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1.1. Explain the importance of costs in the pricing strategy of SUBWAY.

Importance of Costing: In view of the complexity of businesses and increasing changes in industry, trade and commerce, costing is becoming very important : It assist management to make decision for example make or buy, whether to accept a special order and others; It assist management in planning and control; Costing assists management to appreciate scarce resources in the increasingly complex business operations; Understanding costing assist in cost awareness, cost control / management; Is vital to an organizations survival re: using marginal cost in competitive tendering and others.

1.2. Design a cost system for subway the one you are planning to start as a franchising outlet. An accounting system established to monitor a company's costs, providing management with information on operations and performance.

1.3. What are the costing and pricing systems used for the organization? Propose any improvement you would want to make in future.

2.1. Apply a relevant forecasting techniques to make cost and revenue decision for subway. Financial Forecasting describes the process by which firms think about and prepare for the future. The forecasting process provides the means for a firm to express its goals and priorities and to ensure that they are internally consistent. It also assists the firm in identifying the asset requirements and needs for external financing. For example, the principal driver of the forecasting process is generally the sales forecast. Since most Balance Sheet and Income Statement accounts are related to sales, the forecasting process can help the firm assess the increase in Current and Fixed Assets which will be needed to support the forecasted sales level. Similarly, the external financing which will be needed to pay for the forecasted increase in assets can be determined. Firms also have goals related to Capital Structure (the mix of debt and equity used to finance the firms assets), Dividend Policy, and Working Capital Management. Therefore, the forecasting process allows the firm to determine if its forecasted sales growth rate is consistent with its desired Capital Structure and Dividend Policy.

The forecasting approach presented in this section is the Percentage of Sales method. It forecasts the Balance Sheet and Income Statement by assuming that most accounts maintain a fixed proportion of Sales. This approach, although fairly simple, illustrates many of the issues related to forecasting and can readily be extended to allow for a more flexible technique, such as forecasting items on an individual basis.

2.2. Assess the sources of funds available or planned for subway for propose of franchising Franchising is a method of expanding business on less capital than would otherwise be needed. For suitable businesses, it is an alternative to raising extra capital for growth. Franchisors include Budget Rent-a-Car, Wimpy, Nando's Chicken and Chicken Inn. Under a franchising arrangement, a franchisee pays a franchisor for the right to operate a local business, under the franchisor's trade name. The franchisor must bear certain costs (possibly for architect's work, establishment costs, legal costs, marketing costs and the cost of other support services) and will charge the franchisee an initial franchise fee to cover set-up costs, relying on the subsequent regular payments by the franchisee for an operating profit. These regular payments will usually be a percentage of the franchisee's turnover. Although the franchisor will probably pay a large part of the initial investment cost of a franchisee's outlet, the franchisee will be expected to contribute a share of the investment himself. The franchisor may well help the franchisee to obtain loan capital to provide hisshare of the investment cost. The advantages of franchises to the franchisor are as follows: The capital outlay needed to expand the business is reduced substantially. The image of the business is improved because the franchisees will be motivated to achieve good results and will have the authority to take whatever action they think fit to improve the results. The advantage of a franchise to a franchisee is that he obtains ownership of a business for an agreed number of years (including stock and premises, although premises might be leased from the franchisor) together with the backing of a large organisation's marketing effort and experience. The franchisee is able to avoid some of the mistakes of many small businesses, because the franchisor has already learned from its own past mistakes and developed a scheme that works.

3.1. Plan appropriate budget targets for the subway An organizational budget is a target in that it establishes boundaries for how much money could be spent on one particular area of department or competency. The budget may not be

laid in stone but provides a guideline for how operations need to function in order to stay within a maximum goal of money spent
EXHIBIT 1 SALES FORECAST Product Lace Shoes Volume 16,000 Price $ 4.50 Total Sales $ 72,000

3.2. Prepare a master budget for the franchise with the estimated figures splitting them into their relevant budgets and then summaries it to a master budget. The master budget is a summary of company's plans that sets specific targets for sales, production, distribution and financing activities. It generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. In short, this budget represents a comprehensive expression of management's plans for future and how these plans are to be accomplished. It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. More one budget estimate effects other budget estimates because the figures of one budget is usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets. Parts | Components and Preparation of a Master Budget: Following are the major components or parts of master budget. Click on a budget link for detailed study. Sales Budget Production Budget Material Budgeting | Direct Materials Budget Labour Budget Manufacturing Overhead Budget Ending Finished Goods Inventory Budget Cash Budget Selling and Administrative Expense Budget Purchases Budget for a Merchandising Firm Budgeted Income Statement Budgeted Balance Sheet

