University of Westminster

Westminster Business School

7ACCN018W
Financial Analysis for Managers
May 2018

Marking Scheme
Question 1 – (2.5 marks per concept – Total 10 marks)

Accruals (Matching) concept

The purpose of this concept is to make sure that all revenues and costs are recorded
in the appropriate statement at the appropriate time.

Costs concerning a future period must be carried forward as a prepayment for that
period and not charged in the current profit statement. For example, payments made
in advance such as the prepayment of rent would not be treated as an expense in
the current accounting period.

Going Concern concept

It is assumed that the company is to continue for the foreseeable future which is taken
to mean at least 12 months from the approval of the financial accounts, and accounting
information reflects this. If the company is about to cease trading then all non-current
assets become current assets and all non-current liabilities become current liabilities.
Also, some assets are likely to have much lower values than their current book values.

Historical Cost concept

This concept suggests that all transactions should be recorded at their values at the
time the transaction took place and not the values at the time the accounts are
drawn up. So, a fixed asset bought five years ago will be shown at cost less
accumulated depreciation in the accounts of the company in the subsequent five
years.

Money measurement concept

Financial accounts can only record items to which a monetary value can be
objectively attributed.

Money measurement is used for all assets and liabilities, incomes and expenses.
Thus any item which cannot be objectively measured will not be included in the
accounts (e.g. human resources that a company has at its disposal do not appear in
the balance sheet)

Question 2 - (10 marks)

Management accounting is concerned with the provision of information to people
within the organisation to help them make better decisions.

Financial accounting is concerned with the provision of information to external

parties outside the organisation.

Differences between Management Accounting & Financial Accounting:

 1. Legal requirements – Financial accounts are required by law but management
accounts are not.

2. Focus on individual parts or segments of the business – Financial accounts

are for the whole of the organisation while management accounts can be for
any part of the business.

3. Generally accepted accounting principles – Financial accounts are prepared

using GAAP and IFRSs & CA2006 while management accounts do not need
to follow any set standards or format.

4. Time dimension and reporting frequency – Financial accounts are normally

prepared once a year for a period of 12 months while management accounts
could be produced at any interval covering any time period

Question 3

Part (a) – 3 marks (2 marks for correct calculation and 1 mark for decision to
accept/reject)

Year 0 Initial investment (£462,700)

Year 1 Net cash flow £150,200
Year 2 Net cash flow £175,300
Year 3 Net cash flow £218,100
Year 4 Net cash flow £77,800

Payback = 2 years + (462,700 – 150,200 – 175,300) / 218,100 = 2.63 years

As it is less than 3 years, it should be accepted.

Part (b) – 3 marks

Year 1 Net cash flow £150,200

Year 2 Net cash flow £175,300
Year 3 Net cash flow £218,100
Year 4 Net cash flow £77,800
----------------
£621,400
Less total depreciation £462,700
----------------
Total Profits £158,700
Average annual profit = £158,700 / 4 = £39,675

ARR = Average annual profit / initial investment = £39,675 / £462,700 = 8.57%

Part (c) – 4 marks (0.5 mark per valid point – max 4 marks)

Despite its limitations, the payback is still quite useful as a filtering technique.
Additionally, it is also used because:

 It is easy to calculate as you do not need to forecast the cash flows beyond
the desired payback period.
 It is very easy to understand
 Assumes cash flows after payback period are so risky as to be of no value
 It is also a good technique in:
 Times when liquidity is more important than profitability
 Times of high inflation
 Economic uncertainties
 Political uncertainties

Question 4

Incremental budgeting is a budget prepared using the previous year’s budget or

actual performance as a basis with incremental amounts added for the new budget
period based on changes in prices, level of activity and changes in the method of
operation.

Advantages of incremental budgeting

 The budget is stable and change is gradual.
 Conflicts should be avoided if departments can be seen to be treated
similarly.
 Co-ordination between budgets is easier to achieve.

Disadvantages of incremental budgeting

 Assumes activities and methods of working will continue in the same way.
 No incentive for developing new ideas.
 No incentives to reduce costs.
 There may be budgetary slack built into the budget, which is never reviewed-
managers might have overestimated their requirements in the past in order to
obtain a budget which is easier to work to, and which will allow them to
achieve favourable results.

