Managing Financial Principles and Techniques

Formative assessment (progress checks) hand in dates.  (1)………………………… (2)………………………………

Unit Aim

This unit provides the learner with the skills to apply financial principles relevant to strategic management in an organisational context, including forecasting, capital appraisal, budgeting, financial appraisal and analysis.

Unit introduction

Organizations operate in a very competitive and continually changing environment where effective decision making is crucial if an organization is to survive or even be profitable. An important resource for decision making is financial information and it is important for managers to be able to interpret, analyze and evaluate this information effectively.
This unit will give learners a foundation in financial principles and techniques relevant to the strategic management process. It encourages learners to explore the nature of cost-based financial data and information, the impact of the budgeting process on the organization, and the development of cost reduction and management procedures and processes. It also focuses on the management of these costs through the use of forecasting, appraisal and financial reporting procedures. One of the main objectives of this unit is for learners to develop the confidence to apply, analyze and evaluate financial and cost information.

Learners will develop the ability to judge the sources, nature, accuracy and completeness of cost-based information and influence others to make decisions that are based on well-researched options. These important decision-making skills will be enhanced further through the use and validation of forecasting techniques, the consideration of financial statements and making judgments on the validity of information sources used in the decision-making process.
Learners will also apply strategies associated with determining sound management information with reference to sources of funds, the potential investment of resources and the interpretation of financial statements.

Learners will study issues of cost, responsibility and control in the contexts of management accounting and the management process. This unit gives learners the opportunity to enhance their competency in the construction, review and evaluation of cost-based financial information, and introduces them to the analysis and control or reduction of costs in a range of situations.

Learning outcomes and assessment criteria

In order to pass this unit, the evidence that the learner presents for assessment needs to demonstrate that they can meet all the learning outcomes for the unit. The assessment criteria determine the standard required to achieve the unit.

The assessment criteria is a sequence of steps you will follow to help you achieve the unit assignment.

Learning outcomes    Assessment criteria
1.    Be able to apply cost concepts to the decision-making process    1.1 explain the importance of costs in the pricing strategy of an organisation
1.2 design a costing system for use within an organisation
1.3 propose improvements to the
costing and pricing systems used by an organisation
2.    Be able to apply forecasting
techniques to obtain information for decision making    2.1 apply forecasting techniques to make cost and revenue decisions in an organisation
2.2 assess the sources of funds available to an organisation for a specific project
3.   Be able to participate in the
budgetary process of an        organization    3.1 select appropriate budgetary targets for an organisation
3.2 participate in the creation of a master budget for an organisation
3.3 compare actual expenditure and income to the master budget of an organisation
3.4 evaluate budgetary monitoring processes in an organisation
4. Be able to recommend cost      reduction and management processes for an organisation    4.1 recommend processes that could manage cost reduction in an organisation
4.2 evaluate the potential for the use of activity-based costing
5. Be able to use financial appraisal techniques to make strategic investment decisions for an organization    5.1 apply financial appraisal methods to analyse competing investment projects in the public and private
sector
5.2 make a justified strategic investment decision for an
organisation using relevant financial information
5.3 report on the appropriateness of a strategic investment decision using information from a post audit
appraisal
6. Be able to interpret financial
statements for planning and decision
making    6.1 analyse financial statements to assess the financial viability of an organisation
6.2 apply financial ratios to improve the quality of financial information in an organisation’s financial
statements
6.3 make recommendations on the strategic portfolio of an organisation based on its financial information

Before you get started please read the following information very carefully.

Produce a informal report/paper that addresses all the tasks in the assignment brief. You are encouraged to use diagrams or tables to illustrate and reinforce your findings.  Any references to academic theory should be correctly cited in-text and referenced in a bibliography at the end of the report. (please do not copy and paste information)

?    Fully completed assignment cover page
?    Title page
?    Table of contents
?    Introduction
?    Main body of the report clearly identifying the separate outcomes and assessment criteria
?    Conclusion and recommendations
?    References and bibliography
?    Appendices only if relevant and necessary

Assignment Content
The assignment brief includes headings relevant to the unit outcomes, read and follow the tasks listed under each heading and this will make certain that you cover all the outcomes and assessment criteria to achieve the unit.