EXHIBIT 2 PRODUCTION BUDGET

Planned Sales (Exhibit 1) Desired Ending Inventory Total Units Less Beginning Inventory Planned Production

16,000 1,500 17,500 ( 3,000) 14,500

EXHIBIT 3 MATERIALS BUDGET Lace Shoes require .25 square yards of leather and leather is estimated to costs $ 5.00 per yard next year. Materials Required = 14,500 (Exhibit 2) x .25 = 3,625 yards. Materials Required for Production Desired Ending Inventory Total Materials Less Beginning Inventory Total Materials Required Unit Cost for Materials Total Materials Purchased 3,625 375 4,000 ( 500) 3,500 x $ 5.00 $ 17,500

EXHIBIT 4 LABOR BUDGET Lace Shoes require .50 hours to produce one unit. 14,500 units x .50 = 7,250 hours. The expected hourly labor rate next year is $ 12.00. Estimated Production Hours Hourly Labor Rate Total Labor Costs 7,250 x 12.00 $ 87,000

EXHIBIT 5 OVERHEAD BUDGET (Based on Unique Drivers) Estimated for each line item as follows: Indirect Labor Costs * Utilities Depreciation Maintenance Insurance and Taxes Total Overhead Costs *Production Supervision and Inspection $ 12,000 5,000 3,000 1,000 4,000 $ 25,000

EXHIBIT 6 COST OF GOODS SOLD BUDGET Direct Work In Materials Progress Beginning Inventory $ 2,500 $ 16,000 Purchases (Exhibit 3) 17,500 Less Ending Inventory ( 1,875) Materials Required 18,125 Direct Labor (Exhibit 4) 87,000 Overhead (Exhibit 5) 25,000 Total Manufacturing Costs $ 130,125 130,125 Total Work In Progress 146,125 Less Ending Inventory ( 12,000) Cost of Goods Manufactured $ 134,125 Cost of Goods Available for Sale Less Ending Inventory Cost of Goods Sold

Finished Inventory $ 46,000

134,125 180,125 ( 36,000) $ 144,125

EXHIBIT 7 MARKETING BUDGET Estimated for each line item per the Marketing Department: Marketing Personnel Advertising & Promotion Marketing Research Travel & Personal Expenses Total Marketing Expenses $ 75,000 42,000 12,000 6,500 $ 135,500

3.3. Explain how will the master budget will help in planning and decision making process by evaluating a monitoring process with the help of variance analysis. Some advantages of a master budget are that it can give an idea of where a company wants to go and what it has to do in order to get there. It will also allow the company to realistically project future cash flows which in turn would help in getting certain types of financing. A business plan must contain some indication of future profit and loss and cash flow. This may extend as far as three or even five years. Planning the finances of the business is critical at the early stages, when loans may be needed to support the set up of the business. Ongoing budgeting is equally important, as any business always needs to keep a handle on its finances, and that means knowing where they are going in the coming months and years. A business plan is for the life of the business, not just for the start up. Budgeting Gives The Business Targets

Budgeting is a simple case of planning where the money is expected to come in, and how it is going to be spent. Complications arise when actual income and spend vary from the plan. This is perfectly normal and no one can avoid even the Chancellor of the Exchequer has to modify the Governments budget! Budgeting helps give the business targets to aim for though theyre not cast in stone and consists of a planning incorporating figures which you believe the business can achieve. There is no point in putting together a budget which has a host of high figures, if its completely unachievable. Equally, a budget that is too easily reached is pointless as the business will not be making sufficient progress. It is best for the business to strive for the biggest profit that is realistically achievable. The budget should be part of the ongoing business plan that is used to control the business. Budgets tend to be for a year, but can be for more. If set for a year, a budget needs to be ready well before that year begins; it should not be prepared as part of the same years activities. Wider Views And Real Figures The budget should be put together using the knowledge of key people in the business not just the owners. If you employ people, you need to get their views of how they think the business is going to perform in future months and years. It is essential to compare actual figures as soon as they are available with budgeted figures. This will enable you to understand the variances and what is working well and what has gone wrong. It will also help you modify your budget for the future with real figures from the past, thereby enabling you to see if your cash flow is going to hold up. Keeping up with your real finances is critical. Finance is the lifeblood of a business. If your cash runs out, your business will fail. Without a budget, there are no targets, and without targets there are no incentives for anyone in the business to achieve anything. That will lead to business failure. How Much Cash? When you initially prepare your financial forecasts in your business plan, you will see how much cash you need to raise to get the business going. When the business is up and running your cash flow forecasts will become cash flow budgets. They become real figures, which are targets which need to be reached for the well-being of the business. Accurate budgeting will depend on payment agreements and credit terms. To ensure positive cash flow, you must always have enough money coming into the business before that money has to go out to pay to run the business. Budgeting is essential for control of business finance. You must always know where the finances of the business are going to be in the future, so that you can ensure positive cash flow. Budgeting is the way to achieve this.

