Contents

Task A ............................................................................................................................................. 2

Task B ............................................................................................................................................. 7

Task C ............................................................................................................................................. 8

Task D ........................................................................................................................................... 14

Bibliography ................................................................................................................................. 18

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Task A
1. Explain how budget can be a decision-making tool for businesses.

For a company, making the right decision is essential. There are many important factors that
influence and direct the company to make the right decision, and one of them is the budget. The
budget can help the company manage its finances and the company can rely on it to make decisions
that match its budget. Therefore, creating a budgeting process is the most effective way to keep
businesses - and its finances - on track.

The first thing that a budget gives to a management team is broader perspective. Before moving
forward, an assessment has to be made about where the business stands. The first step in
developing a budget is to examine business's current financial standing. This will give them an
idea of where they are in terms of daily operations, of the market as a whole and of plans for
expansion and growth.

The real goal of budgeting is to develop short- and long-term plans. No business intends to
stagnate. By carefully assessing the company’s current standing, they have the tools to look into
their future plans. Budgeting helps the company and their teams see what kinds of expansion would
be realistic. In other cases, budgeting might reveal areas of wasteful spending that, if cut out, could
help you move forward with longer-term projects.

The heartbeat of a business is its day-to-day operational expenses. A business might want to
expand into another country or open a new store, but if they are having trouble paying their staff,
that is out of the question. Budgeting will also help the company find the cheapest way to finance
their day-to-day business. Cash flow can be a big problem for many businesses, to such an extent
that it might cause failures for businesses that are doing everything else right. Every business needs
to have ways of financing both regular expenses and expansionary projects. Theoretically,
businesses take out loans for new projects and expansions on the assumption that bigger operations
will pay back the loans and then some. Budgeting is crucial here, because it will help the business
to find the best ways to fund their project.

(Source: Ray, 2017)

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 2. Prepare a budgeted income statement and balance sheet for Printer Rite Ltd.
• Sale budget:

Sales budget is the first and basic component of master budget and it shows the expected number
of sales units of a period and the expected price per unit. It also shows total sales which are simply
the product of expected sales units and expected price per unit (AccountingExplained.com, 2017).

Sale budget of Printer Rite Ltd = Price per Unit x Number of Units Sold = 100 pounds x 10,000 =
1,000,000 pounds.

• Production budget:

A production budget is a financial plan that lists the number of units to be manufactured during a
period. In other words, this is a report that estimates the number of units that a plant will produce
from period to period (MyAccountingCourse.com, 2017).

Use this formula to calculate production budget:

Closing Finished Goods = Opening Finish Goods + Production – Sales per Unit

 Production = Closing Finished Goods – Opening Finished Goods + Sales per Unit

The subject show that closing balance for both finished goods and raw materials are planned to be
10% above the opening stock levels as at 1 January 2017. So that, any closing balance for both
finished goods and raw materials are more than the value of Opening balance for both finished
goods and raw materials 10%.

At 1 January 2017, there are 800 units of PR are in stock. So, closing finished goods at 31
December is: 800 + (800 x 10%) = 880

 Production = 880 – 800 + 10,000 = 10,080

• Direct material:

Direct materials are raw materials that are made into finished products. These are not materials
that are used in the production process. Direct materials are goods that physically become the
finished product at the end of the manufacturing process. In other words, these are the tangible
pieces or components of a finished product (MyAccountingCourse.com, 2017).

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For each unit of PR, 5 units of raw material P and 10 units of raw material R are needed. P is
expected to cost £3 per unit, and R £4 per unit.

Direct material usage:

Direct material of P = Production x Number of Units of P x Price per Unit of P = 10,080 x 5 x3 =

151,200

Direct material of R = Production x Number of Units of R x Price per Unit of R = 10,080 x 10 x 4

= 403,200

Total Direct Material Usage = Direct material of P + Direct material of R = 151,200 + 403,200 =
554,400

Direct material purchase:

Opening Raw material + Direct Material Purchase – Direct Material Usage = Closing Direct
Material

Direct Material Purchase = Closing Direct Material - Opening Raw material + Direct Material
Usage

Product P: Direct Material Purchase = Closing Direct Material - Opening Raw material + Direct
Material Usage = 4,950 – 4,500 + (10,080 x 5) = 50,850

Product R: Direct Material Purchase = Closing Direct Material - Opening Raw material + Direct
Material Usage = 13,200 – 12,000 + (10,080 x 10) = 102,000

Total Direct Material Purchase = (Direct Material Purchase of P x Price per Unit of P) + (Direct
Material Purchase of R x Price per Unit of R) = (50,850 x 3) + (102,000 x 4) = 560,500

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 • Direct Labor:

Two departments are involved in producing PR: machining and assembly.

