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Accounting for Business Assignment Sample
a. Critical Appraisal
The business benefits of the beyond budgeting approach are to overcome the flaws in the traditional budgeting system. Traditional budgeting involves lots of time and cost, which is saved in this method. The traditional budget also fails to focus on the company's strategy, which is the central area of focus in the beyond budgets. All the activities are allied to the organization's common purpose. The beyond budgeting approach and principles stimulates the organization's value creation, which was missing in the traditional budgeting system. It does not consider the involvement of all levels of management in decision-making (Gerhard 2010). The beyond budgeting approach clears the obstacles for changes and avoids the concentration of the organization's power within a few hands. Joint efforts achieve common objectives (Brown et al, 2017).
b. Main challenges by Vardy Virtual Viewing
The principles and approach of beyond budgeting are practical, but its implementation requires individual efforts, and challenges are required to be overcome depending upon the organization to the organization (Horngren 2011). In the given case, Vardy Virtual Views Ltd is a UK-based company, is facing a difficult time financially and is dependent on the support of its parent's company in the form of huge debts undertaken by the company. Thus the change from traditional budgeting to beyond budgeting approach would require an initial investment in the form of time and cost, which may divert the company in its current approach of increasing revenue, reducing cost, and other significant and efficient measures.
The current budgeting system is not operating effectively. The management has already taken the approach that initially, the implementation would require or include short-term cost but will be benefited in the long run. The management should take initiatives for its implementation and motivate and guide the lower level management team for the better and improved effects of the beyond budgeting approach. The application of the principles involves extensive study about the company and its operations based on which the proper management controls can be set. Accordingly, the approach of beyond budgeting may be implemented (Dosch & Wilson, 2010).
1. Break-even analysis
a. Review of the risk and return
Vardy Virtual Viewing Ltd wants to analyze the current and proposed new production process. The difference between the two processes can be measure by the concept of operating gearing. Operating gearing means the cost of fixed assets to its variable costs; the larger the proportion of the fixed cost to variable costs, the greater the operational gearing.
In the current situation,
The fixed cost is 375,000, and the variable cost is 765, whereas, in the proposed situation, the fixed cost is 475,000 and 735.
The breakeven point of the current situation 2,778 and the breakeven point of the proposed situation is 2,879. Thus the breakeven point in the proposed situation is higher than the current situation.
The margin of safety at the budgeted profit level is 62% for the current situation and 56% for the proposed situation.
In the current process, the Fixed cost is less, so the Break-even point is at a lower unit as compared with New process. If the company sells units around the break-even point, then the process with lower fixed cost will be better. Still, if the company sells the unit around its capacity, then the process with higher fixed cost but the lower variable cost will be better.
In the current process, the contribution per unit is 135, and in the new process, the contribution per unit is 165. The Margin of safety is higher in the current process under the current production capacity, so the return is also higher. In contrast, the margin of safety is lower in the new process, so that return is also lower.
We could recommend the current process based on the Margin of safety under existing capacity; the margin of safety is higher under the current process than the new process. The existing capacity does not change with a change in the fixed cost; then, the return is higher in the current process under the existing production capacity.
But suppose the existing capacity and sales increase beyond the current capacity. In that case, the new process will be recommended since the profit volume increase with the increase in the higher production and sales capacity. The contribution per unit is also higher under the new process, and the profit volume graph is also higher than the current process.
So, the company needs first to analyze the production and sales capabilities; if the company intends to produce and sell at existing capacity, they should stick with the current process. If they intend to extend the production and sales, they should go for a new process.
2. Reasons for the significant deterioration of the cash balance
Based on a cash budget of Vardy Virtual Viewing ltd for the first three months of the year 2021-2020, we see that there is a deterioration of cash balances in the cash budget. The main reason the same for the following reasons:-
In January, the cash receipts are lower than the cash payments. Therefore there is a negative net balance of 23,916 where the opening balance was only 10,056 the negative closing balance is 13,860.
