Produce a report divided into seven main sections based on a case-study BB Ltd investigating the following aspects of management accounting techniques.
UNIT 13
MANAGEMENT ACCOUNTING
Produced By
A.Akil
INTRODUCTION
My name is Akil, I am required to produce a report divided into seven main sections based on a case-study BB Ltd investigating the following aspects of management accounting techniques.
Part 1: Types of Cost
Part 2: Breakeven analysis and Marginal Cost
Part 3: Absorption costing
Part 4: Investment appraisal
Part 5: Budgets and budgetary control
Part 6: Standard cost and various analysis
Part 7: An effective summary of my results and a critical evaluation of each method
or technique used. (A grade)
Background information
Bianca Butcher is the managing director of BB Ltd a famous wooden toys manufacturer in Bromley. She supplies shops throughout the UK as well as retailing its products from a shop.
I have been employed as the management accountant and as part of my assignment. I am required to analyse various management accounting issues in making both short term and long term decisions.
The business address is as follows
BB Ltd
Broadfield Industrial Estate
Bromley
Kent
BR6 6TT
Tel : 020-8286-2222
Fax : 020-8286-7700
PART 1: CLASSIFICATION OF COSTS
A) I have had various discussions with Bianca Butcher and she would like me to carry out a brief investigation into the activities of any wooden toy manufacturer demonstrating my understanding of the following cost and how they behave
) Fixed Costs
2) Variable Costs
3) Direct Cost
4) Indirect Costs
5) Semi Variable Costs
6) Standard Costs
Fixed Costs
Any costs that do not vary with the level of output because they are linked to a time base rather than to a level of activity. Sometimes called period costs, they include rents and rates and depreciation.
The graph represents total payments made for the use of buildings, plant and equipment, etc, which must be met irrespective of whether outputs is high or low.
Variable costs
Any costs that tend to vary directly with the level of output. They represent payments made for the use of variable factor-inputs, notably raw materials i.e. wood, metal locks, labels etc and direct labour. BB Ltd will leave a market if in the short run it cannot earn sufficient sales revenue to cover its total variable cost. If it can generate enough total revenue to cover total variable costs and make some contribution towards total fixed cost then it will continue to produce in the short run even though it is still making a loss.
Direct Costs
Any costs which can be allocated precisely to a cost centre and which varies in direct proportions to activity or output. Common examples of direct costs are materials and piece rate labour.
Indirect Costs
A cost not directly attributable to a product line or a cost centre. It is probably, but not necessarily, a fixed cost. An example might be general maintenance charges in a factory. Under full or absorption costing, indirect costs are allocated in full to cost centres.
Semi Variable Costs
Are costs that vary with output, but not in direct proportions. Therefore, in order to calculate total costs at a specific level of output, a manager would have to work out the semi variables especially. This makes then hard to deal with, notably in break even analysis. Examples of semi variables include maintenance expenditure and telephone bills. In the latter case, it is clear that although a doubling of customer demand would not necessarily double a firms telephone calls or bills, it is reasonable to except that they would increase. Therefore the telephone is neither a fixed nor a variable cost.
Standard Costs
The desired average cost for producing an item. This can be compared with the actual achievement to discover whether the firm is working effectively.
Classify the costs in direct and indirect costs.
Direct costs
Direct materials: Wood, metal locks, labels, plastic hinge buttons
Direct Labour: 28 hours in manufacturing
Indirect costs
Indirect Materials: small factory, office, machinery
Indirect Labour: 12 hours in marketing /administration
Indirect expenses: insurance, rent, depreciation, delivery
The number of toys produced
To find out the number of toys produced each week is by taking the number of hours spent on manufacturing the toys per week, and then I will divide it by the time it takes to make one toy:
28 hrs manufacturing = 7 toys
4 hrs per toy
Number of toys produced in a year will be
7 toys x 50(weeks in a year)
= 350
Therefore the number of toys produced per year is 350 toys
Total Variable costs
To find out the variable cost per toy I will add the direct material and the direct labour per toy together.
