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Introduction

Cost has enhanced the overall scope of the business as in the situation of tough external market competition the role of an entity will increase. Nero Ltd has been selected for this project report as this stresses on the management accounting techniques in assessing their internal efficiency in relation to the external market. It emphasizes on the costing techniques, capital budgeting techniques in assessing the ability of an entity.

PART A

1.

The principles of management accounting will help an enterprise as it serves the needs of internal management to improve their existing business conditions. These principles will assist the top management in making decisions in their business related to setting of goals and the objectives (Braun and Tietz, 2013). It stresses on all other aspects such as internal business processes, resource application and creating additional value for an entity by increasing customer satisfaction.  This terms are used commonly in management accounting whose primary aim is to reduce their overall cost involved in an enterprise.  There are two accounting management principles which can be used by an enterprise which are given as below:

Principle of causality- The business transactions are linked with an enterprise by forming causes and effect relationship among them in order to align all transactions of an entity by scrutinize all of them.

Principle of Analogy- Another principles which cab be used by an enterprise in which casual insights are developed by an entity that defines all kinds of management activities in the business entity.

The above two principles will able to serve the needs and expectations of all the clients in overall business entity that helps in catering the needs and expectations of all community and its various kinds of customers.

2.

  Management accountant play a significant role in an enterprise as it is regarded as one of the important aspect of which is a function of tracking internal business cost. The roles and responsibilities of the accountant play a crucial role in the business entity as it helps in reducing the work load of the management by reducing their cost. The role of accountant includes collecting recording and reporting all kinds of financial information by preparing budgets. This preparation of budgets will help an entity in properly allocating their all kinds of resources in the best suitable manner. The primary aim of this enterprise is to cater all future needs of the business by preparing variety of budgets in an enterprise.

3.

A

Absorption costing (Quarter 1)

Particulars

 

Amount

Sales revenue

 

56000

Cost of goods manufactured (68000*.85)

57800

 

Closing stock (12000*.85)

10200

 

 

68000

 

GP

 

-12000

 

 

 

Less: Fixed selling & administration expenses

4200

 

 

4200

 

Net profit margin

 

-16200

Variable costing (Quarter 2)

Particulars

 

Amount

Sales revenue

 

56000

Cost of goods manufactured (68000 *.65)

44200

 

Closing stock (12000*.85)

7800

 

 

52800

 

GP

 

4000

Less:

4200

4480

Fixed overhead

12000

 

Fixed selling & administration expenses

4200

 

Net profit margin

 

-12200

Variable or marginal costing (Quarter 2)

Particulars

 

Amount

Sales revenue (64000 *1)

 

64000

Less: Opening stock (12000*.65)

7800

 

Cost of goods manufactured (56000*.65)

36400

 

Cost of goods which are available for sale

44200

 

Closing stock (4000*.65)

2600

 

 

46800

 

GP

 

17200

Less: Fixed cost

12000

 

 Fixed selling & administration expenses

4200

 

16200

 

 

Net profit margin

 

1000

Interpretations

The above cost statements is based on the two efficiently used techniques in determining the cost involved in the business enterprise (Anessi-Pessina and Barbera, 2016). The two techniques includes marginal and absorption costing that stresses on determining the profit by considering different set of costs involved in an entity. The absorption costing is that technique which includes two important costs such as fixed and variable costs. It is also regarded as the complete costing method that includes both kind of costs taken into account. On the contrary another quarter of the business is based on the marginal costing system that includes only variables costs which is deflated according to the changes takes places in the sales activity level.

b

The profits statements prepared above for different quarter in an enterprise is based on the two important methods such as marginal and absorption costing methods. The quarter 1 and quarter 2 has suffered with losses by using both the techniques of calculating profit by preparing cost statements (Ball, 2013). The profit in the quarter 1 is higher that is 16200 due to the involvement of both kinds of costs such as fixed and variable costs. The fixed cost in absorption costing are absorbed on the total sales units held within the business enterprise. On the other hand, the loss suffered by an entity in the quarter 2 is less than compared with the above method of costing. This difference in the values is due to the exclusion of the fixed cost as in the marginal costing high preference is given to the variable cost. In the quarter 2 the business efficiency is judged by applying both the technique which results into the profit of 1000 as this is regarded as the complete profit which is obtained after excluding all kinds of costs major variable and the fixed costs.

c.

