BMP6015 Exam: Financial Reporting for Management

This exam paper for BMP6015 course covers topics such as budgeted cost per unit, critical evaluation of ABC costing, activity-based management, net present value, profitability index, financial ratios, and balanced scorecard. The paper includes calculations and discussions on the financial performance of a company between 2019 and 2020. The balanced scorecard is evaluated as a method of assessing performance.

BUSINESS MANAGEMENT PATHWAYS
SEMESTER 2, EXAMINATION 2021/22
FINANCIAL REPORTING FOR MANAGEMENT
MODULE NO: BMP6015
==============================================================
1 of 21

Question 1
(a) Calculation of budgeted cost per unit of each product
(i) Determination of the cost driver for each activity and absorption rate:
Cost pool/activity Cost driver
Overheads Activity Absorption rate
£ units £
Stores Cost No of Material Setup 140000 320 437.50
Production Cost No of Production Setup 280000 280 1000
Quality Control Cost No of Quality Inspection 180000 90 2000
(i) Calculation of budgeted cost per unit for each product:
Micro Delta
Units
Price/cost (£) £
Units
Price/cost (£)
£
Direct material 60000 2.60 156000 25000 3.90 97500
Direct labour 60000 3.50 210000 25000 2.70 67500
Store costs 100 437.50 43750 220 437.50 96250
Production set up costs 80 1000 80000 200 1000 200000
Quality control inspection 30 2000 60000 60 2000 120000
549750 581250
Units produced 60000 60000
Cost per unit 9.1625 9.6875
2 of 21

(a) Critical evaluation of ABC as a costing method:
ABC can be as a techniquewhich helps in calculation of overhead and indirect expenses such
as wages, worth with reference to stock(Barzegar, 2021).
This is considered and counted as anessential method which clarifies that it is a tool which
assess in cost book keeping recognized on definite occurrences, that needs to be worked upon
so that the tasks assigned could be accomplished concerningthe objectives and planned goals
of a company.
In such cases there are enterprise jeopardies, compensations which accompany and are allied
with schemes such as ABC costing.
Pros:
 It is observed to be helpful in planning strategies and policies. It also assists in
becoming one of the fine companies for better outcomes and building certain
courses as well.
 It is hence assured that the computation done with the help of such methods is reliable
and error free.
 With the assistance of such tools and techniques companies can assess the procedure
and choice of selection adapted by counting different factors that affect the working of
enterprise.
It is useful in calculating and determining additional expenses with the help of such methods
and afterwards supervisors can eradicateand minimize the expenditure by developing
& choosingensuredtactics(Alabi, 2021).
 It is also dependent and trustworthy for performing the product related costing for
performing tasks with alternative methods practiced so far.
 It is helpful when there is full control and competency in professional companies.
Cons:
 It is a difficult situation for executives, supervisors and staffs to examine& apportion
administrative, service-related outlays and construction as well related to
organizational events.
is a complex activity to explain and make owners & stakeholders understand.It is
possible that the actions and price drivers might result in unsuitable and unresponsive
situations.
3 of 21

4 of 21

(b) How Activity Based Management could assist better management decision making and control:
Activity based management is observed to perform and serve as a tool when compared to other
tools and techniques prevailing in competitive market.ABC is well known for
improving the effectiveness and efficiency of the organisation by cutting down
costs,minimizing risks and developing proper plans for having better control(Carr,
Aier and Cao, 2021). It counts expenditure that related to production costs and
machinery related expenses as well. It also helps to increase revenue and profitable
margin that would help to improve working and functioning of a business in
competition. ABC method is counted as one of the effective toolsthat helps companies
to enjoy stabilityand sustainability in unpredictable situationswhich would help them
to prevail better chances for growth and expansion as well.Such methods are kept at
foremost priority when compared to other tools the reason behind is that it ascertains
ideas related to what time would best suit which method and would serve right in
fulfilment and achievement of organisational goals in precise manner.Activity based
costing Is helpful in management of plans, controlling operation related works in a
firm that might lead to rise in unwanted expenditures.It also facilitates assistancein
minimizing cost incurred which is functioning as a hurdle in growth and expansion of
company.It helps to understand elementsthat leads to miscellaneous costs and the ways
that would assist in controlling the same within given time frame.
ABC Can serve as a guiding medium in specific ways such described as under:
 ABC can be useful for executives, supervisors, managers in planning related
decisions for future purposes keeping unpredictable situations in mind.
 It explains what can be the useful ways that would be assisting in planning and
implementation of related decision.
 It also gives an idea about future related conditions that would be useful in
generating profit and revenue.
 It is useful in keeping profit related margins of company set well in advance.
 In case of Traditional costing,it does not allow working and functioning in specific
industries such as service-related areas.
 It can be used for finding reasons behind unwanted risks, costs and obstacles which
increase unpredictable results in a certain business sector.
5 of 21

