Assignment Sample on ACC4029 Managing Operations and Finance

1. Introduction

Cucumber is a leading smartphone company which has been earning gradually in recession period due to high quality management system and skilled workforce in the organization. Based on this case study the major target for the company is to achieve return on capital employed and profit by using investment appraisal. In this report, the new finance director of company is concerned about three areas of the organization to control the budgeting process. The report is going to discuss the use of balanced scorecard and investment appraisal techniques for betterment in future to achieve their mission and making proper decisions for the business plan.

2. Management Accounting

2.1. Role of the Management Accounting

The management accounting helps a manager to make a proper decision for the organization. The management accounting can be called cost accounting which can help to achieve business goals for the organization.

Making decisions

It is the process which can help to analyse and identify the business goals to achieve in a shorter period by making appropriate decisions for an organization. As cited by Latan et al. (2018), it is the bridge between the function of finance and the other accounting in an organization. The management accounting can help to control the entity for an organization.

Long-term and short term planning

Management accounting has an important role in forecasting future business in the long-term and short-term. As cited by Amir et al. (2020), it can help to make a strategy for the business to formulate corporate strategy for the business in the short and long term.

Maintaining capital structure

Management accounting has a role to play raising funds for their organization to steady growth in the upcoming years. As cited by Feld et al. (2018), the team has to control the equity and debt and raise the fund with a cheaper cost for an organization.

2.2. Differences between the management accounting and financial accounting

The major differences between managerial and finance accounting is that managing accounting refers to the current and future aspects. As cited by Taipaleenmäki (2017), finance accounting refers to the past performance for an organization. There are certain differences between the management accounting and financial accounting which are as follows:

Subject Management accounting Financial Accounting
Factors Management deals with internal factors. Financial accounting deals with the external factors for an organization.
Decision solving Management accounting helps the manager to make a proper decision for an organization in operational activities (Franco et al. 2018). Financial accounting helps an investor to make a proper decision for investment in the market.
Objectives Management accounting provides solutions to the operational and managerial factors. Financial accounting provides financial aspects and factors for an organization (Hlaciuc et al. 2017).

Table 1: Difference between management accounting and financial accounting

(Source: Created by Learner)

2.3. Models of costing in operational management

There are different costing models that can be used in operating management for the company to make a proper decision for activities they can provide.

Open book costing models

Open book costing model provides the information about the suppliers, labours, burden and profit for the business. As cited by Santana et al. (2017), it can provide a high degree of collaboration between customers and suppliers that can determine the sales for the business.

Hyper-optimized costing models

Hyper-optimized costing models can help to combine all aspects of operating activities to generate profit for the business. As cited by Farukul (2020), it provides the gap between global industry which cost data and cost breakdown data.

Attribute based costing models

Attribute costing model does not provide the information about the cost for customers who can get the information about the market. As cited by Belguith et al. (2018), it is easy to develop the costs for an organization to make a proper decision in the strategies.

3. Capital investment appraisal techniques

Cash flows (£ms) Cash Flows DCF @10% PV (@10%)
Year 0 -24 1 -24
Year 1 16 0.91 14.56
Year 2 12 0.83 9.96
Year 3 8 0.75 6
Year 4 4 0.68 2.72
Year 5 -8 0.62 -4.96
Residual value 0 0.62 0
  NPV = 4.28

Cash flows (£ms) Cash Flows CCF
Year 0 -24 -24
Year 1 16 -8
Year 2 12 4
Year 3 8 12
Year 4 4 16
Year 5 -8 8
Residual value 0 8
PBP = 1 year 8 month

Lower DCF = ra = 10%
Higher DCF = rb = 30%
NPV at ra = Na = 4.28
NPV at rb = Nb = -1.68
IRR = ra + {Na * (rb – ra) / (Na – Nb)}
IRR = 24.4%

Table 2: Proposal 1

(Source: MS Excel)

Cash flows (£ms) Cash Flows DCF @10% PV (@10%)
Year 0 -19 1 -19
Year 1 2 0.91 1.82
Year 2 8 0.83 6.64
Year 3 8 0.75 6
Year 4 12 0.68 8.16
Year 5 10 0.62 6.2
Residual value 0 0.62 0
  NPV = 9.82

Cash flows (£ms) Cash Flows CCF
Year 0 -19 -19
Year 1 2 -17
Year 2 8 -9
Year 3 8 -1
Year 4 12 11
Year 5 10 21
Residual value 0 21
PBP 3 year 1 month

Lower DCF = ra = 10%
Higher DCF = rb = 30%
NPV at ra = Na = 9.82
NPV at rb = Nb = -2.16
IRR = ra + {Na * (rb – ra) / (Na – Nb)}
IRR = 26.4%