Zero-based budgeting is an approach to planning and decision-making which

reverses the working process of traditional budgeting. In traditional incremental
budgeting, departmental managers justify only variances versus past years, based
on the assumption that the "baseline" is automatically approved.
By contrast, in zero-based budgeting, every expenditure line, particularly
discretionary expenditures, in the budget must be approved rather than only
changed incrementally. During the review process, no reference is made to the
previous level of expenditure.

Zero-based budgeting requires the budget request be re-evaluated thoroughly,

starting from the zero-base. This process is independent on whether the total budget
or specific line items are increasing or decreasing.

Zero based budgeting also refers to the identification of a task or tasks and then
funding resources to complete the task independent of current resourcing.

Disadvantages

 More time-consuming than incremental budgeting.

 Justifying every line item can be problematic for departments with intangible
outputs.
 Requires specific training, due to increased complexity vs. incremental
budgeting.
 In a large organization, the amount of information backing up the budgeting
process may be overwhelming.

Question 5
Part (a) – 5 marks (please give 0.5 for each correct formula)

Total material expenditure variance = AQ x AP – SQ x SP

= £132,437 – (5,410 x £25) =
= £132,437 - £135,250 = £2,813 (F)
(Max 1.5 marks)
Material price variance = (AP – SP) x AQ
= [(£132,437 / 12,948) - £10] x 12,948 = £2,957 (A)
(Max 1.5 marks)

Material usage variance = (AQ – SQ) x SP

= [12,948 – (5,410 x 2.5)] x £10 = £5,770 (F)
(Max 1.5 marks)

Note - If all three variance are correct, then give full 5 marks

Part (b) – 5 marks (please give 0.5 for each correct formula)

Total Labour expenditure variance = AH x AR – SH x SR

= £164,464 – (5,410 x £27) =
= £164,464 - £146,070 = £18,394 (A)
(Max 1.5 marks)
Labour rate variance = (AR – SR) x AH
= [(£164,464 / 17,312) - £9] x 17,312 = £8,656 (A)
(Max 1.5 marks)

Labour efficiency variance = (AH – SH) x SR

= [17,312 – (5,410 x 3)] x £9 = £9,738 (A)
(Max 1.5 marks)

Note - If all three variance are correct, then give full 5 marks

(Total: 10 marks)
Section B – Answer Any Two Questions

Question 6
Part (a) – 10 marks (2 mark for definition & 2 marks per each function explained –
max 10 marks)

Definition – A budget is a quantitative expression of the plans of the organisation for

a future period

Functions of budgets
1. To aid the planning of actual operations:
 by forcing managers to consider how conditions might change and what
steps should be taken now.
 by encouraging managers to consider problems before they arise.

2. To co-ordinate the activities of the organization:

 by compelling managers to examine relationships between their own
operation and those of other departments.

3. To communicate plans to various responsibility centre managers:

 everyone in the organization should have a clear understanding of the part
they are expected to play in achieving the annual budget.
 by ensuring appropriate individuals are made accountable for
implementing the budget.

4. To motivate managers to strive to achieve the budget goals:

 by focusing on participation
 by providing a challenge/target.

5. To control activities:
 by comparison of actual with budget (attention directing/management by
exception).

6. To evaluate the performance of both divisions and managers:

 by providing a means of informing managers on how well they or their
divisions are performing in meeting targets they have previously set.
Part (b) – 12 marks

  June July August  

Sales 38,000 42,800 43,600  
Purchases 15,000 16,900 17,200  
         
  June July August Total
Receipts £ £ £ £
Cash sales (40%) 15,200 17,120 17,440 49,760
From debtors   21,660 24,396 46,056
TOTAL RECEIPTS 15,200 38,780 41,836 95,816
         
Payments        
Purchases   15,000 16,900 31,900
Wages 12,800 13,000 13,100 38,900
Overheads 1,500 1,750 2,100 5,350
Rent & Rates     1,100 1,100
Advertising 4,000 6,000 2400 12,400
TOTAL PAYMENTS 18,300 35,750 35,600 89,650
         