Direct material per toy
Wood £6.00
Canvas £5.50
Metal locks £1.20
Label £0.80
Plastic hinge buttons £0.50
Total £14.00
Direct labour per toy =Drawing per week 120 = £3
40
£3 x 28hrs manufacturing = £84 direct labour per week
So £84 ?7 = £12 labour per toy
Total variable cost per toy is £12 +14 = £26
Total variable cost per week's production is 26 x 7 = £182
Total variable cost per annum is 182 x 50 = £9100
Total Fixed Costs
To find out the fixed costs is to calculate the fixed cost per toy, then to find all indirect costs. I will now calculate the indirect labour per week, and then when I have found the week labour cost, I will divide by 7 to get the indirect labour per toy. I can either multiply the indirect labour per toy by 350(toys produced per year) to obtain the yearly indirect labour cost or multiply the weekly labour cost by 50(number of weeks in working year). Then I will carry out the same method to find the indirect expenses per toy, per week and per year.
20 ?40 = 3 x 5 hr (marketing) = £15
3 x 7 hrs (administration) =£21
Total indirect labour per week (15 + 21) = £36
Indirect labour per toy 36 ?7 =£5.14
Indirect expenses
Rent: £4160 pa = 83.20 per week
50weeks
83.20 = £11.89 per toy
7
Insurance
£500 = £10 per week
50
£10 pw =£1.43 per toy
7
Machine depreciation
650 cost -50 scrap value = £300 per year
2 years
£300 = £6 per week
50
£6 = 0.86p per toy
7
Running expenses
£280 per year = £5.60 per week
50
£5.60 =80p per toy
7
The total fixed cost per toy
Indirect labour 5.14
Rent 11.89
Insurance 1.43
Depreciation 0.86
Running expenses 0.80
Total £20.12
The fixed cost per toy £20.12
Total fixed cost per week's production is £20.12 x 7 = £140.84
Total fixed cost per annum is £140.84 x 50 = £7042
PART 2: BREAKING ANALYSIS AND MARGINAL COSTING
A) BREAKEVEN ANALYSIS
The number of customers, which must use the delivery service for its breakeven is 19.
Quantity
VC (15)
FC (1400)
TC (VC+FC)
TR (90)
0
0
400
400
0
5
75
400
475
450
0
50
400
550
900
5
225
400
625
350
20
300
400
700
800
25
375
400
775
2250
30
450
400
850
2700
35
525
400
925
3150
40
600
400
2000
3600
Variable costs = £15
Selling Price = £90
Fixed Costs = £1400
I have been asked to calculate the breakeven analysis and to draw a breakeven chart. The Graph is on page
Breakeven = Fixed Cost / (selling price - variable costs)
So: Breakeven = 1400 / (90-15)
Breakeven = 1400 / 75
Breakeven = 18.66 (Whole number 19)
Robbie believes 30 customers a month to be a realistic take up. I would say the margin of safety for this amount is as follows
Number of customer- Breakeven = margin of safety
30- 19 =11
Number of customers - Breakeven = margin of safety as a percentage
Breakeven x 100
30-19 x100 = 36%
30
Number of customers ...
This is a preview of the whole essay
Breakeven = Fixed Cost / (selling price - variable costs)
So: Breakeven = 1400 / (90-15)
Breakeven = 1400 / 75
Breakeven = 18.66 (Whole number 19)
Robbie believes 30 customers a month to be a realistic take up. I would say the margin of safety for this amount is as follows
Number of customer- Breakeven = margin of safety
30- 19 =11
Number of customers - Breakeven = margin of safety as a percentage
Breakeven x 100
30-19 x100 = 36%
30
Number of customers - breakeven x total revenue = margin of safety as a revenue
30 -19 =11
1 x 90 = 990
The margin of safety for 30 customers is 58%
The margin of safety is important because BB Ltd will not be able to forecast exactly what will happen. It needs a margin of safety just in case sales fall short of the predicted level before making any loses, and this will help them to make a sound and profitable decision, i.e. they can drop their production by 5 customers which then will serve 25 customers and still make a profit.
