ASSESMENT 2

FINANCIAL MANAGEMENT

Carmen Mabel Zuluaga Valencia

Part A Written or Oral Questions

1. List TWO sources of information that may help a manager to estimate the cost for
the coming year. (2 Marks 1 Mark per point)

Profit and loss statements

Previous years balance sheets.

2. Identify and briefly describe THREE examples of external banking records which are
used for the purpose of record keeping
(3 Mark 1 Mark per example)

Bank statements: This record shows detailed information about all the transactions a
business made during a period of time.

Deposit Books: These books can support all the deposits made on the business bank
account, when the deposit was made, who made it and a short description to give details
about the transaction.

Check Books: They are used to support all the expenditures made by the business.

3. List the relevant personnel you may communicate with in the organisation to ensure
that documented outcomes and information about customers, competitors and
business operations. (2 Marks)

- Financial Manager.
- Accountant.
- Financial controller.
- Production Manager.
- Supervisors.

4. What is a contingency plan? Explain the reasons for a contingency plan?

What are the steps to follow to prepare and develop a contingency plan?
List THREE specific areas to include in the plan. (10 Marks)

What is a contingency plan?

A contingency plan is a course of action designed to help an organization respond effectively

to a significant future event or situation that may or may not happen.
Contingency planning is a component of business continuity, disaster recovery and risk
management.
Contingency planning is about:
Command and control
Anticipating, and planning a response to something that might go wrong
Safety and security personnel
Documentation

Examples:
Purchasing: Changes suppliers
Reduces materials on hand

Finance: Backup financial records

Photocopy key documents

Explain the reasons for a contingency plan?

The reasons for a contingency plan are mainly to be prepared having a plan B to face risks
and develop strategies to avoid the negative consequences a risk can bring with them

- Minimise the risk

- Determine how to respond to unsatisfactory performance
- To respond to external events such as natural disasters

What are the steps to follow to prepare and develop a contingency plan?

- Analyse risks: list out all of the possible events that could disrupt operations
- Determine the likelihood and impact of risks.
- Develop a process for each item.
- Look at alternatives

List THREE specific areas to include in the plan. (10 Marks)

Natural disasters such as fires , loss of data loss due, Damage, Mismanagement

5. What is a financial plan? What should financial plans include? What are the external
and internal factors that may affect the financial planning? (10 Marks)

What is a financial plan?

A financial plan is an evaluation of the business current and future financial state by using
currently known variables to predict future cash flows, asset values and withdrawal plans.
To build a financial plan the following variables can be used: current net worth, tax liabilities,
asset allocation and estate plans in developing financial plans.
These metrics are used along with estimates of asset growth to determine if a person's
financial goals can be met in the future, or what steps need to be taken to ensure that they
are.
It will examine the individual total position, both financial and non-financial and put in place a
set of actions or plan.

What should financial plans include?

- Financial goals
- Budget forecast
- Net worth statement
- Cash flow analysis
- Risk management plan
- Long-term investment plan
- Funds required starting the entity
- Anticipated funding over the next few years
- Use of funding

What are the external and internal factors that may affect the financial planning?

-Internal sources are those that you can find within the organisation such as: clients personal
details, employees details, employees costs, profit and loss statements, asset register,
creditor details, expenses and so on.

Staff turnover
Financial position
Financial performance

-External sources are those that you can only find outside the organisation, this information
usually comes from third parties sources such as: interest rates that can be found on the
reserve bank web page, information about competitors coming from these companies reports
and websites, taxation information and rates coming from the taxation office and so on.

Economic environment
Interest rates
Inflation

6. What is a budget? What are the objectives of a budget? What is the role of the
master budget? (10 Marks)

What is a budget?

A budget is a formalised financial plan for the operations of an entity for a specified future
period. This plan helps the organisation coordinate the activities needed to carry out the plan.
A budget is a detailed quantitative plan for acquiring and using financial and other resources
over a specified forthcoming time period.
 What are the objectives of a budget?

-Developing and communicating organisational strategies and goals for the entire entity as
well as for each segment, division and department.
- Assigning decision rights (authority to spend, and responsibility for decision outcomes);
- Motivating managers to plan in advance;
- Coordinating operating activities such as sales and production;

What is the role of the master budget?

The master budget is a one-year budget planning document for the firm encompassing all
other budgets. It coincides with the fiscal year of the firm and may be broken down into
quarters and, further, into months. If the firm plans for the master budget to be an ongoing
document, rolling from year to year, then normally a month is added to the end of the budget
to facilitate planning. This is called continuous budgeting.