Direct Labour per Direct Labour rate

Unit of Product per hour
(hours) £

Machining 1.00 6

Assembling 0.50 8

Direct Labour hours required for Machining = Production x Direct Labour per Unit of Product

= 10,080 x 1 = 10,080

Direct Labour hours required for Assembling = Production x Direct Labour per Unit of Product

= 10,080 x 0.50 = 5,040

Direct Labour Cost of Machining = Direct Labour hours required x Direct Labour rate per hour

= 10,080 x 6 = 60,480

Direct Labour Cost of Assembling = Direct Labour hours required x Direct Labour rate per hour

= 5,040 x 8 = 40,320

Total Direct Labour Cost = Direct Labour Cost of Machining + Direct Labour Cost of Assembling

= 60,480 + 40,320 = 100,800

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 • COGS

Production Cost = Direct Material Usage + Direct Labour + Overhead

= 554,400 + 100,800 + 100,000 = 755,200

COGS = Opening Finished Goods – Closing finished Goods + Cost of Goods Manufactured

COGS = Opening Finished Goods – Closing finished Goods + Production cost

= 52,000 – [(52,000 x 10%) + 52,000] + 755,200 = 750,000

• Depreciation

Fixed assets are depreciated on a straight-line basis at a rate of 20% per annum on cost therefore,
depreciation = 20% x Fixed Assets = 250,000 x 20% = 50,000

BUDGETED INCOME STATEMENT

Printer Rite Ltd

Budgeted Income Statement as at 31 December 2017

Pounds

INCOME

Sales 1,000,000

COGS (750,000)

Gross Profit 250,000

Less EXPENSE

Depreciation (50,000)

Administration, selling and distribution overhead (150,000)

Net Income 50,000

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Task B
1. Explain break-even analysis and its importance for a business

The point at which total of fixed and variable costs of a business becomes equal to its total revenue
is known as break-even point (BEP). At this point, a business neither earns any profit nor suffers
any loss. Break-even point is therefore also known as no-profit, no-loss point or zero profit point.
Calculation of break-even point is important for every business because it tells business owners
and managers how much sales are needed to cover all fixed as well as variable expenses of the
business or the sales volume after which the business will start generating profit (Accounting For
Management, 2017).

2. What is the break-even sale price if the compulsory trade discount is 10%?

If the compulsory trade discount is 10%, call the break-even sale price is A.

Sales Revenue = Number of Units sold x Selling Price

= Number of Units sold x Selling Price x 90%

= 8,000 x 0.9A = 7,200A (*)

Expense = (Cost per unit x Number of units sold) + Other expenses

= [(Direct materials + Direct labor + Variable manufacturing overhead expenses) x

8,000] + Fixed manufacturing overhead expenses + Fixed selling and administrative expenses

= (62 x 8,000) + 120,000 + 800,000 = 1,416,000(**)

As mentioned above, Break – even occurs when Expense = Revenue therefore, from (*) and (**),
we have:

7,200A = 1,416,000

 A = 1,416,000 / 7,200

 A = 196.66

So that, the break-even sale price = £196.66 if the compulsory trade discount is 10%.

3. What sales price is required to earn £50,000 profit?

7|Bruce
If the company want to earn £50,000 profit, call the break-even sale price is B

Sales Revenue = Number of Units sold x Selling Price

= Number of Units sold x Selling Price x 90%

= 8,000 x 0.9B = 7,200B (*)

Expense = (Cost per unit x Number of units sold) + Other expenses

= [(Direct materials + Direct labor + Variable manufacturing overhead expenses) x

8,000] + Fixed manufacturing overhead expenses + Fixed selling and administrative expenses +
50,000

= (62 x 8,000) + 120,000 + 800,000 + 50,000 = 1,466,000(**)

From (*) and (**), we have:

7,200B = 1,466,000

 B = 1,466,000 / 7,200

 B = 203.6

So that, if the company want to earn 50,000 pounds of Profit, the break-even sale price = £203.6

Task C
Year Option 1 (£) Option 2 (£)

1 150,000 120,000

2 120,000 100,000

3 100,000 100,000

4 100,000 80,000

5 80,000 80,000

Salary of workers in Option 1 per year = 10,000 x 2 = 20,000

Salary of workers in Option 2 per year = 7,000 x 8 = 56,000

8|Bruce
So that, minus this Account for each cashflow of each Option.