Robbie thinks breakeven charts are a load of rubbish. Robbie I personally think the breakeven chart is very important for a business like BB Ltd in fact all businesses. The breakeven charts shows you the breakeven point at which sales levels are high enough not to make a loss, but not high enough to make a profit, in other words, sales revenue just cover costs. In order for a business to survive it must know how many units it needs to sell to breakeven. You can also tell your margin of safety, this shows the firm at what level of productions you can cut out and still make a profit. So Robbie I hope I've changed your mind on breakeven charts and hope you consider using it on your business.
Personally the break even point is a very useful financial indicator. It can be used to compare actual and anticipated work to monitor of your businesses performance. It is a margin of safety for your company.
c) If BB Ltd deals with 30 customers a month instead of 40 the targeted profit will be
Sales Revenue
2700
Less Variable cost
450
Contribution cost
2250
Less Fixed cost
400
Targeted Profit
850
The sales revenue and variable cost shown above was taken from the breakeven chart.
What makes breakeven so important is that it analyses all the information that is needed for estimating the total cost of delivery thus providing a mean of predicting profit or loss using one simple chart. A breakeven chart would save BB Ltd from failure to make the right decisions about how much products to produce, whether cost is too high or too low etc, most importantly, it prevents a bad decision from being made before all the likely consequences are being taken into consideration.
Not only would a breakeven chart help to deal with the financial aspects or the business but also the non financial side meaning with less pressure on solving cost problems management will be able to concentrate a lot more on motivating and training their employees. This enhance the effectiveness of the business environment and try to develop room for improvements which could be by extending the business, which may result in the requirement for more employees thus reducing the rate of unemployment around the community in which BB Ltd operates. BB Ltd will later be thinking about increasing the number of delivery made ie higher than 40 and at this stage they can extend the breakeven chart to cover the additional cost.
B SPECIAL DELIVERY
The company in addition to the above delivery wants to make a one-off special delivery to 5 customers at a charge of £75 per delivery. The special delivery will incur an additional fixed cost of £150. Other details from (A)-breakeven analysis.
Sales Revenue
£375
Variable costs
£75
Contribution
£300
Additional Costs
£150
Extra contribution
£150
I think BB Ltd should make the delivery. This is the table to show their profit they will make if they do the delivery, they will be making a profit of £150. The profit made was gained after the total variable and fixed cost was deducted. Therefore this is a good investment and should be used to improve the business. it will definitely benefit the business financially In order to make my decision on whether to make the delivery or not I have used marginal costing method to guide my decision. Marginal costing was used because it is one of the best method for making such short term decision. The opportunity cost assist in marginal costing decision. The business would not have to worry too much about the opportunity cost because BB Ltd will be making a profit if they make the special delivery. The business wouldn't be facing financial problems after the delivery because they are going to make a profit.
C MAKE OR BUY
BB Ltd has developed a new toy, which can be used as a household electrical appliance. The company can make the product or buy it from a Czech manufacturer. They have collected some data to assist in deciding which cause of action to take.
Made in own factory
The figures for first alternative
Selling price per unit £300
Sales in unit 5,000
Fixed cost 6,000
Variable cost £130
Profit and loss account for the first alternative
£ £
Sales 1,500,00
Less
Variable cost plus 650,00
Fixed cost 600,00
Total cost 1,250,000
Net profit or loss 250,000
Sales - Variable = Contribution
= 1,500,000 - 650,000
= 850,000
Made abroad
The figures for the second alternative
Selling price per unit £300
Sales in unit 5,000
Fixed cost £200,000
Variable cost £200
Profit and loss account for the second alternative
£ £
Sales 1500,000
Less
Variable cost plus 1,000,000
Fixed cost 200,000
Total cost 1,200,000
Net profit or loss 300,000
Sales - Variable cost = contribution
= 1,500,000 - 1,000,000
= 500,000
Made in Factory
The figures for third alternative
Selling price per unit £320
Sales in unit 4,500
Fixed cost £200,000
Variable cost per unit £200
Profit and loss account for third alternative
£ £
Sales 1,440,000
Less
Variable cost plus 585,000
Fixed cost 600,000
Total cost 1,185,000
Net profit or loss 255,000
Sales - variable cost = Contribution
= 1,440,000 - 585,000
= 855,000
Made abroad
The figures for the fourth alternative
Selling price per unit £320
Sales in unit 4,500
Fixed cost £200,000
Variable cost per unit £200
Profit and loss account for fourth alternative
£ £
Sales 1,440,000
Less
Variable cost plus 900,000
Fixed cost 200,000
Total cost 1,100,000
Net profit or 340,000
Loss
Sales - variable cost = Contribution
= 1,440,000 - 900,000
= 540,000
The profit for the four alternatives is as follows
st alternative profit was £250,000
2nd alternative profit was £300,000
3rd alternative profit was £255,000
4th alternative profit was £340,000
b) BB Ltd may not opt for the best alternative because it will be made abroad and this will affect BB Ltd because it is based in the United Kingdom and the other manufacturer will be in Czech. The selling price per unit of £320 and sales in unit of 4500 gives the highest profits for both make and buy as shown in the tables above. The overall highest profit is obtained from buying the toys from Czech therefore buying is the best alternative. (Alternative 4)
The tables also show that the higher the costs less units are sold. Although less units are sold using a higher selling price of £320 the profit is never the less higher than the selling price of £300 and the sales unit of 5000.
