Southern Cross University Graduate College Of Management

SOUTHERN CROSS UNIVERSITY GRADUATE COLLEGE OF MANAGEMENT

ASSIGNMENT COVER SHEET For use with online submission of assignments Please complete all of the following details and then make this sheet the first page of each file of your assignment – do not send it as a separate document. Your assignments must be submitted as either Word documents (with .doc extension, NOT.docx), text documents with .rtf extension or as .pdf documents. If you wish to submit in any other file format please discuss this with your lecturer well before the assignment submission date. Student Name: Student ID No.: Unit Name: Unit Code: Tutor’s name: Assignment No.: Assignment Title:

MUOGBUO ELOCHUKWU VINCENT 21692899 ACCOUNTING AND FINANCE FOR MANAGERS ACC00724 MR VICTOR KO TWO SUPER CHEAP AUTO FINANCIAL STATEMENT ANALYSIS. Due date: 25TH OF JUNE,2009 Date submitted: 25TH OF JUNE,2009 Declaration: I have read and understand the Rules relating to Awards (Rule 3.17) as contained in the University Handbook. I understand the penalties that apply for plagiarism and agree to be bound by these rules. The work I am submitting electronically is entirely my own work. Signed: MUOGBUO ELOCHUKWU VINCENT Dat e: 25TH OF JUNE,2009

Table of content Question 1.......................................................................................................................3 Question 2.......................................................................................................................6 Question 3......................................................................................................................11 References......................................................................................................................15

[Type text]

Page 1

Question 1 Flexible budgets need more sophisticated management and cost information than do fixed budgets. A budget is an estimate of future needs, arranged according to an orderly basis covering some or all the activities of an enterprise for a definite period of time as "financial and/or a quantitative statement prepared prior to a definite period of time of the policy to be pursued during that period for the purpose of obtaining a given objective'(Dawn 2003) .A budget is an important device managerial control. It provides a standard by which actual operations can be evaluated to know variations from the planned expenditures. A budget has the following characteristics It is prepared in advance and is based on a future plan of actions. It relates to a future period and is based on objectives to be attained. It is a statement expressed in monetary and/or physical units prepared for the implementation of policy framed by the top management.

[Type text]

Page 2

A flexible budget is a budget that adjusts or flexes for changes in the volume of activity or budget which used by recognising different cost behaviour patterns, it’s also designed for changes as volumes of output changes. Fixed budgeting is a more realistic budget and it can be used in retrospect thereby creating mediums for differences. Thus it is essential because management requirements to be conversant on how favourable or averse the actual performance has been and flexible budgets serve as a benchmark against which actual performance can be measured i.e. evaluating actual results achieved at the actual level of activity with results that ought to have been achieved under the status shown by the flexible budget. Establishment of standards in terms of quantity, quality and time is necessary for effective control because it is essential to determine how the performance is going to be appraised. The second step in the control process i.e., measurement of performance, has no sense unless it can be compared with some predetermined standards. Standards should be accurate, precise, acceptable and workable. Standards should be flexible, i.e., capable of being changed when the circumstances require so. Standard is bound to fail if it is based on records of past performance, which show either too high or too low achievement. http://blog.accountingcoach.com/flexible-budget. Fixed budget is a budget, which is designed to remain, unchanged irrespective of the level of activity actually attained. The main purpose of fixed budgeting is coordinating sectional activities to attain the enterprise objectives. It is prepared for a given level of production and does not take into account the changes in circumstances. It becomes a rigid and unrealistic measuring rod in case the level of production actually accomplished does not conform to the one assumed for the purpose of fixed budgeting. It is a master budget prepared before the beginning of a budget period on the basis of an estimated volume of production and volume of sales. No strategy are made for the event that actual volume of sales or production may differ from budgeted volumes and they are not adjusted in retrospect to the new levels of activity at any point of the period. The flexible budget is more sophisticated and useful than a static budget, which remains at one amount regardless of the volume of activity. And by considering the implications for costing method let apply comparison of fixed budget with the actual results for a different level of activity is of little use for control purposes. However, flexible budgets should be used to show what cost and revenues should have been for the actual level of activity. [Type text]