The budget committee usually develops the master budget for each year, guided by the
Budget Director, who is usually the Controller of the company.

7. Scenario: You are an accountant for APC Bikes, a manufacturer of sturdy mountain
bikes for intermediate-level bikers. The variable costs per bike include:

Direct materials:
Wheel/tyres $20.00
Components $70.00
Frame $50.00
Total direct materials $140.00
Direct labour $39.75
Variable overhead $75.00
Total cost per bike $254.75

You decide to create a budget variance analysis that reflects the actual volume of sales. The
budgeted selling price is $800 (per bike). The budgeted fixed costs of manufacturing
overhead are $20,200,000 and the budgeted support department cost is $32,956,430.
Using the following template to create a budget variance analysis including the calculation of
variances.

Flexible Actual Variance Favourable /

Budget Unfavourable
Bikes sold 113,500 113,500
Revenue 90,800,000 $90,500,000 -300,000 Unfavourable
Production costs:
Variable 28,914,125 $ 29,492,408 $578,283 Unfavourable

Fixed overhead 20,200,000 $19,400,000 -$800,000 Favourable

Support 32,956,430 $37,565,337 $4,608,907 Unfavourable
department costs
Net income 8,729,445 $4,042,255

Total variance $4,087,190 Favourable

Notes:

- You are required to fill in the place with ? only.

-Flexible budget is a budget that reflects a range of operations in which fixed and variable
costs are separated to more accurately reflect the effects of activity levels on cost.
- Favourable variance is a variance in which actual revenues are larger than the budget, or
actual costs are lower than the budget.
- Unfavourable variance is a variance in which actual costs are greater than budgeted, or
actual revenues are less than budgeted.

Tasks for Question 7:

i. Complete the above flexible budget variance report (15 Marks 1 Marks per item
ii. Based on the schedule, what is your opinion about the entitys performance?
(3 Marks)

Looking the schedule in my opinion the major variance is Support department cost because it
was the most actual extra variance that contributes to the loss Net income.

iii. What actions are you going to take based on the flexible budget variance analysis?
(2 Marks)

Maintain the lower Fixed overheads while minimise as much of the support department cost
and increasing the number of bikes sold will greatly improve the actual results.

8. What is a good cash management? (3 Marks)

Cash management is the corporate process of collecting and managing cash, as well as
using it for (short-term) investing. It is a key component of ensuring a company's financial
stability and solvency. It helps to ensure that there are enough cash and working capital to
cover everyday company needs, without tying up funds that could be invested more profitably
elsewhere, or relying too much on short-term credit facilities.

For example, cash management may involve contracting a debt collection service to retrieve
what is owed by a customer, or, more simply, it may involve depositing cash into a lock box to
ensure that it is not stolen.

9. What is cost-volume-profit (CVP) analysis and how is it used in decision making? (5

Marks)

Cost-Volume-Profit (CVP) analysis is a managerial accounting technique that is concerned

with the effect of sales volume and product costs on operating profit of a business.
It deals with how operating profit is affected by changes in variable costs, fixed costs, selling
price per unit and the sales mix of two or more different products.
The volume of sales needed to achieve a target level or profit.
This analysis is used to determine how changes in costs and volume affect a company's
operating income and net income.

10. Scenario: APC Bikes, a manufacturer of sturdy mountain bikes for intermediate-
level bikers. Due to the increasing popularity of cross-country cycling, the
management of APC Bikes wants to produce a new mountain bike. After discussions
with the sales and production teams, management has forecast the following
information:

Price per bike $800

Variable cost per bike $300
Fixed costs related to bike production $5,500,000
Targeted pre-tax profit $300,00
Targeted post-tax profit $210,000
Tax rate 30%

Required: Calculate breakeven in units and total revenue. (6 Marks)

Breakeven = $5,500,000 / ($800 -$300) = 11,000,00 units

Total revenue = 11,000,00 * 800 = 8,800,000

11. Goods and services tax (GST), which was introduced in July 2000, is a broad-
based tax of 10% of most goods, services and other items sold or consumed in
Australia. Describe the THREE types of supplies under the GST legislation. (6 Marks
2 Marks each)

The three different types of supplies under GST legislation are:

Taxable supplies: Any good or service made in Australia, imported to or exported from
Australia is subject to GST payment unless it is not defined as a GST-free supply.

GST-free supplies: The supplier of a GST-free supply does not have any GST liability and
there is no need to charge GST to its customers. The business making a GST-free supply is
still entitled to claim the GST back on costs as an input tax credits. Most GST-free supplies
are related to health, education, certain charitable activities, export of goods and other
supplies made to entities outside Australia.

