Financial performance - p.a 1

Kelly7

Hi guys
I was just wondering if anyone else is revising financial performance and goes into practise assessment 1 (on 2013) if you could help me work out a couple of the questions?

The first is on 1.4 where the total budgeted cost for actual production is 621,000 and the actual production cost is £618,800. I have worked out the variance as 2,800 which is correct but they have a minus figure before it and I would have thought it wouldn't have the minus figure as the actual production is less than the budgeted so it should be favourable?

The next is on task 1.9. The question asks what price the company should choose as its price to achieve the profit margin but you have to work out figures using the profit margin anyway so I would have thought they was both achieving the profit margin?

Thank you in advance if anyone can help.

Kelly

Kelly7

Sorry to reply to my own post but also on the 2010 practise assessments does anyone know how to work out 2.2b - the return on the additional investment and 2.2c - the fixed costs?

xx

SandyHood

The first question you asked:​ on 1.4 where the total budgeted cost for actual production is 621,000 and the actual production cost is £618,800. I have worked out the variance as 2,800 which is correct but they have a minus figure before it and I would have thought it wouldn't have the minus figure as the actual production is less than the budgeted so it should be favourable?​​​The need to minus or add is all to do with the two columns of variances.
If the Favourable column total is more than the Adverse column total (as it is in this example) the "net" variance is a reduction in the cost compared to the standard cost for actual production then it is a minus.
Look at it like this: the favourable variances (or the reductions in cost) out weigh the adverse variances (or additions to cost) so a net reduction in cost means you take the net variance away to find the actual cost.

SandyHood

In task 1.9. The question asks what price the company should choose as its price to achieve the profit margin but you have to work out figures using the profit margin anyway so I would have thought they was both achieving the profit margin?

Look again and find out the fixed overhead cost per unit each can afford
Then look at the fixed overhead each will incur

For example:............................................... At £40 per unit
The required profit .......(30% of the price)............£12 per unit
Leaves a maximum (target) cost ........................£28 per unit
We know the variable cost is .............................£13 per unit
So this leaves a max fixed cost of ......................£15 per unit

We also know that at £40 the total fixed overhead cost will be £8,500,000 a fixed cost per unit of £17.00
And the forecast sales volume will be .................................... 500,000 units

At a maximum (target) fixed cost per unit of £15 and a forecast cost of £17.00 this alternative is not expected to make the required profit

Do the same for the £50 alternative and see whether this will make the required profit

SandyHood

on the 2010 practise assessments does anyone know how to work out 2.2b - the return on the additional investment

I think I must warn you that I disagree with the model answer here. You may choose to stop reading at this point if you wish.

1. Return on investment is calculated as: additional profit divided by the value of additional investment
2. In this case: The profit will increase by £1,900,000 (1,200,000 units with £1 extra price £0.50 saving per unit in variable costs, £600,000 saving in distribution costs and £500,000 depreciation)
3. And the Investment costs £3,000,000 before depreciation of £500,000 = £2,500,000

​So we make ......................................£1,900,000 extra profit = 76%
And have an investment worth..............£2,500,000

The model answer includes the depreciation in the calculation of the additional profit, but forgets to take this off the value of the investment when the profit has been made giving a 63% return

SandyHood

2.2c - the fixed costs?
Go back to the question: The current fixed production costs are £1,200,000
.....................................The selling and distribution costs are ....£400,000
.....................................And the depreciation cost is .................£500,000
.....................................This comes to a total of .....................£2,100,000

Kelly7

Ahhh, thanks for all your help Sandy, appreciate you taking the time. Not sure I really get the variance minus sign but I will try work it out in my head from your reply and just try to learn this one thing and accept how it is. The sales price to achieve the target profit margin makes sense now, thank you for that. I've wrote down how to get the answers for the other 2 on my answers sheet so will hopefully be able to work those out too.

Thanks again.

Kelly xxx