Balance b/f 5,900 2,800 5,830 5,900
Closing Balance 2,800 5,830 12,066 12,066

Part c) – 3 marks (1 mark for any of the following)

 Arrange a bank overdraft
 Raise a short term loan
 Dispose of surplus assets
 Postpone certain discretionary expenditures
 Offer early settlement discount to trade debtors
Question 7

Part (a) – 18 marks

Expected value of sales =

300,000 30% 90,000
350,000 40% 140,000
400,000 20% 80,000
450,000 10% 45,000
------------
Expected value 355,000

  Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Revenue   355,000 355,000 355,000 355,000 355,000
Advertising income   9,000 10,800 12,960 15,552 18,662
Initial purchase of server -360,000          
Initial set-up costs -150,000          
Working capital -35,000         35,000
Running costs   -64,000 -65,920 -67,898 -69,935 -72,033
Other fixed overheads   -140,000 -147,000 -154,350 -162,068 -170,171
Major upgrade       -41,000    
  ---------- ---------- ------------ ---------- ---------- ----------
Net cash flow -545,000 160,000 152,880 104,712 138,550 166,459
DF @ 8% 1 0.92593 0.857339 0.79383 0.73503 0.68058
PV -545,000 148,148 131,070 83,124 101,838 113,289

NPV = 32,470

Part (b) – 7 marks

Payback is the time that it takes to recover the initial investment. As a general rule,
the shorter the payback period, the more attractive is the project.

Advantages of using Payback:

 It is easy to calculate since only cash flows for the required payback period
need be calculated as it assumes cash flows after payback period are so risky
as to be of no value
 It is also very easy to understand.
 A good technique in:
o Times when liquidity is more important than profitability
o Times of high inflation
o Economic uncertainties
o Political uncertainties
Question 8
Part (a) – 4 marks
Selling Price 295
VC – production -160
VC – Transport -14
VC – Import duty -32
--------
Contribution 89

Budgeted unit sold 9000

Total Contribution = 9,000 x £89 = 801,000

Less FC -595,000
-------------
Budgeted Profit 206,000

Part (b) – 4 marks

BEP = FC / Cont. per unit
BEP = £595,000 / £89 =
6,685
BEP in Sales = 6,685 x £295 =
1,972,191

BEP is the level at which the company breaks even (makes no

profit or loss)

Part (c) – 4 marks (3 marks for calculation & 1 mark for

definition)

Margin of safety in units = budgeted demand - BEP = 9,000 -

2,315
6,685

Margin of safety as % = (2,315 / 9,000) = 25.72%

Margin of safety shows the level by which sales can fall

before the business starts losing money.

Part (d) – 6 marks

additional units demand = 9,000 x 8% = 720

Additional contribution = 720 x £89 = 64080

Less additional FC -46,000
--------------
Extra contribution made 18080
Decrease in SP & thus in contribution = £295 x 10% =

So, new contribution = £89 - £29.5 = 59.5

New demand = 9,000 x 1.15 = 10350

New total contribution = 10,350 x £59.5 615825

Old total contribution = 801,000
-------------
Loss in contribution -185,175

So, option (i) is viable

Part (e) – 4 marks

Required purchase price by Bicycles-R-Us = £249 x 85% = 211.65

Less total VC costs to Innovations Ltd -206
-------------
Contribution from each unit 5.65

Quantity required by Bicycles-R-Us 3000

Total additional contributions made from this contract 16950

So, financially it is worth taking on this order!

Part (f) – 3 marks (1 mark for any valid point – Max 3 marks)

 The break-even graphs assume that cost and revenue behaviour patterns are
known and change on a straight-line basis as activity levels change.
 It may not always be feasible to split costs neatly into variable and fixed
categories. Some costs show mixed behaviour.
 Break-even analysis assumes input and output volumes are the same, so that
there is no build-up of stocks and work-in-progress.
 Break-even charts and simple analyses can only deal with one product at a time.
 It is assumed that cost behaviour depends entirely on volume