ACCOUNTING AND COSTING SYSTEM

QUESTION

Unit 13
Managing
Financial
Principles
and Techniques
WILLIAMS
COTLEGE
edexcel
r
Assignment
Brief
Mqnqging-
Finonciql
Principles
ond Techniques
Name
of
Student:
Student ID:
Course:
Unit:
Strategjc
Management
and Leadership
lvlanaging
Financial Prjnciples
and Technjques
QCF
Level:
Credit Value:
Tutor:
Date of lssue: 19 March 2012
7
15 Credits
Syed Faisal.
H. Zaidi
lnternally
Verified:
lnternal Verifier:
Date :
Date of submission:
77 May
2012
To be signed
by
Student
I declare that all the work
produced
George
19 March
2012
as a response
to this
assignment
is all
my own work.
I understand
the college
policy
on
plagiarism.
Student’s signature showing
understanding
of
plagiarism
notice
I
;.r’,I
.t
,
iir L
Unit 13 Managing
Financial
Principles
and Techniques
Student
Guidelines
1. You
should write
this assignment
in report style. Essential
parts
are
o
Title
page
o
Table
of contents
r
lntroduction
o
Main
body of
the report
clearly
identifying the
separate
tasks
r
Conclusion
r
Reference
and bibliograPhY
r
Appendices
only if relevant
and
necessary
2. Report
should
be word
processed
and
grammatically
conect.
Pages
should be
numbered.
Use Times
New
Roman, Arial etc
font 12
and 1.5
line spacing. Show
titles
and use
bullet
points
for a better
structure
and
presentation.
3. List of references
citing sources
in
Harvard referencing
style
is a must.
Reference
may
include
bibliography
showing
your
wider study
relevant
to this
module.
4. You
will
pass
the assignment
only
if
you
pass
all
the outcomes.
5.
Deadline of assignment
submission
is on 11 May
2012 by
must
collect
cover
page
from
your
tutor
and attach
with
your
assignment
before
submission.
You must fill
all the required
fields
on
cover
page
like Student
Name,
Programme,
Module
title,
date and
Signature.
6. The assignment
will be
submitted
a hard copy
and a soft
copy in CD.
‘1700.
You
Unit 13 Managing
Financial Principles and Techniques
This assignment will
give
learners the opportunity
to achieve:
Learning Outcome 1
–
Be able to apply cost concepts to the decision-making
process
Learning Outcome
2
–
Be able to apply forecasting
techniques
to obtain
information for decision making
Learning
Outcome 3
organisation
Learning Outcome 4
–
Be able to
participate
in
the budgetary
process
of an
:
–
Be
able to
recommend
cost
reduction and
management
processes
for an organisation
Learning Outcome
5
–
Be able to use financial appraisal techniques to make
strategic investment decisions
for an
organisation
Learning Outcome 6 – Be able to interpret
financial
statements
for
planning
and
decision
making
Criteria
reference
To
achieve
the criteria the evidence must
show that the
learner is able to:
Task
1
1 .1 explain the importance of costs in the
pricing
strategy
of an organisation
1.2 design a costing
system for use within an
organisation
1.3
propose
improvements to the costing and
pricinq
svstems
used
bv
an orqanisation
z
2.1 apply
forecasting techniques to make cost
and revenue decisions
in an organisation
2.2 assess the sources of funds
available
to an
organisation for a specific
project.
3.1 select appropriate budgetary targets for an
organisation
3.2
participate
in the creation of a master budget
for an organisation
3.3 compare actual
expenditure and income to
the master budget of an organisation
3.4 evaluate
budgetary monitoring
processes
in
an orqanisation
4 4.1 recommend
processes
that could manage
cost
reduction
in an organisation
4.2
evaluate
the
potential
for the use of
activitybased