In February, the opening cash balance is carried forward of the closing cash balance, which is negative 13,860, and during the month, there is a net negative cash flow of 44,640, so we found that the negative closing balance is 58,499. As compared with January, we observed that the cash receipts had increased by 22,870 from January. In contrast, total payment also increased from the previous month by 43,595 due to increased material cost, operating expenses, production labor, and administrative expenses. So during the month itself, there is a negative cash flow of 44,640, so the net negative cash flow is 58,499 at the end of February.
In March, the opening cash balance is the carried forward of the closing cash balance, which is negative 58,499, and during the month, there is the net negative cash flow of 44,687, so we found that the negative closing balance at the end of the month of March is 103,187. As compared with February, we observed that the cash receipts had increased by 39,412 from February. In contrast, total payment also increased from the previous month by 84,459 due to increased material cost, operating expenses, and production labor. So during the month itself, there is a negative cash flow of 44,687, so the net negative cash flow is 103,187 at the end of March.
We concluded that the cash receipts increase is lower than the increase in the payments by the above cash flow. The increase in the payments is higher than the increase in the cash receipts, so there is a negative cash flow month on month, and the cash balances are getting deteriorated.
3. Basis and reasons for charging overheads
a. Basis of charging overhead
In a profit center, we tend to charge full overhead, and the recovery of the overhead is full. Overviewing the above table, we can see that the overhead is apportioned based on Machine hours. The overhead is observed based on machine hours, but the ideal method of overhead absorption where there is cost activity and driver provided is Activity-based costing (Vanderbeck 2013).
In Activity based costing each item of cost has been apportioned on the basis of cost driver (Martine, Kristof & Alexandra 2017).
The following are the cost activity and its driver
Cost activity Cost Driver
- Indirect labour hours Direct labour hours
- Rent Floor area
- Machine insurance Insurance value
- Heating Floor area
- Machine hours Machine hours
- Machine depreciation Machine value
b. Critical discussion of the process of absorption costing
In the above process, the company is absorption costing because it should identify the cost activity and cost driver. Vardy Virtual Viewing ltd is absorbing its overhead cost based on machine hour, but it should search for the cost activity and cost driver and apportion the cost based on Activity-based costing
6. Critical appraisal of the results of the capital investment appraisal of the Fastcoat and Speedscreen
a. Advantages and disadvantages of each capital investment appraisal
The new method would improve the production process and help save the company's cost, but the company must choose any one of the two methods due to the lack of available capital. The choice shall depend upon the overall feasibility and expected profitability from the same.
The two options are available with the company, the Fastcoat and Speedscreen approach. The advantage of implementing the Fastcoat is that it will improve the production process of the company's small products, such as mobile phone screens. Thus, this approach does not require the implementation or introduction of the new product line in the system and will improve the company's existing products (Omar & Ozyapici 2019). Thus this can be started immediately without much waiting time frame.
The Speedscreen method is beneficial for the production process and product quality of the larger High Definition products. Thus to make this more efficient and effective, the new product lines must be introduced in the system, which will take a few years, and cost and effort for such implementation are required. The investment decision shall be based on other factors apart from this limiting and advantageous position of each process.
b.Discussion of the risk and return
The decision of investing in a product depends upon the net present value of discounted cash flow, which shows the present value of the various cash flows throughout the project (Patterson et al 2013). The discounting taken here is the cost of capital of the company, which is 6%. The return of anything above the company's cost is a benefit to the company and thus will result in the creation or increment in the company's wealth. The company is facing financial difficulties, so the company's preference towards the project is to have the return more than its cost; otherwise, the other approach may even be taken to take the required rate of return as the discounting factor (Patterson et al 2013).
The internal rate of return of the Fastcoat is higher than the speed screen; thus, the overall return from the fastcosat is higher. The payback period is lower, indicating the earlier refund of the invested capital so that the volatility or risk of adverse results is also reduced at an earlier stage. The initial investment is also lower than the speed screen, which also matters in case of limited resources to be invested. The speed screen has an advantage in terms of net present value and the accounting rate of return. The company should invest in the fast coat as the initial cash flows are higher than the speed screen, and thus the recovery is more comfortable as the longer the project higher the chance of deviation.
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