BB Ltd may not use the alternative that I have identified above due to various social and non- financial factors. If the toys are bought from Czech, BB Ltd will need less employees and the level of unemployment will increase and the standard of living will decrease. The safety of customers will be affected because the toys, which can also be used as electrical appliances, may have certain health and safety requirements, this requirement might be different in Czech. Importing the toys from Czech may have its limitations due to different trade barriers such as import quotas; restrictive tendering (controlling the number of toys that can be imported) and licence to trade this will reduce the sales of the toys for BB Ltd.
Then again there are ways of reducing the non- financial and social factors mention above could be: BB Ltd can merge or join with the Czech's manufacturer thus will create more employment and remove the barriers to trade. BB Ltd can send some of their employees to work in Czech as part of the manufacturing of the toys thus will be able to implement UK's health and safety policies along with the quality assurance. There will also be better communication between the two countries and the admin can be dealt with more efficiently.
D CLOSURE OF A DEPARTMENT
Management expects all segments of the business to make a profit. However, the latest profit statement from the shop shows the following:
£
Sales
£80,000.00
Cost of Goods Sold
£50,000.00
Wages
£16,000.00
Share of fixed overheads
8,000
Net Loss
-£4,000
£
SALES
80,000
VARIABLE COSTS
66,000
CONTRIBUTION COST
4,000
FIXED COST
8,000
NET LOSS
-4,000
I don't think the shop should close because although there is a net loss the contribution is positive. The business contribution shows that there is potential and BB Ltd can survive the loss.
Assuming Fred China Ltd is willing to rent the premises for £17,000, I would advise not to because to me £17,000 in overheads wont make much differences because you will still make a net loss.
E TO CONTINUE OR DISCONTINUE
BB Ltd makes four patterns of a particular toy- Lala, Po, Cece, and Zizi , data shown below in the following statement
Lala
Po
Cece
Zizi
Total
Sales Revenue
460,000
400,000
420,000
300,000
,580,000
Total Cost
480,000
540,000
350,000
200,000
,570,000
Profit/loss
-20,000
-140,000
70,000
00,000
0,000
Total Cost can be broken down as 25% fixed overhead costs and 75% variable costs.
LALA
PO
Sales
460000
400000
Variable Costs (75%)
360000
405000
Contribution
00000
-5000
Fixed Costs (25%)
20000
35000
Profit/Loss
-20000
-140000
By looking at this table above Lala and Po are both negative figures so this is making BB Ltd a loss. Toy Lala has a high contribution of £100000 which is much greater than its net loss of £20000. The high contribution proves that the loss made on Lala has the ability to be improved in terms of changing from a loss into a profit. But Po should be taken to more consideration because Po has a negative contribution. Po shows a negative contribution of £5000 towards the profits, the loss made on Po is also very high and with no money to cover the loss Po is clearly proving to be a non-profitable product. I think that Po should be discontinued, Lala should continue because it provides a positive contribution. There is no point producing a product that is causing BB Ltd a great loss especially when there isn't enough money to produce it.
