Accounting for Decision- Makers

Posted on February 7, 2022 by Cheapest Assignment

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Strategic Management in Organisations

Section A

Question 1

Given, Commencement of trading by Grommets Ltd is: January 2021 Share Capital of Grommets Ltd = £ 50,000

Amount to be spent on equipment for the company = £ 140,000 

The number of funds raised by the means of a loan is = £ 125,000

Instalment or the monthly repayments of principal and interest amount (combined) are  =  £ 3,650 per month. 

Expected monthly sales for the first three months are as follows: 

Expected sales for the month of January 2021 = £ 60,000 per month

Expected sales for the month of February 2021 = £ 60,000 per month

Expected sales for the month of March 2021 = £ 60,000 per month 

The inventory at the beginning of the operational year is estimated to be = £ 30,000

Estimated purchase of inventory per month = 30% of Sales  

Other estimated expenses to be incurred by Grommets Ltd are as follows:  

Wages per month = £ 20,000 (payable during the month when incurred)

Salaries per month = £ 10,000 (payable during the month when incurred)

Overhead expenses per month = £ 10,000 (payable one month in arrear) 

  1. The company requires to present a cash budget for the duration of three months, that is from January 2021 to March 2021:  
Beginning Cash Balance 30,000 145000 260000
Add: Budgeted Cash Receipts: 60000 60000 60000
Total Cash Available for Use 3650 3650 3650
Less: Cash Disbursements N/A N/A N/A
Direct Material N/A N/A N/A
Direct Labor 20000 20000 20000
Factory Overhead 10000 10000 10000
Selling and Admin. Expenses 10000 10000 10000
Equipment Purchases 140000 N/A N/A
Total Disbursements N/A N/A N/A
Cash Surplus/(Deficit) N/A N/A N/A
Financing:
Borrowing 125000 N/A N/A
Repayments 3650 3650 3650
Interest N/A N/A N/A
Net Cash from Financing N/A N/A N/A
Budgeted Ending Cash Balance 145000 260000 375000

The company can face several cash flow problems due to the cash budget of the organization. A good cash flow budget is one that considered all the cash competencies of the organisations and their finances. The following are the consequences and problems that the organization is going to face n the coming months: 

  • Startup costs: the company has not taken into consideration the start-up costs which consumes a huge part of the finances. Here, by avoiding the start-up costs in the computation of the cash budget, the organisation can start losing funds by the end of the third month. Thus, the company should not have underestimated the startup costs. 
  • The cash budget is fastening the profitability: the cash flows of the company are going to suffer because the expectation of profit has been done too quickly. No business can reach profitability by the end of the third month hence the company is going to face the consequences.
  • The company has created its cash budget, there was a need for the cash flow budget. The cash flow budget is an indicator to prevent the company from upcoming business instability. Here, the company is surely going to suffer from fund deficiencies or at least a lack of sufficient funds. 
  • Overlooking the major overhead costs: the company has kept an estimation of the petty overhead costs and is ignoring the other overhead costs and expenses. The overhead costs must be specified with separate categories. 
  • The company lacks any receivables. It is slow to zero receivables for the company in the provided information. Receivables are necessary for sustaining in the long run. Recording on the time payments will increase the efficiency of the organization. 
  • The sales and revenues of the organization are not capable of covering up the other direct and indirect expenses of the business and the company is aiming at acquiring profits. The company doesn’t have a definite cash flow structure. 
  • The company will earn a low-profit margin in the upcoming three months. It is impossible to get huge profits in the initial months for a start-up because the commencement and incorporation expenses are huge. Whereas, the company fails to consider the commencement and incorporation cost in its cash flow. The needs to review its sales and revenue from time to time in order to reach the requisite profit margin.  