FIFO- It is regarded as one of the important method used in the inventory valuation which helps in assessing the inventory (Bagliani and Martini, 2012). The inventories are stocked on the basis of this method such as first-in-first-out method which are based on an assumption that goods which are bought first will be sold first. It is the best suitable method in case of rising in the prices of the goods as the costs of the products are recorded at lower prices in relation to the higher income generated by them by selling at higher prices.

Weighted average- It is another important method used in valuation of overall inventory which utilises the average of cost of goods sold which are taken on its costs. It can be determining by taking average of available stock prices. It can be derived by dividing total sale items held for sale by total number of units available for sale. The unit price determined by forming calculation process will be used as the selling price for selling the stock which can entity need to sell in the market.

4.

The major concern of an entity is to reduce their overall cost incurred in their enterprise which will be curtailed strategically without disturbing their normal business operations (Ball,  2013). The management accountant are the representatives of the management who make decisions regarding their business entity in order to adapt with the external market difficulties. The business is a collection of several person's efforts which are applied in this entity in order to improve the existing business conditions that will determine the success of an entity by beating their all kinds of competitors who are raising the level of competition. There are various functions played by the management accountant which are given as below:

  • It helps in improving the existing business conditions of an enterprise that will be nurtured by facing external market challenges.
  • The sustainable success is gained by an entity by using strategic business capabilities which help an entity in order to beat all their rivals.
  • The management accountant will include several responsibilities which will enhance the existing market capabilities by emphasising on the environmental factors.
  • The accountants will use different skills and knowledge that helps an entity in order to make decisions in the whole business.

PART B

Scenario 1

A)

Budgeting is regarded as one of the important tool used by an enterprise in the overall management accounting whose major concern is to make budgets (Braun and Tietz, 2013). The budgeting is a framework that forecast all future expenses which is segmented into various categories which will help an entity in order to define all their goals and the objectives. The budgeting is a broad concept whose part is the foresting. The budget is a detailed statement which defines future activities by presenting current facts and figures by adding future projections. These assumptions will help an enterprise in order to assess their future results, financial position and cash flow that manage the existing business in order to achieve all targets and aims of an organization.

B)

In the official terminology of the management accounting activity based costing or budgeting is that terms which is a method or an activity framework utilizes cost driver data in preparing budget (DRURY, 2013). The preparation of the budgets will help in setting and developing proper arrangement in order to deal with variances occurrence in the budgets. The variances are that factors which can be positive or negative that determines the existing and budgeted output by comparing both the variables. It is that budgeting method which are designed in order to provide transparency of the internal business operations which are reflected in the preparation of this form of budgets. It is that method of budgeting that generates revenue from instructional and conducting research activities that are directly allocated by assigning units. The accountants who held responsible for handling this type of budget is due to the direct access control on the generation of the resources which are decided by an entity owner in order to assign with specific kinds of tasks and activities.

Scenario 2

A)

Cash budget play a significant role in an enterprise as it defines the movement of cash inflow and outflow as increasing amount of cash in an enterprise can raises the level of the business (Bondarouk and Trullen, 2016). The good amount of cash will be beneficial for an enterprise as it increases its overall liquidity level of an entity the liquidity is essential to be maintained in an enterprise as it uses in paying off all the short term obligations arises in the normal course of action. There are various roles and function for which cash budget play a crucial role in an entity which are given as below:

  • It helps in planning the future cash flows by assessing the current and efficient use of resources as the profit is the basic objective of an enterprise which every enterprise aim for achieving this particular objectives.
  • It also assists an entity in forecasting the future needs and expectations of the current business entity by using advance cash in order to meet all their obligations.
  • It helps in maintaining adequate cash balance in an entity as higher values of the  cash budget will be able to lend higher liquidity which is used to pay off all the short term cash obligations of an entity.