costing
5 5.1 apply financial appraisal methods to analyse
competing investment
projects
in the
public
and
private
sector
5.2 make a
justified
strategic investment
decision
for an organisation using relevant
financial
information
5.3 report on the appropriateness
of
a strategic
investment
decision using information from a
post
audit
appraisal
No
Page
n u mbers
o
o
o
o
10
10
10
10
10
10
10
11
11
11
Unit
13 Managing
Financial Principles
and Techniques
6
6.’1 analyse
financial statements
to assess the
financial viability
of an organisation
6.2 apply
financial
ratios to improve the
quality
of
financial
information
in an organisation’s
financial
statements
6.3 make
recommendations
on the strategic
portfolio
of an
organisation
based on its financial
information
13
13
13
‘-t
I
I
Unit 13 Managing Financial Principles and
Techniques
To be
fill€d bv the Tutor.’
Guidelines:
1)
P:
Pass R: Referred
2)
Feedback:
Please
put
comments depending upon
Task
1:
R
.what
grade
achieved
(e.g.
if
can be improved
and if P
–
what can be further improved)
1.’1 Explarn
the importance of
cosis in the
pricing
strategy to
the Dynamic
Models
PLC
1.2 Design
a costing system
for use within Dynamic
Models PLC
1.3 Propcse
improvements to
the costing and
pricing
systems
used
by
Dynamic
Models PLC
Feedbackfor
Task 1:
Task
2:
2.1 Margaret
wants
you
to assist her in
identifying relationship between
units
produced
in the
factory and the associated costs.
She also wants to
know what
others forecasting
techniques can be used to make cost and
revenue
decisions.
2.2 Margarel
wants to expand the business
and she is interested to know
what
funding options
are available to
public
limited companies in UK. She
asks
you
to assess and report
on the sources offunds available to
the
Dvnamic
Models PLC.
Feedback for Task 2:
Gircle as
appropriate
PR
PR
Task 3:
Unit 13 Managing Financial
Principles and
Techniques
3.1
Explain with examples
how to select
appropriate
budgetary targets for
an organisation
3.2 Participate
in the creation
of a
master budget
for
an
organisation,
illustrate
in detail
with example.
3.3
Compare actual
expenditure
and income
to the master
budget of an
organisation
3.4
Give details
how to evaluate
budgetary
monitoring
processes
in
an
organisation
Feedback
for Task
3:
Task 4:
4.1
Recommend
processes
that could
manage
bost reduction in Dynamic
Models
PLC
4.2 Evaluale
the
potential
for
the use of
activity-based
costing
Feedback for Task 4:
PR
PR
Task
5:
Unit
13 Managing Financial
Principles and
Techniques
5.1
Apply
financial appraisal
methods
to analyse these competing
investment
5.2
Make
a
projects
for the Dynamic
Models
PLC
justified
strategic investment
decision
for the company
5.3
Report
on the appropriateness
of a strategic
investment decision
using
information
from a
post
audit appraisal
Feedback
for Task 5:
Task
5:
6.1
Analyse
financial statements
to assess
the financial
viability of the
Dynamic
Models
PLC
6.2 Apply
financial
ratios to
improve the
quality
of financial information
within
Dynamic
Model’s
financial statements
6.3 Make
recommendations
on the strategic
portfolio
of the company
based
on
its financial
information
Feedback for
Task 6:
PR
PR
Unit
’13
Managing
Financial
Principles
and
Techniques
Level
7 Edexcel
BTEC
Higher
National
Diploma
in
Business
(QCF)
lJnit 13:
Managing
Financial
Principles
and
Techniques
Managing
Financial
Principles
and
Techniques
Purpose
Assignment
13
–
Thepurposeofthisassignmentistoprovideaframeworkwithinwhichthe
learner
can:
Apply
cost
concepts
to
the
decision-making
process
nppty
tot””u.ting
techniques
to
obtain
information
for
decision
making
Partitipate
in the
budgetary
process of
an
organisation
necommenO
cost
reduction
and
management
processes for
an
organisation
ijse
tinanciat
appraisal
techniques
to,
make
strategic
investment
decisions
for an
organisation
Inierpret
financial
statements
Dynamic
Models
PLC
for
planning
and
decision
making
Margaret
smith
is
the
new
chief
Executive
of
Dynamic
Models
PLC,
a long
established
“oriruny
treainy
in
UK.
Recenfly
which
makes
model
toys
and
which
had
experience!
r19i!.
growth and
protit
until
two
years
ago.
ihe
business
operates
as
a
public limited
company
you
were
recruited
as
a trainee
accountant
by
Margaret
smith
to
assist
Margaret
in
the decision
making
process’
OnMargaret’sarrivalatDynamicModelsayearago,shecaniedoutaphysical
