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Table of Contents
Executive summary: 2
Discussion of the need
for budgets and strategic planning: 3
Discussion of the
break-even analysis: 4
Explanation of the
different types of cost behavior: 4
Review of the risk and
return: 4
Discussion of the reasons
for the differences: 5
Discussion of the
original and proposed costing methods: 6
Critical appraisal of the
reasons for the choice: 6
Critical appraisal of the Sales Director’s view: 7
Critical appraisal of the
results of the capital investment appraisal: 8
Discussion of the reasons
for the apparent conflict: 8
Discussion of the risk
and return presented by each option: 9
References: 11
 

 

 

 

 

 

 

 

 

 

Executive summary

 

The ultimate purpose of this research is to find out
the effectiveness of proposed costing method and related financial methodology.
The intention is to support the organization’s objectives of cost savings and
other relevant efficiency-related aspects. Whole research conclusion has been
made based on given data and relevant information. Main point of the discussion
has been grounded on the critical analysis of the budgets and strategic
planning and break-even analysis, analysis on different types of cost behavior,
review of the risk and return and critical appraisal of the Sales Director’s
view, critical appraisal of the results of the capital investment appraisal, discussion
of the reasons for the apparent conflict and discussion of the risk and return
presented by each option. Different methods of capital budgeting suggest
different perspectives and analytical issues. But as a wise project management
move, it is thought to be important to have there must be some specific
decision. From the available capital budgeting decision, the manager must
specifically select one of the methods that will take into account the time
value of money concept. So, NPV method may be preferred. Different types of methods
indicating the different levels of risks associated with each project. NPV
tells about the risk regarding the negative NPV will be the issue should be
making the investment not to be considered” and in IRR, a project must have
higher rate than of cost of capital (Radebaugh, L., & Gray, S. 1997).
Payback period method tells to ensure that all the cash inflows with profit
must be within project duration. If the forecasts are wrong, there must be some
incident of project failure. Total re-apportioned overhead costs before
revision was 531,125 for Sports Shoes Department, 687,423 for Sports Clothing Department,
711,452for Sports Equipment Department. On the other hand, revised method is
showing, 608,056 for Sports Shoes Department, 657,735 for Sports Clothing
Department, 664,209for Sports Equipment Department. Overhead absorption rate
per machine hour (£) also differ from previous to revision. So, it can be
concluded that, there is significant change.

Discussion of the need for budgets and strategic
planning

 

A
budget can be expressed as a numerical representation of the planned situation.
It helps for getting support in any critical situation in the business process.
As a continuous guide for the performance, it helps to easily point out the
present condition of the organization regarding where to go, what are the
underlying key initiatives and so on and so forth. Budget is used for getting a
well-organized decision necessary for a particular business. With the help of
budget, an organization may easily ensure its strategic position and the
competitive moves. If there is a well-organized budget for the entity, it can
easily ensure the better performance. If there is no predetermined plan or
budget, a competitive position for the organization could not be ensured. With
the proper implementation of budget, successful business outcomes can be
ensured (Shah 2007). As different advantages can be obtained from budgeting,
all types of organizations use this technique. Organizations are using this for
getting advantages of systematic planning for business process, successful
coordination and communication as well as for high qualities and better
communication. Budgeting process can be outlined as set strategic goals as well
as objectives and forecasting for costs, revenues, cash flows production and
other important factors (Jr. Bierman 2010; and Bonner 2008). Budget also helps cost
control as well as better evaluation of the organizational performance. In case
of selected organization i.e. Pooma Sports Ltd, United Kingdom, different
underlying problems have emerged. Currently it does not apply the process of
strategic planning (Shah Anwar 2007). Moreover, there is problem of
unsuccessful implementation of budgeting system all over the entity. With unfavorable
position of financial condition, the entity is also facing a difficult
situation in the most of the recent years.

