Accounting LQ Summarised PDF

(d) Evaluate the possible use of flexible budgets for Glowtherme plc (6) oct 2022 Case For flexible budgets Case Against flexible budgets Allows good decision making as “like is Drawing up a series of budgets at different compared to like” eg costs can be o...

(d) Evaluate the possible use of flexible budgets for Glowtherme plc (6) oct 2022 Case For flexible budgets Case Against flexible budgets Allows good decision making as “like is Drawing up a series of budgets at different compared to like” eg costs can be output levels will take time which may cost compared to revenues at the same sales Glowtherme plc money. or output levels. Any variances are more meaningful if the volume element is eliminated. Flexible budgets may save Glowtherme plc Figures are only estimates so may be time and money by allowing “management misleading or the action taken in response is by exception” ie management need to take inappropriate. action only if there is a variance at a particular level of output or sales. Glowtherme plc is a new company and they may not be sure exactly what the predicted sales volume will be. Producing just one budget for a possible output level may not be helpful. Therefore, the targets are realistic if the budget is flexible and this may improve the motivation of Glowtherme plc employees. Conclusion Should relate to points made above ie flexible budgets are a very useful tool.  (b) Evaluate budgets as a tool for forecasting, planning and control for companies such as Jolly Pyeman plc. Oct 2021 FOR - AGAINST - Preparing a budget ensures management forecasts may be unrealistic. focus on future possibilities and likely outcomes. For example, production targets for staff may be set too high, which will demotivate staff. Eg Jolly Pyeman plc may focus on level of Some costs are out of management control. sales and expected sales revenues. Some budgets are under the direct control of management. This will mean that management can accurately forecast the likely figures. For example, Jolly Pyeman plc has decided the level of inventory is to be equal to the sales level of the following week. The company will have to plan to ensure it there are uncertainty that they can't control has sufficient capacity for this level of inventory. Forecasting may not be accurate. For example, sales for Jolly Pyeman plc are seasonal, affected by the weather. If the autumn months are mild or warm, sales may not reach the expected levels. For example, Jolly Pyeman plc may not be able to control the wholesale price of meat, or flour. This means that management can only make an informed guess when preparing figures. Some costs are under management control, Some figures or costs may not change each for example rate paid to direct labour. year. Budgets allow a business to see how a level Therefore drawing up budgets is a waste of of costs impacts on profit, for example direct time and money and does not help planning labour. or control. This may result in management deciding on For example, the production figures for Jolly an appropriate level of pay rise. Pyeman plc may stay the same each year. Variances can be analysed and remedial action taken. For example, Jolly Pyeman plc may not be happy with the forecast level of sales. This may result in a marketing campaign to boost sales. Budgets may act as a yardstick against which performance may be measured. This helps senior management in control of other staff of the company. For example, the Production Department has to meet a production target of 620 000 (o/f) pies in the month of July. Budgets ensure that different departments are co-ordinated, integrated and controlled. For example the purchasing, production, and logistics department of Jolly Pyeman plc must be co-ordinated to ensure the smooth running of the company. Conclusion Budgets are a useful management tool for forecasting, planning and control (e) Evaluate the possible change being considered by Kyriakides Ltd to allow customers to buy on credit. (6) Jan2020 Case For : Case Against : Giving credit, forecasts sales revenue to rise. Some of the customers who buy on credit may fail to pay the amounts owing. Without credit, sales are likely to continue to fall.  This may result in lengthy and expensive The total budgeted revenue with credit is £3 court cases to possibly obtain monies due. 339 189, compared to a budgeted total figure of £2 712 000 without credit. This is an increase of £627 189. The budget figures are only forecasts, they are not guaranteed to happen. Kyriakides Ltd may take out insurance to cover non-payments of debts which is likely to be expensive. Conclusion: Allowing customers to buy on credit is probably a good idea and may help to stop declining revenues. (g) Evaluate the role of budgeting as a management tool for planning, forecasting and control (12) (may2024) FOR - AGAINST - Budgets as a management tool for Budgets as a management tool for forecasting, planning and control. Preparing a forecasting, planning and control. Forecasting budget ensures management forecast and may not be accurate. For example, sales for focus on future possibilities and likely PH plc could be affected if one of the four outcomes. For example, PH plc may focus on customers, e.g., Alpha plc, goes out of the level of sales and expected sales business. This would result in sales not being revenues. made. This is out of the control of PH plc. Forecasts may be unrealistic. For example, Some budgets are under the direct control of production targets for PH plc may be set too management. This will mean that high and may not be met. This could result in management can accurately forecast the contracts to supply not being met. Some likely figures. For example, PH plc has costs are out of management control. For forecast total sales to be 42 000 cubic litres example, PH plc may not be able to control per month. the price of water or other inputs. This means that management can only make an informed guess when preparing figures. Some figures or costs may not change each month or year. The company will have to plan to ensure it Therefore, drawing up budgets is a waste of has sufficient capacity to produce this level of time and money and does not help planning output. or control. For example, the production or sales figures for PH plc may stay the same Some costs are under management control, each year. Conclusion Budgets are a useful for example rate paid to purchase the inputs. management tool for forecasting, planning and control. Budgets allow a business to forecast how a level of costs impacts on profit, for example direct labour. This may result