resource”audit,
the
first
for
over
three
years.
The
company’s
manufacturing
department
f,al
emOra”eA
new
engineering
technologir
but this
needed
to be
reviewed
and
,pJ”GO.
Research
& DevelopmJnt
;;;J
”
(R & D),
Sales.
&
{Marketing
and
the
General
Office
combination
of
traditional’methods
with
limited
use
of
computer
based
plus
writing
letters
to
customers
and
suPPliers.
appfic”tions
for
design
and
recording
purchases and
sales
Poor
performance
over
the
last
two
years was attributed
to
the
competition,
poor cost
The
company
needs
to
deliver
a
quality
product more
quickly and
at
a competitive
,unu’g”rn”nt
and
lack
of
pricing
stiategy.
.
price’
Cunentlythecompanychargesthefullcostoftheproductandaddsapercentage
mark-up
for
Profit.
DynamicModelsPLCretainedtheedgeindevelopingnewdesigns,butthisconsumed
a’hign
tevet
of
resources
and
was
a lengthy
process
from
research
to
eventual
production.
MargarethasgiventheSales&MarketingDirectorthetargetofreducingthe
JepXrtment’.
“o-.t”
by 30%
while
increasing
sales
by
50%’
Unit
’13
Managing Financial
Principles and
Techniques
Margaret’s
goals
for the company
over the next six
months are to:
o
Promote
open work environments
and
provide
proper
training
and development
opportunities
where
people
deliver superior
results
o
lntroduce
proper
costing and
pricing
strategy
which could make
Dynamic models
more
competitive into
the market.
r
Build a
strong network
of customers
and suppliers and
invest more in capital
of
the
company with whom
Dynamic
Models can
create mutual, enduring
value
o
Be a socially
responsible
company that
maximises
use
of
scarce resources
while
minimising environmentally
damaging aspects
of manufacturing
r
Maximise long term
return
on investment
o
Be a highly effective,
lean and
fast-moving organisation
that considers efficiency
in
everything it does
r
Develop a
global
market
for selling
Dynamic Models’
products
by investing and
expanding the business
around
the world
You will
produce
an
individual written
report for this assignment.
The report should
be approximately
3000 words
and
presented
in a formal report
style.
Task 1
–
Costs concepts
to the Decision
Making Process
1.1
Explain the importance
of costs
in the
pricing
strategy to
the Dynamic Models PLC
1.2 Design a costing
system
for use within
Dynamic Models PLC
Propose
improvements
to the costing
and
pricing
systems
used by Dynamic
Models PLC
‘1.3
Task
2
–
This
provides
evidence
for 1.1, 1.2, 1.3
Forecasting
Techniques
for Decision Making
2.1 Margaret wants
you
to assist
her in identifying
relationship between units
produced
in the factory and
the associated
costs. She
also wants to know what others
forecasting
techniques can
be used to
make cost and revenue
decisions. The following
is the output
of factory and
costs:
Month
Output Cost
000 s of u nits
X
1
2 9
7
3
LI
7 7
4
4
13
5
3 11,
6
5
15
5’ooo
Unit
’13
Managing
Financial
Principles
and
Techniques
2.2
Margaret
wa nts
to
expand
the
business
and
she is
interested to
know
what funding
options
lre available
to
public
limited
companies
in UK.
She
asks
you
to assess
and
report
on
the sources
of funds
available
to the
Dynamic
Models
PLC
Task
3
–
BudgetarY
Process
After
a
period
of
training,
This
provides
evidence
lor
2-1’2’2
you
have
been
shown
how
to
prepare
and
participate
in
the
budgetary
process
of
the organisation.
Put these
new skills
into
practice
and
prepare
a
trainlng
manual
for
your
colleagues
who
will be carrying
out the
following
tasks.
Your
training
manual
should
cover
the
aspects
below.
3.1
Explain
with
examples
how
to
select
appropriate
budgetary
targets
for an
organisation
in the
creation
of
a master
budget
for
an organisation,
illustrate
in
detail
with
example.
3.2
participate
3.3
Compare
actual
expenditure
and income
to the master
budget
of
an organisation
3.4
Give
details
how
to evaluate
budgetary
monitoring
processes
in an
organisation
Task
4
–
This
provides
evidence
for
3.1, 3-2’
3’3, 3’4
Cost Reduction
and
Management
Process
The
company
asks
you
to
submit
a report
to
the management
as
how to
reduce
cost
and
impiove
management
processes for the
Dynamic
Models
PLC.
You
must
incorporate
the
following
in
your
report:
4.1
Recommend
processes that
could
manage
cost
reduction
in
Dynamic
Models
PLC
4.2
Evaluale
the
potential
for
the use
of
activity-based
cosiing
Task
5
–
Financial
Appraisal
Techniques
This
provides
evidence
