AFE4001 Business Economics Assignment Sample
Submission Date and Time: Week 12 - 11th August, 2022
Expected Return of Feedback and Marked Work: 14 days from submission
Assignment Weighting: 50%
Word Count: 2,000
Learning Outcomes Assessed by this Assignment:
MLO3: Identify and apply appropriate management accounting techniques to assist in management decision making
MLO4: Make use of management accounting information to assess business performance.
WAZ limited is a UK subsidiary of the Australian MMC Group. The company has been operating in the UK for the past 6 years. WAZ provides sporting equipment to a number of sporting activities such as Football, Racing, Running, Cycling, Tennis, and Swimming in the UK, USA, and Australia. For the past 6 years, WAZ has been a profit-making firm as it has retained its previous clients, in addition to capturing an increasing share of the market. However, the finance director of WAZ has recently got in touch with your professional management accounting consulting firm and has engaged your firm with the mandate to provide them with an explanation of the cash flow problem that WAZ Limited had been facing. One of the company’s products, a football helmet for the North American market, requires a special plastic. Last year, the company manufactured 16,000 helmets, using 140,000 kilograms of plastic in the process. The plastic cost the company £0.75 per kilo. However, according to the standard cost card, each helmet should require 120,000 kilograms of plastic, at a cost of £0.70 per kilogram.
Last year also the company manufactured 700 Ski using a total of 3,000 hours. Total actual cost is £13,500. However, the WAZ budgeted for 600 units of Ski at 4 direct labor hour per unit. Standard labor rate is £4.80 per hour. The company’s management wants to know the causes of these variances. Assessing the value of inventory has been the major problem faced by WAZ Ltd. In the past month, there has been a number of meetings in London and Australia where it has been agreed that WAZ Limited should use the best appropriate method to value their inventory each year.
The company is planning to expand and launch a new tennis rackets called V-Shaped with a selling price of £390 per racket. WAZ Limited plan to sell a total of 1200 units of V-Shaped for the same period. Total budgeted sales for each month are as follows: November 400, December 400 and January 400.
From their costs estimates, total fixed cost estimated to be £135,000 and it will be shared equally throughout the period. The variable cost is £130 per unit. The fixed costs are for the whole period, so they are not affected by the level of service. However, the variable costs will increase with services output (ie sales output multiplied with variable cost per product). Variable cost will be paid on the basis of 50% in the month of purchase and 50% the following month. Similarly, revenue from the sale of V-Shaped will be on the basis of 50% cash in the same month, and the remaining 50% credit to be paid the following month.
You are required to write a well-researched and referenced management to the directors of WAZ limited in which the following points should be discussed.
• Provide a critical explanation on the different inventory valuation methods available for WAZ Ltd and their advantages and disadvantages. You should make recommendations for the company on the suitable valuation method to use.
• The importance/purpose/benefits of management tools such as Budgets. A computation of your cash budget for the first 3 months.
• A computation of variance analysis. The possible causes of these variances. You should also briefly comment on the use of standard costing and variance analysis to the company.
• Some other examples that show understanding of the relevant concepts.
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WAZ Ltd is a UK subsidiary of the Australian MNC and the company has managed to provide essential business on sports goods. The company has recently struggled with inventory management and it is necessary for managing the inventory properly. This report is going to evaluate the inventory valuation methods along with the proper calculations.
2. Critical Explanation of the inventory valuation methods
Inventory valuation methods are generally described as the practice that is followed by the companies for inventory stock and developing the financial statements for the company. The inventory valuation method is very important for the improvement of inventory management and preparing the cash budgets as well. In this section, the three types of inventory valuation methods including FIFO, LIFO and WAC are going to be discussed.
FIFO is generally stated as the “first in and first out” which could be effective for the different types of inventory management. Purchasing first and leaving the warehouse first could be very effective in the development of the plan for inventory management. The valuation of the inventory will be effective through the methods of FIFO as the method is effective as well as the implementation of the method is very easy as well (Simeon and John, 2018). On the other hand, the implementation of the model could be useful in the different variants as well. On the other hand, LIFO is the model that is described as the “last In first out” which means making an opposite assumption for the different sections of the organisation the companies using the yearly turnover rate for the variation of the models in the different perspectives and the development of the model through the various factors coin impact on the genetic factors as well. There is a basic difference between the two models. The value of FIFO is more than the value of LIFO as the price of the products drops or increases per year (Ionescu, Toma, and Founanou, 2018). The improvements in the price of the drop in the process could be effective in managing the inventory of the company.
