Preparation Of Flexed Budget From The Assignment Figures (Other (Not Listed) Sample)

Financial and accounting analysis
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Course
Date
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Part one
(a)Flexible budget
Production capacity

80%

90%

comment

Number of units

620,000

697,500



£



Variable cost




Direct materials

434,000

489,150


Direct labor

124,000

139,500


Production overhead

210,000

236,250


Production directors salary

112,400

126,450


Selling and distribution cost
Fixed cost
Admin overhead
Total cost

168,500
36,000
1,084,900

189,562.5
36,000
1,180,912.5


Meaning of Flexible Budget
A flexible budget is a spending which, by perceiving the distinction in conduct amongst settled and variable cost and its connection to changes in output, turnover, or other variable elements, and so forth (Garrison et al 2015 pp 792). It is intended to change in connection with the level of output really achieved. A flexible budget therefore is the type that assesses a scope of possible volumes. It is sometimes alluded to as a multi-volume spending plan. The scope of conceivable yields might be known as the 'important range'. Flexing a budget happens when the first spending plan is intentionally revised to assess change output levels. The flexible budget depends on the crucial distinction in the conduct of variable costs, variable expenses and semi-variable expenses. Since fixed cost don't shift with short-run changes in output, it can be seen that the flexible budgeting will truly comprise of two sections: The first is a fixed spending plan being made of fixed cost and the fixed part of semi-variable expenses. The second part is a real flexible budget that comprises exclusively of variable costs.
When establishing how a flexible budget affects the outcomes of an increase in output of the company, changes in both variable and fixed cost should be categorized as either favorable or unfavorable (Mak and Roush, 2014 pp 93). In the case study however, the basis of budgeting will be based on the profit level of the company is that an increase in overall profit compared to the actual budget is a favorable scenario.
b)Calculate the Sales Revenue and Profit at the 90% capacity level.
Sales revenue = total units* sale price per unit
Cost of one unit=total cost/units produced
=1,180,912.5/697,500
£1.69 per unit.
Mark up price=1.69+0.34= £2.03 per unit
Total sales revenue 697,500*2.03= £1,415,925
Profit = revenue – cost
1,415,925-1,180,912.5
Profit=£235,012.5
Part Two
Net Present Value
Net present value is among the various capital budgeting technique that determines the present value of future cash flows and compares it with the present value of the investment project. The technique is widely known for its concept regarding taking into consideration the time value of money. The basic outline of NPV is therefore the notion that a dollar today is not the same as a dollar today or in future.
Advantages of the Net Present Value Method
The essential component of the net present capital budgeting strategy is that it depends on the possibility that dollars got later on are worth not as much as dollars in the bank today. Income from future years is reduced back to the present to locate their value. According to NPV the value of a pound today is worth more than the value of a dollar tomorrow since the earning capacity of money today is much greater than its equal value in future (Ryan and Ryan 2016 pp 355). This is further emphasized by the financial core value which concludes that provided money earns interest, the sooner it is received the better in terms of value. A rational investor should therefore be of the opinion that he/she should receive a certain amount of funds today rather than waiting to receive the same amount in future. This is because money has the potential to grow in terms of the value for a certain period of time. An example of the situation is a scenario that leads to a dilemma whether to receive $20,000 dollars today or receive the same amount in three years’ time. The basic rationality is that the first option is the most appropriate when time value of money is taken into consideration. Opportunity cost and other economic circumstances render $20,000 received today the best option. The money may be subjected to interest-earning projects hence grow in value for the next three years.
In order to understand time value of money in context the following formulae will be applied;
FV = PV x [ 1 + (i / n)] (n x t)
Where
 FV = Future value of money
 PV = Present value of money
 i = interest rate
 n = number of compounding periods per year
 t = number of yearsassuming the $20,000 that could have been received today is diverted to a project with a 10% interest rate for the three years, compounded at the end of accounting period annually, the future value of the amount is compounded as follows;
FV=$20,000*(1+(10%/3) ^ (1*3)
FV=22,067
Assuming there were toe investors and one of them had opted to wit for the three years in order to receive the $20,000 while another one had taken the $20,000 immediately and invested, then the second investor will be worth $2067 more than the first investor. The above example serves as an advocate for the reality of time value of money in investment decision-making tactics.
Moreover, disparities in the time value of money do not only depend on the interest rate as the sole determinant (Pike, 2016 pp 88). The number of compounding periods within a year also affects how the value of a dollar today could be worth less tomorrow.
The NPV strategy delivers a dollar sum that shows how much esteem the venture will make for the organization. Investors can see obviously how much a task will add to their esteem. a significant number of organizations exist to satisfy the shareholder by maximizing their welfare. Through NPV therefore, the shareholders are able to clearly understand how their funds are utilized and the overall returns its likely to bring back to the organization depending on the period stipulated by the cash flow method.
The figuring of the NPV utilizes an organization's cost of capital as the markdown rate. This is the base rate of return that investors require for their interest in the organization. Such instances are an advantage to the company in that most prospective require approval from the shareholders (Luckett, 2014 pp 231). The base value rate of return therefore will act as a reference to the shareholders during evaluation of the viability of desired projects.
Disadvantages of Net Present Value
The most concerning issue with utilizing the NPV is that it requires speculating about future money streams and evaluating an organization's cost of capital. The NPV strategy isn't appropriate when looking at ventures that have varying speculation sums. A bigger venture that requires more cash ought to have a higher NPV, however that doesn't really improve it a speculation, contrasted with a little undertaking. Oftentimes, an organization has other subjective elements to consider.
The NPV approach is hard to apply when contrasting ventures that have diverse life expectancies. How would you analyze an undertaking that has positive money streams for a long time versus a venture that is relied upon to create money streams for a long time? This is some of the questions that render NPV a hectic technique.
Comparison between NPV and Payback period
Payback period is the amount of projected time that project should take in order to break even or repay back the cost incurred in establishing it. If the payback period our case project that cost $1,000 is 2 years for example, then the payback period is the 2 years hence the financial requirement that the organizations should have recovered the initial $1,000 at the end of the 2-year projected period. The NPV technique is therefore the best option when compared to payback period due to the following arguments;
Firstly, payback period does not account for time value of money but rather concentrates on the period taken to recover the initial investments amount of the project. Payback does not therefore take into consideration time value of money, inflation and external risks associated with the investment. NPV on the other hand maximizes shareholders wealth by taking into consideration the profitability level of projected investment. NPV on the other hand takes into consideration the time value of money. According to NPV, the year 2 cash flow amounting to $300 is much greater to its equivalent cash flows in year 5. The formulae on time value of money can be used to analyses this instance as flows;
FV = PV x [ 1 + (i / n)] ^ (n x t)
The future value of $300 in year 2 after additional three years will be;
FV=$300*{1+(0.20/3)} ^ (3*1) = $364. This value is greater than $300 in year five by $64 dollars i.e. ($364-$360). Additionally, in the case of the project presented by the C.E.0, the discounted cash flows taking into consideration the present value of future cash flows indicates that the present value of future $300M is $120.57 M.
Secondly, the payback technique ignores the going concern of the project after the payback period is finally achieved (San Ong and Thum, 2013 pp 153). This implies that the payback period does not include total incomes of the project from the beginning to its break-even point since its major concern is regarding accomplishment of the set period. The assumption in this case regarding the use of payback period is that the returns on the projected investment continue after the end of the payback period.
Thirdly, unlike NPV, payback period does not provide an op...