for 4.1,
4’2
The
company
is
considering
investing
in
either
Project
Alpha
or
Project
Beta
and
requires
you’to
use
financial
appraisal
techniques
to
make
strategic
investment
decisions’and
fo
llows:
to submit
a report
accordingly.
Relevant
financial
information
is as
l0
Unit
13 Managing Financial Principles and
Techniques
Project
Alpha Project Beta
lnitial capita: cost ol
equipment 52,OOG
Estimated
net annua: cash inflotils:
$$
Year
J
25,000 1O,0OO
Year 2
2O,OOO 36,000
Year
3
14,000 40,000
Year 4
4,OOO 42,0OO
years
4
years
Anticipated re-sale
value of equipment
Life of
projec:
4
at the end af Year 4
12,OOO nil
The company’s cost
of capital is 8Yl and the applicable discount €tes are as follows:
Year I
0-926
Year 2
0-857
Year 3
4.794
Year 4
0.735
The target rate of
return is 20%.
5.1
Apply financial appraisal
methods to analyse these competing investment
projects
for the
Dynamic Models PLC
5.2
Make a
justified
strategic investment decision for the company
5.3 Report
on
the
appropriateness
of
a
strategic investment
decision using information
from
a
post
audit appraisal
Task 6
–
lnterpret Financial
Statements
This
provides
evidence for 5.1, 5.2,5.3
Analyse
and
interpret the last two
years’financial
statements of Dynamic Models PLC
and
help in
planning
and decision making
process.
Following
are the
company’s
financial
statements
and industry average ratios:
l1
‘l
O0,OOO
Unit 13 Managing Financial Principles
and Techniques
Current ratio
Quick
ratio
.
Your work should be handed in by 11 May
2012
.
Your result will be issued on
(TBC)
lndustry
Average Ratios
Trade Receiva
bles turnover
Stock
/
lnventory turnover
Profit
Margin
Asset turnover ratio
Return on Capital Employed
Gearing
.
Assessment feedback will be
provided
on
(TBC)
1’>
1,.L
10 days
7 days
2s.o0%
2 times
50%
20%
6″1 Analyse financial statements to assess the financial
viability of
the
Dynamic
Models
PLC
6.2
Apply financial ratios
to
improve
Model’s financial statements
6-3
Make recommendations on
the
financial
information
the
quality
of
financial information
within Dynamic
shategic
portfolio
of the company based
on its
t3
Unit 13
Managing Financial
Principles and
Techniques
Assessment
Criteria
To obtain
a Pass
you
will need
to achieve
the following criteria:
Learning
Outcome
1
–
Be able to
apply cost concepts to the
decision-making
process
1.1 explain
the importance
of
costs in the
pricing
strategy of an
organisation
1.2
design a costing
system
for use within
an organisation
1.3
propose
improvements
to the
costing and
pricing
systems
used by
an
organisation
Learning
Outcome
2
–
Be abl’e to
apply forecasting techniques
to obtain
information
for decision making
2.1 apply
forecasting
techniques
to make cost and revenue
decisions
in an
organisation
2.2
assess the
sources of
funds available
to an organisation for
a specific
project.
Learning
Outcome
3
organisation
–
Be
able to
participate
in the budgetary
process
of an
3.1 select
appropriate
budgetary targets
for an organisation
3.2
participate
in the
creation of
a master budget
for an organisation
3.3
compare actual
expenditure
and
income to the master
budget of an
organisation
3.4 evaluate
budgetary
monitoring
processes”in’an’organisation
Learning
Outcome
4
–
Be able
to recommend cost
reduction and
management
processes
for an
organisation
4.1
recommend
processes
that could
manage cost reduction
in an
organisation
4.2
evaluale the
potential
for the use of
activity-based costing
Learning
Outcome
5
–
Be able to
use financial
appraisal techniques
to make
strategic
investment
decisions
for an
organisation
5.1
apply
financial
appraisal
methods
to analyse
competing
investment
projects
in the
public
and
private
sector
5.2
make
a
justified
strategic
investment
decision
for an organisation
using
relevant
financial
information
14
Unit 13 Managing Financial
Principles
and
Techniques
5.3
report on the appropriateness
of a strategic investment
decision using
information
from a
post
audit appraisal
Learning Outcome
6
–
Be able to interpret financial statements for
planning
and
decision making
6.1 analyse
financial statements to assess the
financial viability of an
organisation
6.2 apply
financial ratios to improve the
quality
of financial information in an
organisation’s
financial statements
6.3 make recommendations
on the strategic
portfolio
of
an organisation based
on its financial information
15