 

Discussion of the break-even analysis:

 

Explanation of the different types of cost behavior:

 

Explanation
of different types of cost behavior can be helpful for getting a high quality
research outcome. There are basically
two types of costs associated with the production. These are fixed cost and
variable cost. (Robinson 2007) Fixed cost is that type of cost that does not
vary with the output. If there is no output, even though, there must be some costs
related with different sectors (such as the plant, equipment maintenance or
land rent etc). These types of costs are called as the fixed costs. The nature
of fixed cost is constant in terms of total amount but per unit of output does
vary according to the variance in production output. (Crane, D. 1983) In
variable cost, per unit variable cost is constant but total amount does vary with
the level of output (Brigham, E. 2017).

 

Review of the risk and return:

 

The
organization has two different types of manufacturing options. There are different
risks and returns associated with two options. The most relevant concept of
operating gearing may be helpful in decision making. Step fixed cost can be
defined as the cost that remains same with the increase and decrease of the production
units. (Drake and Fabozzi 2010) But to a certain level of activity, this will
change with the excess production. There are both the variable costs and as
well as the fixed costs. The fixed portion of cost may be pointed out as the in-house
manufacture: Fixed manufacturing overheads (amount £100,000) and fixed
administrative overheads (£50,000) as well as the fixed selling and
distribution overheads (£40,000) and also the outsourced manufacture: fixed
administrative overheads (£50,000) as well as Fixed selling and distribution
(£40,000) overheads. So, stepped fixed cost of in-house manufacture is £1,
90,000. On the other hand, in case of the outsourced manufacturing, the stepped
fixed cost amount is only £ 90,000. Operating gearing is the amount or the proportion
of the fixed cost with the relevance to the total cost. It says about the
amount on how much capability an entity has to increase profitability for overcoming
fixed cost. If there is high volume of fixed cost, break-even point in quantity
and monetary amount must be high. That indicates that the company has to ensure
the high volume of sales in order to meet break-even. In the selected case, the
outsourced manufacturing option is
recommended. As in this option, there is lower stepped fixed cost, lower
stepped fixed cost refers to low risk.

 

Discussion of the reasons for the differences:

 

Underlying
differences between net cash flows and the operating profit of the given
statements can be measured. Moreover, there is a condition of net cash flow
remaining negative. Net cash flows are the differences between total cash receipts
and the total cash payments. In case of month January, cash receipt amount is
297 and cash payment amount is 496, so net cash flow amount is -199. In case of
the month February, cash receipt amount is 307 and cash payment amount is 484;
so net cash flow amount is -177. In case of month March, cash receipt amount is
326 and cash payment amount is 475, so net cash flow amount is -150. In case of
month April, cash receipt amount is 354 and cash payment amount is 474; so net
cash flow amount is -120. In case of month May, cash receipt amount is 391 and
cash payment amount is 485; so net cash flow amount is -94. In case of month
June, cash receipt amount is 448 and cash payment amount is 514; so net cash
flow amount is -66.  On the other hand,
operating profit is defined as the differences between the gross profit and the
total expenses. Total expenses can be outlined as operating expenses, fixed
overheads and administrative (labor) overhead. In case of month January, the gross
profit amount is 130 and the total expenses amount is 310, so the operating
profit amount is -180. In case of month February, Gross profit amount is 136
and total expenses amount is 286, so the operating profit amount is -150. In
case of month March, Gross profit amount is 147 and total expenses amount is 265,
so the operating profit amount is -118. In case of month April, the gross
profit amount is 162 and total expenses amount is 246, so the operating profit
amount is -84. In case of month May, the gross profit amount is 181 and total
expenses amount is 229, so the operating profit amount is -47. In case of month
June, the gross profit amount is 218 and total expenses amount is 213, so the operating
profit amount is 5. Moreover, there is a specific link between negative
operating profit and financial position. The negative operating profit
indicates that there are excess expenses than that of the operating income
(Ingram, R., & Albright, T. 2007). There must have favorable net cash flows
and operating profit.           