Corrective measures that can be taken to overcome the cash flow shortcomings are:

  • Creating a cash flow budget will explain the cash inflows and cash outflows of the company. To prevent being vulnerable to any adverse impacts the organization needs to create its cash flow budgets immediately for the entire year.
  • Focusing on the revenues and the sales will enhance the market position of the company and hence will improve the funds and cash flows of the company. 
  • The company needs to cut its costs and expenses incurred on the overheads or direct and indirect expenses. Because if the company spends too much on the expenses and overheads, the company will fail to earn profits margins in a substantial margin. 
  • Maintaining liquidity of cash is important because having subsequent access to cash flows and cash funds will give a smooth effect on the operations of the company. And the company will strat warning higher profit margins. 

(c) differences between fixed and flexible budgets are as follows:  

Fixed Budget  Flexible Budget
The fixed budgets are not flexible and do not change with the volume of sales and output achieved. The flexible budgets are flexible and they change with the volume of sales and output achieved.
In the case of a fixed budget, the assumptions are made that the business outputs and conditions remain static.  In the case of a flexible budget, the assumption is not made that the business outputs and conditions remain static. 
In the case of a fixed budget, it is difficult to estimate the results or forecast results and outputs.  In the case of a flexible budget, it is easier to estimate the results or forecast results and outputs. 
In the case of a fixed budget, the application of cost control tools is limited. In the case of flexible budgets, the application of cost control tools is not limited.
In the case of a fixed budget, the comparison between the budgeted or estimated output and the actual out is not possible. In the case of a flexible budget, the comparison between the budgeted or estimated output and the actual output is easily possible.
In the case of a fixed budget, the cost of operations in the business is not classified in the categories of fixed costs, variable costs or semi-variable costs.  In the case of flexible budgets, the cost of operations in the business is always classified in the categories of fixed costs, variable costs or semi-variable costs. 
In the case of a fixed budget, the estimation is unrealistic and non-explanatory.  In the case of a flexible budget, the estimation is realistic and non-explanatory. 

 Question 2 

(a)

  1. i) Return on capital employed – here we are required to calculate the Return on capital employed of the company.  The increase in the capital employed will increase the Return on capital employed return and its ratio as well. 

Thus, the formula of the Return on capital employed  is as follows: 

Return on capital employed  = (net operating profit / total asset) * 100

Profit = $ 12000

Total Asset = $ 760000

Current Liability = $ 17000

Therefore, ROCE = 14.12%

  1. ii) Gross profit margin – here we will calculate the gross profit margin. The formula for gross profit margin is:

gross profit margin = ( Revenue – Cost of good sold) / revenue 

Thus, 

Sales / Revenue = $ 10000

Production Cost = $ 2500

Gross Profit  = $ 7500

Gross Profit Margin  =  75%

iii) Current ratio – the formula for current ratio is Current assets / current liabilities 

Thus, 

Current assets = $ 308000

Current liabilities = $ 1510000

Therefore, Current ratio = 0.98

  1. iv) Inventory turnover period – the inventory turnover period here is 3 months
  2. v) Payables settlement period – the payables settlement period is 4 months.

(b) some of the recommendations are that the company must focus on its sales volumes. Because increasing the sale volume may lead to high gross profit margins. Although the current ratio of the organization is weak. Because the suitable current ratio is 2:1. Thus, the company lacks to maintain an adequate amount of liquid assets as well. This is needed to be kept in check to get better results. 

(c ) the limitation of the ratio analysis is as follows:

  • The ratio analysis is a very traditional approach that very much puts emphasis on the current assets and liabilities of the company.
  • The ratio analysis always ignores external factors such as recession, fall in the nation’s GDP and much more. 
  • The ratio analysis is only used to company the current situation and size and type of the company. It does not consider the vital and crucial element of business.
  • The ratio analysis ignores the human elements of the organization which are essential to human resource management.
  • The companies may face many difficulties during estimation of the ratio analysis as these ratios do not share all the information with the stakeholders or owners.