4.1. What are the various processes adopted by organisations for cost reduction and to control their cost. Design a method for SUBWAY with proper estimated figures explaining why you choose this method. Cost management strategies should be utilized as components of a larger objective to maintain maximum profitability. As such, cutting expenses will be just one part of a plan that focuses also on maximizing revenue. Effective techniques will begin with the setting of goals and objectives. There can be many reasons why a company might need to cut costs. To create additional cash reserves To reduce price of product or service To bring expenses in line with revenues To eliminate unnecessary expenses or wasteful spending To increase company value To increase competitive advantage To move costs between departments

Identifying the goal of the expense reduction exercise will assist with implementation of an effective plan. In other words, if you don't know why you are cutting costs, how are you going to know where to cut costs? The purpose of expense reduction is to help the company towards long term survival. Purposes of expense reduction include: Create cash for reinvest in research and development Reduce manufacturing costs to stay competitive Reduce costs as a nonprofit so able to serve more people Lower costs of service in order to provide additional services To become more efficient To prevent employee lay-offs To prevent reduction in employee benefits

Cost reduction techniques should also be evaluated in terms of impact on the organization. Prioritizing the goals of the cost cutting program will insure that the strategies are implemented appropriately. There are many different ways a company can institute a plan to reduce expenses. Across the board reductions Prioritized reductions Departmental reductions Reductions based on professional assessment

Budget reductions

Cost reduction techniques can be an important strategy for another reason. They can teach a company to be economical, by forcing a regular review of spending at every level of the organization. It can keep a company vital and streamlined. When you are looking for the right cost reduction techniques for your company, review the professional advice available such as from VIE Partners. There you will find ideas and tested strategies that can be applied to any organization or business. SUBWAY cost reduction method Our cost reduction method saves you both money and time. There are four key steps: 1. Analyze costs 2. Map cost savings 3. Implement 4. Track cost savings 1. Analyze costs First you get a quick, confidential estimate of the savings you could achieve with our help -all at no cost to you and with no obligation. Our proprietary database of purchasing data allows us to benchmark your spending and provide an estimate of cost savings. This allows us to mutually decide if we should proceed any further in the process. Next, if you choose to have us look deeper and make recommendations, we begin analysis of spending, invoices, and contractual agreements. We work with you and your team to understand the industry specific and unique specifications that exist in your business. 2. Map cost savings You focus on your core business while we handle the time consuming negotiation process. Our extensive network allows us to enlist the best service providers at the best price. We also negotiate with your current service providers; as a result, often times changing vendors is not necessary. You receive a savings strategy that clearly outlines what savings are available to you. We work together to assemble a customized solution that will minimize the impact on your organization while maximizing your savings. 3. Implement approved changes You have a liason (Peak) ensuring a smooth implementation of the cost reduction strategy that you have approved. We work directly with vendors and key employees at your organization to manage the implementation of the new strategy.

4. Track savings Peak conducts quarterly audits to ensure savings targets are met and to ensure your satisfaction. If needed, we are happy to call on a vendor to assist in getting invoices or service aligned with what was promised.

4.2. What is ABC? Design a projected ABC for SUBWAY. Evaluate the potential for the use of activity based of costing.
ABC systems help companies make better pricing and product mix decisions. ABC assists in cost management decisions by improving processes and product designs. Activities generate transactions. Transactions generate costs. ABC traces costs to activities. ABC systems refine costing systems by focusing on individual activities as the fundamental cost object. ABC calculates the costs of individual activities and assigns costs to cost objects such as products and services on the basis of the activities undertaken to produce each product or service.