 

Discussion of the original and proposed costing
methods:

 

Critical appraisal of the reasons for the choice:

 

Critical
appraisal of the choice of apportionment bases used in existing and proposed
costing method also can be done. If any organization uses this type of costing,
the result is more accurate. This type of costing method reveals more favorable
outcome for the organization. For more explanation, this type of costing takes
into account all types of the cost of production relevant with the business
process. Costs of manufacturing such as direct materials, direct labor,
indirect materials, indirect labor, machine insurance, rent relevant with
direct manufacturing as well as machine power and machine depreciation cost can
easily be apportioned under this type. Moreover, it can be possible to apply
the cost regarding maintenance and other administrative cost can also be easily
applied. The selected method of costing is more reliable than any other costing
method. In both of original and proposed costing method, apportionment base can
be chosen. All of the costs relevant with manufacturing have been well
distributed under this method. For getting a clear understanding, direct
materials as well as the direct labor is directly distributed among the different
production units. In case of overhead, costs associated with different sectors
are apportioned based on the rational thinking. For example, in case of
indirect labor, it is apportioned on the basis of number of employees. Rent can
also distributed on the basis of the number of employees. Machine insurance is
distributed on the basis of machine operating hour. Heating is apportioned on
the basis of number of employees. Machine power can also be distributed on the
basis of active machine hour. Machine depreciation is apportioned according to
machine hour. Machine maintenance cost is apportioned on the basis of machine
value. Administrative overhead is distributed with consideration of flor area.
These apportions are well-organized to get actual result. This type of cost
allocation can contribute to more accurate operating contribution via each of
product line (Albright, T., Ingram, R., & Hill, J. 2006). If cost
allocation is not well-allocated, production manager may not take proper
initiative for developing his or her operation.

 

Critical appraisal of the Sales
Director’s view:

 

In the viewpoint of sales director
new method is better than current as this will contribute to minimize the overhead
charge. That also contribute to sales amount raising and
ensure a higher profit than earlier. Specifically, minimum overhead cost will
contribute to reduce selling price per unit. That will finally contribute to
increase the sales volume and increased sales volume will raise the profit
amount or keep it in a favorable level (Proctor, R. 2012). As apportionment
basis of costing method take into consider different things related to better
allocation of cost, this will ensure the best outcome (Kru?ger, T., &
Gitman, L. 2009. The deliberate evaluation of both of original and revised
method indicates about superior method. The revised method is well organized by
costing team. For more specification, it can be mentioned that, total
apportioned overhead costs before revision was 511,438 for Sports Shoes
Department, 669,442 for Sports Clothing Department, 696,283 for Sports Equipment
Department, 33,608 for Maintenance Department and 19,229 for Administration
Department. On the other hand, revised method is showing, 536,414 for Sports
Shoes Department, 562,611 for Sports Clothing Department, 515,453 for Sports
Equipment Department, 147,498 for Maintenance Department and 168,024 for
Administration Department. From following Sales Director’s proposal entity will
get more concise and wise decision. The revised principle of costing should be
applied.      

 

Critical appraisal of the results of the capital
investment appraisal:

 

Discussion of the reasons for the apparent conflict:

 

