RDI/EDEXCEL

Programme: Business Finance

Level 4

BTEC Higher Nationals

Management Accounting: Costing and Budgeting

Assessment

Unit code: F/601/0836 Credit Value: 15 credits

Date for Submission: 13th February 2014 The submission portal on ilearn will close at 13.59 (GMT) on 13th February 2014

Assessor: Mike Hermann

Assignment Brief

As part of the formal assessment for the HNC/D programme you are required to submit an assignment for each module. Please refer to your Student Handbook for full details of the programme assessment scheme and general information on preparing and submitting assignments. After completing the module you should be able to: 1 Analyse cost information within a business 2 Propose methods to reduce costs and enhance value within a business 3 Prepare forecasts and budgets for a business 4 Monitor performance against budgets within a business The learning outcomes above each have a number of assessment criteria which must be met. These are itemised at the end of the assessment together with the tasks which are used to assess them.

Informal feedback

In order to assist with your learning and to give you some early, informal feedback, you are encouraged to submit a draft of your answer to Task 1 to your tutor. This offer is optional for you and whether you do this or not, you must still submit your answer to Task 1 with the other tasks on 13th February when all tasks will be formally assessed. If you wish, before your final submission, you will be able to amend your response to Task 1 after receiving feedback. If you do decide to complete a draft of an answer to task 1, then, in order to receive feedback, the document must be emailed to the module tutor by no later than Friday 27th December 2013. The tutor‟s email address can be found later in this module (under assessment criteria for a pass) and you will normally receive feedback within seven days.

Assignment brief You are a trainee manager in a manufacturing business which has a number of different businesses and initiatives. At present it has several issues which need to be addressed and you have been tasked to examine some of these matters. Following a recruitment campaign a number of new trainees have been appointed and are to take part in a short induction course. The course is designed to introduce the new trainees to the business and to its various procedures. The induction course will concentrate on a number of key issues within the organization and some of the tasks within this assessment will require you to focus on preparing suitable materials to assist trainees on the induction course. Assessment criteria associated with each task are indicated, for example, as 1.1

Task 1a) You have been asked to prepare some briefing notes, suitable for the new recruits to the business, which briefly explains the kinds of manufacturing and operating costs likely to be encountered within the business. The notes should give examples of manufacturing costs and the way these costs may be classified. Your notes will need to explain what is meant by:

„direct’ and ‘indirect’ indicating examples of „direct‟ and „indirect‟ costs, and 1.1

‘Fixed’, ‘Variable’ and ‘Semi-variable’ costs, again, indicating which of your chosen examples fall into these categories. 1.1 Task 1 b) The new trainees will also experience of a range of different costing methods which take place within the organisation. You should also write brief notes to explain what is meant by:

Job Costing 1.2

Process Costing 1.2 Task 1 c) The organisation uses traditional absorption costing and marginal costing techniques in the course of its business. The following case study, Unified Models (UM) Ltd., has been designed to help the new trainees understand how these techniques may be applied within the business. UM Ltd has 2 products, Alpha and Beta. It operates from premises with two separate production factories, X and Y. In the forthcoming budget year the following information is relevant: Unified Models Annual

Production

Items

Product Alpha 600

Product Beta 1,500 Unified Models

Labour Labour Machine Machine

Labour Material Annual hours in hours in hours in hours in

Cost per Cost per Production Factory X Factory Y Factory X Factory Y

item item Items per item per item per item per item

£ £

Product Alpha 160 300 600 5.0 5.0 1.0 1.0

Product Beta 39 60 1500 1.5 1.5 2.5 2.5

The annual fixed operating costs, £9m are to be shared between the two factories using a traditional absorption costing methodology which has resulted in the following overhead analysis. The calculations have been „rounded‟. Unified Models Store Administration Distribution Factory X Factory Y Total

£ £ £ £ £ £

Annual Fixed Operating costs 200,000 2,400,000 3,200,000 2,200,000 1,000,000

Allocation of Store (200,000) 40,000 100,000 60,000

- 2,440,000 3,200,000 2,300,000 1,060,000

Allocation of Administration (2,440,000) 244,000 976,000 1,220,000

- 3,444,000 3,276,000 2,280,000

Allocation of Distribution (3,444,000) 1,377,600 2,066,400

Total Fixed Operating Costs - 4,653,600 4,346,400 9,000,000

Labour Hours taken:

Product Alpha 3,000 3,000

Product Beta 2,250 2,250

5,250 5,250

Fixed overhead per labour hour 886.40£ 827.89£

Machine Hours taken:

Product Alpha 600 600

Product Beta 3,750 3,750

Total 4,350 4,350

Fixed overhead per machine hour 1,069.79£ 999.17£ UM Ltd absorbs the fixed overheads into the product costs on the basis of machine hours. The following information has been prepared in respect of product Alpha on the assumption that the unit cost is to be marked up by 75% in order to arrive at the selling price. For this purpose Value Added Tax (VAT) can be ignored. Unified Models Machine Unit Cost

Product Alpha Hours per Product Alpha

item £

Direct Labour per item produced 160.00

Direct Materials per item produced 300.00

460.00

Fixed overhead Factory X 1.0 1,069.79

Fixed overhead Factory Y 1.0 999.17

Total Unit Cost 2,528.98

Mark up on cost 75% 1,897.02

Selling Price 4,426.00

Profit per item 1,897.02 Required: Produce the information required to establish the selling price of product Beta assuming the unit cost is marked up by 45% in order to arrive at the selling price. You may, if you wish, present it in a similar format to that shown for product Alpha, above. Your analysis should show a selling price, rounded to the nearest £ of £7,644. 1.3

Task 1 d) The trainees need to have some understanding of aspects of marginal costing. The UM Ltd Case includes a simple „break-even‟ case study as follows. UM Ltd has a works restaurant which provides snacks and cooked meals during 6 hours of each working day, 6 days a week for 48 weeks of the year. The restaurant area can accommodate up to 25 customers at any one time and it is considered, on average, that each diner would spend 1 hour in the restaurant. The facility is operated as a profit centre which is expected to generate a small profit for the organisation. It has the following annual fixed costs. Unified Models £

Restaurant rent and local taxes 25,000

Chef and cooks 150,000

Kitchen staff 50,000

Depreciation of equipment 10,000

Heating, Light and Cleaning 10,000

Repairs and maintenance 5,000

Licences etc 2,000

Loan Interest on borrowings 4,000

256,000

A typical cooked meal is sold for £8 and the variable costs of the ingredients and power etc for this meal are £2.00. You are required to:

Calculate how many meals are needed to break even and to briefly state your opinion about the financial viability of the restaurant in terms of its ability to make a profit for UM Ltd. 1.3

Produce a simple pie chart using the annual fixed cost information, above. Briefly describe the main message portrayed by your chart. 1.4

. Task 1 e) The recruits will be required to understand the rationale for simple data sampling (not data collection) and to be able to present data in a variety of forms. You are required to:

Write brief notes which explain to the recruits the meaning of the terms „random sampling‟ and „stratified sampling‟ and which discuss why such techniques are used. NB, this task relates to data sampling, NOT data collection 1.4.

Task 2 One of your organisation‟s small manufacturers Folkestone plc has been in operation for 3 months since October 2013. Your organisation had originally invested £16 million of assets (capital) into the company. The overall market for the product for the 3 months period ending December 2013 had been estimated to be around £25 million of sales. At the end of the trading period in December 2013 the actual overall market for the product for the period had been around £22 million of sales. The directors of Folkestone plc had been required to achieve the following performance ratios as part of their own performance targets:

The Marketing director had been required to achieve around 25% penetration of the market and net asset turnover of 0.39 times

The Production director had been tasked with achieving a gross profit margin of 55%, an operating profit margin of 6.8% and customer complaints to be 50 or less in the period, and

The Finance director had been required to ensure that the current ratio was maintained at 2.0:1

The Distribution director had been required to ensure that at least 90% of deliveries to customers were on time.

A summary of various performance indicators and the actual outcomes for the 3 month period was as follows: Folkestone plc October October

December December

2013 2013

Budget / Actual

Target

Assets Invested (£) 16,000,000 16,000,000

Market (£) 25,000,000 22,000,000

Market Penetration 25.0% 27.0%

Quality

Customer complaints 50 80

On-time deliveries 90% 76%

Profitability

Gross Profit Margin 55.0% 52.2%

Operating Profit Margin 6.8% 0.1%

Return on Capital Employed 2.7% 0.0%

Efficiency

Net Asset Turnover (times) 0.39 0.37

Solvency

Current ratio X:1 2.0 4.2

Required: Task 2a)

Write an informal note which indicates the degree of success or otherwise of The Marketing and Production directors in achieving their goals;

2.1 and 2.2

Write an informal note which indicates the degree of success or otherwise of the Finance and Distribution directors in achieving the goals set;

2.1 and 2.2 Task 2b) Explain how the concept of „Value Added‟ is important to Folkestone plc 2.3 Task 2c) Define „Total Quality Management‟ and discuss how it might assist the business in improving its performance. 2.3 Task 2 d)