However, the WAC which is described as “weighted average cost” could be useful in the development of cost throughout the sections as well. The average per cost unit is generally calculated by dividing the total cost by the total number of articles purchased. The average cost is an effective factor in maintaining the cost inventory for the different variables as the improvements in the different sections will require a management purpose for the improvement as well (Teplická and Se?ová, 2020). The difference between WAC values can change and depends on the LIFO and FIFO values for the inventories for making a better effective approach.
Advantages of FIFO, LIFO, and WAC are Being Described
First in First Out helps in increasing warehouse space and operations of the warehouse become more streamlined (Sufa, and Mulyana,2021). The handling of stocks can be kept at minimum with the help of FIFO. There has been an enhancement in quality control with the help of FIFO. In addition to that, FIFO is of great use in the case of warranty control. On the other hand, Last in First Out matches the recent costs that are against the present revenues. There has been a benefit in the case of tax, and immense improvement has been there within cash flows. There has been minimization of write-downs with the help of LIFO in markets. There has been a presence of physical flow in the case of inventory with the help of LIFO. Weighted Average Costs can be benefited the case of individuals when SKU units have become relatively differentiated from one another. It has been useful in the case of difficult at the time of tracking costs that have been related to individual units. There may be a fluctuation in the price that raw materials possess, however, with the help of WAC it becomes in specific range. It is useful in the case of purchasing materials when it has been on daily basis.
Disadvantages of FIFO, LIFO, and WAC are Being Described
Vital disadvantage of FIFO is that complicated calculations have been involved in it. There has been an expansion of probability of errors that are clerical. In the case of pricing, a requisition not less than a price has to be acquitted often. At the time of rising in prices, there has been an absence of reflection of market price with the help of issue price as there has been utilization of materials from earliest consignments (Zajmi231, and Paic232,2018). In matters of fluctuations within costs of materials, comparison in the middle of a job and other jobs have been criticized as there has been a beginning of one job after few minutes as compared to another that is of same nature that can be delivered at distinct prices (Hada et al., 2019). On the other hand, the utilization of LIFO may get clumsy, and complex and it is very tough to manage inventory, as well as, respective prices that are of every batch if there has been placement of several orders by entity in the case of goods that possess fluctuating costs (Khan, Faisal, and Aboud, 2018). There has been a matter of being prone to errors increasingly in this case. There has been an absence of correspondence of LIFO with casual physical flow that inventory possesses. There has been an understatement of value with the help of LIFO in the case of concluding inventory. In the case of WAC, there has been an absence of public information and there has been a transformation in the case of capital structure. Another major disadvantage is that there has been a sort of difficulty in the case of comparison with the help of WAC.
After the analysis of all the three methods, it has been analyzed that in the case of WAZ Limited, there should be the utilization of Weighted Average Costs (Simeon, and John, 2018). This has been suggested as there has been a less disadvantage of this method as compared to other two and hence, the company will be benefited with the help of this.
3. Importance of Budgets
a) Budget helps an individual to figure out those goals that are long-term and work against them. Budgets force an individual for mapping out goals, saving money, keeping track of progress, and making dreams reality (Auer et al., 2021).
b) If an individual creates the budget and sticks to it, he or she will never be in any sort of precarious position. Budget should be made in accordance with the money that has been earned by an individual (Frank, Goeppert, and Goldscheider,2021). Hence, the budget helps in analyzing the earned money of an individual and immense help has been acquired in the case of saving huge amounts of money in the case of any emergency.
c) It is mandatory to invest money in a wise manner today as per growing prices of all the commodities. The expenditure should be made in such a way that a person can be able to manage all the expenses in case of emergency too. Savings have been considered critical in the case of the future too. This can only be done with the help of a budget that has been made by every individual. It is vital to create contributions on investment into the budget of the individuals. If a person can plan to set aside just a part of earnings of each month, then a contribution can be made in case of the budget and this is only for future. In addition to that, these savings can be termed as retirement funds as they will be required after retirement too in the case of every individual. Hence, at the time of employment, individuals have to save some money by doing just a little sacrifice to be safe and secure in future at the time of their aged days in the matter of money.
d) Another positive side of budgets is that it works at the time of any sort of emergency. A person never knows when an emergency occurs and hence, it is very important in the case of a person to be prepared for emergencies by saving some money as budget.