Question 3

  1. Here, the initial investment = $ 685,000

Cash flow = $ 765,000

Payback period = is 1.83 years

  1. The two disadvantages of the payback and NPV ratio analysis are :
  • The rations do not incorporate the effect of the external factors.
  • The ratios do not forecast the estimation for the future expenses and incomes or revenues. 

(c) Sunk costs: sunk costs are the costs that cannot be recovered once they are incurred.

working capital: working capital is the summation of the current assets minus the number of current liabilities. 

residual values: residual values are needed to calculate the depreciation of the company’s machinery. Therefore, this expense is incurred after the usage of the machine for a long period of time. 

Section B

Question

a)

The profit volume ratio (P/V) is the calculation of the rate of profit adjustment due to a change in market volume. The allocation made in relation to revenue is one of the major ratios for the measurement of profitability. 

Using the following formula to obtain the PV or P/V ratio. 

P/V ratio =contribution x100/sales (*Contribution means the difference between the sale price and variable cost)

The high-profit margin is granted when the P/V ratio is high. A low P/V ratio suggests a low margin of benefit. In the event of a poor margin, the organisation can either lift the purchase price to boost its PV ratio or maximise sales to generate successful business benefits. The high PV ratio condition is regarded as productive. 

In the following, the p/v ratio, the breakpoint and the safety margin can be determined further. 

Sales=1500

Contribution=sales price-variable cost=174-24=150 

P/V ratio= 150 x100/1500=10% 

10%, the production plant that will maximise profit for Giant Ltd for next year given that Giant Ltd has only managed to contract 45,000 labour hours for next year. 

  1. b) Giant’s profit based on the production plan in A

A profit calculator is a simple tool to calculate the profit earned during sales. This article will explain how to calculate profit and what gross profit is also. The last part deals with how the benefit ratio is measured.

When it speaks about one thing, the benefit is the difference between price and cost. The total benefit is the difference between sales and expense when dealing with larger quantities of goods. In general, the motivation behind most business deals is a benefit. On the one hand, a commodity or service needs to be bought and the other wants to market it for profit.

Profit represents the financial gain gained by exceeding revenues, expenses and taxes involved in sustaining the operation in problem while income is generated from economic activity. Any money received by companies who either pocket the cash or reinvest it into the corporation. Total receipts are measured as less total expenditures. 

Profit =selling price-cost

Cost = 24+32+40=96

So, profit=174-96 =78 

So, Giant’s profit based on the production plan in A is 78. 

  1. c) The production plan that will maximise profit according to this new factor

Profit =selling price-cost

Cost = 80+96+60=236 

So, profit=340-236 =104

So, the production plant that will maximise profit according to this new factor is 104. 

  1. d) Factors are-

Everett M. Rogers has defined the five factors that affect the acceptance and progress of any innovation. As the feasibility of innovation is measured, whether it is a new product or service, comparing the advantages of innovation to the five considerations will help define potential obstacles to acceptance and areas of development.

Analysis has shown that the relative advantages, compatibility and sophistication of the first three facets consistently affect the degree of invention acceptance. Technologies that better fit these requirements likely attain the highest degree of saturation for prospective adopted individuals. 

Relative advantage

When an invention is deemed equivalent to the alternative approach it substitutes, it is implemented more generally. This relative gain could be economic, but it could also be (receiving email more quickly than typing and going to the post) or a prestige factor (“I need that product in order to look cool”). The new technology is cheaper than the old technology, or it is costly but more efficient. A relative advantage is important because a modern product seldom has no alternative, be it digital cameras, not analogue cameras, or video on demand rather than DVD rentals from a DVD store. But relative benefits are not adequate to guarantee rapid diffusion speed, and superior hardware, from the Dvorak keyboard to the Betamax or Video 2000 video recorder, is plentiful on the market. 

Compatibility

Innovation is compatible with the collection of norms, values and other cultural aspects of religious beliefs which prevail in the population. This often entails branding issues: in a culture with a poor degree of compatibility, a commodity wearing the wrong name or the wrong colours. 