Underlying
reasons of the conflicts among different investment advice can be noted in the
upcoming discussion. From the supportive document, it can see that, there is
various result. For Superstitcher, payback period method is showing 4 years and
5 months. On the other hand, in case of accounting rate of return, it is
showing 14.0 % and internal rate of return 9.10 %. For Gluemaster, payback
period method is showing 3 years and 4 months. On the other hand, in case of
accounting rate of return, it is showing 9.0 % and internal rate of return 9.60
%. From this calculation, it may be treated as a conflicting result. For
clearly understand, it can be defined each of method. The method of payback
method helps to find out the time for return the initial investment. On the
other word, payback method of capital budgeting contribute to understand how
much time required to return back the initial investment. But it does not take
into consider, the time value of money concept. It is simply calculate the
cumulative cash flow. In case of accounting rate of return, it is consider the
net income from the operation (Moyer, R., McGuigan, J., & Rao, R. (2007). After
calculating the net income or loss of all year, it has been averaged the
amount. The average net income is divided by average investment (Finney, H.,
Miller, H., John, G., & Gentry, J. 1974). Average investment is the sum of
all investment in the different years divided by the number of year those are
invested. The rate of accounting return is shown in percentage basis. This
method of capital budgeting also does not take into consider the time value of
money concept. In case of internal rate of return, it is a measurement of
finding out minimum rate of return that must be ensured for securing in a
profitable position. If the internal rate of return is minimum, then it may not
be a profitable project. There is also basic differences of evaluation criteria
for each of method. In case of accounting rate of return, the project whose
rate is higher than other, be selected. On the other hand, in case of payback
period method, the project whose period is lower relative to others, be chosen.
And in case of internal rate of return, the project whose rate is higher than
opportunity cost and higher than same other project. As there is different
concept underlying each of method of capital budgeting, outcome also be
different (Pahler, A. 2006). The decision criteria of each of method must also
be different. For this, there is apparent conflicts between the investment advices
provided by each method.

 

Discussion of the risk and return presented by each
option:

 

Risk
and return of presented options can be evaluated from the given document. In
Superstitcher, payback period 4 years and 5 months. NPV for this is 158,844 and
accounting rate of return is 14.0 % and internal rate of return is 9.10%.
Gluemaster, payback period 3 years and 4 months. NPV for this is 140,775 and accounting
rate of return is 9.0% and internal rate of return is 9.60%. In case of
underlying concept of and internal rate of return (IRR), the preferred option
is Gluemaster, as it is showing higher IRR. Superstitcher have IRR 9.10% and
Gluemaster have IRR 9.60%. From underlying concept of and accounting rate of
return, the preferred option is Superstitcher, as it is showing higher ARR. For
more clear understanding, Superstitcher have ARR 14.0% and Gluemaster have ARR 9.0%
(Gelinas, U., Sutton, S., & Oram, A. 1999). From underlying concept of
payback period, the preferred option is Gluemaster, as it is showing lower
return time. As, Superstitcher have payback period 4 years and 5 months and
Gluemaster have payback period 3 years and 4 months. From underlying concept of
Net Present Value, the preferred option is Superstitcher, as it is showing higher
NPV. As, Superstitcher have NPV 158,844 and Gluemaster have NPV 140,775.

 

 

 

 

 

 

 

 

 

 

References:

 

1.     
Brigham, E.
(2017). Fundamentals of Financial Management. S.L.: South-Western.

2.     
Crane, D.
(1983). Financial management. New York: Wiley.

3.     
Kru?ger, T.,
& Gitman, L. (2009). Study guide to accompany Principles of managerial
finance, twelfth edition, Lawrence J. Gitman. Boston u.a.: Pearson Prentice
Hall.

4.     
Moyer, R.,
McGuigan, J., & Rao, R. (2007). Fundamentals of contemporary financial
management. Eagan, MN: Thomson/South-Western.

5.     
Albright, T.,
Ingram, R., & Hill, J. (2006). Managerial accounting. Mason, OH:
Thomson/South-Western.

6.     
Finney, H.,
Miller, H., John, G., & Gentry, J. (1974). Principles of accounting,
intermediate. Place of publication not identified: Prentice.

7.     
Ingram, R.,
& Albright, T. (2007). Financial accounting. Mason, OH:
Thomson/South-Western.

8.     
Proctor, R.
(2012). Managerial accounting for business decisions. Harlow: Financial Times
Prentice Hall.

9.     
Pahler, A.
(2006). Advanced accounting. Mason, Ohio: Thomson/South-Western

10.  Radebaugh, L., & Gray, S. (1997). International
accounting and multinational enterprises. New York: John Wiley & Sons.

11.  Gelinas, U., Sutton, S., & Oram, A. (1999).
Accounting information systems. Cincinnati, Ohio: South-Western College Pub

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