The Managing Financial Principles And Technique

Published Date: 02 Nov 2017

The amount of property or money paid   for a goods or some service. Cost is expenditure for both individual and business property. If a cost is for a business purpose, it may be tax deductible. A cost may be paid straight away in the form of cash or over time in a credit sale or similar transaction. Cost is the opposite of revenue: It may be thought of as money spent instead of made. (Rudi Vander Vennet, 2002)

Financial costs integrate everyday expenditure that a company acquires throughout operations, from factory costs to surcharges along the supply chain. For examples include the cost of raw materials; semi finished goods and fully finished goods along with organisational expenses, such as rent, salaries, insurance and utilities. Organisations record financial costs in the statement of profit and loss. (Richard lambert, 2007)

Different types of cost

There are many types of cost in finance such as Product and Period Costs, Variable and fixed costs, direct and indirect costs, differential cost, opportunity costs, sunk cost, relevant costs, irrelevant costs (Radell Hunter, (2010)).

Fixed cost:

Fixed cost those are always the same or in close proximity to the same amount in use every month or year. These are normal monthly expenses that in industry whether you make a trade or not (Kenji Matsui, (2013)). It is a cost that doesn’t differ in the short term, irrespective of changes in production or sales levels. For example; manufacture or sales volumes include salaries, payment, insurance, accountancy costs. 

Variable cost:

Variable is expenses of business and it is directly linked to manufacturing goods on another way fixed cost remain same during production. Variable cost increase or decries because there are certain kind of affecting facture that make changes during produce such as raw material of goods, packaging workers salary etc (Colin Drury (2008)).

Total cost

Total cost is the cost that total amount spend on production amount of a produce (W steve at.el(2010)). Total cost includes environmental cost, maintenance of good, equipment and land, running cost, disposal cost, installation cost, manufacturing cost, specification cost, and environmental cost those are total cost were expend in manufacturing processor.

For calculating total cost formula is below:

= Total Fixed Costs + Total Variable Costs

The fixed costs are not different those costs that as the level of production do not change. They are independent of production; they are the same if the firm produced 1 or many production.

Pricing strategy

Costs and price there is big differentiation between them. Thus, costs are the expenses of a business. And price in simple it is amount that customer buy for goods. For example to making coca cola drink company have to spend less amount and after production when customer buying it and its price is higher then its cost of produce.

Customers:

Thus, price of product is affecting straightly to sales. If price of goods is low then it will increase demand of product. However if low price then might be price affects sales. Lowering the price of a product increases customer demand. However, too low a price may lead customers to think you are selling a low quality ‘budget product’.

Competitors:

It is also most affecting factor for all organisation. The term competitor means having same product as different seller or business. Well it is most important part because if customers get same satisfaction from other supplier it will affect business sales. So organisations have to look forward each and every time for changes from supplier. For example ASDA, TESCO, Sainsbury, Morison’s are selling grocery, electric and clothing product were they have to make there own strategy for attracting customers.

Costs:

However, business can make a more profit only if the price charged ultimately covers the costs of manufacture an item. Thus, to ensure a profit is to use cost in additional pricing. Such as, adding a 60% mark up to a burger that costs £5 to make means situation the price at £8. However price is different then cost because price involves profits marketing tax and many other factors. Were organisation have there on advantage and disadvantage on that time negative point is then organisation need to improve there sells they use  hammering leader strategy to increase sales and market share.

Important of cost in pricing system

The most important in pricing system is cost if costs will increase or decrease it will directly affect to the profit margin. Therefore cost cutting need in big organisation because of improving profit margin well if cost is rapidly going up then its will affect price of goods and also affecting profit but for organisation have to make same price and making adjustment in cost. For example in cheeps or in restaurant if oil rates are go up then manufacture need to increase price of product but then they get problems from competitors if they make price remain same.

B) Propose improvement to the costing and pricing systems used by the organisation

The most significant part of pricing is cost for the reason that it can relatively to decide the profit-margin were it adds to form the price of the manufactured goods. Further that usually the phrase of cost cutting whiles it comes to big organisations to raise the profit margin but while costs extensively go up they do consequence the price of the produce but usually producer of goods would like to keep the price regular when there are slight adjustments in cost.

C) Budgetary target and master budget

A budget is predicted of cost and incomes. For particular purpose cost and income must relay to each other Budgets should be based on actuality of similar element Individual budgets are brought collectively into a master budgets which is for the organisation as a whole.

Significance of budgetary accounting consists of chasing and registering processes regarding appropriations and its use. Budgetary cover the appropriations, distribution, any raise or reduce in appropriations, obligations, expenditures at the confirmation phase and payments. Budgetary accounting is only one constituent of administration accounting organisation, but it is the most vital for both formulating strategy and managing budget completion. However, limitation in budgetary accounting and recording make excellence analysis of the performance, productivity and outcomes. A lot of developing organisation keep related record, moreover at the expenditure organisation level or through essential manage measures.