As indicated above, Folkestone plc has been in operation for 3 months since October 2013. The following is a summary of the performance of the first 3 months, budget and actual: Folkestone plc October October

Income Statement December December

2013 2013

Budget Actual

£ £

Sales 6,250,000 5,940,000

Cost of goods sold (2,812,500) (2,840,625)

Gross profit 3,437,500 3,099,375

Operating costs

Salaries 1,000,000 900,000

Rent and rates 500,000 600,000

Heating and Lighting 600,000 606,000

Office consumables 300,000 294,000

Vehicle running expenses 200,000 202,000

Depreciation of equipment 10,000 10,000

Repairs and maintenance 400,000 480,000

Total operating expenses (3,010,000) (3,092,000)

Operating Profit / Loss (-) 427,500 7,375

You are required to prepare a detailed (line by line) numerical variance report for the management of the organisation which:

Shows the variances, budget against actual, for each item in the table above, and 4.2

An informal note which briefly highlights and discusses each of the variations from budget where actual performance is in excess of £10,000 above or below the budget. 4.3

Task 2e)

Re-state the Income statement shown in 2d), above on the basis that the October to December 2013 actual sales had been £6,100,000 and the gross profit margin 51% (all other operating costs remain unchanged.) 4.2

Write a short explanation as to whether you think that the revised operating results are better or worse than the initial scenario and indicate why this position might have occurred. 4.3

Task 3a) Your organisation uses a range of budgeting and budgetary control techniques in the course of its business activities. You are required to prepare some short briefing notes, suitable for the new recruits to the business, which explain briefly:

the overall purpose of the planning and budgeting process (including co-ordination and motivation); 3.1

how the budgeting process is linked to the organisation‟s overall objectives and strategy; 3.1

the nature of incremental and zero based budgets, and 3.2

which briefly discusses „creative‟ aspects of budgeting which can impact on the behaviour of budget managers. 3.2.

Task 3b) Your organisation has recently formed a new manufacturing unit, Fabrication Ltd The following information has been produced to illustrate the manufacturing and other budgets required to support the initial months of trading during 2014: Fabrication Ltd March April May June

2014 2014 2014 2014

Production Budget (Units)

Sales Quantities - 2,000 2,500 3,000

Add closing stock of finished goods required 2,000 2,500 3,000 3,500

2,000 4,500 5,500 6,500

Deduct Opening stock of finished goods 0 (2,000) (2,500) (3,000)

Production Required 2,000 2,500 3,000 3,500

Labour production costs are £160 for each item manufactured. Each item of production requires 1 item of raw material costing £30 per item: Fabrication Ltd March April May June

2014 2014 2014 2014

Raw Materials Budget (Units)

Required for Production 2,000 2,500 3,000 3,500

Stock of raw materials (units) required at end of month (1 months) 2,500 3,000 3,500 4,000

4,500 5,500 6,500 7,500

Deduct Opening stock of raw materials (2,000) (2,500) (3,000) (3,500)

Purchase (units) 2,500 3,000 3,500 4,000

Raw material purchases required £ 75,000 90,000 105,000 120,000 Fabrication Ltd March April May June

2014 2014 2014 2014

Labour budget (£)

Production Required (Units) 2,000 2,500 3,000 3,500

Labour cost per unit £ 160 160 160 160

Production Labour cost £ 320,000 400,000 480,000 560,000

The following additional information is also relevant:

All raw materials (other than the initial 2,000 units of opening stock in March 2014) will be purchased on credit with suppliers being paid one month after the month of purchase. The purchase of 2,500 units of raw materials in March 2014, therefore, which would cost £75,000, would be paid for in April 2014.

Labour costs are paid for as incurred. The labour cost of producing 2,000 units in March 2014, therefore, £320,000, would be paid for in that month.

There is £350,000 of cash available in March 2014, which, after paying the labour costs of £320,000 in that month, would leave a balance of £30,000 at the bank to start the month of April 2014.

The selling price of the product is £250 and sales are all on credit. Customers are given 1 month in which to pay, so the 2,000 items planned for sale in April 2014, value £500,000, will be paid for in May 2014.

You are required to prepare your own version of the following debtors, creditors and cash budgets (or provide the budgeting information in a format of your own choosing). Selective figures have been provided for guidance. Fabrication Ltd March April May June

Debtors Budget 2014 2014 2014 2014

Opening Balances 0 500,000 ?

Sales in Month 500,000 ? ?

500,000 ? ?

Receipts from Debtors in Month 0 ? ?

Closing Balances 500,000 ? 750,000

Fabrication Ltd March April May June

Creditors Budget 2014 2014 2014 2014

Opening Balances 0 75,000 ? ?

