Budgeting and Investment Appraisal in Applied Management Accounting

This assignment solution provides a detailed analysis of applied management accounting concepts, focusing on budgeting and investment decisions. It includes the preparation of a production budget, a direct material purchase budget, and a cash budget for April, May, and June. The solution also discusses the negative effects of budgeting within an organization, such as time consumption and strategic rigidity. Furthermore, it analyzes whether a company should manufacture a product or purchase it from an external supplier, considering both quantitative and qualitative factors. Finally, the assignment evaluates a potential investment using payback period, net present value (NPV), and internal rate of return (IRR) methods, concluding that the investment is financially viable due to its high IRR and positive NPV. Desklib offers numerous resources for students, including similar solved assignments and study tools.

APPLIED MANAGEMENT
ACCOUNTING

TABLE OF CONTENT
QUESTION 1...................................................................................................................................3
a)..................................................................................................................................................3
b)..................................................................................................................................................3
c)..................................................................................................................................................4
d)..................................................................................................................................................4
QUESTION 2...................................................................................................................................4
QUESTION 3...................................................................................................................................4
a)..................................................................................................................................................4
b)..................................................................................................................................................5
QUESTION 4...................................................................................................................................6
a)..................................................................................................................................................6
b)..................................................................................................................................................6
c)..................................................................................................................................................7
d)..................................................................................................................................................7
REFERENCES................................................................................................................................8

QUESTION 1
a)
Preparation of Production Budget in units
Particular April
(in $)
May
(in $)
June
(in $)
Budgeted sales units 800 1000 1200
Less Opening stock of
finished goods
-600 -750 -900
Add Closing stock of
finished goods
750
(1000* 75%)
900
(1200* 75%)
1050
(1400* 75%)
Total 950 1150 1350
b)
Preparation of direct material purchase budget in Kg and dollars
Particular April
(in $)
May
(in $)
June
(in $)
Units to be produced
(from production
budget)
950 1150 1350
Direct material per
unit
3 3 3
Total direct material 2850 3450 4050

needed for production
Add Closing direct
material
500
(1000* 50%)
600
(1200* 50%)
700
(1400* 50%)
Less Opening direct
material
-1200 -500 -600
Total direct material
purchase (in Kg)
2150 3550 4150
Cost per dollar (kg) 8 8 8
Total direct material
cost (in dollars)
17200 28400 33200
c)

(c)
Prepare cash budget for the month of April, May and June
Particular April May June
Opening cash balance
(A)
16500 -17800 5900
Cash Inflow:
Cash sales 86400
(144000×60%)
165600
(144000×40%) +
(180000* 60%)
201600
(180000×40%) +
(216000×60%)
Total cash inflow (B) 864000 165600 201600
Cash Outflow:
Cash paid on direct
material purchase
17200 28400 33200
Cash paid on direct
labour hours
42750
(950* 45)
51750
(1150* 45)
60750
(1350* 45)
Variable overheads 4750
(950* 5)
5750
(1150* 5)
6750
(1350* 5)
Manufacturing fixed
cost excluding
depreciation
24000 24000 24000
Administrative and
selling expenses
32000 32000 32000
Total Cash outflow
(C)
120700 141900 156700
Net Closing cash
balance (A) + (B) - (C)
-17800 5900 50800

d)
The participation of budgeting in an organization has various kinds of negative effects on
the business which are as follows,
Time required:
The preparation of the budget in the organization is considered to be the time taking
process which allows the business in the development of the organizational process. This time
can be used by the organization for the productivity of purpose (Bosch-Badia, Montllor-Serrats
and Tarrazon-Rodon,2020).
Gaming the system:
In scenarios, it has been said that there are many individuals which are able to change the
business financial results by modifying them towards the application in the organization.
Expenses Allocation:
The business is unable to allocate the organizational expenses as it is not able to provide
the organization with application of the organizational advantages.
Strategic Rigidity:
Due to the fact that the organization is not able to flexible enough towards the
organization.
QUESTION 2
QUESTION 3
a).
In case the product is being manufactured by the company
Cost Per unit Total
Direct material 3.51 105300
Direct labour 2.1 63000
Factory space rental 1.5 45000
Equipment leasing costs 0.6 18000
Fixed manufacturing overhead 3.75 112500
Total manufacturing costs 11.46 343800
In case product is purchased by Expo Limited
Per unit cost total number of units Total cost