Master Budget

There are certain types of budgets in organisation. Sales budget, manufacturing budget, purchase and income, expenditure well master budget is set of all of this. Master budget is bunch of reports were added pre planning for future transactions. It is preparing all business activities throughout the time period in addition it involves all requirement of business and gives superior results for planning and controlling in an organisation. There are many types of master budgets technique:

Technique of Master Budget

Master budget has two major sections which are the operational budget and the financial budget and they have following method:

Operational Budget

Overhead

promotion budget and administrative expense

Cost of product budget & manufacture budget

sale budget

Production Budget

Direct material purchases and labor Budget

t

Financial Budget

Cash flow Budget

Cash Receipts from Customers

Income Statement

Balance-sheet

Schedule of Expected Cash Payments to Suppliers

D) Recommend process that could manage cost reduction.

Cost reduction is panic for business that affect in profit margin. Well it will not consider for long term result. There are many reasons for cost reduction depend on slowly economy or manufacturing or market value of different products or to gain maximum profit or to improve selling. Making important decision for business, cost reduction for having saving money wherever. In year 2009 it was economical crises in UK were many bankrupt and many business reduced there staff in banking sectors even in NHS. Thus, if similar products available in market then management have to reduce product price.

There are cretin techniques of cost reductions such as revenue declines, fixed cost base, reduction in staff, altercation in work load, technology change. Were analysis tools useful for it such as zero - based budgeting value stream mapping total cost analysis, employee idea systems, breakeven analysis, check sheets, benchmarking.

E) Evaluate the potential for the use of activity based costing.

Costing is monitoring activity were involves implementation of resource and out of final results (CIMA Official Terminology, ((2005). Activity base management objectives are to improve efficiency of machineries and improve consumption. Measures, support on activity based cost examination that aspire to change require for activities to improve profitability.

Activity-based costing techniques for applying overhead are two phase procedure. The first set in motion with classifies important activities in the manufacture of the products that is grouping similar activities into an activity pool and conduction a cost to that group according to the quantity of funds consumed by the activity pools. Well in second phase a cost drivers recognized and quantify for each activity pool.

Task 3

A) Calculate the accounting ratios for both years:

Profitability determinant for insurance company is mainly analysed by calculating financial ratios from the balance sheets of the company. Ratios are following correlation and regression analysis as a part of statistical analysis (peterson, p (2006)) Ratio Analysis, prime ratios to be calculated are Profitability ratio i.e. Return on Equity, return on assets, return on revenue; return on capital employed, net profit margin, Liquidity ratio, current ratio, capital ratio and Underwriting ratios i.e. Loss ratio, Expense ratio and combined ratio (Fabozzi, F(2007). The description for each ratio is given below.

Return on Capital Employed (ROCE)

Return on capital employed ratio gives result of overall profit in firm. Its include profit before interest and tax divided by capital employed.

ROCE =

profit before interest and tax

× 100

Capital employed.

Calculation:

Last Year

=22/109 x 100

= 20.18

This year

=35/117 x 100

= 29.91

Return On Shareholders Funds (ROSF)

Basically return on shareholder funds ratio important to know risk in business. It is profitability ratio that measure previously used investors profits for the particular periods were gives more profitability in business.

Formula:

Return On Shareholders’ Funds

profit before interest and tax

× 100

(Ordinary share capital + Reserves) x 100

Last Year

=8/109 x 100

=7.35

This year

=12/117x100

=10.26

Gross Profit Margin

Gross profit margin calculating by sales and cost of goods sold divided by revenue. Feature for gross profit margin is to know profitability and business. However gross profit margin calculating by following formula:

Formula

Gross Profit Margin =

Gross profit

× 100

Sales or turnover

Net profit margin:

Net profit margin called operating profit it is identify the efficiency with costs have been controlled in generating profit from sales. It does not distinguish between operating costs administrative cost and distribution costs. A fall in ROCE may be due to a fall in net profit margin in which case further investigation may determinate whether an increased cost or a fall in profit margin is the cause.

Net profit margin

Profit before interest and tax

x100

Sales or turnover

Last Year

=12-350/350 X 100

=-96.57

This year

=18-420/420 X 100

=-95.71

Current ratio

The current ratio is all the rages of financial ratios used to test a company’s liquidity by obtain the percentage of current assets available to cover up current liability.

The purpose of this ratio is to determine a business short term assets for example, cash, profitable securities and inventory are enthusiastically obtainable to pay off its short term liability for that the higher the current ratio, the superior.

