# DE3J 35: Preparing Financial Forecasts

Part A

Introduction I am the advisor of the Tricol plc, I would like to make a flexed budget as well as give some opinions to evaluate this project for the management. Flexed budget Tricol plc Flexed budget for the product ‘Zupper’ for June originals Flexible Actual 2000 1600 1600 ￡ Direct Material Direct Labour Variable Production Overheads Depreciation Rents & Rates Administration Overheads Insurance Total 80,000 36,000 4,000 1,500 2,500 2,000 2,200 ￡ 64,000 28,800 3,200 1,500 2,500 2,000 2,200 ￡

Variance F/A ￡

61,600 2,400 (F) 35,200 6,400 (A) 3,200 1,500 2,500 2,200 2,400 0 0 0 200 (A) 200 (A)

128,200 104,200

108,600 4,400 (A)

Calculation 1. Direct material total variance: (Standard units of actual production*standard price)- (actual quantity*actual price) 4kg*￡10 per kg*1,600 -￡61,600=￡2,400 (F) (3.75%) Direct material usage variance: Standard price*(standard units of actual production-actual quantity) ￡10 per kg*(4kg*1600-5,600kg)=￡5,000 (F) (12.5%)
2.

3. Direct material price: Actual quantity*(standard price-actual price) 5600kg*(￡10 per kg-￡61,600/5600)=￡5,600(A) (8.75%) Direct labour total variance: (standard hours of actual production*standard rate ph)- (actual hours*actual rate ph) ￡2 per unit*1,600*￡9 per hour-￡35,200 =￡6,400(A) (22.2%)
4.

Scottish Qualifications Authority Assessment Exemplars for Higher National Units

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it improved the production efficiency.200+ ￡2.520 hrs*(￡9 per hour-￡35.520 hrs)=3. c) Also.500+￡2.500+￡2. the company has concluded a high-than-expected wage settlement for productive operative which encouraged the morale of workforce.   Scottish Qualifications Authority Assessment Exemplars for Higher National Units 2 .actual rate ph) 3.000+￡2.880(A) (10%) 6. The actual rate increased but it was not efficient management should pay more attention on it. it made higher quality materials.DE3J 35: Preparing Financial Forecasts Direct labour rate variance: Actual hours*(standard rate ph.200)-(￡3200+￡1. Total overhead variance: Total standard overhead for actual production-total actual overheads (￡3200+￡1.22%) 5. c) It would also increase the cost of labour for the specification changes of the new production machinery Direct labour total variance: a) It was an unfavourable variance.500+￡2. Direct material price: a) It was an adversed variance and the actual price increased to￡11 per kg.400+￡1. Although the quality improved. Because the actual price is less than the standard price and the actual quantity of materials (1600) used is different from the standard quantity (2. Direct labour efficiency variance: standard rate ph*(standard hours of actual production.000).520 hrs)=2.  Direct material usage variance: a) It was a favourable variance.actual hours) ￡9 per hour*(￡2 per unit*1600-3.520(A) (12. But it would increase the cost price.400) =￡11. b) And they changed suppliers to use higher-grade materials too. b) And the company has recently switched suppliers and is now using highergrade materials. Due to the improvement of production machinery used for this product.500+￡2.180 =￡400(A) (3. Variance analysis  Direct material total variance: a) It was a favourable variance.51%) 7.200/3. Because the company has recently upgraded the production machinery used for this product. it might loss the previous discounts for the company.

Total overhead variance: a) It was an unfavourable variance. For the company upgraded the production machinery. there might be more insurance should be covered. b) The company recently upgraded the production machinery and it might result in the shortage of skilled labour. Thus. There might be lower grade workforce in the new machinery b) And labours might need time to accommodate or be trained. b) And they changed new suppliers so that they needed some cost on training or installing. b) Some future investigations should be made on the increased price and low labour efficiency which are the most significance to be considered.   Recommendations a) All of the rate of significance should be concerned and analyzed by the management.DE3J 35: Preparing Financial Forecasts  Direct labour rate variance: a) It was an adversed variance. the insurance overhead increased. this was the main negative effect that should concern more. The actual rate increased maybe for the overtime working but it was not as expected. Thus. It is beneficial in the long run to find accurate reasons and look for solutions Scottish Qualifications Authority Assessment Exemplars for Higher National Units 3 . Direct labour efficiency variance a) It was an adversed variance as the actual hours increased. the administration overheads increased. Therefore.

000.160 240.000 320. b.000 40.000 -360.5 months.DE3J 35: Preparing Financial Forecasts Part B Introduction I am an advisor of the company and I would like to evaluate the financial viability of the investment proposal to the management and give some recommendations to improve the project. NPV Year Annual cash flow 0 1 2 3 4 5 ￡ -1.560 198.000 320.000.000 280.000 -840.000 Present value factors at 10% ￡ 1 0. Application I will use two investment appraisal techniques to evaluate the project.000 160. pay back period Year 0 1 2 3 4 5(the first 1.000 145.000 Payback will take exactly 4 years and 1.000 Nil 280.000 160.000 320.621 Present value ￡ 1.000 Cumulative cash flow ￡ -1.000 280.5 months) net cash benefit Yearly net cash flow￡ -1.000 -680.5 months) 5(the rest 10.000 280.000 -40.683 0. a.909 0.000 320.000 160.000.000.826 0.320 218.751 0.440 132.000 320.720 Scottish Qualifications Authority Assessment Exemplars for Higher National Units 4 .000 160.

Therefore. e) There is no inflation. And in the analysis of expected rate of return. Firstly.800 Assumptions Assumptions can be summarised as below: a) All the cost is happened at year 0. Other factors to be considered To make more accurate and comprehensive decisions. and labour’s morale and working efficiency will impact on the cash flow of company. It may be different when considering the long-term project which may be turned to be positive. d) The cash flows in each year are evenly spread among 12 months of the year. and the NPV was not very high in terms of the whole company. f) Uncertainty does not exist. we can do some market research and do some SWOT and PEST analysis. Thus. it was not acceptable and the management should take some other factors into account. the project is acceptable for the payback period is shorter than expected investment payback period. From the result of the calculation of NPV. the calculation is unilateral. b) We should think some more external factors such as political and technical factors.DE3J 35: Preparing Financial Forecasts Net present value -64. d) The management has to consider if we have enough funds to invest this project. Then. it ignores cash flows after initial outflow has been met. the real rate of rate is lower than expected rate of return. Appraisal and recommendation According to the calculation of payback period. g) Unlimited funds can be raised at a competitive rate. it ignores time value of money. Scottish Qualifications Authority Assessment Exemplars for Higher National Units 5 . b) All the cost and revenues for every year are all net cash flows c) 10% of market rate of return is expected rate of return. no taxation to be considered. it means the loss of cash and it was not break even. there are some intrinsic limitations. etc. Additionally. it ignores the fact that benefits from different projects may accrue at an uneven rate. and the project life is commonly longer than five years. so we should not ignore it. However. what the management should consider is listed as follows: a) We can predict cash flow in the long run and make it in the NPV for more comprehensive decision. and the profitability and safety is comply with the company. I found we cannot accept it because it was negative. In the view of present value. c) The management can consider redistribution of labour for better performance. management should consider some more sophisticated and accurate ways to appraise. It only considered the revenue over the next five years. However. Because the cash flows may increase continually.

Scottish Qualifications Authority Assessment Exemplars for Higher National Units 6 .DE3J 35: Preparing Financial Forecasts otherwise. some other financing ways may decrease the expected rate of return.