By discontinuing Po they might lose the confidence of their customers who relied on this particular product. BB Ltd can perhaps advertise Lala more which will influence their customers to buy Lala instead, in order to avoid losing their customers.
F PRODUCT MIX WITH A RESOURCE CONSTRAINT
A single material is required in the production of each of the three products itemised below.
£Per unit
Lala
Cece
Zizi
Sales Price
£3.00
£3.30
£3.50
Direct Materials
£0.80
£0.80
£1.00
Direct Labour
£1.00
£1.10
£1.30
Variable Overheads
£0.50
£0.60
£0.70
Fixed Costs amount to £50,000 and currently the firm produces 50,000 units of each product. The current unit cost for this single material is 20 pence per litre. Problems over supply will mean that only 500000 litres of this single material will be available to the firm in the coming year.
Lala
Cece
Zizi
Selling Price
£3.00
£3.30
£3.50
Variable Costs
£2.30
£2.50
£3.00
Contribution
£0.70
£0.80
£0.50
Units
50,000
50,000
50,000
Total Contribution
£35,000
£40,000
£25,000
A single material is required in the production of each of the three products listed below.
Lala
Cece
Zizi
Sales Price
£3.00
£3.30
£3.50
Direct Materials
£0.80
£0.80
£1.00
Direct Labour
£1.00
£1.10
£1.30
Variable Overheads
£0.50
£0.60
£0.70
£2.30
£2.50
£3.00
Contribution
£0.70
£0.80
£0.50
Contribution Per Lit
£0.20
£0.20
£0.20
Contribution Per Key Factor
£3.50
£4.00
£2.50
PART 3: ABSORPTION COSTING -JOB AND BATCH COSTING
A)
BB Ltd Budgeted data for period 6 are as follows:
Direct Materials
£30,000
Direct Labour 10,000 hours at £6 an hour
£60,000
Rates
£20,000
Machinery Depreciation
£14,000
Electric Power
£30,000
Supervision
£22,000
Statistics about the three manufacturing departments- Cutting, Making & Finishing are:
CUTTING
MAKING
FINISHING
Area in sq meters
00
200
60
Machinery value
£60,000
£30,000
£10,000
Number of employees
0
20
25
Machine Hours
600
300
00
Labour hours
900
3600
4500
. An overhead apportionment for the three production cost centres.
COSTS
DEPARTMENTS
BASIS OF APPORTIONMENT
CUTTING
MAKING
FINISHING
RATES
4,347
8,696
6,956
AREA IN SQUARE METRES
DEPRECIATION
8,400
4,200
,400
MACHINERY VALUE
E.POWER
8,000
9,000
3,000
MACHINERY VALUE
SUPERVISION
4,000
8,000
0,000
NUMBER OF EMPLOYEES
Cost
Cutting
Making
Finishing
Basis
Rate
00/460 x 20000
= 4347
200/460 x 20000
= 8696
60/460 x 20000
= 6956
Area in square metres
Machinery depreciation
60000/10000 x 14000
= 8400
30000/100000 x 14000
= 4200
0000/100000 x 14000
= 1400
Machinery value
Electric power
60000/100000 x 30000
= 18000
30000/100000 x 30000
= 9000
0000/100000 x 30000
= 3000
Machinery value
Supervision
0/55 x 22000
= 4000
20/55 x 22000
= 8000
25/55 x 22000
= 10000
Number of employees
2. Absorption Costs
Machine hour rates & Labour hour rates for the three departments
COSTS
DEPRTEMENTS
CUTTING
MAKING
FINISHING
MACHINE HOUR RATE
£57.91
£99.65
£213.56
LABOUR HOUR RATE
£18.28
£8.30
£4.74
You can work out the labour and machine hour rate by dividing the machine and the labour hours by the fixed cost giving you the overhead apportionment.