SOLUTION

Task 1:
1.1    The importance of costs in the pricing strategy of Dynamic Models Plc:
Costs are important in the pricing strategy of Dynamic Models Plc. The company needs to deliver products at competitive prices. Without controlling costs, it won’t be able to do so. Having the right costing system helps in controlling costs. Currently Dynamic Models Plc charges the full costs of the product and adds a percent as its mark-up.
Two of the main reasons behind the poor performance of Dynamic Models Plc over the past two years are poor cost management and lack of pricing strategy.
1.2    A costing system for use within Dynamic Models Plc:
Dynamic Models’ costing system is based on absorption costing system. In this costing system both the fixed and variable costs are included in the costing to determine prices. Variable costs are those costs which vary with the change in production level while fixed costs are those which remain unchanged with the production levels. An absorption costing system for Dynamic Models Plc will look like:
Direct Material Costs
Plus: Direct labor costs
Plus : Variable manufacturing overheads
……………………………………
Total Variable costs
Add:  Fixed production costs
Add : Fixed non-production costs
………………………………………..
Total cost = Total fixed cost + Total variable costs
Average cost per unit = Total cost / Total output
Add: Mark-up (say 20 %)
…………………………………..
Total price per unit
1.3 Recommendations on improving the costing and pricing systems used by Dynamic Models Plc
In 2011 Dynamic Models Plc charged a mark-up of a whopping 64.015 percent (for calculations see below) on its total cost per unit for setting the price per unit. However, the net profit margin was only 3.04 per cent.
In 2010 Dynamics Models Plc charged a mark-up of 63.93 per cent on its total cost per unit for setting the price per unit. However, the net profit margin was only 3.68 per cent.
In spite of the high mark-up, the net profit margin is very low because of the very high selling and administrative expenses. It is imperative that the company cuts down its selling and administrative expenses.
A better pricing strategy may be one where the company charges only variable cost. On the variable costs it may charge the same mark-up which it is currently charging (around 60 per cent). This will have the effect of lowering the price per unit charged from customers. A lower (more competitive) price may translate into much high revenues for Dynamic Models Plc if the price elasticity of demand of its products is greater than one. In such a case variable costing strategy will transfer into higher profits for the company.
Calculation of mark-up:
Mark-up charged = ((Sale – cost of goods sold) / Cost of goods sold)) * 100
Mark-up charged in 2011 = ((2990 – 1823 ) / 1823) * 100 = 64.01 per cent
Mark-up charged in 2010 = ((3500 – 2135)/2135) * 100 = 63.93 per cent
Net profit margin = (Net Profit / Sales) * 100
Net profit margin in 2011 = (91/2990) * 100 = 3.04 per cent.
Net profit margin in 2010 = (129/ 3500) * 100 = 3.68 per cent.
Task 2:
2.1 Forecasting techniques for decision making
Month    Output    Cost    Cost per unit
000s of units    $0
X    Y
1    2000    9000    0.222222
2    3000    11000    0.272727
3    1000    7000    0.142857
4    4000    13000    0.307692
5    3000    11000    0.272727
6    5000    15000    0.333333

