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Managing Financial

Resources and Decisions

Session 9

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Topics

Passing of Final Paper

Group Presentation

Lecture

Seatwork/ Quiz

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Criteria 3-1: analyse budgets and

make appropriate decisions

Budgeting decisions:

analysis and monitoring

of cash and otherbudgets

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Criteria 3-2: calculate unit costs

and make pricing decisions using

relevant information

Costing and pricing

decisions: calculation of

unit costs,

use within pricing

decisions,

sensitivity analysis

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GroupGroup

PresentationPresentation

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LectureLecture

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Budgeting Decisions

Analysis

Monitoring of cash and

Other budgets

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BudgetingBudgeting

Process of expressing

quantified resource requirements

(amount of capital, amount

of material, number of people) into

time-phased goals and milestones.

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Budget Analysis

The process of evaluating budget to see if it is

working.

Look for problem areas

Reaching financial goals. Monthly analysis at first

Quarterly, Semi-Annual, Annual monitoring

comes after

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Cash Monitoring

Cash Budget

Variance Analysis Actual vs. Budget

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Cash Monitoring

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Other Budgets

The Master Budget

Sale Budget

Materials Budget

Production Budget

Creditors Budget

Debtors Budget

Cash Receipts Budget

Cash Payment Budget

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MasterBudget Preparation

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MasterBudget PreparationThe plans for the six months ended 30th June 2008 are as follows:

(i) Production will be 60 units per month for the first four months,

followed by 70 units per month for May and June.

(ii) Production costs will be (per unit):

Direct Materials 5

Direct Labour 4

Variable Overhead 3

(iii) Fixed overhead is 100 per month, payable always one month in

arrears.

(iv) Sales, at a price of 18 per unit, are expected to be:

(v) Purchases of direct materials (raw materials) will be:

(

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MasterBudget Preparation

(vi) The creditors for raw materials bought are paid two months after

purchase.

(vii) Debtors are expected to pay their accounts three months after they

have bought the goods.

(viii) Direct Labour are variable overhead are paid in the same month

as the units are produced.

(ix) A machine costing 2,000 will be bought and paid for in March.

(x) 3,000 shares of 1 each are to be issued at par in May.

(xi) Depreciation for the six months: Machinery 450, Motor Vehicles

200.

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MASTER BUDGET PREPARATION

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MASTER BUDGET PREPARATION

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MASTER BUDGET PREPARATION

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MASTER BUDGET PREPARATION

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MASTER BUDGET PREPARATION

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MASTER BUDGET PREPARATION

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MASTER BUDGET PREPARATION

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The MASTER BUDGET

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The MASTER BUDGET

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Calculate unit costs and make pricing

decisions using relevant information

Costing and pricing decisions: calculation of unit costs,

use within pricing decisions,

sensitivity analysis

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COSTING

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Unit Cost

The cost incurred by a company to produce, store

and sell one unit of a particular product. Unit costs

include all fixed costs (i.e. plant and equipment)

and all variable costs (labor, materials, etc.)

involved in production.

Unit cost is an important metric to look at when

evaluating a "unit grower" stock, or a stock that

chiefly produces items that have a low fixed cost.

Important term: economies of scale.

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Unit Cost Calculation

Direct Cost/ Unit

Labor

Material

Factory Overhead

Fixed Cost

Total Fixed Cost/ Number of units produced

Use Absorption costing method or

Activity BasedC

osting (ABC

)

Unit Cost = Direct Cost perUnit + Fixed Cost per

Unit

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PRICING

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Objectives in Pricing

Profit maximization in the short term

Profit optimization in the long run

A minimum return on investment

A minimum return on sales turnover

Achieving a particular sales volume

Achieving a particular market share

Deeper penetration of the market

Entering new markets

Target profit on the entire product line, irrespective of profit level in individual

products

Keeping competition out, or keeping it under check

Keeping parity with competition Fast turnaround and early cash delivery

Stabilizing prices and margins in the market

Providing the commodities at prices affordable by weaker sections

Providing the commodities / services at prices that will stimulate economic

development

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Pricing Decisions

Cost-based approaches to pricing

Marginal Cost-Plus Pricing

New Products Pricing

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Cost-based approaches to

pricing

There are a variety of different costing bases.

These include:

(i) Total cost + % for profit = selling price

(ii) Variable cost +% for profit = selling price

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Marginal Cost-Plus Pricing

This method determines the sale price by

adding a profit onto either marginal cost of

production or marginal cost of sales.

Marginal Cost of Production + % for profit

Marginal cost of sales + % for profit

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Price skimming policy

an attempt to exploit sections of themarket that are relatively insensitive toprice changes. A skimming policy shouldnot be adopted when a number of close

substitutes are already being marketed.

Circumstances when skimming isappropriate:

(a) A new or different product

(b) Firm can identify different marketsegments for the product

(c) Short life cycle

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Penetration pricing policy based on the concept of changing low prices

initially with the intention of gaining rapidacceptance of the product.

Such a policy is appropriate when closesubstitutes are available or when the market

is easy to enter. Circumstances when penetration price is

appropriate:

(a) Pending new entrants

(b) Firm may want to enter the growth and

maturity stage of the

product life cycle and therefore reduces theinitial stage

(c) Elastic demand exists

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Sensitivity Analysis

A technique used to determine

how different values of an

independent variable will impact a

particular dependent variable under a

given set of assumptions.

Sensitivity analysis is a way to predict the

outcome of a decision if a situation turns

out to be different compared to the keyprediction(s).

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Cost Price Sensitivity Analysis

Increase Variable Unit Cost

Increase Fixed Cost

Increase both Variable and Fixed Cost

Decrease % of Profit

Decrease % of Profit and Increase Cost

Break Even Analysis

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Seatwork per Group

Design an excel costing price model

using the various Costing and Pricing

decisions.

Design a sensitivity analysis model