Formula:

Current ratio= current assets/current liabilities

Last Year

=110/109

=1.01

This year

=136/117

=1.16

ACID test

Shareholder and lender calculate the acid test ratios it is also called as the quick ratio. The main purpose for ACID is to test ratio to test a business’s short-term reducing risk. The acid test ratio is a harsher test of a business’s its ability to pay the liabilities that will come outstanding in the short period than the current ratio.

The acid-test ratio eliminates account and prepaid expenses, which the current ratio contains, and it limits assets to cash and substance that the business can rapidly adapt to cash. This limited type of assets is identified as liquid assets.

Formula:

Acid test ratio = Liquid assets ÷ Current liabilities

Last year

=110-44/109

=0.61

This year

=136-63/117

=0.62

Average stock turnover period

Cost of goods sold to average inventory of Inventory turnover is the ratio. It is a movement in ratio and it procedures how many times per period, a production sells and return its inventory all over again.

Formula

Inventory turnover ratio is calculating formula:

Inventory Turnover = 

Cost of Goods Sold

Average Inventory

Last Year

=350/44

=7.95

This year

=420/63

=6.67

b) Report to identify two years different between profitability and business performance

The value of return on equity is more important as shareholder point of view while, the value for return on assets and return on revenue is more important as a company point of view. These all ratios are positively correlated with the firms overall value and financial position at a given time. Generally, a firm or a company with higher profitability ratios is profitable in nature. For determining each ratio value for profit after interest and taxes is divided to average equity, total assets and total revenues for all ratios respectively. Final value for each ratio was presented in a percentage figure for analysis of two year (last year and this year)

Unit 4

5. A) Apply financial appraisal methods to analyses competing investment

There are many types of financial appraisal methods that impartment in business here are some descriptions for financial appraisal methods:

Financial appraisal methods

Pay Back Period

The payback period present to the duration of time requisite to improve the capital cost of the development. Specially, it is the lengths of time from the beginning of the project in anticipation of the net value of the incremental manufacture flow reach the total of capital investment. As per this condition, the short the period for recuperation the more gainful is the development. This standard has two significant weak points it fails to consider earnings after the payback period and it does not sufficiently take into contemplation the point in time of progress.

value-Added

Value added amount of financial value produce by the activity accepted within each manufacture unit in the organisation. Value-added is calculated by the differentiation between the value of the amount produced of the business and the value of all inputs purchase from outside the business. Internal inputs the capital and labor joined to every business are measured. Therefore, value-added is the importance that has been added by the labor and capital of the project to the economy. Gross value-added comprise payment for taxes, interest, rent, profits, and funds for reduction. Subtract depreciation provide the net value-added. The sum of all the net value-added is referred to as net domestic manufactured goods. Additional the value added by the development, the more it will be necessary cost-effectively.

Capital-Output Ratio

The capital-output ratio is definite as the standard value-added manufacture per component of capital expenditure. Developments with small capital-output ratio are preferential

Proceeds per Unit of Outlay

It is considered by dividing total net value of incremental manufacture by the total quantity of investment. So, the higher the production per unit of the out lay result the superior the economic practicability of the project. This decisive factor does not take into deliberation the time value of amount.

Average Annual Proceeds per Unit Outlay

To calculate average annual proceeds per unit outlay calculate, the total of the net value of incremental manufacture is divided by the figure of years during which it will be comprehend and then this average of annual proceeds is divided by the total capital cost. Therefore if average annual productions per unit of outlay are higher, the project will be economically defensible for accomplishment.

5. B) Make a justified strategic investment decision for an organisation using relevant financial information.

Given report of amber lights Ltd were defined balance sheet and profit and loss account for two years. As compare for two year, last year in this year fixed assets are increased (84000, 98000) same in current assets also greater than before (last year 110000, this year 136000). However, creditor increases rapidly from 50000 to 92000. Well result gives more profit as saw in profit and loss account gross profit for last year 92000 and improved 110000 on this year and profit after taxation is 18000 were improve better.

Positive point is bank load decrees for this year before it was 35000 and now it is 25000.Thus capital and reserves there are not major changes according to balance sheet ordinary shares and capital reserve remaining same (16000 and 25000) and retained profit is gain 8000 more then last year (last year 68000 and this year 76000)

5. C) Report on the appropriateness of a strategic investment decision using information from a post audit appraisal.

Post audit appraisal gives information for the future criticism in the investment of capital decision making process. The main purpose of post audit appraisal, to avoiding poor financial outcomes and resolve problems in business. However opinion from post audit help to current project of business and improve future investment decisions implementation. For making very important judgment process comprises of to main factors; project monitoring and post audit.