You are employed in a financial consultancy and one of your clients is a relatively new company that is facing rapid growth. As they began as a small family business, they have not had the level of financial control that would be expected in a business of their current size. The management team are looking to employ an accountant. Before taking this step they need to understand the reasons for recording and reporting financial information, the legal responsibilities they have in this respect and the usefulness of financial information. They also require some specific help in relation to working capital and in respect of a new project which they are considering.
You should assume the business is incorporated i.e. in the UK as a limited company; in other countries, the equivalent. Your answers can be based on law and regulations in the country of your choice as agreed with your tutor.
You are required to produce a written document for the board of directors that answers their questions about accounting and financial control and to produce some calculations in respect of figures they have provided.
Produce a written document for the board of directors that:
• Explains the purpose and requirements for keeping financial records
• Analyses the techniques for recording financial information Analyses the legal and organisational requirements of financial reporting
• Evaluates the usefulness of financial statements to stakeholders
• Explains the difference between management and financial accounting
• Explains the budgetary control process
• Describe different costing methods that are used to determine product pricing
The business carried out some calculations on set up and the following information relating to their main product was produced:
Sales Revenue 62
Direct labour (1 hour) (22)
Direct materials (1kg) (20)
Fixed overheads (6)
Standard profit (14)
The budgeted output for last month was 1,000 units of this product. Actual output was 1,100 units which were sold for £69,900. The actual production costs were:
Direct labour (1075 hours) 24,420
Direct materials (1175 kg) 23,260
Fixed overheads 6,400
There were no inventories at the start or the end of the month.
You are required to calculate the variances for the month from the available information, and use them to reconcile the budgeted and actual profit figures. You should produce a document that identifies and explains the variances and reconciles the actual and budgeted profit figures. You should identify further information required that would help to further explain variances.
The directors have the opportunity to invest in a new project. This involves the acquisition of new machinery. The figures for the project are shown in the table below.
Cost of machine £10,000
Estimated life 5 years
Estimated future cash flows:
Year 1 £2,000
Year 2 £3,000
Year 3 £3,000
Year 4 £5,000
Year 5 £5,000
Estimated residual value £3,000
For the project, calculate the accounting rate of return and the payback period. In your report, explain the significance of these values and indicate how such values can be used to determine the viability of a project.
The board think that they might like to raise money to enable them to invest in the project. Explain to the board how they might obtain finance for a business project. In addition discuss the components of working capital and describe the importance of effective working capital management as part of the process of making funds available for projects.