B)

Interpretations

It can be seen from the above cash budget that the overall surplus generated by an enterprise from their own business is increasing (Braun and Tietz 2013). The increasing cash surplus shows the ability of an entity which will help an enterprise in achieving all the goals and objectives. The revenues of this cash budget are higher than compared to their total cash outflow. The burden of taxation is imposed in the month of march which will not reduce its cash surplus as the cash inflow of that particular month are higher than their overall cash outflows. It can be seen that it is based on an assumption that unit of machinery has increases with a rate of 200 each month starting from the January. The increment in the sales value is due to the changes in the units of machines with an increasing rate with a selling price of 2000 each which enhances the value of sales from one period to another.

C)

Bank overdraft is regarded as one of the important sources of financing which can be taken from the bank on additional rate of finance for the amount exceeding their account value. The amount can be taken by an entity from different banks with an additional interest rate charged on the specific exceeding amount taken against the amount held with an enterprise in their bank account (Anessi-Pessina and Barbera, 2016). It is the responsibility of the bank who held responsible for lending amount in addition to the amount held with an entity's account. Bank overdrafts is short term facility that can be used temporarily increases the cash flow. This allows an entity in order to spend more than they have in their current account (DRURY, 2013). This facility available with an enterprise who hold current account and having good trade relations with the bank. The credit rating will be assessed by an enterprise before granting loan to an individual before analyzing their capabilities in order to payback the obligation of banks in a given time frame. The financial performance of Nero will be assessed by an entity in order to pay their obligations in a given time frame. The amount are provided by bank at their own discretion after demanding collateral security which can be used in analyzing the existing performance of the business. The credit history of the business will be assessed which will help bank in order to make their decision in order to lend their money to them.

Scenario 2

A)

Particulars

Unit price

Sale

90

variable cost

75

Contribution

15

Fixed cost

20

Loss

-5

BEP

 

Fixed cost

800000

Contribution per unit

15

BEP

53333.33

 

 

Margin of safety

 

Actual sales

720000

Break even sales

 

Sale price

90

BEP units

53334

Break even sales

4800060

Margin of safety

-4080060

Interpretations

The break even point is that method which help an entity in order to determine a particular point at which an entity will earn no profit not suffered any kind of loss. The margin of safety will assess the alert situations of the business which protect an entity from the external market changes (Ball, 2013). The shortage of inventory is one of the dangerous situations faced by an enterprise which will be improved by using margin of safety. In the given case scenario, the break even point of this standard service are ascertained which will help an entity owner in order to decide to take this service in near future in catering needs and expectations of all kinds of customers. The break even point is higher than the sales units of an enterprise which will result into the loss of the business. The standard service will not be offered in the next year as it is suffered with loss The BEP method will be used as one of the rationale actors which will determine the success of an entity by assessing their internal business efficiency. From this perspective the management of Nero will not choose this product to be offered in the next year.

B)

Particulars

Units price

Sale

85

variable cost

60

Contribution

25

Fixed cost

20

Profit

5

 

BEP

 

Fixed cost

800000

Contribution per unit

20

BEP

40000

 

 

Margin of safety

 

Actual sales

680000

Break even sales

 

BEP units

40000

Sale price

85

Break even sales

3400000

 

 

Margin of safety

-2720000

Interpretations

In the current case, the sales price per unit has changes by reduces from the main unit of 90 per unit and the variable cost of the standard service has also changed from 75 to 60 per unit. The sales price per unit has reduced which will result into decreasing in the variable cost which in turn reduces the sales value from earlier rate (Bagliani and Martini, 2012). This changes takes place in the overall cost structure per unit which will result into less number of break even point units. The margin of safety is negative in this particular case but the negative amount has decreased which was in earlier years. It can be seen that the overall ratio of break even point and mragin of safety of earlier rates are less which enhances the chances of choosing this particular option. Hence, it can be said that from the above calculation this product can be selected for offering to all the customers in the next year.