Year Option 1 (£) Option 2 (£)

1 130,000 64,000

2 100,000 44,000

3 80,000 44,000

4 80,000 24,000

5 60,000 24,000

1. Payback period

It is the period of time (year, month) that investors can compensate for the present value of the
capital that the investor has spent Invalid source specified..

To calculate Payback Period, we use this formula:

Payback Period = Initial Investment / Cash Inflow per Period

Or we use:

Payback Period = Number of years prior to full recovery of investment + Unrecovered cost at start
of year/Cash flow during full recovery year

(Source: Peavler, 2016)

Discounted Payback Period is used to determine the profitability of a project. Discounted Payback
Period takes into account the time value of money by discounting each cash flow before the
cumulative cash flow is calculated, and determines the time at which the net present value becomes
positive

9|Bruce
Formula:

Discounted Payback Period = A + B/C

A: Last period with a negative discounted cumulative cash flow

B: Absolute value of discounted cumulative cash flow at the end of the period A

C: Discounted cash flow during the period after A.

➢ Option 1

Initial cost – (annual cash flow of year 1 + annual cash flow of year 2)

= 355,000 – (130,000 + 100,000)

= 125,000

After 2 years, the company have enough money to recover initial investment

Payback Period = 2 + 125,000/80,000 = 3.5 years

➢ Option 2

Initial cost – (annual cash flow of year 1 + annual cash flow of year 2)

= 140,000 – (64,000 + 44,000)

= 32,000

After 2 years, the company have enough money to recover initial investment

Payback Period = 2 + 32,000/44,000 = 2.7 years

Conclude: The payback period of Option 1 is rejected because it takes 3.5 years longer than the
payback period of Option 2 to recover Initial Investment. Therefore, investors should choose
Option 2.

2. Accounting Rate of Return

Accounting rate of return (also known as simple rate of return) is the ratio of estimated accounting
profit of a project to the average investment made in the project (Accounting Explained, 2017).

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Formula: ARR = Average Accounting Profit / Average Investment

Option 1 Option 2

Total Cash Flow 450,000 200,000

Depreciation 355,000 140,000

Total Profit after depreciation 95,000 60,000

Average profit (/5 years) 19,000 12,000

Value of investment initially 355,000 140,000

Eventual residual value 0 0

355,000 140,000

Average value of investment (/2) 177,500 70,000

(There is no Scrap Value therefore, Total Depreciation = Total Investment)

The accounting rates of return for Option 1 = 19,000/177,500 x 100 = 10.7%

The accounting rates of return for Option 2 = 12,000/70,000 x 100 = 17.14%

 Option 2 would therefore be chosen.

3. Net Present Value

Net present value is a calculation that compares the amount invested today to the present value of
the future cash receipts from the investment. In other words, the amount invested is compared to
the future cash amounts after they are discounted by a specified rate of return ( Accounting Coach,
2017).

Formula: NVP = [Sn / (1+r) n] – Initial Investment

n is number of time periods.

Sn is net cash inflow during the period n.

r is discount rate

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Option 1

Year 0 = (355,000)

Year 1:

P1 = S1 / (1+ 0.10)1 = 130,000 / (1+ 0.10)1 = 118,182

Year 2:

P2 / (1+ 0.10)2 = 100,000 / (1+ 0.10)2 = 82,645

Year 3:

P3 / (1+ 0.10)3 = 80,000 / (1+ 0.10)3 = 60,105

Year 4:

P4 / (1+ 0.10)4 = 80,000 / (1+ 0.10)4 = 54,641

Year 5

P5 / (1+ 0.10)5 = 60,000 / (1+ 0.10)5 = 37,255

Net present value of Option 1 = P0 + P1 + P2 + P3 + P4 + P5 = - 355,000 + 118,182 + 82,645+

