Programme: Pearson BTEC Level 7 Extended Diploma in Strategic Management and Leadership (QCF)

Unit Number and Name: Unit 13 Managing Financial Principles and Techniques

Assignment title: Managing Financial Principles and Techniques

Credit value: 15

Level: Level 7

4500 words

The Purpose of this Assignment:

For an organisation to be competitive both now and in the future, it is vital to understand how current thinking on leadership influences an organisation's planning to meet current and future leadership requirements. This assignment will enable you to demonstrate an understanding of the links between strategic management, leadership and organisational direction, and the skills to be able to apply this understanding within an organisational context.

Task 1

Solution Plc produces industrial cleaning machines. A particularly successful product is the Duren1. This device is based upon a sub- assembly manufactured in China. The product is completed in the UK. The following information relates to October 2013:

Duren1

Budgeted Units

Actual Units

Purchase of sub-assemblies

720

720

Completed production

720

560

Sales

520

600

Stock of finished goods at 1 October 2013

60

60

Stock of finished goods at 31 October 2013

260

20

There was no stock of sub-assemblies or work-in-progress at either the start or the end of the month. The finished goods are valued at full standard production cost. The standard cost of one unit is:

Sub-assembly

$1200

Direct labour

$600

Fixed production overhead

$400

Variable production overhead

$200

Total $2400

The fixed production overhead is based on the monthly budgeted volume of production. The selling price of the product is $6 000 per unit.

Actual costs during October 2013 were as follows:

Sub-assemblies

$694 400

Direct labour

$380 000

Fixed production overhead

$280 000

Variable production overhead

$104 000

Required

Explain the importance of costs in the pricing strategy for Solution Plc and Duren 1

Design a costing system for use with Duren 1

Propose improvements to the costing and pricing systems used by Solution Plc

Task 2

Management of Norman Ltd has obtained the following estimated cash flows from the company's profiled functional budgets for next year:

 

Quarter 1

Quarter 2

Quarter 3

Quarter 4

 

£

£

£

£

Sales revenue

70000

52500

42500

31650

Purchase of direct materials

34460

13500

10000

7000

Direct Wages

13000

11500

10000

10000

Production overhead

1550

1550

1550

1550

Selling overhead:

 

 

 

 

Fixed

4000

2500

5000

6500

Variable

700

525

425

317

Administration overhead

3250

3250

3250

3250

Additional information:

1. Examination of the capital expenditure budget reveals cash payments of £41,500 and £30,000 in Quarters 2 and 3 respectively. In Quarter 1, sale of capital assets will realise £1,000 in cash.

2. Corporation tax of £10,500 in respect of last year's profit will be payable in Quarter 3.

3. 10 per cent of sales are made on a cash basis, the remainder being credit sales. Of the company's customers, 70 percent pay in the quarter after sale, 18 percent pay two quarters after sale and the balance is irrecoverable bad debts. At the end of the current year, it is estimated that debtors will amount to £71,000 of whom 70 percent will pay in Quarter 1, and 26 percent in Quarter 2, the balance being bad debts.

4. Purchases of materials are paid for 50 percent in the quarter of purchase and the remainder in the quarter after purchase. At the end of the current year, it is estimated that creditors for purchases will amount to £2,000 all of which will be paid in Quarter 1.

5. Direct wages, selling overheads and administration overheads are paid in the quarter in which they are incurred.

6. Included in the production overhead is £50 for depreciation

7. At the end of the current year it is expected that the cash balance at the bank will be £1,500

Required

1. Apply forecasting techniques to make cost and revenue decisions for Norman Ltd

2. Assess the sources of funds available to Norman Ltd if it wants to expand its business.

Task 3

Hop plc is a company that produces containers used for the storage of Beer. The company's two main products are containers described by the code names B308 and B310.

The budgeted and actual results for September 2013 are as follows:

 

Budget

Actual

 

units

units

Output Product B308

1200

1000

Product B310

800

1000

Costs

 

 

Materials

 $26 400

26 600

Direct labor

$14 000

16 800

Machining

$19 200

18 900

Overheads

$8 800

8 800

Total                                         $

 

 

The budget was constructed on the following bases

68 400

71 100

Product B308

 

B310

Material required per unit Kg 8

 

10

Direct labour hours per unit 2

 

4

Machine hours per unit 1

 

0,5

Machining costs include a variable element of $4 per machine hour and overhead costs include a variable element of $1 per machine hour.

Required

       Select appropriate budgetary targets for Hop plc

       Participate in the creation of a master budget for Hop plc

       Compare actual expenditure and income to the master budget of Hop plc

       Evaluate budgetary monitoring processes in Hop plc

Task 4

DLEX 5597 is a new product that has been developed by Dude plc. The intended launch date for the product is 1 January 2014. The following information about weekly production costs and selling prices of current products is available. Assume that sales volume is equal to production volume and that there is a 50-week trading year.

The company currently uses a standard absorption costing system to calculate inventory and cost of sales values.