BB Ltd Machine hour rate
Cutting
Making
Finishing
Labour hours
600
300
00
Fixed cost
34748
29896
21356
Machine hour rate
57.91
99.65
213.56
BB Ltd Labour hour rate
Cutting
Making
Finishing
Machine hours
900
3600
4500
Fixed cost
34748
29896
21356
Machine hour rate
8.28
8.30
4.74
B)
3. Profit Margin
I have produced two different job costing cards for a particular toy showing variable cost, absorbed overheads and profits. Profit margins are to be 25% on cost.
Direct Materials £300
Direct Labour: Cutting 30 hours
Making 12 hours
Finishing 36 hours
Machine Hours: Cutting 12 hours
Making 6 hours
Finishing 22 hours
JOB COSTING
LABOUR HOUR RATE
£ £
Direct Materials 300.00
Direct Labour: Cutting (30 x 6) 180
Making (12 x 6) 712
Finishing (36 x 6) 216
460.00
768.00
Overheads: Cutting (30 x 18.29) 548.70
Making (12 x 8.30) 99.60
Finishing (36 x 4.74) 171.00
819.30
1587.30
Profit Margin of 25% on cost 396.83
Sales Price 1984.13
JOB COSTING
MACHINE HOUR RATE
£ £
Direct Materials 300.00
Direct Labour: Cutting (30 x 6) 180
Making (12 x 6) 72
Finishing (36 x 6) 216
468.00
768.00
Overheads: Cutting (12 x 57.91) 694.92
Making (6 x 99.65) 597.90
Finishing (22 x 213.56) 4698.32
5991
6759
Profit margin of 25% on cost 1689.75
Sales Price 8448.75
PART 4: INVESTMENT APPRAISAL
The board of BB Ltd is meeting to decide whether to invest £50,000 in an automated packing machine or into a new customer service centre. The production manager has estimated the cash flows from two alternative investments as follows:
PAYBACK
Year
Packing Machine
Service Centre
Year 0
-50,000
-50,000
Year 1
30,000
0
Year 2
40,000
20,000
Year 3
6,000
30,000
Year 4
0
44,000
Packing machine would be ideal due to the fact it only takes one year and six months to pay back compared with service centre, which would take twice as long to payback (three years).
ACCOUNTING RATE OF RETURN
Packing Machine
Service Centre
Total receipt
£86,000
£94,000
Profit over 4 years
£86,000-(50,000)= £36,000
£94,000-(50,000)= £44,000
Average Annual Profit
£9,000
1,000
ARR for Packing Machine = 9,000 x 100 = 18%
50,000
ARR for Service Centre = 11,000 x 100 = 22%
50,000
Service Centre has the highest percentage return of 22% therefore this project should be undertaken (accept) but reject other, packing machine with a lower ARR of 18%.
DISCOUNTED CASH FLOW
Discounted cash flow (not present value)
Packing Machine
YEAR
CASH FLOW (£)
DISCOUNTED FACTOR (8%)
PV (£)
0 Initial Layout
-50,000
-50,000
Year 1 NCF
30,000
0.93
27,900
Year 2 NCF
40,000
0.86
34,400
Year 3 NCF
6,000
0.79
2,640
Year 4 NCF
0
0.735
0
NPV
24,440
Service Centre
YEAR
CASH FLOW (£)
DISCOUNTED FACTOR (8%)
PV (£)
0 Initial Layout
-50,000
-50,000
Year 1 NCF
0
0.93
0
Year 2 NCF
20,000
0.86
7,200
Year 3 NCF
30,000
0.79
23,700
Year 4 NCF
44,000
0.735
32,340
NPV
23,240
I have chosen to accept the highest (NPV) which is packing machine £24.940, and reject lower (NPV) of £23,240.
Other non financial factors which the board should consider before making a final decision is maybe depreciation because if you buy a brand new machine it depreciates in value as years go by. Without a packing machine, production time will be longer because the toys will have to be manually packed. This could result in loss of customers where the toys might not be available on demands. There may be an increase in employment because if the business does not invest in the packing machine - the business would need more employees to pack the toys in an attempt to cut down on packing time. An increase in employment may reduce profit as to more wages would be held. They will have to decide on which project will meet the objectives of the business effectively and efficiently. The objectives might probably be to be the best customer based business or it might be to raise profit through increase production.