60,105 + 54,641+ 37,255 = - 2,172

Option 2

Year 0 = (140,000)

Year 1:

P1 / (1+ 0.10)1 = 64,000 / (1+ 0.10)1 = 58,182

Year 2:

P2 / (1+ 0.10)2 = 44,000 / (1+ 0.10)2 = 36,364

Year 3:

P3 / (1+ 0.10)3 = 44,000 / (1+ 0.10)3 = 33,058

Year 4:

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P4 / (1+ 0.10)4 = 24,000 / (1+ 0.10)4 = 16,392

Year 5

P5 / (1+ 0.10)5 = 24,000 / (1+ 0.10)5 = 14,902

Net present value of Option 1 = P0 + P1 + P2 + P3 + P4 + P5 = - 140,000 + 58,182 + 36,364 +

33,058 + 16,392 + 14,902 = 18,898

NPV of Option 2 is positive and more than 0 and more than NPV of Option 1. Therefore, choose
option 2, investors will get profit.

Two other factors that might influence the final investment decision

In addition to NPV, ARR, Payback Period, there are also two other factors that might influence
the final investment decision which is Personnel and Coherence.

Personnel

Personnel is one of the most essential functions for every organization. In fact, in the absence
of a good staffing system no organization can exist for a long duration.

All the resources like, money, material and machine etc are utilized efficiently through
specialized man power and specialized man power can only appoint in an organization
through a good staffing system. Personnel greatly influence the investment decision. Each
investment project, if investors want it to be successful, they must have a powerful and
experienced Personnel Source. If Personnel is insufficient as well as lack of experience, it is
a major threat in the implementation of the project. Investors will certainly worry that their
project won’t be succeed or they will be loss more. In contrast, if they have a powerful
Personnel Source, the path to the success of the project is shortened as well as bring more
efficient.

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Coherence

This is the factor which is also effect to the final investment decision. It is the connection
and coordination between employees.

Managers, investors will have difficulty when deciding to invest in a project if there is no
connection between them and the staff or between their staff. They will lack communication
as well as the purpose of the project will not be conveyed clearly. On the other hand, if the
project is implemented and there is no cohesion among employees, it is likely to cause
friction between them. From there, reduce the efficiency of the project, and it will not
succeed as expected.

Task D
2016 2015 2014 2016 – Average
Industry

Long-term debt 0.45 0.40 0.35 0.35

Inventory Turnover 62.65 42.42 32.25 53.25

Depreciation/Total Assets 0.25 0.014 0.018 0.015

Days’ sales in receivables 113 98 94 130.25

Debt to Equity 0.75 0.85 0.90 0.88

Profit Margin 0.082 0.07 0.06 0.075

Total Asset Turnover 0.54 0.65 0.70 0.40

Quick Ratio 1.028 1.03 1.029 1.031

Current Ratio 1.33 1.21 1.15 1.25

Times Interest Earned 0.9 4.375 4.45 4.65

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 1. Analyse the statement: 2014 was a good year for the firm with respect to our ability
to meet our short-term obligations

The CEO of DFF commented that “2014 was a good year for the firm with respect to our ability
to meet our short-term obligations”. A good year for him and the company for meeting short-term
obligations, this term is certainly related to liquidity ratio. A company with a high and/or increasing
quick ratio is likely experiencing revenue growth, collecting its accounts receivable and turning
them into cash quickly and likely turning over its inventories quickly. In 2014, quick ratio hit
1.029. A rule of thumb is that a quick ratio greater than 1.0 means that a company is sufficiently
able to meet its short-term obligations. Also with current ratio. The current ratio measures the
ability of a company to cover its short-term liabilities with its current assets. The current ratio of
DDF is 1.15. A current ratio of 1.0 or greater is an indication that the company is well-positioned
to cover its current or short-term liabilities.

2. Ratio Analysis

• Long term debt

In 2014, long term debt of DDF Inc is 0.35. In 2015, it increased 0.40 and also increased to 0.45
in 2016. This show that liabilities of company tended to increase, especially, compared to industry,
their ratio is higher than Industry, it demonstrated that they are borrowing more from the bank and
this can affect them if the ratio continues to increase rapidly.