Assessment and Grading
All units within the L7 Strategic Management and Leadership qualification are internally assessed. The qualifications are criterion referenced, based on the achievement of all the specified learning outcomes. To achieve a ‘pass’ a learner must have successfully passed all the assessment criteria.

Assignment Submission
All assignments must be submitted by the agreed date, via MOODLE.  Assignments submitted late, but with permission, will be marked in the usual way.  Assignments submitted late, without permission, will not be marked until the end of the year, or the next time the unit is scheduled.

Please ensure that your assignment is attached to the assignment submission receipt and that you read and sign the statement confirming authenticity. Check that all relevant fields are completed fully before submission.

Assignment Feedback
Once the assessor has marked your assignment, you will receive written feedback, either confirming that you have met the required standard and grade awarded, or that you have not yet met the standard and what you need to do to make the necessary improvements.  Please note that achieved and confirmation of grades is provisional until signed off by the Internal Verifier.

Student Guide to Writing an Assignment
This is an assignment guide to help support you while completing your BTEC Assignments.
It includes:
•    Assignment writing guidance
•    Referencing guidance

Recommended Reading
A reading list will be given to you at the first session unit session.

You should also read a good quality newspaper and/or use relevant internet sites regularly and identify key influences and recent and relevant research with regard to your subject area.  You should read topical case studies and read about national campaigns and government initiatives in your area of interest.

Assignment Brief

Please use the headings shown below when writing up your report    Assessment Criteria coverage

Assignment Title: Managing Financial Principles and Techniques

Assignment Description: There are different scenarios provided for each learning outcome and the learners are expected to demonstrate their knowledge and understanding on the tasks according to the scenario.

Learning Outcome 1: Be able to apply cost concepts to the decision-making process. (1.1, 1.2, 1.3)

Task1

Great Deal Company started its business in 2005. The following information was available for January to March 2005 for the company that produced a single product P and is pricing under Absorption costing method.
Revenue and costs data of product P :
£
Selling price per unit                        120
Direct materials per unit                      20
Direct Labor per unit                        10
Fixed factory overhead per month                30000
Variable factory overhead per unit                5
Fixed selling overheads                              1000
Variable selling overheads per unit                 4
Budgeted activity was expected to be 1000 units each month
Production and sales for each month were as follows:
Jan        Feb        March
Unit sold            1000        800        750
Unit produced             1000        1300        900
Additional information: Great Deal Company is struggling with its pricing as sales were decreased in the last three months ending March 2005 due to increased competition. You are working as accountant in Great Deal you need to:

You are required to:
1.1    Explain the importance of costs in the pricing strategy for Great Deal.
1.2    Design a costing system for use within Great Deal.
1.3    Propose improvements to the costing and pricing systems used by Great Deal.

Learning Outcome 2: Be able to apply forecasting techniques to obtain information for decision making. (2.1, 2.2)

Task 2
Assume that Oasis estimates its costs, sales and prices for the year as follows:
Item    Cost    Sales per month
Rental of the shed    £16 per month
Lab coats    £20 each
Display boxes    £4 each
Money box    £20
Delivery fees    £6 per day
Fruit:
Apples (each)    34p    90
Oranges (each)    32p    75
Bananas (each)    30p    120
Grapes (per bunch)    29p    200
Strawberries (per punnet)    45p    180
Pears (each)    30p    240
Average price of fruit:
•    Apples: 25p each
•    Oranges: 20p each
•    Bananas: 18p each
•    Grapes: 20p per bunch
•    Strawberries: £38p per punnet
•    Pears: 25p each.
In specific months such as March, May and September the sales of fruit are estimated as follows:
Fruit    Sales