Potential of Activity based costing# Take care of the top line and the bottom line will take care of itself. This adage is at the core of traditional top-down forecasting techniques that ties the budget into direct and indirect costs, and assigns overhead on a percentage basis to overall revenues. However, new technology and improved computer programs have improved the usage of activity-based costing and budgeting techniques. Activity based budgeting (ABB) allows managers to develop more accurate forecasts than traditional cost-based forecasting methods. ABB is a part of an activity based management (ABM) system that draws its conclusions from activity based costing (ABC). Traditional cost accounting comes with several weaknesses that can decrease a companys overall profitability by failing to adequately identify products that are not profitable. Cost-based forecasting uses projected increases in revenue or inflation to adjust costs downward from prior budgets and allocates overhead on the concept of a percentage of direct labor. At the core, activity based budgeting begins with the activity based costing model. With the advent of activity based costing in the eighties, companies could identify the unique costs associated with individual products. Activities are identified, and the resources needed to complete the activity as well as its outputs are defined. Cost pools or cost centers are created, which identify a geographic location, department, person, or machine that ties in with associated direct and indirect costs. Indirect costs are those that are not distinct to one process, such as advertising, utilities, or security. Cost drivers can then be assigned to these pools, and are factors that change the costs associated with that activity or item. For instance,

machine hours can be tied directly to specific products and would contribute to that cost center. Newer technologies and computer software make this process easier to implement. For example, a printing company uses traditional budgeting methods. Based on revenue increases of five percent expected in the next year, they increase their direct and indirect costs by five percent. In contrast, their competition, while expecting the same increase overall, identifies that the increases will come from a new production method for signs that requires less labor hours and inks to produce than their other products. The costs of this item do not increase overall costs by five percent. The competition will only adjust costs associated with that product by the increases in the inputs needed to produce the product, and will actually decrease certain costs. Activity based budgeting will take the analysis of the ABC system and create forecasts based on how each cost center contributes to the business. Rather than focusing primarily on direct versus indirect costs, departmental costs, and labor, ABB identifies areas of waste and unused capacity associated with specific items, focuses on workloads, and works to find the base causes of expenses. By doing so, a company is able to focus on reducing waste, creating value, and efficiently use resources.

5.1. Design a justified strategic investment decision for the franchise subway using relevant financial information and reflecting its capital and revenue expenditure and analyse its risks . You will study the investment decision-making process in more detail in your Financial Management syllabus so we will review the process in outline only here, to set the financial investment appraisal techniques in context. A typical model for investment decision making has a number of distinct stages. Origination of proposals. It has been suggested that good ideas for investment are likely to occur in environments in which staff feel free to present and develop ideas. Some alternatives will be rejected early on. Others will be more thoroughly evaluated. Project screening. Before a detailed financial analysis is undertaken a qualitative evaluation of the project will be made. For example, questions will be asked such as whether the project 'fits' with the organisation's long-term objectives and whether all possible alternatives have been considered. Only if the project passes this initial screening will more detailed financial analysis begin. Analysis and acceptance. This will include a financial analysis, using the organisation's preferred investment appraisal techniques. You will be studying the most common techniques in the remainder of this chapter. Qualitative issues will also be considered before a decision is made whether to proceed and the project is implemented.

Monitoring and review. During the project's progress it will be necessary to ensure that capital spending does not exceed the amount authorised, that the implementation of the project is not delayed and that the anticipated benefits are eventually obtained.

5.2. Explain different appraisal techniques used for the decision making and choose the technique to be used for the subway with proper calculations explaining why u choose this method

The payback period


Definition
Payback is defined by CIMA as 'The time required for the cash inflows from a capital investment project to equal the initial cash outflow(s)'. Payback is often used as a 'first screening method'. By this, we mean that when a capital investment project is being subjected to financial appraisal, the first question to ask is: 'How long will it take to pay back its cost?' The organisation might have a target payback, and so it would reject a capital project unless its payback period were less than that target payback period. However, a project should not be evaluated on the basis of payback alone. Payback should be a first screening process, and if a project gets through the payback test, it ought then to be evaluated with a more sophisticated project appraisal technique, such as those presented later in this chapter. You should note that when payback is calculated, we use profits before depreciation in the calculation, because we are trying to estimate the cash returns from a project and profit before depreciation is likely to be a rough approximation of cash flows.

The accounting rate of return (ARR) method of appraising a project involves estimating the accounting rate of return that a project should yield. If it exceeds a target rate of return then the project is acceptable. The ARR method of capital investment appraisal can also be used to compare two or more projects which are mutually exclusive. The project with the highest ARR would be selected (provided that the expected ARR is higher than the company's target ARR). Discounted cash flow (DCF) techniques are used in calculating the net present value of a series of cash flows. This measures the change in shareholder wealth now as a result of accepting a project. NPV = present value of cash inflows less present value of cash outflows .. If the NPV is positive, it means that the cash inflows from a project will yield a return in excess of the cost of capital, and so the project should be undertaken if the cost of capital is the organisation's target rate of return. .. If the NPV is negative, it means that the cash inflows from a project will yield a return below the cost of capital, and so the project should not be undertaken if the cost of capital is the organisation's target rate of return. .. If the NPV is exactly zero, the cash inflows from a project will yield a return which is exactly the same as the cost of capital, and so if the cost of capital is the organisation's target rate of return, the project will have a neutral impact on shareholder wealth and therefore would not be worth undertaking because of the inherent risks in any project. The internal rate of return Another discounted cash flow (DCF) technique for appraising capital projects involves calculating the internal rate of return (IRR). The IRR is a relative measure (%) in contrast to the absolute () measure resulting from NPV calculations. The IRR is the DCF rate of return (DCF yield) that a project is expected to achieve, in other words the discount rate at which the NPV is zero.