PART 5: STANDARD COST AND VAIRANCES
Assuming BB Ltd produces and sells one particular wooden toy - The Blob.
The standard cost of one unit is as follows.
Direct Materials - wood 10 Kg at £20 per Kg £200
Direct Materials - paint 5 litres at£6 per litre £30
Direct Wages - 5 hours at £6 an hour £30
Fixed Production overhead £30
Total standard cost £310
Fixed overhead included in the standard cost is based on an expected monthly output of 900 units
During April 2001 the actual results were as follows.
Production 800 units
Wood 7,800 Kg used, costing £159,900
Paint 4,300 litres used, costing £23,650
Direct Wages 4,200 hours worked for £24,150
Fixed production overhead £47,000
. Price & usage Variance for each Material
PRICE
Price Variance for wood
59,900 = £20.50 ? 50p difference
7800
50p x 7800 Kg = £3900
£3900=Adverse reduction in profit
Price Variance for paint
23,650 = £5.50 ? 50p difference
4200
50p x 4300 litres = £2150
£2150 Favourable
USAGE
Usage Variance for wood
Actual usage = 7800
Standard usage = 8000 (10 Kg x 800 units)
8000 - 7800 = 200
200x £20 = 4000
£4000 favourable
Usage Variance for paint
Actual usage = 4300
Standard usage = 4000 (800 x 5)
4000 - 4300 = 300
300 x 6 = 1800
£1800 Adverse
2. Labour Rate and Efficiency Variances
Labour Rate
24,150 = £5.75 an hour
4200
Actual Labour Rate £5.75
Standard Labour Rate £6.00
Differences £0.25
25p x 4200 = £1050
£1050 Adverse
Efficiency Variances
Actual efficiency Labour Rate 4200 hours
Standard efficiency Labour Rate 4000 hours
Differences 200 hours
200 x 6 = £1200
£1200 favourable
PART 6: CASH FLOW FORECAST
The cash flow forecast is an estimate of the cash position of the business over the forthcoming period. It will normally be drawn up for the next 6 or 12 months. It may be part of the budgeting process of an organisation as shown above: in this case it is the cash budget. It will also be part of the business plan drawn up by a new business, or one, which is seeking to expand. In this case its use will not be restricted to internal budgeting; it will also be shown to outside agencies such as banks.
The cash flow forecast is drawn up for three main reasons:
> As evidence when seeking finance. A business wishing to arrange an overdraft facility with a bank will wish to show:
a) How much it will need to burrow and when
b) That it will ultimately be able to repay
Alternatively where a medium or long term loan is required, perhaps for expansion, then the business will need to show that it will have sufficient funds to pay the instalments as they become due.
> As a planning tool. In planning future operations a business will need to know how much finance will be required. It may be necessary to arrange for this in advance. Where a plan indicates that cash flow will be unsatisfactory, there is an opportunity to rethink. Where a number of options are being considered, the cash flow forecast will be an important consideration when making the final decision.
> As a means of monitoring actual performance against planned performance. Plans can act as targets: sales income to be achieved and expenses not to be exceeded. Often a cash flow forecast will have two columns per month: one for the budget to be completed at the planning stage and one for the actual figures to be entered as they become known. This allows the variance between these to be calculated. As with other budgets, management will be concerned to know why significant variances occur. They may ask for instance 'why are sales less than expected?' or 'why are expenses more than expected?'
Cash. In a cash flow forecast the term 'cash' refers to money received and paid. It will include any payment (cheques, credit transfers as well as cash) which affects the bank account. The cash flow forecast will not include depreciation as this is not a cash flow but merely an accounting adjustment in the books.
Structure of the Cash Flow Forecast.
There are three sections in a cash flow forecast.
* Receipts: Details of money expected from various sources
* Payments: Details of money to be spent on various items
* The summary: This is the section at the bottom which compares total receipts with total payments for the month. After taking account of any opening balance it shows the balance of cash available at the end of the month. The exact way in which this section is set varies slightly from one plan to another.