•    Apples (each)
•    Oranges (each)
•    Bananas (each)
•    Grapes (per bunch)
•    Strawberries (per punnet)
•    Pears (each)
•    240
•    200
•    350
•    120
•    150
•    130
When completing your forecast, take into account the fact that during August the school is closed. Oasis does not receive any revenue in that month, but will still have to pay rent. Also assume that Oasis operates for 20 days every month. In addition, in April and December, they expect to receive half the normal expected monthly revenue because of school holidays and therefore have half the variable costs. Due to no sale in the month of August there has been no spending on coats, delivery box, and delivery fee. We have given you an opening balance of +£20 to start you off. You are working as accountant in Oasis you need to :

You are required to:
2.1 apply forecasting techniques to make cost and revenue decisions Oasis
2.2 assess the sources of funds available to Oasis if it wants to expand its business

Learning Outcome 3: Be able to participate in the budgetary process of an organisation.

Task 3

Scenario
Bunzal is comparing budget and actual data for the last three months.
Budget         Actual
£              £
Sales                          950,000        922,500
Cost of sales
Raw materials             133,000                 130,500
Direct labour             152,000                 153,000
Variable production OH               100,700                 96,300
Fixed production OH               125,400                 115,300
511,100        495,100
438,900         427,400

The budget was prepared on the basis of 95,000 units produced and sold, but actual production and sales for the three-month period were 90,000 units.
Bunzal uses standard costing and absorbs fixed production overheads on a machine hour basis. A total of 28,500standard machine hours were budgeted. A total of 27,200 machine hours were actually used in the three-month period. You are working as accountant in Bunzal there you are required to perform the following tasks.

You are required to:

3.1 suggest the types of budget prepared in an organisation which can be useful to Bunzal.
3.2 participate in the creation of a master budget for Bunzal
3.3 compare actual expenditure and income to the master budget of Bunzal
3.4 evaluate budgetary monitoring processes in Bunzal

Learning Outcome 4: Be able to recommend cost      reduction and management processes for an organisation. (4.1, 4.2, 4.3)

Task 4
Best Way manufacturers currently produce two products, P and P1. It currently uses a standard absorption costing system to calculate inventory values and cost of sales. It has, up to now, used a labour hour basis to absorb fixed production overheads into the cost of production.
Budget data relating to the company’s two products are as follows.
P        P1
Material cost per unit                     £450              £550
Direct Labour cost per unit                         £1,250     £625
Labour rate per hour                     £25         £25
Fixed production overheads per hour            £50         £50
Selling price                                 £9,000         £4,525
Production and sales volumes                        14,000         12,500
Best Way manufacturers are considering moving towards an Activity Based Costing (ABC) system. It has identified the following activities undertaken within the factory and has allocated its overheads to each activity.
Activity Overheads                    £
Production set ups                     200,000
Delivery to customers                     490,000
Component receipts/storage                 320,000
Other activities                         300,000
Total overheads                     1,310,000
Other relevant data                    P         P1
Production runs                     1,025         3,000
Deliveries to customers                 14,000             25,000
Different components per unit                 620         425
You are working as accountant in Best Way manufacturers which, is considering moving towards an Activity Based Costing (ABC) system
You are required to calculate the full production cost per unit and net profit for each product using:
4.1 Absorption costing and Activity Based costing based on the results explain the importance of costs in the pricing strategy of Best Way manufacturers
4.2 Suggest a costing system for use within Best Way manufacturers for better pricing.
4.3 propose improvements to the costing and pricing systems used by Quality manufacturers.
Learning Outcome 5: Be able to use financial appraisal techniques to make strategic investment decisions for an organization (5.1, 5.2, 5.3)

