.15

8.15

8.20

8.20

14,256 16,137 17,930 18,040 18,040

Income Statement
Year 1

Year 2

Year 3

Year 4

Year 5

Sales

14,256

16,137

17,930

18,040

18,040

Operating expenses

12,425

13,493

14,409

14,258

14,106

EBT

1,831

2,644

3,521

3,782

3,934

Income Tax (25%)

458

661

880

946

983

EAT

1,373

1,983

2,641

2,837

2,950

Year 1

Year 2

Year 3

Year 4

Year 5

1,373

1,983

2,641

2,837

2,950

2,536

2,536

2,536

2,536

2,536

Cash Flows Statement:

Cash Flow

Year 0

Factory Building

14,394

Interest expenses
Outflows

14,394

Debt
Cash Flow
activities

by

operating

Debt Capital
Depreciation
Liquidation and Deperciation
Overleft

1,714

Inflows
Net Cash Flow
Debt cash flow
Equity Cash Flow

3,909

4,519

5,177

5,373

7,201

(14,394)

3,909

4,519

5,177

5,373

7,201

(6,000)

606

2,106

1,955

1,803

1,652

(8,394)

3,303

2,413

3,222

3,570

5,549

3.3 Assess the viability of a project using investment appraisal

techniques
Financial appraisal:
NPV:
a. Identify capital costs of the project:
- The cost of loan: the interest rate banks incentives (Agribank):

= 10,1%

- Cost of Equity: capital costs requires taking by investors, at least with ROE of peers:
20%
=> WACC =

= 12,1% *

+
+ 20% *

= 15.87%

b. NPV appraisal:
NPV = -K +

= 2.961,47 (Mil. vnd) > 0

IRR:
IRR is the value of the WACC to value cash flows owners NPV = 0
From the equity cash flow of the project is to identify IRR = ROE = 28.78%
Payback Period:
With a capital cost k = 15.87%, PB is about time that the recovery of capital projects.
Based on the cash flow we project is PB = 4 years 2 months, it was determined that
the payback period is relatively long, but still within the permissible limits
Break even Point:
Year 1

Year 2

Year 3

Year 4

Year 5

Break-even Point
Break-even Point/Capacity

70.00%

1,291
58.70%

1,291 1,291 1,272 1,253 1,253

1,272
57.81%

1,253
56.95%

1,253
56.95%

1,400

60.00%

1,200

50.00%

1,000

40.00%

800

30.00%

600

20.00%

400

10.00%

200

0.00%

1,272
57.81%

Break-even
Point
Break-even
Point/Capacit
y

Year 1 Year 2 Year 3 Year 4 Year 5

Final Conclusion: The project has high feasibility with NPV = 2961.47 billion vnd,
IRR = ROE = 28.78% and Payback Period = 4 years 2 months lower than project life.