C)

Particulars

Units price

Sale

60

Variable cost

35

Contribution

25

Break-even sale price =Fixed cost/Sales+ variable cost

= 800000/720000+ 35

=1.11+35

=36.11

D)

Particulars

Basic(12000 units)

Standard(8000)

Comprehensive(20000)

Sale

60

90

130

variable cost

35

75

100

Contribution

25

15

30

Fixed cost

20

20

20

Profit/loss

5

-5

10

BEP

 

 

 

Fixed cost

800000

800000

800000

Contribution per unit

25

15

30

BEP units

32000

53333.33

26666.66

Break even sales

 

 

 

BEP units

32000

53333.33

26666.66

Sale price

60

90

130

Break even sales

1920000

4800000

3466666.66

Actual sales

720000

720000

2600000

Margin of safety

-1200000

-4080000

-866666.66

Interpretations

Margin of safety is one of the important method which can be used by an entity in removing their basic limitation of scarce of resources (Ball, 2013). This will inform the management regarding safety stock to be maintained in an entity before it get shortage and entity will not able to meet all their obligations. The above all the three services are judged by determining break even point and margin of safety of all the services. It has been observed that comprehensive product has lower break even point as it has higher sales level of activity and margin of safety is less negative in the comprehensive product.

Scenario 3

1.

It is correct to say that favorable labor rate variance incurred in the business by deducting actual rate from the standard rate. The higher values of actual labor efficiency is achieved by earning high efficiency than the budgeted target set by an entity in order to maintain the discipline among the business.

2.

The ignorance of volume of output by the management with a clear motive in order to focus upon the favorable outcomes generated by an enterprise. The deflating variances values can be due to negative rate of return.

3.

The feed forward control is a terminology which refers to sending of feedback to the assigned authority in order to make appropriate actions to be taken in the business entity. The current business entity need to give emphasizes on achieving their primary motive of preparing budget in meeting their goals and the objectives within a given time frame. The feedback provided by assigned persons by on the prepared budgets in order to resolve all the discovered issues by an entity.

Scenario 4

A)

The cash flow are required to be ascertained which help an enterprise in determining the future business efficiency by applying investment appraisal techniques (DRURY, 2013). The cash flow is essential for the manager of Nero who will determine the NPV of the business project in order to decide to select or reject the business proposal. The cash flows are compared with the business income generated by an entity by analyzing the ratio of increasing or decreasing of all the cash flows of an entity. The cash flow are used by an enterprise rather than using profits as an individual as the profitability cannot be used in order to identify the future profitability which will confuse the users by showing deflating results in near future.

B)

1.

NPV

Calculation of cash flow

 

 

 

Particulars

1(£'000)

2(£'000)

3(£'000)

Operating profit/loss

29

-1

2

Depreciation

31

31

31

Cash flow

60

30

33

 

Calculation of cash flow

 

 

 

Particulars

1(£'000)

2(£'000)

3(£'000)

Operating profit/loss

18

-2

4

Depreciation

18

18

18

Cash flow

36

16

22

 

Year

cash flow

Pv@10%

Present value

0

100

 

 

1

60

0.9090909091

54.5454545455

2

30

0.826446281

24.7933884298

3

30

0.7513148009

22.539444027

4

7

0.6830134554

4.7810941876

Total

 

 

106.6593811898

NPV

 

 

6.6593811898

 

Year

cash flow

Pv@10%

Present value

0

60

 

 

1

36

0.909

32.72

2

16

0.826

13.22

3

22

0.751

16.528

4

6

0.683

4.09

Total

 

 

66.57

NPV

 

 

6.57

 

IRR

Year

cash flow

Pv@10%

Present value

Year

cash flow

PV@12%

 

0

100

 

 

0

100

 

 

1

60

0.909

54.54

1

60

0.892

53.57

2

30

0.826

24.79

2

30

0.797

23.91

3

30

0.751

22.53

3

30

0.711

21.35

4

7

0.683

4.78

4

7

0.635

4.44

Total

 

 

106.65

 

 

 

103.28

NPV

 

 

6.65

 

 

 

