Finance For Managers Of Assessment Answer

Assignment Task

Task 1 

You are the financial manager of a small ice cream company, planning to launch a new  product. This is a small chocolate-coated ice cream, containing no colouring or flavouring  additives, available in a wide range of different varieties aimed at the children’s market. It will  be produced as a boxed unit containing 24 ice creams. 

Q-Prepare an information paper for senior managers within the company which explains the  key financial statements comprising business accounts. It should describe each type of  statement, indicating the general format and its role in the process of financial management.  Reference should be made to any variations that may be made for different types of  organisations. 

Q-Describe the use of financial statements in the both financial accounting and management  accounting, clearly distinguishing between these two functions. Indicate the significance of  each function to the effective operation of a business. 

You are required to carry out a costing exercise for the new ice cream product. Begin by  defining the following terms, with appropriate examples related to the production of the new  ice cream: 

fixed cost variable cost direct cost indirect cost 

Q-Using the following information, determine what would be the minimum number of units to be  made each month: 

• Selling price per unit £15 
• Variable costs per unit £10 
• Fixed costs per month £6,000 
• If the company finds that it is able to produce 2,000 units per month, what would be the new  breakeven selling price? As a consequence, propose a selling price to the company  directors for their next meeting, providing detailed reasons to justify your proposal.

Task 2 

A business has prepared a fixed budget for the coming financial year, as shown below: 

• Production = 2000 units £ 
• Variable costs 
• Direct materials 6000 
• Direct labour 4000 
• Maintenance 1000 
• Semi-variable costs 
• Other costs 3600 
• Fixed costs 
• Depreciation 2000 
• Rent and rates 1500 
• Total costs 18100 
• As a result of increased demand, it has been decided to increase production by 50%. An  updated flexible budget is required. You are asked to prepare this using the following cost  behaviour information: 
• Direct materials, direct labour and maintenance are considered as variable. Rent and rates and depreciation are fixed. 
• Other costs are calculated as £1600 plus a variable cost of £1 per unit. Calculate any relevant new values and prepare the updated flexible budget. Actual figures for the year are shown below: 
• Production = 3000 units £ 
• Variable costs 
• Direct materials 8500 
• Direct labour 4500 
• Maintenance 1400 
• Semi-variable costs 
• Other costs 5000 
• Fixed costs 
• Depreciation 2200 
• Rent and rates 1600 
• Total costs 23200

Carry out a variance analysis using these figures. Present your findings as a  summary report for circulation to senior management. Include in your report suggestions for  the possible causes of the variances observed.

Task 3 

The directors of a small production company have the opportunity to invest in one of two  new projects. Both projects involve the acquisition of new machinery. The figures for the  projects are as follows: 

The business has an estimated cost of capital of 10%.

They use a straight line method of  depreciation for non-current assets to calculate operating profit. The business has sufficient  funds to meet the capital expenditure requirements. 

For each project calculate: 

a) accounting rate of return 

b) payback 

c) net present value 

d) internal rate of return 

You must demonstrate the main methods of project appraisal. Produce a document setting  out your findings and the assumptions on which calculations are based. Evaluate each  method of project appraisal and make a recommendation to the board as to which project  they should invest in. 

An alternative way of determining depreciation is to use the reducing balance method. Use a  theoretical rate of depreciation value of 40% to determine the annual net book values of assets costing £200,000 and £120,000 respectively for a four-year period. 

Q-Discuss what allowances should be made for the effects of inflation in project appraisal.

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