Task 5
A local Council is seeking to build a school and a community Health Centre   However, recent cuts in spending allocation have caused problems and it seems that both projects cannot go ahead.  It seems that only one will be given the go ahead.
There are various options open to the Council to finance the projects.  It could:
•    Raise the money from local taxpayers using the council tax and business rates as well as using money it has built up in its reserves.
•    Seek funds through the private finance initiative (PFI).
•    Borrow the money directly from the money markets in the UK.
•    Borrow the money directly from the international money markets.
•    Enter in to a public-private partnership with some money coming from sponsoring organisations and the rest coming from the local Council.
•    Outsource the project to the private sector entirely in return for a management fee to be able to use the facilities.
The relevant data for each project is:
Project    School     Community Health Centre
£000    £000
Initial outlay     1,100    800
Profit (loss)
Year 1    60    (40)
Year 2    200    140
Year 3    400    220
Year 4    500    300
Year 5    620    380
Residual value    220    80

The current cost of capital is 10%.  The target rate of return is 15%.
The private sector usually looks for a payback period of 5 years.
Little work has been done on measuring the financial value of improvements to the health of those who will use the School and the community health centre.

You are required to:

5.1 apply financial appraisal methods to analyse competing investment projects in the public and private sector
5.2 make a justified strategic investment decision for an organisation using relevant financial information
5.3 report on the appropriateness of a strategic investment decision using information from a post audit appraisal.

Learning Outcome 6: Be able to interpret financial statements for planning and decision making (6.1, 6.2)

Task 6
Scenario: You are required to analyze the annual reports of a listed company. The reports should cover a period of minimum of two years, for example 2008-2009 and 2010-2011
Ratios can be grouped into categories, each of which reflects a particular aspect of financial performance or position. The following broad categories provide a useful basis for explaining the nature of the financial ratios to be dealt with in the task: Profitability, Efficiency, Liquidity, Gearing and Investment.

You are required to:

6.1 Analyse the financial statements to assess the financial viability of the organisation.

6.2 apply appropriate financial ratios to improve the quality and presentation of the financial statements which will ensure that planning and decision making is base on an accurate understanding of the financial results of the company.

6.2 make recommendations on how to improve the strategic portfolio based on the financial information assessed.

Assessment Criteria
Student Name:
Learning Outcomes    To achieve a Pass grade the evidence must show that the learner is able to:    Learning Outcomes    To achieve a Pass grade the evidence must show that the learner is able to:
1.    Be able to apply cost concepts to the decision-making process.
(Learning Outcome 1)    1.1 Explain the importance of costs in the pricing strategy of an organisation
2.    Be able to apply forecasting techniques to obtain information for decision making.

(Learning Outcome 2)    2.1 Apply forecasting techniques to make cost and revenue decisions in an organisation.        1.2 Design a costing system for use within an organisation.
2.2  Assess the sources of funds available to an organisation for a specific project
1.3 Propose improvements to the costing and pricing systems used by an organisation.

3.    Be able to participate in the budgetary process of an        organization.
(Learning Outcome 3)    3.1  select appropriate budgetary targets for an organisation
4. Be able to recommend cost      reduction and management processes for an organisation. (Learning Outcome 4)    4.1 recommend processes that could manage cost reduction in an organisation        3.2  participate in the creation of a master budget for an organisation
4.2 evaluate the potential for the use of activity-based costing        3.3 compare actual expenditure and income to the master budget of an organisation

4.    Be able to use financial appraisal techniques to make strategic investment decisions for an organization.
(Learning Outcome 5)    5.1 apply financial appraisal methods to analyse competing investment projects in the public and private
sector
6. Be able to interpret financial
statements for planning and decision
making.
(Learning Outcome 6)    6.1 analyses financial statements to assess the financial viability of an organization        5.2 make a justified strategic investment decision for an
organisation using relevant financial information
6.2 apply financial ratios to improve the quality of financial information in an organisation’s financial statements.        5.3 report on the appropriateness of a strategic investment decision using information from a post audit
appraisal
6.3 make recommendations on the strategic portfolio of an organisation based on its financial information

Assessment and Verification Sign Off record

Students’ confirmation of authenticity.                         Sign and Date for Interim and Final Assessment
I confirm that this is my own work.
Student Signature:    Date:
Assessor Signature:    Date:
Student Signature:    Date:
Assessor Signature:    Date:
Final Unit Grade Achieved:     Pass/Fail

Verification of Assessment Outcomes
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