Input taxed supplies: A business making an input taxed supply does not have any GST
liability and there is no need to charge its customers any GST. However, unlike a taxable or
GST-free supply, businesses that make input taxed supplies are not entitled to claim the
input tax credits on any of the related acquisitions or costs. This includes transactions such
as: residential rental, sales of residential properties, financial transactions, and certain
charity fund raising events.
12. Scenario: Brian is running an ice cream shop. He paid $9.50 per hour for $3,950
hours of working in packing 40,000 buckets of ice cream. The standard labour rate is
$8 per hour. How much is the direct labour price variance (i.e. the difference between
the actual price for labour and the standard price)? Is the variance favourable or
unfavourable? List the possible reasons for this variance? (5 Marks)

Brian labour price 3,950.00/9.50 = 415.78 hours

Standard labour price: 415.78 * 8.00 = 3,326.24
Direct labour price variance: 3,950.00 - 3,326.24 = 623.76

This is Unfavourable for Brian as he is paying more per hour for the same amount of
buckets of ice cream to be packed.
For this to be favourable for Brian he would need a worker to be able to pack more buckets
of ice cream per hour.

13. When evaluating financial information systems, what factors will you need to
consider? (3 Marks)

We need to consider the cost of the system, and the sort reports of the system.
Also, it is good to consider the following points; economic benefit, such as return on
investment, usability measurements, mainly of interfaces, measurements of user and/or
customer satisfaction.

The next six categories are used to evaluate:

-Systems quality
-Information quality -Use
-User satisfaction -Individual impact
-Organizational impact
International standards and Information and record quality are also factors to be taken into
consideration.

Part B Written or Oral Questions

Answer the following questions:

1. List and describe the 5 common types of budgets. (5 Marks)

-Income budgets: to show the overall income objective of a firm, budgets are prepared for
sales and other income.
Sales budgets include the quantity and dollar value and can be shown by product or
department or time period.
Other income budgets include revenue from all other sources, eg commission, royalties,
interest, etc.
Example: The following budget is the only income budget for Southside
Engineering

-Cost and expense budgets: To show the overall cost and expense objective of a firm,
budgets are prepared for
Production (Purchases, Direct Labour, Manufacturing overhead);
Distribution;
Administration and
Example: The following budgets together form the basis of cost and expense
budgets for Southside Engineering.

-Financial budgets: The financial budget shows the complete plan for the business
operations. It is composed of the budgeted Profit and Loss Statement, the budgeted
Balance Sheet and also the Cash Budget, Inventory Budget, Capital Acquisitions Budget
and other relevant budgets.
Example: The following budgets together form the basis of the financial budget for
Southside Engineering.

-Master budgets: the operating budget (which shows forecast profitability), and the financial
budget (which shows the forecasted funding requirements and the expected financial
position of the business.)
The following budgets make up the Master Budget - sales; production; direct materials and
purchases; direct labour.

-Zero-based budgets: With zero-based budgeting, rather than adjusting previous figures the
business starts from a zero base, views all its activities and previous priorities as new ones,
and creates new and up-to-date allocations for the coming year.
Each section manager presents proposals and alternatives using cost-benefit analysis. All
proposals are then ranked and funds allocated accordingly.

2. Listed below are the names of some of the commonly used budgets in businesses. Using
the 5 common types of budgets identified in Question 1, determine the budget type for each
listed budget. (5 Marks)

Commonly used Budgets Budget Type

a. Room Revenue Budget Income budget
b. Refurbishment Budget Financial budget
c. Event Budget Zero based budget
d. Contract Cleaning Budget Master budget
e. Printing Budget Cost and expense budget
f. Marketing Budget Financial budget
g. Cash Budget Income budget
h. Budget for a Small Business Master budget
i. Advertising Budget Cost and expense budget

3. What is cash flow? Give one example of how an organisation can control its cash flow.

Cash flow is the difference in amount of cash available at the beginning of a period (opening
balance) and the amount at the end of that period (closing balance). It is called positive if
the closing balance is higher than the opening balance, otherwise called negative.

One example of how an organisation can control its cash flow is by a statement which
includes total cash received minus total cash spent; for that It is also important to ask
yourself the following two questions to get a sense about whether you have your business'
cash flow situation under control:
What is my cash balance right now?
What do I expect my cash balance to be six months from now?