 

Product Units of output
Variable cost Fixed cost
Selling

EL552

800 000

0,90

0,30

1,50

AKL046

192 000

1,00

0,50

2,10

BSO454

560 000

2,00

0,40

2,60

 The production director has estimated that there will be additional fixed costs in respect of DLEX 5597:

Modification of production machinery          $          1 600 000

Marketing and distribution costs                 $          2 000 000

Variable cost of production of the new product is estimated at $1.00 per unit. Estimates of demand are as follows:

Price per unit in $ Maximum weekly demand units

3, 00

120 000

2, 80

160 000

2, 50

200 000

DSCG 6 can only be produced if the production of existing products is reduced. There are two proposals to reduce production:

1. Reduce the production of EL552 by 20% per year.

2. Reduce the production of BSO454 by 25% per year.

Required

Calculate the full production cost per unit and net profit for each product using:

 Absorption costing and Activity Based costing based on the results explain the importance of costs in the pricing strategy of Dude plc.

 Design a costing system for use within Dude plc for better pricing considering the possible new product.

 Propose improvements to the costing and pricing systems used by Dude plc.

Task 5

Herring plc produces industrial storage units. The directors of the company are looking at four potential new products. These are as follows:

Net cash inflows in year

 

Product Outlay

1            2          3         4

5

 

$'000

$'000 $'000 $'000 $'000

$'000

PRIMO

2 400

1 740

1 740

SECUNDO

1 200

876        876    876

TERTIO

480

192      192        192    192

192

QUARTO

840

324      324        324    324

324

 Investment capital available to start new projects is limited to $3.6 million. The company's cost of capital is 10%

The private sector usually looks for a payback period of 5 years.

Required -

        Apply financial appraisal methods to analyse competing investment projects in the public and private sector

        Make a justified strategic investment decision for an organisation using relevant financial information

         Report on the appropriateness of a strategic investment decision using information from a post audit appraisal

Task 6

This is based on the financial statements of Green Plc from 2009, 2010 and 2011 (Table 1).

The CEO of Green Plc is concerned about the poor liquidity of the company. Liquidity here is defined as the speed at which a company can convert its investment into money before the end of the investment period. A bank savings account is an example of a high-liquidity investment. Conversely, in a low-liquidity investment, it may take time to find a buyer at a price that is acceptable to the company.

The CEO has asked you, as the accounting director, to report on the company's performance. The following financial statements are extracts from the accounts of Green Plc.

Profit and Loss Accounts for years ending 31 December

 

2009

2010

2011

 

£000

£000

£000

Sales

960

1080

1220

Cost of sales

670

780

885

Gross profit

290

300

335

Administration expenses

260

270

302

Operating profit

30

30

33

Interest

13

14

18

Profit before taxation

17

16

15

Taxation

2

1

1

Profit after taxation

15

15

14

Dividends

0

0

4

Retained profit

15

15

10

 

2009

2010

2011

 

£000

£000

£000

Net fixed assets

 

Current assets:

160

120

100

Stock

200

210

225

Debtors

160

180

250

Cash

0

0

 

 

Total

 

360

 

390

 

475

Trade creditors

75

80

145

Overdraft

70

80

110

Current liabilities:

145

160

255

Net current assets

215

230

220

Total assets less current liabilities (capital employed)

375

350

320

8 per cent debentures (long term debt)

120

80

40

Capital and reserves:

255

270

280

Ordinary shares

160

160

160

Profit and loss

95

110

120

Total

255

270

280

Required

    Calculate and analyse financial statements to assess the financial viability of an organization.

    Apply financial ratios to improve the quality of financial information in an organisation's financial statements.

    Make recommendations on the strategic portfolio of an organisation based on its financial information.

Assessment Criteria:

       : Explain  the  importance  of  costs  in the pricing strategy of an organization.

       : Design a costing system for use within an organization.

       : Propose improvements to the costing and pricing systems used by an organization.

       : Apply forecasting techniques to make cost and revenue decisions in an organization.

       : Assess the sources of funds available to an organisation for a specific project.

       : Select appropriate budgetary targets for an organization.

       : Participate in the creation of a master budget for an organization. 3.3: Compare actual expenditure and income to the master budget of an

organization.

3.4: Evaluate budgetary monitoring processes in an organization.

       : Recommend processes that could manage cost reduction in an organization.

       : Evaluate the potential for the use of activity-based costing.

       : Apply financial appraisal methods to analyse competing investment projects in the public and private sector.

       : Make a justified strategic investment decision for an organisation using relevant financial information.

       : Report on the appropriateness of a strategic investment decision using information from a postaudit appraisal.

       : Analyse financial statements to assess the financial viability of an organization.

       : Apply financial ratios to improve the quality of financial information in an organisation's financial statements.

       : Make recommendations on the strategic portfolio of an organisation based on its financial information.

Learning outcomes:

  • Be able to apply cost concepts to the decision-making process.
  • Be able to apply forecasting techniques to obtain information for decision making.
  • Be able to participate in the budgetary process of an organisation.
  • Be able to recommend cost reduction and management processes for an organisation.
  • Be able to use financial appraisal techniques to make strategic investment decisions for an organisation.
  • Be able to interpret financial statements for planning and decision making
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