Analysis of the above data reveals that minimum cost per unit occurs at production level of 1000 units. Per unit production cost rises as production is increased above 1000 units. This rise is mainly due to the rise in variable costs per unit. The increase in variable costs per unit offsets the decline in fixed cost per unit as production is increased.
Another forecasting technique which can be used by Dynamic Models Plc is to forecast sales and set production according to the sales forecasts. Sales however are dependent on price which in turn depends on per unit costs. Per unit cost is dependent on level of production. So Dynamic Models Plc can set production at the level at which it expects its Marginal Revenue will be equal to marginal costs. At this level of production its profits will be maximized.
2.2 Funding options available for public limited companies in UK
Public limited companies can tap both debt and equity for raising funds. Debt can be raised as loans from banks or financial institutions or through floating of corporate bonds. There is an active primary and secondary market for both debt and equity in United Kingdom.
Total debt on the balance sheet of Dynamic Models Plc in 2011 = Total short term debt + Total long term debt = 125000 + 75000 + 625000 = 825000
Total equity = 995000
Total preferred equity = 150000
Total capital employed = Total debt + total equity + total preferred equity = 825000 + 995000 + 150000 = 1970000
Debt to equity ratio of Dynamic Models Plc = 825000 / 995000 = 0.829
Debt to total capital employed ratio of Dynamic Models Plc in 2011 = 825000 / 1970000 = .418 or 41.8 %
If Dynamic Plc uses more debt for raising funds then the interest costs will increase further. This may have the effect of putting further pressure on the net profit margin of the company. Net profit margin is already low.
Raising funds through equity may dilute the earnings per share if it is not followed by a proportionate increase in earnings.
Net income available to common equity shareholders in 2011 = 76000
Total equity in 2011 = 995000
Return on equity in 2011 = 76000 / 995000 = 7.6 per cent
The return on equity in 2011 can be taken as the cost of equity for raising more funds through equity (those buying more shares of the company will expect at least this much return).
The after-tax cost of debt of Dynamics Plc in 2011 (assuming a tax rate of 25 %) = {Interest (1 – tax rate)} / Total debt = 40500/ 650000 = 6.23 per cent.
Debt therefore is a much cheaper source of funding for Dynamics Plc than equity. Therefore it will be better if the company raises the needed funds through the debt equity route. However if the equity markets are booming and valuations are extraordinarily high then the equity route may be better.
Task 3:
3.1 How to select appropriate budgetary targets for an organization
One way to select appropriate budgetary targets for an organization is to do scenario analysis. For instance in three possible scenarios (optimistic, pessimistic and least likely) the cost of production can be estimated. Say:
Scenario        Probability     Cost of production
Optimistic    0.25        150000
Most likely    0.5        200000
Pessimisstic    0.25        250000

Expected cost of production :     200000

In this way the expected cost and revenues of all the elements in the budget can be determined.
Often organizations simply set their budgetary targets by increasing the previous year’s numbers by the expected inflation. This is not a very sound way of setting budgetary targets and should be avoided. It does not take into consideration the unique circumstances of the current years. The external environment is a highly dynamic one and to set budgets in such a scenario by assuming that the external environment will remain static is a blunder, which no organization can afford to make.
3.2 Creation of master budget for an organization
Master Budget of an organization :
Production Budget

expected Sales    10000
Add desired closing inventory (.20 * next year’s sales)    2000
Total finished goods requirement    12000
less opening inventory    1000
Budgeted production in units    11000

Manufacturing cost budget
Required production    11000
Expected direct material cost per unit of production    15
Total direct material costs    165000
Per unit direct labor cos    5
Total direct labor costs    55000
per unit variable overheads cost    9
Total variable overheads cost    99000
Total variable manufacturing costs    319000
Fixed manufacturing overheads cost    60000
Total manufacturing costs    379000

Purchase Budget (Raw Materials)
Production requirement    11000
Raw material per unit     5
total raw material requirement    55000
Raw material cost per unit    3
Total raw material costs    165000

Selling and Administrative Expenses Budget
Expected Sales    10000
Variable selling and administrative expenses at  per unit    5
Total variable selling and administrative expenses    50000
Add fixed selling and administrative expenses    20000
Total  selling and administrative expenses    70000

Cost of goods sold budget
expected sales    10000
Variable cost per unit    29
fixed cost per unit    6
total cost per unit    35
budgeted cost of goods sold    350000

Budgeted Income Statement
Sales in units    10000
Price per unit    50
total revenues    500000
less cost of goods sold    350000
Gross profit    150000
less selling and administrative expenses    70000
Operating profit    80000
Budgeted interest expense    20000
Income from operations    60000

Taxes    18000
net income    42000
Preferred dividends    5000
Income available for ordinary shareholders    37000

Budgeted cash flow statement
Opening balance     100000
Cash inflows from sales    480000
collection from debtors of the previous period    10000
Total cash inflows    490000
Cash outflows
Payment to existing creditors or accounts payable    30000
payment to direct labor costs    55000
payment towards direct material costs    165000
payment to variable manufacturing overheads    99000
payment towards fixed manufacturing costs    60000
payment for selling and administrative expenses    70000
Taxes    18000
Total cash outflows    497000
Closing balance    93000

Budgeted Balance sheet
Cash    93000
Receivables    1000
Inventory    100000
Total current assets    194000
Property, plan and equipment    1700000
Depreciation    220000
Net fixed assets    1480000
Intangible Assets    100000
Total Assets    1774000