4. Cash (Flow) Budget Prepare a Cash Flow Statement for months 1-6 using the following
forecast details:

Months 1 2 3 4 5 6
Cash
Receipts
Cash from $9,000 $10,800 $12,600 $19,800 $21,600 $25,200
sales
Cash from $30,000 $1,000 $1,200 $1,400 $2,200 $2,400
Debtors
Capital
Cash
Payments
Stock $17,000 $7,660 $15,070 $16,440 $19,180
Purchases
Advertising $3,000 $1,000 $1,000 $1000
and
Promotion
Rent $1,733 $1,733 $1,733 $1,733 $1,733 $1,733
Wages $1,933 $1,933 $1,933 $1,933 $1,933 $1,933
Other $5,106 $606 $1,056 $606 $606 $1,056
Expenses
Asset $3,400
Purchases
Drawings $1,600 $1,600 $1,600 $1,600 $1,600 $1,600

Forecast Cash Flow Statement for Year Ended

Months Mth 1 $ Mth 2 $ Mth 3 $ Mth 4 $ Mth 5 $ Mth 6 $

Cash position- $5,228 $10,156 $8,9774 $8,232 $9,720
start of month
Cash Receipts
Cash sales $9,000 $10,800 $12,600 $19,800 $21,600 $25,200
Cash from $30,000 $1,000 $1,200 $1,400 $2,200 $2,400
Sales
Debtors
Proceeds from
asset
sales
Capital
contributions
Borrowings
Total cash $39,000 $11,800 $13,800 $21,200 $23,800 $27,600
receipts
Less Cash
 Payments
Advertising $3,000 $1,000 $1,000 $1,000
Stock $17,000 $7,660 $15,070 $16,440 $19,180
Purchases
Wages $1,933 $1,933 $1,933 $1,933 $1,933 $1,933
Rent $1,733 $1,733 $1,733 $1,733 $1,733 $1,733
Loan
Repayments
Other Expenses $5,106 $606 $1,056 $606 $606 $1,056
Asset $3,400
Purchases
Drawings $1,600 $1,600 $1,600 $1,600 $1,600 $1,600
Total cash $33,772 $6,872 $14,982 $21,942 $22,312 $25,502
Payments
Net Cash Flow
Cash position $5,228 $4,928 $1,182 $742 $1,488 $2,098
end of month

5. When collecting data for analysis what are the two sources we can get data from?
(2 Marks)

When collecting data information we can get data from:

-Internal sources
Client or patient personal details
Amounts owing by clients or patients
Appointment schedules

-External sources

6. How can data collected help an organisation determine the effectiveness of

their financial management processes? (3 Marks)

Analyse data and information on the effectiveness of financial management

processes within the work team and identify, document and recommend any
improvements to existing processes

Accuracy is not just important it is essential. In order to make effective decisions

you need accurate information. The majority of accounting systems are managed by
well trained and dedicated employees.
7. What is a financial plan and what does a financial plan include? (5 Marks)

A financial plan is a comprehensive evaluation of an individuals current pay and

future financial state by using current known variables to predict future income,
asset values and withdrawal plans.

It will examine the individuals total position, both financial and non-financial and put
in place a set of actions or a plan which, once implemented, will assist in meeting
the individuals ultimate goals and objectives.

Financial plan include:

Funds required starting the entity;
Anticipated funding over the next few years;
Use of funding;
Cash flow projections;
Long-term budgets/plans
Operational plans.

8. What are some factors that could affect a budget? (4 Marks)

Some of the factors that can affect your budget could be:

- Previous sales figures

- The actual economy
- The actions taken by your competitors.
- Changes on the market.
- Changes on government legislation.

9. Budget/Financial Plan Exercise Using the following information work out

the answers for the questions below: (6 Marks)

160-seat restaurant
Average spent at lunch $16.50
Lunch seat turnover 80%
Average spent at dinner $25.50
Dinner seat turnover 70%
Restaurant open for lunch 260 days a year
Restaurant open for dinner 312 days a year
a. What are the projected sales for lunch? (2 Marks)
$549,120.00

b. What are the projected sales for dinner? (2 Marks)

$891,072.00
c. What are the projected total annual sales for the restaurant? (2 Marks)
$1,440,192.00

Sales Budget

Lunch (a) Dinner (b) Restaurant (c)

Seats 160 $16.50 $25.50
Lunch seat turnover 80%
Daily sales for lunch 128 $2,112.00
Days open for lunch (Annually) 260 $549,120.00

Dinner seat turnover 70%

Daily sales for lunch 112 $2,856.00
Days open for dinner (Annually) 312 $891,072.00

Toal Annual Sales $1,440,192.00