Page 3

May be prepared for any activity level in the relevant range Reveal variances due to good cost control or lack of cost control Improve performance evaluation Assume that a manufacturer determines that its cost of electricity and supplies for the factory are approximately $10 per machine hour (MH). It also knows that the factory supervision, depreciation, and other fixed costs are approximately $50,000 per month. Typically, the production equipment operates between 4,000 and 7,000 hours per month. Based on this information, the flexible budget for each month would be $50,000 + $10 per MH. Now let’s illustrate the flexible budget by using some data. If the production equipment is required to operate for 5,000 hours during July, the flexible budget for July will be $90,000 ($50,000 fixed + $10 x 5,000 MH). If the equipment is required to operate in August for 6,300 hours, then the flexible budget for August will be $103,000 ($50,000 fixed + $10 x 6,300 MH). If September requires only 4,100 machine hours, the flexible budget for September will be $81,000 ($50,000 fixed + $10 x 4,100 MH).If the plant manager is required to use more machine hours, it is logical to increase the plant manager’s budget for the additional cost of electricity and supplies. The manager’s budget should also decrease when the need to operate the equipment is reduced.(Bnet.com) Finally, the flexible budget provides a better opportunity for planning and controlling than does a static budget. Preparing flexible budgets require the principle of marginal costing. In ballpark figure future costs, it is usually necessary to begin by looking at cost behaviours in the past. For costs which are known to be fixed or variable, problems do not arise but when dealing with a cost which appears to have behaved as mixed costs in the past i.e. partly fixed and partly variable, problems arise. For instance, in a processing department, the total overhead costs will be partly fixed and partly variable. The variable part of it may vary with direct labour hours worked in the department or with the number of machine hours of operation. However, the better measure of activity will be judged based on a close analysis of the cost behaviour in the past. Thus, the high-low method may be used to estimate the levels of such costs. (CAT 10, 2008) In preparing a flexible budget necessitate a proper identification and separation of fixed costs and variable costs which is not always in line. This separation is principally because fixed costs are never to be flexed. They remain unchanged regardless of the level of activity. Therefore, it is [Type text]

Page 4

of paramount importance to differentiate costs so as to produce the right results in a flexed budget.

Question 2 Why are pricing decisions more difficult for firms with multiple products than for firms with single products? Pricing is fully as the task of scenery price for a firm’s products or services depends on the costs of production. This is a very important aspect of an organizations management policy, and for company’s with multiple products, this is even more important because firms with single products simply apportion all their costs to the single product, while those with multiple products have to choose a method of assign costs that is reasonable and fair, and this is rather complex. Cost is a vital issue in price decision making, the problem the multiple product firm has in lain in virtual neglects on the threshold of the monopolistic or imperfect competition since the pioneering efforts of chambelion and Joan Robinson .The significant of both is apparently since it is probably impossible to find a single firm that sells a single products at a single price. This is theoretically explainable by the fact that the conventional single product firm that is presumably in equilibrium, when marginal revenue is equal to marginal cost is not in equilibrium. If it can serve the remaining portion of the demand curve at a price above greater than marginal cost without adversely disturbing its existing market or more commonly, if there is any accessible market for which it can produce with its unused capacity at a price above marginal cost. In the first situation, price discrimination, differs only slightly from the second, multiple-product production together they constitute the terrain of the firm activities. The assumption of a products mix does little to meet the needs of the situation for it lends itself to only the crudest forms of analysis and assumes away some of the most fundamental problems including those [Type text]

Page 5

involved in the manipulation of the firms price and products line. It is common-place of business practice that the production and sales managers work hand in hand to devise new product Full cost plus pricing This is a conventional approach to pricing products whereby sales prices are gritty by calculating the full cost of the product and the accumulation a percentage mark-up for profit. Obviously this kind of costing is useful to management since a decision based on a price in excess of full cost ought to guarantee that a company working at normal capacity will cover all its fixed cost and make a profit. The tribulations with this method become palpable when you have two or more admiring products that use the same overheads, i.e. they are produced in identical factory, how do you assign the rental costs of the factory to the product? This is done by using the number of machine hours i.e. the hours spent in converting the raw materials into finished goods in the factory expended by the products, totalling it and dividing the cost of the rental by this total amount, and finally allocating it to the products. Activity Based Costing Since demand for paradigm ABC points out to this nature of intricacy in pricing by compound products in a different way from single products. The ABC has materialized with the initiation of advanced manufacturing technology; many funds have been used for non-volume related support activities such as conception of machines product scheduling, first item inspects and data processing. The wider the range and the more multifarious the products the more support services will be required to assist the efficient manufacture of the products. For instance, comparing linking factory A which produces 10000 units of 1 product, shoes and factory B which produces 1000units each of them slightly different version of the shoes. Supporting activity costs in factory B are likely to be a lot higher than factory A such as settingup machines and product scheduling for instance, factory A will only used to set-up structure once but factory B will have to structure at least several times for different products. The major ideas behind activity base cost are activities such as requesting, machine assembly, production scheduling, dispatching cause costs and material handling. Producing products creates demand for activities and thus costs are assigned to a product on the basis of the products consumptions of the activities.

