Unit 4.9 Finance for Managers

Unit 4.9     Finance for Managers

Level 5     15 Credits

Assignments

Task 1

You are the financial manager of a small ice cream company, planning to launch a new product. This is a small chocolate-coated ice cream, containing no colouring or flavouring additives, available in a wide range of different varieties aimed at the children’s market. It will be produced as a boxed unit containing 24 ice creams.

Prepare an information paper for senior managers within the company which explains the key financial statements comprising business accounts. It should describe each type of statement, indicating the general format and its role in the process of financial management. Reference should be made to any variations that may be made for different types of organisations.

Describe the use of financial statements in the both financial accounting and management accounting, clearly distinguishing between these two functions. Indicate the significance of each function to the effective operation of a business.

 

You are required to carry out a costing exercise for the new ice cream product. Begin by defining the following terms, with appropriate examples related to the production of the new ice cream:

fixed cost        variable cost    direct cost      indirect cost

Using the following information, determine what would be the minimum number of units to be made each month:

Selling price per unit               £15

Variable costs per unit            £10

Fixed costs per month            £6,000

 

If the company finds that it is able to produce 2,000 units per month, what would be the new breakeven selling price? As a consequence, propose a selling price to the company directors for their next meeting, providing detailed reasons to justify your proposal.

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Task 2

A business has prepared a fixed budget for the coming financial year, as shown below:




























Production = 2000 units£
Variable costs 
Direct materials6000
Direct labour4000
Maintenance1000
  
Semi-variable costs 
Other costs3600
  
Fixed costs 
Depreciation2000
Rent and rates1500
  
Total costs18100

 

As a result of increased demand, it has been decided to increase production by 50%. An updated flexible budget is required. You are asked to prepare this using the following cost behaviour information:

Direct materials, direct labour and maintenance are considered as variable.

Rent and rates and depreciation are fixed.

Other costs are calculated as £1600 plus a variable cost of £1 per unit.

 

Calculate any relevant new values and prepare the updated flexible budget.

 

Actual figures for the year are shown below:

 




























Production = 3000 units£
Variable costs 
Direct materials8500
Direct labour4500
Maintenance1400
  
Semi-variable costs 
Other costs5000
  
Fixed costs 
Depreciation2200
Rent and rates1600
  
Total costs23200

 

 

Carry out a variance analysis using these figures. Present your findings as a summary report for circulation to senior management. Include in your report suggestions for the possible causes of the variances observed.

Task 3

The directors of a small production company have the opportunity to invest in one of two new projects. Both projects involve the acquisition of new machinery. The figures for the projects are as follows:

Project

1                                  2

£                                  £

Cost (will be incurred immediately)                            200,000                       120,000

Expected annual profits/losses

Year 1                                                             58,000                         36,000

Year 2                                                             (2,000)                        (4,000)

Year 3                                                               4,000                           8,000

Estimated scrap value of machinery                          14,000                         12,000

 

The business has an estimated cost of capital of 10%. They use a straight line method of depreciation for non-current assets to calculate operating profit. The business has sufficient funds to meet the capital expenditure requirements.

For each project calculate:
  1. accounting rate of return

  2. payback

  3. net present value

  4. internal rate of return


 

You must demonstrate the main methods of project appraisal.  Produce a document setting out your findings and the assumptions on which calculations are based. Evaluate each method of project appraisal and make a recommendation to the board as to which project they should invest in.

An alternative way of determining depreciation is to use the reducing balance method. Use a theoretical rate of depreciation value of 40% to determine the annual net book values of assets costing £200,000 and £120,000 respectively for a four-year period.

Discuss what allowances should be made for the effects of inflation in project appraisal.

Guidelines for assessors

The assignments submitted by students must achieve the learning outcomes and meet the standards specified by the assessment criteria for the unit.  The suggested evidence listed below is how students can demonstrate that they have met the required standard.












Task NumberAssessment criteriaSuggested evidence
11.1, 1.2, 1.3, 1.4, 3.1, 3.2, 3.4Answers should give comprehensive explanations in all areas and give an accurate reflection of the legal and regulatory requirements in relation to financial recording and reporting. They should assess the usefulness of the financial statements to different groups of stakeholders considering the purpose of the statements and explain why management accounting information is more effective for management purposes.
23.3Answers should detail sales, direct labour, direct materials and fixed overheads variances and include a reconciliation of budgeted and actual profit. Adverse and favourable variances should be identified. There should be a comprehensive explanation of variances and how they have arisen including identifying further information needed to fully explain variances e.g. why materials price might have changed etc.
34.1, 4.2, 4.3, 2.1, 2.2Answers should give calculated investment measures for each project with an explanation of any assumptions made. There should be an evaluation of the methods pointing out the strengths and weaknesses of each method. Answers should include a clear recommendation and the basis on which it is made.

Documents should set out and explain options for borrowing money and how the business may go about this. An explanation of working capital and its components should be included together with a brief explanation about how working capital might be manipulated to release funds.

 

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