If the IRR exceeds a target rate of return, the project would be worth undertaking.

5.3. Explain how this method helps the franchised SUBWAY for decision making. Advantages of the payback method The use of the payback method does have advantages, especially as an initial screening device. A long payback means capital is tied up Focus on early payback can enhance liquidity Investment risk is increased if payback is longer Shorter-term forecasts are likely to be more reliable The calculation is quick and simple Payback is an easily understood concept

6.1. Prepare and analyse the projected financial statement to assess the financial viability for the franchise subway

6.2. Interpret the projected financial statement by applying different ratios and how they help in interpreting the financial statement.

6.3. How will the projected statement help in strategic planning for subway and any further point of action to be considered in future? 1. Gives you control over your money - A budget is a way of being intentional about the way you spend and save your money. It is said that with budgeting, you control your money and not your money controls you. Budgeting saves you the stress of suddenly having to adjust to lack of funds because you did not initially plan how to spend them. It also helps you decide if you want to sacrifice short term spending like buying coffee everyday in exchange for a long term benefit like a cruise vacation or a new HDTV. 2. Keeps you focused on your money goals You avoid spending unnecessarily on items and services that do not contribute to attaining your financial goals. If you are working with limited resources, budgeting makes it easier to make ends meet. 3. Makes you aware what is going on with your money With budgeting, you are clear on what money is coming in, how fast it goes out, and where it is going to. Budgeting saves you from wondering every end of the month where your money went. A budget enables you to know what you can afford, take advantage of buying and investing opportunities, and plan how to lower your debt. It also tells you what is important to you based on how you allocate your funds, how your money is working for you, and how far you are towards reaching your financial goals.

4 Helps you organize your spending and savings By dividing your money into categories of expenditures and savings, a budget makes you aware which category of expenditure takes which portion of your money. That way, it is easy for you to make adjustments. Budget also serves as a reference for organizing your bills, receipts, and financial statements. When all of your financial transactions are organized for tax time or creditor questions, you save time and effort. 5. Makes you decide in advance how your money will work for you. 6. Enables you to save for expected and unexpected costs Budgeting allows you to plan to set aside money for emergency costs. 7 Enables you to communicate with your significant others about money If you share your money with your spouse, family, or anyone, a budget can communicate how you use money as a group. This promotes teamwork on working for common financial goals and prevents conflict on how money is used. Creating a budget in tandem with your spouse will avoid conflicts and resolve personal differences on how your money is spent. Budgeting teaches family members spending responsibility and accountability. 8. Provides you with an early warning for potential problems When you budget and take a big picture view, you will see potential money problems in advance, and be able to make adjustments before the problem appears. 9. Helps you determine if you can take debt and how much Taking debt is not necessarily a bad thing if the debt is necessary or you can afford it. Budgeting shows you how much a debt load you can realistically take without being stressed or if taking the debt load is worth it. 10. Enables you to produce extra money In budgeting, you get to identify and eliminate unnecessary spending like late fees, penalties and interests. These seemingly small saving can add up over time.

References http://basiccollegeaccounting.com/costing-and-reasons-for-its-importance/ http://www.zenwealth.com/BusinessFinanceOnline/FF/FinancialForecasting.html http://www.howtowriteabusinessplan.co.uk/importance-budgeting-your-business-plan.html http://www.the-cost-reduction-consultant.com/CostReduction.html http://www.peakcc.com/services/how-it-works/ http://www.helium.com/items/1910856-understanding-activity-based-budgeting http://financial.kaplan.co.uk/Documents/ICAEW/MI_Ch3_p.pdf http://www.accountingformanagement.com/the_master_budget.htm

http://www.fao.org/docrep/W4343E/w4343e08.htm#sources of funds http://www.budgetingincome.com/making-your-budget/35-personal-budgeting-basics/49-10benefits-of-budgeting-your-money http://www.investorwords.com/1152/Costing_System.html