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.
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.
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
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.
A business has prepared a fixed budget for the coming financial year, as shown below:
Production = 2000 units £
Direct materials 6000
Direct labour 4000
Other costs 3600
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 £
Direct materials 8500
Direct labour 4500
Other costs 5000
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.
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:
Cost (will be incurred immediately) 200,000 120,000
Expected annual profits/losses
Year 1 58,000 36,000
Year 2 (2,000) (4,000)
Year 3 4,000 8,000
Estimated scrap value of machinery 14,000 12,000
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
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.