Table 3: Proposal 2

(Source: MS Excel)

Cash flows (£ms) Cash Flows DCF @10% PV (@10%)
Year 0 -16 1 -16
Year 1 6 0.91 5.46
Year 2 8 0.83 6.64
Year 3 6 0.75 4.5
Year 4 6 0.68 4.08
Year 5 4 0.62 2.48
Residual value 0 1.62 0
  NPV = 7.16

Cash flows (£ms) Cash Flows CCF
Year 0 -16 -16
Year 1 6 -10
Year 2 8 -2
Year 3 6 4
Year 4 6 10
Year 5 4 14
Residual value 0 14
PBP 2 year 4 month

Lower DCF = ra = 10%
Higher DCF = rb = 30%
NPV at ra = Na = 7.16
NPV at rb = Nb = -0.72
IRR = ra + {Na * (rb – ra) / (Na – Nb)}
IRR = 28.2%

Table 4: Proposal 3

(Source: MS Excel)

Cash flows (£ms) Cash Flows DCF @10% PV (@10%)
Year 0 -32 1 -32
Year 1 6 0.91 5.46
Year 2 10 0.83 8.3
Year 3 18 0.75 13.5
Year 4 16 0.68 10.88
Year 5 12 0.62 7.44
Residual value 8 0.62 4.96
  NPV = 18.54

Cash flows (£ms) Cash Flows CCF
Year 0 -32 -32
Year 1 6 -26
Year 2 10 -16
Year 3 18 2
Year 4 16 18
Year 5 12 30
Residual value 8 38
PBP 2 year 11 month

Lower DCF = ra = 10%
Higher DCF = rb = 30%
NPV at ra = Na = 18.54
NPV at rb = Nb = -2.2
IRR = ra + {Na * (rb – ra) / (Na – Nb)}
IRR = 27.9%

Table 5: Proposal 4

(Source: MS Excel)

3.1. Discussion on making decision

As per the case study, there are four proposals which Cucumber Ltd wants to expand their business. Therefore, to make an appropriate investment decision the company should apply the investment appraisal techniques to get the better result for their expansion. As cited by Adebimpe et al. (2018), there are three techniques of investment appraisal such as Payback period, Net present value and Internal rate of return. Payback periods help to analyse the time taking for an organization to recover their initial cost.

Based on the consideration of cost of capital of 10% the NPV of the first proposal has been found £4.28 million. Moreover, the company can recover their initial investment within 1 year 8 months and get 24.4% of internal rate of return. Hence, risk in terms of investing in this proposal is low.

Expansion the production the company provides; the company needs to set up a business plan. In proposal 2, the company can expect a net return from the investment of £9.82 million if the cost of capital remains 10%. On the other hand, the payback duration of this investment option will be approximately 3 years and 1 months. Based on the assessment of risk factors in the investment it has been revealed that the IRR is 26.4%, thus risk in this investment option is low.

On the other hand, in proposal 3, it has been estimated the internal rate of return is 28.2% which is higher as compared to the two proposals and positive net present value for the organization. Moreover, the company can recover their initial capital within 2 year 4 months. Based on the consideration of the profitability factor it has been revealed that the NPV of this investment option is £7.16 million which is also worth considering.

In proposal 4 the report has estimated that the net present value of £18.54 which is greater as compared to the other proposals whereas the company would face a lower rate of return on investment which is 27.9%. Apart from that, there is a lower rate of return on investment to recover the cost within 2 years and 11 months.

Selection of investment option

The company should select proposal 3 for their business growth as the rate of return on investment is greater as compared to the other proposals. The company can be faced with a lower amount of risk factor in the company due to getting a higher rate of return.

4. Business Plan and Budget

4.1. Role of Business Plan and Budget

The role of business plan and budgeting are essential for operating management and projected income statements and supporting statements. The company’s management can formalize and analyse the budget for their business which is a major concern about the budget controls. As per the case study, Mr McDonald was disappointed with adverse variance of the budget. It has stated that the company has failed to achieve the set of goals and level of output.

4.2. Review report

The budgetary report has been shown that the cost of production of Cucumber Ltd has increased due to production increases. As cited by Singh et al. (2020), as a result of adverse variance due to increased cost however, their output has been increased during the period. It can be stated that the per-unit cost of production needs to be focused by the company where it has decreased and positively affected the company. Therefore, the overall performance of Cucumber has increased whereas the cost increases as the production has been increased.