Complexity

Complexity is the degree to which an invention can be seen as a functional complexity, either because the user interface is not simple, or because it needs so many steps in sequence such as swallowing pills ten times a day per hour. This is an area in which well-conceived solutions, such as iPod and iTunes, bundle hardware and apps, may have a real competitive advantage: each component can be conveniently used by itself and the components have been optimally built to communicate.

Trialability

Trialability is the extent to which an invention may be limitedly played with. It removes barriers to customers’ entrance, in particular the late majority. Trialability will help reassure those who are reluctant to use the technology and would slow down their use of it because they do not know whether it meets or satisfies prior practise standards. In order to enable subscribers to use the service, a substantial majority of telecommunications networks provide new offerings free of charge in their initial launch process, such as unrestricted mobile TV coverage. 

Observability

Lastly, inventions that are less observable can spread more slowly than others, so they advertise observable innovations themselves. These may include technologies used only in domestic and not external uses or innovations that have provided less shelter than other goods. 

According to Rogers, “five innovation attributes were found to account for around half of the variance in the rate of adoption of innovations.” The second half is based on: 

  • The strength of the promotion activities with aggressive publicity strategies in particular
  • The proper pacing and behavioural channel mix
  • If an individual, joint or authoritative decision is made by a state or business management, jointly or independently, collective decisions are slower to diffuse and authoritative decisions are quicker. 
  1. e) Marginal costing is more accurate than absorption costing system, 

Because, Marginal costing, as well as absorption, are two distinct methods used to measure the inventory, where only nominal costs incurred by the manufacturer by the marginal costing are added to the inventory while variable costs and fixed costs incurred by the company apply to the inventory in case of absorption costs. 

  • Marginal costs are a process by which the variable cost is known as the cost of the output and the fixed cost as that of the time.
  • The cost of absorption, on the other hand, is a process considering the cost of goods as both fixed and variable costs. This method of costing is important for reporting purposes in particular. Financial reports and tax reporting are included. 

Two cost accounting methods used to attribute the cost to the goods manufactured for assessment are marginal costing and absorption costs. A marginal cost assigns variable expenses to goods separately, and fixed costs would be excluded immediately from the contribution received as time costs. Fixed costs for absorption are often allocated as overheads to the expense of the component. 

Marginal costs create a gap between the cost of the goods and the cost of the duration. The contingent costs incurring on goods are regarded as the expense of products and cycles are called the fixed costs paid by the entity in a given period. Thus, as the marginal price is applied to the expense of the goods, fixed costs are not added to the cost of the product, but removed from the commitment to achieving the amount of the operating benefit. The cost of absorption, as the name implies, consumes or charges fixed costs for the product. In addition to the variable expense for each substance on the basis of an absorption rate, absorption costs are thus distributed at fixed costs. 

  • Marginal expenses shall be dealt with by variable and fixed costs separately; variable costs shall be assigned to the manufacturer as the expense of the product and the costs fixed shall be excluded from the contribution directly in respect to its operational benefit. Costs of absorption are considered as commodity costs, both fixed and contingent, as well as allocations.
  • To calculate the benefit gains from the marginal cost of goods, the profit volume ratio (PV) is used. PV Ratio provides the sum of contribution on goods which eliminates operating costs from the benefit contribution. The absorption cost acceptable for the product is a part of the fixed cost, thereby impacting the performance of a product by the addition of the fixed cost.
  • The marginal costing cost details are a contribution per unit that can be used to measure the contribution sum. The variable costs per unit of selling price were determined by reducing them. Cost data represent a net benefit per unit of output measured by the elimination of fixed and changing revenue overheads per unit.
  • And if the output volume increases, the cost per unit stays the same as the commodity cost contains only variable costs. The cost per unit falls in absorption costs as demand grows because of the absorption of fixed costs. Nevertheless, only the unit fixed costs and variable costs remain identical.
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