SOUTHERN CROSS UNIVERSITY

GRADUATE COLLEGE OF MANAGEMENT

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Student Name: MUOGBUO ELOCHUKWU VINCENT

Student ID No.: 21692899

Unit Name: ACCOUNTING AND FINANCE FOR MANAGERS

Unit Code: ACC00724

Tutor’s name: MR VICTOR KO

Assignment No.: TWO

Assignment Title: 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: Dat

e:

MUOGBUO ELOCHUKWU VINCENT

25TH OF JUNE,2009

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Table of content

Question 1.......................................................................................................................3

Question 2.......................................................................................................................6

Question 3......................................................................................................................11

References......................................................................................................................15

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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.

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.

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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.

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

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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

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

budget.

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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

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

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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 setting-

up 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.

Suppose that company manufacturers 4 products L, M, N and O. Output and cost data for the

period just ended as follows:

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Output No.Of

production

run in the

period

Material cost

per unit

Direct labour

hrs per units

Machine hrs

per unit

Units $ Hours Hours

L 10 2 20 1 1

M 10 2 80 3 3

N 100 5 20 1 1

O 100 5 80 3 3

Direct labour cost per unit is $ 5. Overhead costs are as follows.

$

Short-run variable costs 3080

Set-up costs 10920

Production and scheduling 9100

Material heading costs 7700

Overhead total 30800

Calculating product using, Absorption costing.

L M M O Total

$ $ $ $ $

Direct labour 70 120 500 1500 2200

Overheads 800 2000 7000 21000 30800

950 3050 9500 30500 44000

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Units product 10 10 100 100

Cost per unit $ 95 $ 305 $ 95 $ 305

Therefore $ 30800/440hrs= $70per DLH

Using ABC and assuming that the number of production runs is the cost driver for

Set-up costs

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 TOTAL

$ $ $ $ $

Direct material 200 800 2000 8000 11000

Direct labour 50 150 500 1500 2200

Short-run variable O/H (w1) 70 210 700 2100 3080

Set-up costs (w2) 1560 1560 3900 3900 10920

Production and scheduling(w3)

1300 1300 3250 3250 9100

Materials handling (w4) 1100 1100 2750 21500 7700

4280 5120 13100 21500 44000

Units products 10 10 100 100

Cost per unit $428 $512 $131 $215

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

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Production Absorption costing Activity based costing differences

Unit cost Unit cost

$ $ $

L 95 428 +333

M 305 512 +207

N 95 131 +36

O 305 215 -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.

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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

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

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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

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.

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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.

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.

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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.

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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

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