Computation of Cash Budget in the case of first three months have been shown below in the table-
Table 1: Cash Budget
4. Possible Causes of Variance Analysis and Use of Standard Costing and Variance Analysis
Computation on Variance Analysis has been done on table below for WAZ Limited-
Variance Analysis has been caused for several reasons that are highlighted below-
Table 2: Variance Analysis of WAZ Limited
a) Variance in material price has occurred due to transformation in price of market, costs of delivery, purchase of materials that are non-standard, emergency purchases, wrong instructions about shipping, and the loss that has occurred in the case of discount.
b) Variance in usage of material occurs due to worst quality that materials have, transformation within material mix, methods of production of products, careless handling, waste that is excessive and wrong setting that standards have.
WAZ Limited can utilize Standard costs as it has several advantages that have been described below-
These costs deliver as yardsticks in opposition to which there can be a comparison of actual costs. The second benefit of utilizing this cost is that when there has been an undertaking of immediate action, there has been an advantageousness of control above costs. In addition to that, immense help has been acquired from Standard Costs in motivating employees. This is due to the fact that may be utilized system to bestow incentive scheme in which there has been minimization of variance.
WAZ Limited should utilize Variance Analysis for several reasons that have described below-
Immense help has been acquired by this analysis in the case of organizations for being proactive in the case of achievement of targets of business and assisting in the identification and mitigation of potential risks. This helps in eventually building trust in the case of employees and team members for delivery that has been planned.
5. Other Examples that Show Understanding of Relevant Concepts
Budget, as well as, Variance Analysis has been utilized by FP&A. It is the vital function of this particular company to perform budget to variance analysis. This company has engaged in utilizing this as the budget of the company has been compared to real outcomes with the help of this. In addition to that, reason for the budget has been interrupted and aim of variance in the case of this company is to make distinctions in the middle of ctual, as well as, a few predefined measures that include budget, plan, or rolling forecast.
The performance of Variance Analysis has been done by this company on the basis of period in sufficient details to permit managers to acknowledge that matter that is occurring to business at the time of the absence of huge burden on staff. The budget has been performed by the company by mainly two types of variance that is favorable and negative as both of them have helped the company to get the appropriate budget. In addition to that, there has been a matter of calculating Budget and Variance Analysis with the help of excel by which the computation can be done easily and accurately.
The report has discussed the evaluation of the inventory valuation methods for the company WAZ Ltd as the improvements for the various developments of the different sections as well. Through the discussions it can be concluded that the improvement in inventory management could be useful in preventing stock outs, ensuring accurate record keeping and managing the locations of the company.
Auer, U., Kelemen, Z., Engl, V. and Jenner, F., 2021. Activity Time Budgets—A Potential Tool to Monitor Equine Welfare?. Animals, 11(3), p.850.
Frank, S., Goeppert, N. and Goldscheider, N., 2021. Improved understanding of dynamic water and mass budgets of high?alpine karst systems obtained from studying a well?defined catchment area. Hydrological Processes, 35(4), p.e14033.
Hada, I.D., 2019. The Influence Of Methods Of Valuation Of Stocks At The Entity Output On Performance. Contemporary Economy Journal, 4(2), pp.172-180.
Ionescu, L., Toma, M. and Founanou, M., 2018. Applied Analysis of the Impact of Inventory Valuation Methods on the Financial Situation and Financial Performance. Valahian Journal of Economic Studies, 9(1), pp.67-76.
Khan, A.K., Faisal, S.M. and Aboud, O.A.A., 2018. An Analysis of Optimal Inventory Accounting Models–Pros and Cons. European Journal of Accounting, Auditing and Finance Research, 6(3), pp.65-77.
Simeon, E.D. and John, O., 2018. Implication of choice of inventory valuation methods on profit, tax and closing inventory. Account and Financial Management Journal, 3(7), pp.1639-1645.
Simeon, E.D. and John, O., 2018. Implication of choice of inventory valuation methods on profit, tax and closing inventory. Account and Financial Management Journal, 3(7), pp.1639-1645.
Sufa, M.F. and Mulyana, M.K., 2021, April. Spare Part Warehouse Management Analysis Using 5S Approach and FIFO System. In International Conference Health, Science And Technology (ICOHETECH) (pp. 318-322).
Teplická, K. and Se?ová, A., 2020. INVETORY VALUATION METHODS AND THEIR IMPACT ON THE COMPANY´ S PROFIT GENERATION. Acta Logistica, 7(3), pp.201-207.
Zajmi231, S. and Paic232, M., 2018. GLOBAL DIVERSITIES IN FINANCIAL REPORTING: COMPARATIVE ANALYSIS OF INVENTORY VALUATION METHODS IN RELATION TO US GAAP AND IFRS. Recent Advances in Information Technology, Tourism, Economics, Management and Agriculture, p.579.
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