3.28

Calculation of IRR

PVA- Initial investment/PVA-PVB*(B-A)

=106.65-100/106.65-103.28*(12-10)%

=6.65/3.37*2%

=10+.03=10.3%

Year

cash flow

Pv@10%

Present value

Year

cash flow

PV@12%

 

0

60

 

 

0

100

 

 

1

36

0.909

32.72

1

60

0.892

53.57

2

16

0.826

13.22

2

30

0.797

23.91

3

22

0.751

16.52

3

30

0.711

21.35

4

6

0.683

4.09

4

7

0.635

4.44

Total

 

 

66.57

 

 

 

103.28

NPV

 

 

6.57

 

 

 

3.28

Calculation of IRR

PVA- Initial investment/PVA-PVB*(B-A)

=66.57-60/66.57-103.28*2%

=6.57/-36.71*2%

=10+.003=10.03%

Payback period

Year

Cash flow(£'000)

Cumulative

0

100

 

1

60

60

2

30

90

3

30

120

Calculation of payback period

=2+30/100

=2+.3=2.3 years

Year

cash flow(£'000)

Cumulative

0

60

 

1

36

36

2

16

52

3

22

74

Calculation of payback period

=2+22/60

=2+.36

=2.36 years

2.

The performance evaluation techniques such as NPV, IRR and payback period will help an entity in order to assess the business project properly (Bondarouk and Trullen, 2016). It has been observed that on the basis of payback period which defines time period in which returns generated by the project is Project A as it has generated returns in less number of years. The NPV is higher in project A which is higher amount of future profitability to be generated. IRR is that rate which identifies return generated by an enterprise in near future higher than the actual cost of capital. On the basis of IRR project B should be selected but the overall majority states that Project A should be selected.

Scenario 5

A

Every business organizations want to earn profit for which this technique is used in which specific percentage of profit are added in the price of a product (Adams and Smart, 2016). It is the best suitable form of pricing methods which will consider all kinds of costs incurred in an enterprise along with the mark up cost included by an enterprise in operating their business successfully. There are some disadvantages of using this approach which are given as follows:

It ignores competition in the market by using higher profit

The basic limitation of this method is that it ignores the basic concept of replacement of costs.

B

There are various reasons of holding inventory in an enterprise which are given as follows:

  • The shortage of inventory can be improved by holding inventory within an enterprise
  • The inflation rate effects can be reduced by pile up inventory with them
  • It also helps in capitalizing low cost offers

The holding of cash is more important for an organization which will enhances the liquidity of an entity.

C

1.

Efficiency of working capital management

Ratios

Formula

2015(£000)

2016(£000)

Current asset

 

579

732

Current liabilities

 

195

225

Working capital ratio

Current asset/Current liabilities

579/195

= 2.96

732/225

=3.25

Sales

 

1800

1920

Inventory

 

200

250

Inventory turnover ratio

Sales/ Inventory*365

1800/200

=9

1920/250

=7.68

2.

The business efficiency can be controlled by controlling trade receivables and the inventory as these two variable are regarded as one of the important variables of an entity. The receivables turnover ratio and inventory turnover ratio can be determined in order to determine these existing business efficiency in order to decided whether to protect or control the existing business performance of an enterprise.

3.

Particulars

2015

2016

COGS

1080

1125

COGS per day

2.95

3.08

Closing inventory

200

250

Days inventory outstanding

67.59

81.11

 

 

 

Sales

1800

1920

Sales per day

4.93

5.26

Accounts receivables

375

480

Days sales outstanding

76.04

91.25

 

 

 

Accounts payable

195

225

COGS per day

2.95

3.08

Days of payable outstanding

65.90

73

 

 

 

Operating cycle

2015

2016

Days inventory outstanding

68

82

Days sales outstanding

76

92

Total

144

174

Days of payable outstanding

66

73

Operating cycle days

78

101

Conclusion

It can be summarized from the above project report than management accounting principles and specific tools are used by an entity throughout the business. The reliability of techniques will help an entity in order to assess the business efficiency by preparing cost statements which reduces the overall cost burden of an enterprise.

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