Accounting for Decision Making - finanacial management

Running head: ACCOUNTING FOR DECISION MAKING
Accounting for Decision Making
Name of the Student:
Name of the University:
Author Note

1ACCOUNTING FOR DECISION MAKING
Table of Contents
Financial Management:................................................................................................2
1. Identifying the cost for each source of finance, while explaining the advantages
and limitations of both DDM and CAPM:......................................................................2
2. Determining the optimum cost of capital using Weighted Average Cost of Capital
for the target capital:.....................................................................................................3
3. Evaluating the total value and breakeven rate of the new operations:....................4
4. Analysing the sensitivity of the projected NPV:........................................................5
5. Providing for and against the suggestion of the account’s manager:......................6
Management Accounting:.............................................................................................7
1. Identifying the difference between absorption and marginal costing, while
detecting different profits:.............................................................................................7
2.1 Preparing the statement showing the highest profit available for the organisation:
......................................................................................................................................7
2.2 Highlighting the steps that could be used to improve profitability in light of the
labour shortage:............................................................................................................8
3.1 Calculating the variance for March, while using them to reconcile the budgeted
and actual profit figure:.................................................................................................9
3.2 Indicating how flexible budget of the company for identifying the budget variance:
......................................................................................................................................9
References:................................................................................................................10

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Financial Management:
1. Identifying the cost for each source of finance, while explaining the
advantages and limitations of both DDM and CAPM:
Particulars Value
Share price 40
Dividend per share 1.2
Growth rate 4%
Cost of equity DDM 7.12%
Particulars Value
Rf 3%
Rm 6%
Beta 1.15
Cost of equity
CAPM 6.45%
The information in the above table states about the cost of equity under
Dividend Discount Model and Capital Asset Pricing Model, as it helps in determining
the equity cost. However, the values under both the method is relevant different,
which is due to the assumptions and methodology of the formulas the DDM model
mainly focuses on detecting the value of cost of equity by utilising dividends, share
price and growth rate of the organisation. On the other hand, the CAPM formula
uses beta levels, market premiums and risk-free rate for understanding the cost of
equity level of a stock. Hence, under both the methods the overall cost of equity is
mainly derived, which the management uses for calculating WACC (Kisman and
Restiyanita 2015).
Advantages of DDM Disadvantages of DDM
Conservatism that is used in DDM is
considered as one of the advantages, as
investors are able to discount the future
earnings and determine the appropriate
The major limitation of the model is
based on its selectivity, where it only
focuses on factor and ignores non-
dividend factors such as brand loyalty,

3ACCOUNTING FOR DECISION MAKING
valuation of the company. customer retention and the ownership of
intangible assets.
The simplicity of the model is one of the
advantages, which could be used by
novice investors to understand the
current valuation of the company.
Sensitivity is also a major limitation
where without the key assumptions the
overall values of the DDM are no correct.
Hence, investors can only use the
formula on companies that provide
dividends to investors on constant basis.
Advantages of CAPM Disadvantages of CAPM
The CAPM eliminates unsystematic
risk
Too many assumptions
CAPM helps in detecting Systematic
risk
Assigning different variables to the CAPM
formula
CAPM value is used in investment
appraisal techniques
The focus of the CAPM is on using utilising
the risk-free rate
CAPM formula is ease of use Determining the project proxy beta
2. Determining the optimum cost of capital using Weighted Average Cost of
Capital for the target capital:
Particulars Value Particulars Value
Rf 3% Weight debt 40.00%
Rm 6% Weight Preferred equity 10.00%
Beta 1.15 Weight Common equity 50.00%
Cost of equity CAPM 6.45% Cost of debt 15.71%
Cost of preferred equity 10.42%
Particulars Value Cost of equity CAPM 6.45%
Current bond price 115 Tax 30.00%
FV 100 WACC 8.67%
Coupon rate 15%
Time 10
Coupon payment 15
Cost of debt
15.71
%
Particulars Value
Average preferred dividend 10
Preference shares 96

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Cost of preferred equity
10.42
%
The information in the above table states about the formula that is used for
calculating the Weighted Average Cost of Capital. The WACC formula mainly
contains values from preferred equity, Corporate bonds, and Common stock. In
addition, the Cost of equity is calculated at 6.45%, while cost of debt is 15.71% and
cost of preferred equity is at 10.42%. Hence, the formula has indicated that the
WACC value is at the levels of 8.67% with a tax rate of 30%. Therefore, the values
that have been calculated could help in determining the coast of capital of the firm,
which could be sued for understanding the correct valuation of the net present value.
The CAPM formula has been used instead of the DDM model, as it is considered to
be the corrective way for determining the correct cost of equity of a firm. The DDM
formula is mainly dependent on the overall dividends and growth rate of the
company, whereas with the CAPM formula includes the actual risk components of
the firm. Hence, the expected rate of return for the equity could be determined, as
the most viable values for determining the cost of equity of a firm (Koziol 2014).