Raw Material Purchases in Month 75,000 ? ? ?

75,000 ? ? ?

Payments to Creditors in Month 0 ? ? ?

Closing Balances 75,000 ? ? 120,000

3.3 Fabrication Ltd March April May June

Cash Budget 2014 2014 2014 2014

Opening Balances 350,000 30,000 ? ?

Receipts from Debtors - ? ? ?

350,000 ? ? ?

Payments to Creditors - ? ? ?

Payments for Labour (320,000) ? ? ?

Total Payments (320,000) ? ? ?

Closing Balances 30,000 ? ? (555,000)

3.4 Task 3c) Commencing with the scenario in 3b), above, reproduce the debtors and cash budgets on the assumption that the selling price per item was £275 (not £250) and that the customers are given 2 months in which to pay (rather than 1 month. All other aspects of the case remain unchanged. Comment on your answer assuming that Industrial Ltd have an agreement with the bank to overdraw the bank account by up to £500,000. 3.3 and 3.4 Task 4 In recent months, the Directors of your organisation had been considering launching a new product range in April 2014 and running that part of the business as a separate entity. The new business would be called Reaction Ltd. During March 2014, in preparation for the launch of the new business Reaction Ltd, labour was recruited on a temporary basis and a trial batch of the proposed new product was manufactured. This was to be representative of a typical month‟s production. At the same time a variance reporting mechanism was created as part of the management accounting control system for the proposed new product. During March 2014, the trial batch of 10,000 items of the new product range was produced. The following information was gathered as part of the control system: Operating budget for the March 2014 trial batch of the proposed new product. (Direct labour and materials only)

Reaction Ltd Production volume (number of items) 10,000

No Rate Per Item Total Cost

£ £ £

Labour hours per item 5 18 90 900,000

Kilograms of Material per item 3 20 60 600,000

1,500,000 Actual results for March 2014 trial batch. (Direct labour and materials only) Reaction Ltd Production volume (number of items) 10,000

No Rate Per Item Total Cost

£ £ £

Labour hours per item 4 19 76 760,000

Kilograms of Material per item 2 22 44 440,000

1,200,000

As can be verified below, the actual cost represents a favourable (F) total cost variance of £300,000, made up of a favourable (F) labour cost variance of £140,000 and a favourable (F) materials cost variance of £160,000. Reaction Ltd Budgeted Actual Difference

Volumes 10,000 10,000 -

Labour 900,000 760,000 140,000

Materials 600,000 440,000 160,000

Total Cost Variance 1,500,000 1,200,000 300,000 You are required to: Task 4a)

analyse the labour cost variance, £140,000 (F) into the following components: Labour rate variance, and Labour efficiency variance; Your two calculations should total £140,000 (F) 4.1

Task 4b)

analyse the materials cost variance, £160,000 (F) into the following components: Material price variance, and Material quantity variance. Your two calculations should total £160,000 (F) 4.1

Task 4c)

Comment on why you think these variances could have occurred.

Outline the main purpose of undertaking variance analysis such as that demonstrated in this task.

4.1 Student Guidelines

1. You should write this assignment according to the instructions attached to each of the tasks. There are no formal report requirements and your written notes should be structured to answer the questions posed. For computational aspects you should produce an appropriate solution and, where necessary, show your workings. 2. You should use diagrams and tables of figures where appropriate ensuring that you reference their source. 3. You should include a reference list and a bibliography using the Harvard referencing system. You must ensure that the submitted assignment is all your own work and that all sources used are correctly attributed. Penalties apply to assignments which show evidence of academic unfair practice. (See „Guide to Unfair Practice in Assessment‟ on the module page on ilearn). 4. It is advised that you write the written elements of your assessment within approximately 2,500 – 3,000 words in order for your research and summarising skills to be developed and for effective time management. You are required to ensure that the assignment addresses all of the assessment tasks .There is no penalty for being over the suggested word count, however, in the interests of good academic practice, assignments submitted with excessive word counts (e.g. over 3,000 words) may be returned to students and asked to be reduced before marking. The word count excludes the title page, reference list and appendices. Where assessment questions have been reprinted from the assessment brief these will also be excluded from the word count. ALL other printed words ARE included in the word count. Printed words include those contained within charts and tables.

5. Your assignment should be submitted as a single document. For more information please see the “Guide to Submitting an Assignment” document available on the module page on iLearn. 6. You are recommended and encouraged to prepare the numerical analysis using a computer spreadsheet which is embedded into your submission document, but this is not essential. If you choose to support your computations with a separate spreadsheet file, then this must be emailed to your tutor after you have submitted your main document to Turnitin. You cannot submit a spreadsheet file to Turnitin.