  Budget Actual Variances Variances %
Unit 3,000 4,000 -1,000 -33%
             
  Budget  PU Actual  PU Variances Variances %
Material        31,000   10.33        39,000     9.75    (8,000.00) -26%
Suppliers        11,000     3.67        12,500     3.13    (1,500.00) -14%
Direct Labour          9,000     3.00          9,500     2.38       (500.00) -6%
Indirect Labour          5,000     1.67          5,200     1.30       (200.00) -4%
Depreciation          2,000     0.67          2,000     0.50                – 0%
Share of sales costs          2,500     0.83          2,800     0.70       (300.00) -12%
Apportioned overhead        10,000     3.33        15,000     3.75    (5,000.00) -50%
Total Cost        70,500   23.50        86,000   21.50  (15,500.00) -22%

Table 6: Review report

(Source: MS Excel)

4.3. Recommendation on areas of improvement

Cucumber need to focus on their overhead cost which is greater as compared to the other costs. The company needs to improve their per unit overhead costs which needs to be lower than 3.75 units to recover their variance in the organization. On the other hand, the per unit cost of suppliers for the company has been increased due to increase in production, therefore, cost of suppliers needs to be decreased for betterment of an organization to mitigate their adverse variance in the budgetary report.

5. Balanced Scorecard Approach

5.1. Usefulness of Balanced Scorecard

The balanced scorecard is an essential metric to use as a key of an organization to help internal factors and operating activities in the business. As cited by Quesado et al. (2018), it can help external factors to give better results for the organization to grow in the future. The balanced scorecard helps an organization to align the share of vision for success of an organization where the staff and employment can right things for the business to grow.

Better strategic planning

Balanced scorecard is useful for building communication strategies for the business to improve better management skills. As per the view of Firk et al. (2020), the business model can set up a strategy map for their betterment where the manager can identify the cause and effect of the relationship with different strategic objectives. It can help to create a future performance and the organization can identify the complete picture of the business planning process for the organization.

Better management information

Balanced scorecards are helpful to identify the various strategy maps for key performance to keep upward growth for the organization. As cited by Malagueño et al. (2018), it can help to get higher quality management and the best solution to make a proper decision for their success in the upcoming year. Balanced scorecard can improve the better management information for an organization.

Improved performance

Balanced scorecards can be beneficial for the organization to get better design of performance in the strategic planning process. It has a role to get a better monitoring plan for the organization to get better results in the upcoming year. The balanced scorecard can help to get a better financial performance for an organization to create growth in the upcoming growth. This process can help to create a success vision for an organization to meet all the objectives and increase the motivation for the employment who contributes effectively in the business.

Better organizational structure

Balanced scorecard is an essential for any kind of business to align the organizational structure for achieving the strategic goals. As cited by Mailat et al. (2019), the balanced scorecard helps to analyse the organization plan for betterment towards the goals. The company needs to align their organizational structure to meet their objectives of strategic goals to get a better environment in the organization.

5.2. Balance Scorecard for this organization

  Objectives Measures Targets Initiatives
Financial targets Increase the rate of return and profit before tax.

Spend on product development

Increase the fixed cost

Increase in percentage of rate of return and profit in pounds to improve the business.

Increase in selling price and variable cost to develop the production for the company

Increase the fixed cost in pounds.

18% of rate of return and £5m of profit within two years.

£150 selling price and £100 variable cost

£1,500,000 of fixed cost within a year.

Spend on product development to improve in the goods and services. Expanding the business, the company needs to increase fixed costs in the company.
Customer Increase the customer satisfaction level. Customer satisfaction survey which is sent to the customer to get feedback for improving sales 80% within 4 weeks. Customer support manager gets to respond over the phone calls and surveys and mails to get the feedback for the product that the company provides.
Internal business process Manufacturing staff should be qualified

Finished product with high quality management.

Manufacturing director implements a policy that the staff should be highly skilled.

Introduce a new quality management system to finish the products.

NVQ 4 and qualified in BSC (Hons).

5% of finishing products

The managing director released a policy to get a high skilled staff and supervisors and finished goods with a high quality.
Learning and growth Increase the margins

Lowering staff turnover.

Increase in margins to get the mission fulfilled and lowering staff turnover to get a huge profit 30% of margins

25% of staff turnover.

The HR department is concerned about employment retention to improve in the workplace.

Table 7: Balanced scorecard approach

(Source: Created by learner)

6. Conclusion

Cucumber is a topmost smartphone company in the UK where the company needs to improve their management accounting and get to know about financial accounting. The company should implement the proposal 3 for their growth strategic business in the upcoming year. Therefore, investment appraisal techniques can be beneficial for the company to propose such techniques to make a proper decision about their structuring the business. The budgetary report has been measured in the case study to show their variance in the budget and improve their overhead cost to grow in the market, based on this report the useful balance scorecard for an organization to get a successful vision for the next three years to grow.

Reference

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