5ACCOUNTING FOR DECISION MAKING
3. Evaluating the total value and breakeven rate of the new operations:
The calculations in the above table represent the values of the future cash
flow for Hull, Leeds, and Sheffield. The information directly provides insight on the
net present value and internal rate of return for each investment options presented to
the organisation. Hence, the values could be used for determining the significance of
the investment options and best possible returns it could generate over the period of
time. From the relevant analysis, it is detected that only Hull is considered to be the
most viable extended operation, which could generate the highest level of income
from operations. The NPV value of Hull is at the level of 40,292,675, while Leeds has
a value of 26,319,566 and Sheffield value is 21,514,635. In the similar context, the
overall IRR, or the breakeven rate value of the Hull in higher in comparison to other
extended operations. The combination of each extended operation is relevantly
positive, as both its NPV and IRR is higher that the initial constraints. Henceforth, the
invested in the extended operations is viable, as it would allow the organization to

6ACCOUNTING FOR DECISION MAKING
generate high level of income in the long and maximize their profits from the
operations (Baum and Crosby 2014).
4. Analysing the sensitivity of the projected NPV:
Sensitivity analysis cost of
capital Sensitivity analysis cost of capital
Hull 40,292,675 Hull 40,292,675
7.02% 45,334,921 12,150,000 25,149,966
7.80% 42,868,415 13,500,000 32,322,829
8.67% 40,292,675 15,000,000 40,292,675
9.53% 37,877,742 16,500,000 48,262,522
10.49% 35,392,722 18,150,000 57,029,353
Leeds 26,319,566 Leeds 26,319,566
7.02% 30,160,930 9,720,000 14,205,399
7.80% 28,281,396 10,800,000 19,943,689
8.67% 26,319,566 12,000,000 26,319,566
9.53% 24,481,153 13,200,000 32,695,444
10.49% 22,590,404 14,520,000 39,708,909
Sheffield 21,514,635 Sheffield 21,514,635
7.02% 24,864,947 8,100,000 11,419,496
7.80% 23,225,971 9,000,000 16,201,404
8.67% 21,514,635 10,000,000 21,514,635
9.53% 19,910,365 11,000,000 26,827,867
10.49% 18,259,777 12,100,000 32,672,421
The analysis in the above table directly presents about the sensitive analysis
for each of the extended operations that is being proposed to the organization. The
sensitivity analysis is mainly conducted to support the BREXIT conditions, where
both the cost of capital and sales units could alter for the new project. From the
overall analysis, it has been detected that the alternations of the cost of capital is
relevantly low, which could indicate that is has low sensitivity in comparison to sales
units. The calculations have been conducted on the overall revenues, where it has
been anticipated that the reduction or increment in the sales unit will have similar
impact on its cost of sales. Thus, alternations in the gross profit is mainly conducted

7ACCOUNTING FOR DECISION MAKING
for detecting the level of changes it might have on the overall NPV values for each
extended operations of the organization. Upton et al. (2015) indicated that with the
help of sensitivity analysis companies are mainly able to determine the level of
alternations, which could be conducted due to external factors.
5. Providing for and against the suggestion of the account’s manager:
The focus of Ms Madison is on profit maximisation, while neglecting the
approach towards increasing the value of the firm and shareholder wealth
maximisation. The focus of the account manager is not appropriate, as the company
who focuses on only profit maximisation and not taking into account the value of the
firm and shareholder wealth maximisation would have negative impact on their
market image and reputation. The other limitation of focusing on profit maximisation
is to neglect the fact that firm value is more important in the valuation purpose, which
is essential in detecting its current share price in the market. Hence, the account
manager needs to focus on the total firm value, shareholder wealth maximisation
and profit maximisation.
Management Accounting:
1. Identifying the difference between absorption and marginal costing, while
detecting different profits:
There are relevant differences between absorption and marginal costing,
which are depicted as follow.
 The marginal costing method uses the variable cost as product cost. On the other
hand, absorption is a method, which uses both variable cost and fixed cost, as
the product cost.

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 The overheads used in variable cost are fixed costs and variable costs. However,
absorption method overhead cost consists of production, distribution, selling and
administration (Adachi and Ebina 2014).
 The marginal costing method does not conduct factory overhead values in the
inventory assets system, which is conducted in the absorption costing method.
 The profits levels of marginal costing method are mainly calculated by using profit
volume ratio, whereas in Absorption costing the overall income is derived by
adding the fixed cost, which reduces the actual benefits from operations.
There is significant difference between the profitability measurement of both
marginal costing method and variable costing method. This is the main reason
behind the low level of profitability that is observed, when using he absorption-
costing method in contrast to the marginal costing method.
2.1 Preparing the statement showing the highest profit available for the
organisation:
Service A B C Total
Sales revenue 44.65 35.81 34.54 115.00
Variable costs
Materials 8.00 6.00 7.00 21.00
Labour 8.65 6.81 7.54 23.00
Expenses 5.00 4.00 4.00 13.00
Allocated fixed cost 6.00 15.00 12.00 33.00
Total cost 27.65 31.81 30.54 90.00
Profit 17.00 4.00 4.00 25.00
The information in the above table indicates about the overall profits that
could be generated by using the restraints from the labour cost. Hence, the
percentage method is mainly used for deriving the distribution of the overall 23,000
labour cost within the three segments of the products. This method would ensure