Liabilities and Shareholders’ equity
Accounts payable    10000
Short term bank notes    100000
Current portion of long term debt    10000
Accruals    80000
Total current liabilities    200000
Long term debt    500000
Deferred taxes    10000
Preferred stock    150000
Common stock    200000
Retained earnings    150000
Total liabilities and shareholders’ equity    1410000

3.2 Comparison of actual expenditure and income of the organization with the budgeted expenditure
Actual costs    budgeted costs    variance
Cost of goods sold    380000    350000    30000
selling and administrative expenses    70000    70000    0
Total variance (unfavorable)    30000
Income                                                      42000        42000                 0

Thus we can see that the total variance of the organization in terms of expenditures incurred is unfavorable i.e.actual expenditures exceeded the budgeted estimates. In terms of income the variance is zero.
3.3 How to evaluate budgetary monitoring process in an organization
The budgetary monitoring process can be evaluated on the basis of its effectiveness in minimizing adverse variances. In case of such adverse variances, the budgetary monitoring process should identify the causes of these variances and report them in detail.
Task 4:
4.1 Recommendation on processes which can manage cost reduction in Dynamic Models Plc
Dynamic Models Plc needs to control its selling, general and administrative costs. These have become a big drag on its profitability. Trimming them will improve operating profits and operating profit margin of the company.
Dynamic models needs to deliver best quality products at the most competitive prices. This can be achieved by implementing lean manufacturing at every step of operations. The lean philosophy is about minimizing wastage in all the processes.
4.2 Evaluation of the potential for using Activity Based Costing at Dynamic Models Plc
In Activity based costing, the costs associated with each activity in the operations are identified. Activity based costing is a very effective tool for controlling costs (M.Y Khan, P.K.Jain, 2012). At Dynamic Models Plc, the objective of the management is to control costs and Activity-Based-Costing can be a very effective tool in achieving this objective. By assigning costs to each activity, those activities which are taking up too much cost can be identified and steps can be taken for controlling these costs.
5.1 Analysis of competing projects for Dynamic Models Plc
Project Alpha:
Initial cash outflow    52000
Year    Cash inflows    Discount rate
1    25000    0.926
2    20000    0.857
3    14000    0.794
4    4000    0.735
Salvage or resale value at the end of 4th year    12000
Net present value    11166
Rate of return on project Alpha    21.47308

Net present value = Cash inflow in year 1 * Discount rate + ………+ Cash inflow in year 4 * discount rate in year 4 – Initial cash outflow.
Rate of return = Net present value / Initial investment
Project Beta
Initial cash outflow    100000
Year    Cash inflows    Discount rate
1    10000    0.926
2    36000    0.857
3    40000    0.794
4    42000    0.735
Salvage value    0
Net present value    2742
Rate of return    2.742

5.2 Strategic Decision based on the above financial appraisal
The net present value of both Project Alpha and project Beta is positive. However project Alpha’s net present value of 11166 is much higher than Project Beta’s NPV of Rs 2742. The targeted or required rate of return for Dynamic Plc is 20 %. Project Alpha’s rate of return at 21.47 per cent, is above the required rate of return, while project Beta’s rate of return at 2.742 % is below the required rate of return. Hence Dynamic Plc should accept or invest in Project Alpha while it should reject project Beta.
5.3 Appropriateness of a strategic decision using information from a post-audit appraisal
Post-audit appraisal involves analysis of the actual costs and benefits that have accrued from undertaking an investment or project. It is conducted after the completion of the project. Post-audit appraisal compares the actual costs and benefits from a project with the expectations set while making the decision to invest in the project (Perman Stephen H, 2001). The appropriateness of a strategic investment decision (whether the calculated NPV and other expectations have turned right) is determined by the post-audit appraisal process.
6.1 Analysis of the financial statements of Dynamic Models Plc
Current Ratio in 2011
current assets    490
current liabilities    300
current ratio    1.633333

current ratio in 2010
current assets    650
current liabilities    350
current ratio    1.857143

Quick ratio in 2011
current assets    490
inventory    230
quick assets    260
current liabilities    300
quick ratio    0.866667

Quick ratio in 2010
current assets    650
inventory    330
quick assets    320
current liabilities    350
quick ratio    0.914286

Trade receivables turnover in 2011
Total sales    2990
trade receivables    170
trade receivables turnover    17.58824
Trade receivables turnover in 2010
Total sales    3500
trade receivables    220
trade receivables turnover    15.90909