• Inventory Turnover

This ratio is Activity Ratios. Following the ratio, Inventory Turnover of DDF Inc in 2014 is 32.23,
it increased to 42.42 in 2015 and in 2016, this ratio is 62.65. Compared to Industry, which is 53.25,
their ratio show that this is a good ratio, it says they have done better than Industry and inventories
are sold and replaced quickly.

• Depreciation/Total Assets

The Depreciation to Total Assets in 2014 is 0.018. This ratio decreased in 2015 which is 0.014 and
still decreased in 2016 with the ratio is 0.25. Although it decreased over three years but compared
to Industry, their ratio is much higher. This indicated that they are changing their old equipment
and make way for newer ones quicker than their competitors.

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 • Days’ sales in receivables

This ratio of DDF Inc in 2014 is 94 days, in 2015 is 98 days and in 2016 is 113 days. Compared
to Industry which is 130.25 days, their ratio is better. However, they did better than their
competitors in Industry but the increase of this ratio demonstrated that it takes too long for
company to collect money from customers and it will reduce their profit.

• Debt to Equity

In 2014, Debt to Equity of DDF Inc is 0.90, it decreased to 0.85 in 2015 and still decreased to 0.75
in 2016. Compared to Industry which is 0.88, their ratio is better. This show that they are doing
good in term of payment their debt as well as interests. This will create a good aspect of DDF Inc
for investors.

• Profit Margin

Profit Margin ratio is Profitability Ratios. This ratio of DDF Inc in 2014 is 0.06, increased to 0.07
in 2015 and reached 0.082 in 2016. The increase is good for DDF Inc as well as compared to
Industry average, their ratio is higher and it indicated that they have higher sales than other
companies in the industry and they can earn enough money to cover for their costs.

• Total Asset Turnover

This ratio of DDF Inc in 2014, 2015, 2016 with the corresponding value is 0.75, 0.65 and 0.54.
Although compared to Industry which is 0.4, their ratio is higher but the decrease in Total Assets
Turnover ratio is not good for DDF Inc. This ratio demonstrated that DDF Inc are using their assets
ineffectively and improperly.

• Quick Ratio

This ratio is Liquidity Ratios. In 2014, this ratio is 1.029, increased to 1.03 in 2015 and decreased
to 1.028 in 2016. The change in this ratio is not significant and this ratio is very similar to Industry.
This ratio show that their assets can change to cash quickly and their short – term obligation are
met quickly.

• Current Ratio

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Same with Quick Ratio, this ratio is also Liquidity Ratios. Current ratio of DDF Inc in 2014 is
1.15, increased to 1.21 in 2015 and still increased to 1.33 in 2016. The growth in ratio is a good
aspect for DDF Inc as well as compared to Industry which is 1.25, it indicated that over three years,
they are doing well in meeting their short – term obligation by current assets.

• Times Interest Earned

This ratio is Leverage Ratios. This ratio of DDF Inc in 2014, 2015 and 2016 with the corresponding
value is 4.45, 4.375 and 0.9. There is a significant decrease from 2015 to 2016. Compared to
Industry which is 4.65, their ratio indicated that their ability to continue to service its debt are
limited than before. If they are not pay attention into this one, it could affect to signal of DDF Inc.

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Bibliography
Accounting Coach. (2017). What is NPV? Retrieved from Accounting Coach:
https://www.accountingcoach.com/blog/npv-net-present-value

Accounting Explained. (2017). Accounting Rate of Return (ARR). Retrieved from Accounting
Explained: http://accountingexplained.com/managerial/capital-budgeting/arr

Accounting For Management. (2017). Break-even point analysis. Retrieved from Accounting For
Management: http://www.accountingformanagement.org/break-even-point-analysis/

AccountingExplained.com. (2017). Sales Budget. Retrieved from AccountingExplained.com:

http://accountingexplained.com/managerial/master-budget/sales

MyAccountingCourse.com. (2017). Direct Materials. Retrieved from MyAccountingCourse.com:

http://www.myaccountingcourse.com/accounting-dictionary/direct-materials

MyAccountingCourse.com. (2017). Production Budget. Retrieved from

MyAccountingCourse.com: http://www.myaccountingcourse.com/accounting-
dictionary/production-budget

Ray, L. (2017). How Does a Budget Help Management Make Good Decisions? Retrieved from Az
Central: http://yourbusiness.azcentral.com/budget-management-make-good-decisions-
20823.html

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