9ACCOUNTING FOR DECISION MAKING
that the overall cost associated with the labour expense needs to be evaluated for
determining the exact level of income, which could be generated from the
operations. The calculation is mainly using the weighted methodology for
comprehending the constraint of the labour cost that would have impact on different
operations (Adachi and Ebina 2014).
2.2 Highlighting the steps that could be used to improve profitability in light of
the labour shortage:
The labour shortage is considered, as one the drastic problems that needs to
be addressed by the company for securing the level of productivity required to meet
their future goals. One of the measures that can be used by the company is to
initiate the training process, which could help in recruiting appropriate the level of
employees to support the shortage of employees. This process would increase
expenses but would ensure the company steady flow of employees for their
workforce, which could help in supporting the future operations and productivity. The
second method that can be used by the organisation is to increase automation
system, which could help in reducing the level of requirements of labour in the
workforce and allow the management to meet productivity requirements. The second
method would mainly require high investments from the organisation, as automation
process requires latest technology. Hence, the overall capital expenditure of the
company would increase, which would lead to rising investments and capital infusion
(Collis and Hussey 2017).
3.1 Calculating the variance for March, while using them to reconcile the
budgeted and actual profit figure:
Particulars
Budgeted
value Actual value Variance

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Sales Revenue 40.00 40.36 0.36
Direct labour (1 hour) (13.00) (13.19) (0.19)
Direct materials (1 kg) (12.00) (12.23) (0.23)
Fixed overheads (5.00) (5.18) (0.18)
Standard profit 10.00 9.76 (0.24)
The information in the above table provides explanation about the overall
variance between the budgeted values and actual values of the organisation fort
March. Therefore, the variance calculation indicates that the budgeted values have
provided negative output, as the variance is negative for majority of the components.
Thus, the calculations have indicated that the budgeted values are not appropriate,
as they are not able to comprehend the overall cost and sales revenue, which is
been generated during the period of March. The overall increment in expenses has
been witnessed in comparison to the budgeted values, which is the main reason
behind the overall decline in the standard profits estimated in the budget. Thus, the
company needs to improve their budget preparation system, as it would ensure that
the company anticipates actual values and reduce the variance between the actual
and budget values (Sponem and Lambert 2016).
3.2 Indicating how flexible budget of the company for identifying the budget
variance:
Flexible budget is one of the methods, which could be used by the company,
as it provides more insight on the budget that is prepared by the company. Flexible
budgeting system would mainly ensure that the static budget amounts do not
change. They remain unchanged from the amounts established at the time from
which the static budget was prepared and approved (Das et al. 2015).

11ACCOUNTING FOR DECISION MAKING
References:
Adachi, T. and Ebina, T., 2014. Cost pass-through and inverse demand curvature in
vertical relationships with upstream and downstream competition. Economics
Letters, 124(3), pp.465-468.
Adachi, T. and Ebina, T., 2014. Double marginalization and cost pass-through:
Weyl–Fabinger and Cowan meet Spengler and Bresnahan–Reiss. Economics
Letters, 122(2), pp.170-175.
Baum, A.E. and Crosby, N., 2014. Property investment appraisal. John Wiley &
Sons.
Collis, J. and Hussey, R., 2017. Cost and management accounting. Macmillan
International Higher Education.
Das, S., Yang, B., Gu, G., Joshi, P.C., Ivanov, I.N., Rouleau, C.M., Aytug, T.,
Geohegan, D.B. and Xiao, K., 2015. High-performance flexible perovskite solar cells
by using a combination of ultrasonic spray-coating and low thermal budget photonic
curing. Acs Photonics, 2(6), pp.680-686.
Kisman, Z. and Restiyanita, S., 2015. M. The Validity of Capital Asset Pricing Model
(CAPM) and Arbitrage Pricing Theory (APT) in Predicting the Return of Stocks in
Indonesia Stock Exchange. American Journal of Economics, Finance and
Management Vol, 1, pp.184-189.
Koziol, C., 2014. A simple correction of the WACC discount rate for default risk and
bankruptcy costs. Review of quantitative finance and accounting, 42(4), pp.653-666.

12ACCOUNTING FOR DECISION MAKING
Sponem, S. and Lambert, C., 2016. Exploring differences in budget characteristics,
roles and satisfaction: A configurational approach. Management Accounting
Research, 30, pp.47-61.
Upton, J., Murphy, M., De Boer, I.J.M., Koerkamp, P.G., Berentsen, P.B.M. and
Shalloo, L., 2015. Investment appraisal of technology innovations on dairy farm
electricity consumption. Journal of dairy science, 98(2), pp.898-909.