in management deciding on an appropriate level of pay rise. Another example could be PH plc ensuring the rise in input costs are taken into account when planning the future price setting of the acid. Variances can be analysed, and remedial action taken. For example, PH plc may not be happy with the forecast level of sales. This may result in a marketing campaign to boost sales. Budgets may act as a yardstick against which performance may be measured. This helps senior management in control of other staff of the company. For example, the Production Department has to meet a production target of 44 000 cubic litres of acid in the month of July. Budgets ensure that different departments are co-ordinated, integrated and controlled. For example, the purchasing, production, and logistics department of PH plc must be co ordinated to ensure the smooth running of the company. Evaluate whether Brainboxxe plc should be worried about the value of parts in inventory at the end of month 4. Agree with concern Against concern The value of inventory is over £900 000 (0/f), Are there issues about storage space? which is a large amount. Possible not, as they are parts for a hand held device. Having over £900 000 (o/f) tied up in inventory does not help cash flow, or the payment of bills. A high inventory value means a higher bill for insurance of inventory. Would there be issues about security? The Other points parts must be small, so may be easily stolen. We do not know the size of Brainboxxe plc. Is inventory of £900 000 (o/f) a large or small figure for this company? Would the parts become obsolete due to technology, if left in inventory for some time? ZimbaPower Electrical Limited has estimated the figures that will be entered into the budgets for the store at Naniuke. (d) Evaluate the possible accuracy of the estimates ZimbaPower Electrical Limited has entered into the budgets for February to July For accuracy Against accuracy Simba have other stores around the country.√ They have not had a store in Naniuke before, They can look at the figures so do not know what to expect. √ of similar sized stores. √ They may not have accurately factored in local competition √ and the If they have many stores and are opening reaction of local competition to a new store. √ another store, they are probably a successful company, √  There may be changes in technology that so are probably good at predicting figures. √ result in a different sales level √ They may not have predicted accurately changes in the economic cycle √, having sales the same in each month. √ Simba may not have taken into account customer loyalty to existing stores, √ and it may take some months to build up their own customer loyalty. √ This may have to be done by offering discounts, special offers etc which will alter sales figures. √ Ignore the factor of time: Estimates ignore the falling value of money over time √ Sales may be affected by seasonal factors √ The Managing Director has stated, ‘I am worried that too many finished goods of ‘Anastazia’ are being rejected.’ Required: (b) Evaluate the Managing Director’s statement.(8) Advantages of Rejecting finished goods Disadvantages of Rejecting finished goods By rejecting damaged goods/ goods not Rejected finished goods means resources perfect, the company are assured that goods have been wasted. √ These would be in the stores are of merchantable/ materials √ and/or labour. √ It also means good quality. √ This will ensure the brand capital/finance is wasted. √ name is not damaged /has a good reputation. √ This is particularly important in the fragrance market, √ where a quality brand name can command a premium price. √ High levels of rejections would mean the The company should investigate the possible inspection process is rigorous /doing its job. √ cause of this rejection √ e.g. poor quality of materials, or unskilled or untrained labour, faulty machinery etc √ (need one possibility for maximum of one tick) Maximum of 4 marks for arguing only one side of argument. Conclusion – 2 marks Andromeda plc should be concerned about the rejection of finished goods as resources are wasted √√(8) Sunny Kipwat stated “I would like to make a profit of £2 000 a month. If all other costs and my selling price remain the same, how much must I pay my workers per tray of fruit, in order to make a profit of £2 000 a month?” Evaluate whether it would be advisable to pay direct labour a lower rate per tray, for Sunny Kipwat to achieve a profit of £2 000 per month. Case for lower labour rate. Case against lower labour rate. Business has profit target √ and has to take Workers will be demotivated √ and workforce action to achieve these targets. √ morale will be low. √ May not possible to decrease other costs, √ It may not be possible for workers to pick especially if fixed eg loan extra fruit, √ to maintain overall repayment, rent etc √ wage level. √ May not be possible to increase selling price Could try to reduce other costs instead √ eg to increase profit, √ as will result shop around for lower insurance. √ in reduced sales √ Narayang doors ltd budgers to pay trade payables after three weeks, and allows trade receivables to pay after four weeks. Evaluate this method of cash budgeting. For Against Narayang may have little choice in method as Firm is waiting longer to collect sales receipts terms may be decided by than they are taking to pay supplier(s) √ who may be in a strong position suppliers. √ √ especially as Narayang are a This gives a simple working capital cycle √ of new business. √ one week. √ Negative effect on cash flow √ in the first two months of business. √ Selling on credit may result in bad debts√ Narayang may be able to negotiate better terms in the future, √ especially if they prove to be a regular customer, √ and/or a reliable supplier.√ After the first two months, √ cash flow will be regular, √ with receipts of £25 632 and payments of £12 600 for supplies. √ Discounts could be given for prompt payment √ (c) Evaluate the company’s policy of producing ovens for expected sales, rather than producing ovens to match actual orders.(8) For Policy Against Policy Customers do not have to wait for their Producing for expected orders means some orders.√ Waiting for orders could mean stock may be unsold √ which is customers go elsewhere.√ risky √ Production may fluctuate if only for actual Unsold stock may build up √ and this involves orders, √ especially if demand is a number of costs eg rent, seasonal √ insurance, √ and ties up working capital √√ If sudden increase in demand √ stock is available √ If delays in production this is not a problem √ as order can be met promptly √