[Type text]

Page 6

Suppose that company manufacturers 4 products L, M, N and O. Output and cost data for the period just ended as follows:

Output

No.Of

Material cost Direct labour Machine

production

per unit

hrs per units

$

Hours 1 3 1 3

run

in

hrs

per unit

the

period L M N O

Units 10 10 100 100

2 2 5 5

20 80 20 80

Hours 1 3 1 3

Direct labour cost per unit is $ 5. Overhead costs are as follows. $ 3080 10920 9100 7700 30800

Short-run variable costs Set-up costs Production and scheduling Material heading costs Overhead total Calculating product using, Absorption costing.

Direct labour Overheads Units product Cost per unit

L $ 70 800 950 10 $ 95

M $ 120 2000 3050 10 $ 305

M $ 500 7000 9500 100 $ 95

O $ 1500 21000 30500 100 $ 305

Total $ 2200 30800 44000

Therefore $ 30800/440hrs= $70per DLH Using ABC and assuming that the number of production runs is the cost driver for Set-up costs [Type text]

Page 7

Production and scheduling cost Material handling/dispatches cost and that machine hours are the cost driver for Short-run variable costs Unit costs would be as follow L M N O $ $ $ $ Direct material 200 800 2000 8000 Direct labour 50 150 500 1500 Short-run variable O/H (w1) 70 210 700 2100 Set-up costs (w2) 1560 1560 3900 3900 Production and 1300 1300 3250 3250 scheduling(w3) Materials handling (w4) 1100 1100 2750 21500 4280 5120 13100 21500 Units products 10 10 100 100 Cost per unit $428 $512 $131 $215

TOTAL $ 11000 2200 3080 10920 9100 7700 44000

Workings 1

$ 3080/440 machine hrs = $7per MH

2

$ 10920/14 production runs = $780 per prod-run

3

$ 9100/14 production runs = $ 680 per prod-run

4

$ 7700/14 production runs = $550 per prod-run

Conclusion Production L M N O

Absorption costing Unit cost $ 95 305 95 305

Activity based costing Unit cost $ 428 512 131 215

differences $ +333 +207 +36 -90

D The statistics imply obviously that decisions, the price product proves to be a multifaceted choice in which an organization with multiple products selects the system in which to operate turnover.

[Type text]

Page 8

Question 3 It is often said that the availability of bank credit is more important to small medium sized firms than it is to larger ones. Why might this be so? Small and Medium sized Enterprises (SME’s) can be define as having three characteristics namely Firms are likely to be unquoted Ownership of the business is restricted to a few individuals, basically a family group They are micro businesses that are normally regarded as those very small businesses that act as a medium for self-employment of the owner, although they could expand and be listed on the investment markets. (CAT 10, 2008) Banks and financial firms are equally businesses that are impatient to make profit. Perhaps, they do not want to give credit to firm’s that comply back with the required percent of interest and charges, so, they carefully consider the kind of customers to whom they offer credit facilities. SME’s often have difficulty raising finance from bank credits. This is occurs frequently because

[Type text]