8.65 30000 259500
With the above calculation it is clear that the Sunsuki company must purchase the product from
Expo limited. This is particularly because in case of the purchasing, the cost of purchase is low
in comparison to the manufacturing. Along with this, another reason for the company to purchase
from Expo limited is that in case manufacturing will not be taking place then company can also
withdraw the rental agreement without any penalty and this is also beneficial for the company.
b)
There are certain qualitative factors which a company needs to consider before agreeing
to purchase XYZ equipment.
Competitive advantage:
The equipment which the organization is looking to purchase needs to have a qualitative
advantage for this organization, if the equipment can provide the organization competitive
advantage over its other competitors then it is essential for the business to ensure how cost
effective the business can be in the management of the competition (Chen and et.al., 2019).
Industrial Growth Trends:
This equipment should highlight the fact that it is providing the business a growth trend
which can help the business in developing a growing trend which can help the business in
growing with the different tools.
Company operations:
The equipment which the organization needs to purchase needs to be very effective
towards helping the business in the growth. The operations of the organization can be helped
with the equipment which will allow the business to grow and provide its customers with
effective performance.
QUESTION 4
a)
Computation of Payback period
Year Cash inflows (in $)
Cumulative cash
inflows (in $)

1 95000 95000
2 100000 195000
3 120000 315000
4 150000 465000
5 90000 555000
Initial investment 75000 150000
Payback period 5
-0.5
Payback period 2 year and 4 months
For this year the payback period is calculated at 2 years and 4 months showing that the
organization is going to take this amount of time to be able to recover the initial investment.
b)
Computation of NPV
Year
Cash inflows (in
$) PV factor @ 10%
Discounted cash inflows
(in $)
1 95000 0.893 84821.4285714286
2 100000 0.797 79719
3 120000 0.712 85414
4 150000 0.636 95328
5 90000 0.567 51068
Total discounted cash
inflow 396351
Initial investment 75000
NPV (Total discounted
cash inflows - initial
321351

investment)
The net present value of this investment is calculated at 321351 this shows the total value
of the potential investment opportunity which is the idea behind the NPV for the project which
shows the idea behind the opportunity of investment that is the future cash inflows (Trejo-Pech
and White, 2020).
c)
Computation of IRR
Year Cash inflows (in $)
0 -75000
1 95000
2 100000
3 120000
4 150000
5 90000
Internal rate of return (IRR) 133%
The percentage of IRR is the metric which is used in the financial analysis for the
estimation of the profitability of the potential investments (Bosch-Badia, Montllor-Serrats and
Tarrazon-Rodon, 2020). The IRR is a discounted rate which makes the net present value of all
the cash flows is considered to be zero for the discounted cash flow analysis.
d)
On the basis of the outcome of all the three financial analysis in the organization it can be
said that the investment is going to be very fruitful for the organization and is going to help the
business in the generation of profit. This can be said so confidently because of the IRR
percentage which has been 133% shows the effectiveness of the investment over the five years.
The net present value has shown positive results as the cost of the new machine is way higher.

The payback period is almost 50% of the total estimated life of the asset showing that this
organization is able to recover its investment in the time of 2 years and 4 months.

REFERENCES
Books and Journals
Bounmasith, N. and GuangLu, L., 2018. Advantages and Disadvantages on Contract Budgeting
in Lao PDR. JL Pol'y & Globalization. 72. p.18.
Bosch-Badia, M.T., Montllor-Serrats, J. and Tarrazon-Rodon, M.A., 2020. The Capital
Budgeting of Corporate Social Responsibility. Sustainability. 12(9). p.3542.
Trejo-Pech, C.J. and White, S., 2020. Capital budgeting analysis of a vertically integrated egg
firm: conventional and cage-free egg production. Applied Economics Teaching
Resources (AETR). 2(4). pp.TBD-TBD.
Chen, Y.J., and et.al., 2019. Fraud detection for financial statements of business groups.
International Journal of Accounting Information Systems. 32. pp.1-23.