A Sales budget for twelve months in Quantity and Sales Revenue
MONTH
QUANTITY
TOTAL
CASH
DEBTORS
January
250
000
250
750
February
400
600
400
200
March
450
800
450
350
April
500
2000
500
500
May
000
4000
000
3000
June
600
2400
600
800
July
750
3000
750
2250
August
500
2000
500
500
September
550
2200
550
650
October
625
2500
625
875
November
750
3000
750
2250
December
900
3600
900
2700
Purchase Budget for twelve months
MONTH
UNIT SOLD (£)
PRICE PER UNIT (£)
TOTAL PURCHACE (£)
January
250
2
900
February
400
2
800
March
450
2
900
April
500
2
000
May
000
2
2000
June
600
2
200
July
750
2
500
August
500
2
000
September
550
2
100
October
625
2
250
November
750
2
500
December
900
2
800
BB Limited has a low receipt which affects their net cash flow because their total payment is higher than their total receipt. Looking at the cash flow most of the closing balances were negative figures. Negative balances indicate that current sources of finance are insufficient to cover forecast commitments. This means that arrangements will have to be made to cover the deficit. She should take this into consideration and maybe improve the quality of her packaging and increase prices. This will increase her total receipt, so increase sales by cash by 35% making her cash sales 60%, reduce her credit sales by 35%, these will lead to a better cash flow for BB Limited.
The most important thing about cash flow forecast is the timing of your payments and receipts. BB Limited can not afford to give incorrect figures on any section and month of the cash flow.
Bianca you have to remember if you have no money to buy stock, pay staff, rates or anything this could bring your business to a serious problem because it will affect your business and you could go bankrupt. If you have a short term cash flow problem you could ask a bank for an overdraft. Also it will give the wrong impression to other investors who would want to invest in the business because all their financial statement is wrong.
Cash flow forecast for Bianca butcher from 1 January 2002 to 31st December 2002
January
February
March
April
May
June
July
August
September
October
November
December
Quantity of units sold
250
400
450
500
,000
600
750
500
550
625
750
900
Receipts
Sales
£250
£400
£450
£500
£1,000
£600
£750
£500
£550
£625
£750
£900
Credit sales
£750
£1,200
£1,350
£1,500
£3,000
£1,800
£2,250
£1,500
£1,650
£1,875
£2,250
Owners Savings
£3,500
Family Loan
£2,000
Consultancy fees
£600
£600
£600
£600
£600
£600
£600
£600
Total receipts
£3,750
£1,150
£3,650
£2,450
£3,100
£4,200
£3,150
£3,350
£2,650
£2,275
£3,225
£3,750
Payments
Purchases of stock
£500
£800
£900
£1,000
£2,000
£1,200
£1,500
£1,000
£1,100
£1,250
£1,500
Stock payment buffer
£2,000
Advertising
£500
£500
£500
£800
£500
£500
£500
£500
£500
£500
£500
£800
Temp wages for office manager
£100
£100
£100
£100
£100
£100
£100
£100
£100
Postage
£100
£100
£100
£150
£150
£150
£150
£150
£150
£150
£150
£150
Packing materials
£50
£50
£50
£75
£75
£75
£75
£75
£75
£75
£75
£75
Telephone *
£250
£250
£250
Sundry expense
£15
£15
£15
£40
£15
£15
£15
£15
£15
£15
£15
£40
Rent
£200
£200
£200
£200
£200
£200
£200
£200
£200
£200
£200
£200
Office equipment
£2,300
Computer and printer
£2,750
Van
£4,600
Owner drawings
£180
£180
£180
£180
£180
£180
£180
£180
£180
£180
£180
£180
Total payments
£5,345
£1,545
£1,945
£5,445
£2,220
£3,220
£2,670
£2,720
£2,220
£2,570
£2,470
£7,545
Net cashflow
-£1,595
-£395
£1,705
-£2,995
£880
£980
£480
£630
£430
-£295
£755
-£3,795
Opening balance
£0
-£1,595
-£1,990
-£285
-£3,280
-£2,400
-£1,420
-£940
-£310
£120
-£175
£580
Closing balance
-£1,595
-£1,990
-£285
-£3,280
-£2,400
-£1,420
-£940
-£310
£120
-£175
£580
-£3,215
2
A.Akil