Page 9

of the high risks they face. Usually, banks are very unconvinced about giving credit facilities mainly loans to them due to the following reasons; Due to insufficient capital Expensively information collection Derisory accounting standards High administration cost Less dependable projects Higher default rates In these process banks hardly issue credits, an evaluation of credit value and inspection of the financial strength of the customer is done. So via businesses, as SME’s are, the financial statements and accounts need to be examined and evaluate to determine the past financial status, present performance and likely prospect conditions of the firm. Finally specific interest is prearranged to liquidity, profitability, efficiency and debt issues, “Profit margins, ROE, ROA, Quick ratio, Interest cover ratios, Current ratios etc” contrasting diverse years in other to classify trends or significantly good or bad outcome. However, the problem arises because SME’s do not have financial statements published for the public. Because SME’s do not declare their financial statement, they are seen as being highly indecisive so, when they need loans, they provide information such as assets, details of the experience of directors and managers, provide a business plan and show how they intend to go about providing security for the amount if given. This means is not sufficient and reliable information with regard to the capital strength of the company. SME’s are usually unable to provide warranty forms of security and information that could help banks assess the business of SMEs is often scant and hard to collect. This makes SME’s splurge so much time preparing information that the bank entail regularly. Banks may reduce facilities if there is ambiguity about future prospects. (CAT, Paper 10 p.280) a common problem faced by SMEs is banks refusal to increase loan funding without an increase in security provided which the firms may be unable to give. SMEs lean to be incapable to provide consistent information on the productivity of their projects and they also have high evasion rates because they are described by reluctance and incapacity to

[Type text]

Page 10

pay at the given time. By considering all these issue that leads to difficult for small and medium sized firms to obtain credits from banks.

SMEs and their market power via the relationship between the firm and its customers and suppliers why Bank credits are very important to them and yet so difficult for them to obtain via swot analysis SWOT Analysis is a tool for auditing an organization and its environment. It is the first stage of planning and helps marketers to focus on key issues. It is a general technique which can find suitable applications across diverse management functions and activities. SWOT stands for strengths, weaknesses, opportunities, threats. Strengths and weaknesses are internal factors while opportunities and strength are external. Performing a SWOT analysis involves the generation of strengths, weaknesses, opportunities, and threats concerning a task, individual, department, or organization. SWOT analysis can provide a framework for identifying and analysing strengths, weaknesses, opportunities, and threat. This can also provide an impetus to analyse a situation and develop suitable strategies and tactics, a basis for assessing core capabilities and competences. Moreover, this can provide the evidence for, and cultural key to change and a stimulus to participation in a group experience SME’s Strength The relationship that exists between supplier and firm in a typical SME is such that the firm has a high tendency to take goods on credit thereby increasing accounts payables. SMEs have the power to survive amidst the high rivalry from fellow SMEs who may be bigger as well as from large companies. [Type text]

Page 11

The challenges faced by SMEs in obtaining bank credits are propelled by the nature of the relationship that exists between the firm and its suppliers. This relationship between suppliers, firm and customers creates the need for external funding. Weakness The fact that SMEs do not have a large track record and business history is one of the problems they face in accessing bank credits. This affects the length of credit period and interest charged Due to poor track record and history in comparison to large organizations, banks prefer to give credit facilities to big companies. The fact the customers take goods on credit accrues account receivables. This makes funding very vital for the business as a good amount of revenue from sales will be tied down by debtors in the accounts receivables which usually creates the need for the company to source for funds from banks Opportunity The loans usually involve high processing costs of monitoring the accounts receivables and inventory which is often pledged as collateral and the primary information is based on the value of the collateral and not strong financial ratios of the SME. Customers in SME industries usually have access to taking goods on credit. This is because it is usually a family or small group of biz. This is also allowed by SMEs because their agreement power is low while the haggle power of customer is usually high ,thus, they try to attract and keep customers so that they don’t have to go another place. Threats Larger enterprises are also subject to more public inspection by law as they receive press attention. Thus, their accounts are audited and contain more details. So banks are better able to get hard information from them and reliability. The most used and most reliable is overdrafts and bank loans although the rates charged may be more expensive as the bank seeks to protect its investment in SME projects. [Type text]

Page 12

References Ability of Banks to lend to Informationally opaque small businesses- A study by Allen Berger,Leora Klapper and Gregory Udell- Journal of Banking and Finance. Eldenburg, Leslie G., and Susan K. Wolcott. Cost Management: Measuring, Monitoring, and Motivating Performance. John Wiley & Sons, 2004. Horngren, Charles T., Gary L. Sundem, and William O. Stratton. Introduction to Management Accounting. Prentice Hall, 2005. Rasmussen, Nils H., and Christopher J. Eichom. Budgeting: Technology, Trends, Software Selections, and Implementation. John Wiley & Sons, 2004. The Management Accounting and Financial Analysis module of the ICAI

[Type text]

Page 13