Inventory turnover ratio in 2011
Cost of goods sold in 2011    1823
average inventory    230
inventory turnover ratio     7.926087

Inventory turnover ratio in 2010
cost of goods sold    2135
average inventory    330
Inventory turnover ratio in 2010    6.469697

Profit margin in 2011
net profit    91
sales    2990
net profit margin    0.030435

Profit margin in 2010
net profit    129
sales    3500
net profit margin    0.036857

Assets turnover ratio in 2011
net sales    2990
total assets    2065
assets turnover    1.447942

Assets turnover ratio in 2010
net sales    3500
total assets    2300
Assets turnover ratio in 2010    1.521739

Return on capital employed in 2011
Total debt    650000
total equity    995000
total preferred equity    150000
total capital employed    1795000
Profit before interests and taxes    193000
tax rate    0.25
Return on capital employed in 2011    0.080641

Return on capital employed in 2010
Total debt    825000
total equity    1075000
total preferred equity    150000
total capital employed    2050000
Profit before interests and taxes    195000
tax rate    0.25
Return on capital employed in 2011    0.071341

Gearing ratio in 2011
Total debt    650000
total capital employed    1795000
Gearing ratio in 2011    0.362117

Gearing ratio in 2010
total debt    825000
total capital employed    2050000
Gearing ratio in 2010    0.402439

6.2 Applying financial ratios for improving the quality of financial information
The current ratio of Dynamic Models Plc was 1.63 and 1.85 in 2011 and 2010 respectively. The industry average current ratio is 2.2. The ideal current ratio is 2 (Prasanna Chandra, 2011). Dynamic Models Plc needs to improve this ratio immediately to catch up with the industry average.
The quick ratio of Dynamic Models Plc was 0.87 and 0.91 in 2011 and 2010 respectively. The industry average quick ratio is 1.1. Dynamic Models quick ratio is less than the industry average which means that it  enjoys less short term liquidity than many of its competitors.
The trade receivables turnover of Dynamic Models Plc was 17.58 and 15.90 in 2011 and 2010 respectively. The industry average trade receivables turnover ratio is 10 days. The higher is the trade receivables turnover ratio the more inefficient is the credit collection process of the organization.
The inventory turnover ratio of Dynamic Models Plc was 7.92 and 6.46 in 2011 and 2010 respectively. The industry average inventory turnover ratio is 7 days. The higher the inventory turnover ratio, the more efficient is inventory management(Prasanna Chandra, 2011).
The net profit margin of Dynamic Models Plc was 3.04 per cent and 3.68 per cent in 2011 and 2010 respectively. The industry average net profit margin is 25 %. Dynamic Models Plc’s is much less than the industry average; this raises serious doubts about its viability.
The assets turnover ratio of Dynamic models Plc was 1.45 and 1.52 in 2011 and 2010 respectively. The higher is the assets turnover ratio, the better is the utilization of assets. The industry average asset turnover ratio at 2 is higher than that of Dynamic Models Plc.
The return on Capital Employed (ROCE) of Dynamic Models Plc was 8.06 % and 7.13 % in 2011 and 2010 respectively. The industry average ROCE is a whopping 50 %.
The Gearing Ratio of Dynamic Models Plc was 36.21 % and 40.24 % in 2011 and 2010 respectively. The gearing ratio measures the degree of debt in the capital structure of the company. The industry average gearing ratio is 20 %. So Dynamic Models is much more leveraged than most of its competitors; it uses much more debt in its capital structure.
6.3 Recommendations on the strategic portfolio of the company based on its financial information
On comparing the financial ratios of Dynamic Models Plc with the industry average it becomes apparent that the company is in dire straits. If the company does not control its costs, increase its revenues and improve its operating ratios in the short term then it may find it really hard to survive in future.
The company should reorient itself into a lean and fast moving organization that considers efficiency in everything that it does. A global market for Dynamic Models’ products should be urgently developed so as to give a thrust to the revenues of the company.
Dynamic Models needs to leverage its core competency in development of new designs more effectively.

References:
Prasanna Chandra, 2011, Investment Analysis and Portfolio Management, McGraw Hill
M.Y Khan, P.K.Jain, 2012, Cost Accounting, Prentice Hall
Perman Stephen H, 2001, Financial Statement Analysis and Security Valuation, McGraw-Hill

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