Recommended Additional Resources Textbooks Online E-Books recommended for this course Wood F. & Sangster A. (2012) Business Accounting Volume 1, 12th Edition, Pearson Education Limited (Volume 1 - Chapter on Introduction to management accounting only) Wood F. & Sangster A. (2012) Business Accounting Volume 2, 12th Edition, Pearson Education Limited Access to these E-Books is provided by RDI – contact the Student Support Team for access code Additional recommended textbook Hall, D., Jones, R., Raffo, C., Anderton, A., Chambers, I., and Gray, D., 2010, Business Studies, 4th Edition, London, Pearson Education. EBSCO Business Source Complete – Online ‘library’ resource available via ilearn Websites http://www.hops-kotch.com/EdxcelMA.html

Outcomes

On successful completion of this unit a learner will:

Assessment criteria for pass To achieve a pass you must meet all of the assessment criteria as

stated below. Failure to cover all of the assessment criteria will result in

a referral grade and you be required to re-submit your assignment.

Further guidance on completion of your assignment can be found in

the welcome briefing note which is posted on the group learning space

by your module tutor. For additional support please post questions

onto the group learning space, or email mhermann@rdi.co.uk

LO1 Analyse cost information within a business

1.1 classify different types of cost: Task 1a)

1.2 use different costing methods: Task 1b)

1.3 calculate costs using appropriate techniques: Task 1c) 1 d) and 1e)

1.4 analyse cost data using appropriate techniques Task 1e)

LO2 Propose methods to reduce costs and enhance value within a business

2.1 prepare and analyse routine cost reports Task 2a)

2.2 use performance indicators to identify potential improvements Task 2a)

2.3 suggest improvements to reduce costs, enhance value and quality Tasks 2b) and 2c)

LO3 Prepare forecasts and budgets for a business

3.1 explain the purpose and nature of the budgeting process Task 3a)

3.2 select appropriate budgeting methods for the organisation and its needs Task 3a)

3.3 prepare budgets according to the chosen budgeting method Tasks 3b) and 3c)

3.4 prepare a cash budget Tasks 3b) and 3c)

LO4 Monitor performance against budgets within a business

4.1 calculate variances, identify possible causes and recommend corrective action Tasks 4a), 4b) and 4c)

4.2 prepare an operating statement reconciling budgeted and actual results Tasks 2c) and 2d)

4.3 report findings to management in accordance with identified responsibility centres Task 2d)

Merit descriptors Indicative characteristics

To achieve a Merit all of the Pass criteria need to be

met, then the tutor will assess whether you have met

the Merit Criteria. Each of the Merit criteria must have

been met at least once within the assignment.

The following statements are examples of how a merit may be achieved, if you do meet the Merit Criteria by showing you have reached this level in other ways then credit will be awarded for this. You will need to meet M1, M2 and M3 at least once.

The learner‟s evidence shows:

M1 identify and apply strategies to find appropriate solutions

relevant theories and techniques have been described and /or applied in terms of analysing the costing procedures within a business

problems with more than one variable have been described and /or explored an effective approach to understanding costing, budgeting and budgetary control mechanisms

M2 select/design and apply appropriate methods/techniques

autonomy/independence has been demonstrated throughout the complete assessment. The answer will be supplemented with resources researched beyond those within the study materials

M3 present and communicate appropriate findings

appropriate structure and approach has been used in terms of presenting a range of financial information

a range of methods of presentation has been used to present financial information

information is appropriate for familiar and unfamiliar audiences in terms of the nature of cost behaviour and budgeting within organisations

Distinction descriptors Indicative characteristics

To achieve a Distinction you have met all of the Pass

and the Merit criteria. Each of the Distinction criteria

must be met at least once within the assignment.

The following statements are examples of how a Distinction may be achieved, if you do meet the Distinction Criteria by showing you have reached this level in other ways then credit will be awarded for this. You will need to meet D1, D2 and D3 at least once.

The learner‟s evidence shows:

D1 use critical reflection to evaluate own work and justify valid conclusions

synthesis has been used to generate and justify a valid conclusion to the complexity of financial issues within the costing and budgeting environment of organisations

evaluation of costing and budgeting decisions has taken place using defined criteria

D2 take responsibility for managing and organising activities

autonomy/independence has been demonstrated throughout the complete assessment

D3 demonstrate convergent, lateral and creative thinking

ideas generated and decisions taken

costing and budgeting problems have been solved

unfamiliar contexts relating to costing and budgeting have been applied