6 of 21

7 of 21

Question 2
(a) Calculation of Net Present Value
Discount Project A Project B
factor
(10%)
CF DCF CF DCF
Year 1 0.91 200000 181800 300000 272700
Year 2 0.83 150000 123900 250000 206500
Year 3 0.75 200000 150200 225000 168975
Year 4 0.68 175000 119525 200000 136600
Total DCF 575425 784775
Initial investment 500000 700000
NPV 75425 84775
Recommendation:From the above computed data it is clear that business must choose Project
B according to calculation of Net present value as they have better chances available for
generating better returns from the project when compared with Project A.
Thus,
Project B is more worthwhile.
(b) Calculate Internal Rate of Return using 20% as the higher discount rate
Discount Project A Project B
factor (20%) CF DCF CF DCF
Year 1 0.83 200000 166600 300000 249900
Year 2 0.69 150000 104100 250000 173500
Year 3 0.58 200000 115800 225000 130275
Year 4 0.48 175000 84350 200000 96400
Total DCF 470850 650075
Initial investment 500000 700000
NPV -29150 -49925
8 of 21

(ii) Calculation of Internal Rate of Return (continued)
IRR of Project A= 10% + (-29150 / -29150 + 75425) * (20% - 10%)
= 10% + (-29150 / 46275) * (10%)
= 10% + (-0.63) * 10%
= 10% - 0.063
= 9.94%
IRR of Project B= 10% + (-49925 / -49925 + 84775) * (20% - 10%)
= 10% + (-49925/ 34850) * (10%)
= 10% + (-1.43) * 10%
= 10% + (-0.143)
= 9.86%
9 of 21

(c) Critical evaluation of the Net Present Value of Project appraisal:
It is observed after computation of Net present value of both ventures that they reflect positive
results. Therefore, it can be said that they are financially feasiblebut at the time of
selectionfrom the available pool. To take in account one plan, the firm has to look at
profitability ratios of both the project plans. With the help of profitability index of
planned project, it can be concluded that Project A is a better choice(Dadashzadeh,
MohammadzadehSalteh, Hejazi and Taghizadeh, 2020).
(d) How the Profitability Index is used for project appraisal:
Profitability Index = Present Value of future cash flows / Initial Investment
Project A at (10%) = 575425/500000
= 1.15
10 of 21

Project B at (10%) = 784775/700000
= 1.12
Various uses of Profitability index are stated as under:
 The computed PI would helpbusiness in decision making related to selection of project
as which must be chosen for performing operation related activities. It also explains
which planwould not generate enough profit and revenues for a organization and must
be ignored.
 Profitability index calculated for several projects depicts the risk that the
enterprisecantake in account at the time of selecting projects.
 It further assists as a tool in managing companyand choose projects that fit best in the
need and wants of business and which facilitate better earning while running life cycle
of organization.
 If the PI of any business is recorded to be higher than 1 then it is easier formanagement
of company that the plan chosen fits right in the needs of business.
11 of 21

Question 3
(a) Calculation of ratios and discussion of the financial performance of the company between
2019 and 2020.
Calculation of Fiscal Ratios:
1. Net profit margin ratio = (Net Profit / Net sales) * 100
2019 = (70 / 1000) * 100 = 7 %
2020 = (190 / 2000) * 100 = 9.5 %
2. Operating Profit Margin Ratio = (Operating Profit / Net Sales) * 100
2019 = (150 / 1000) * 100 = 15 %
2020 = (340 / 2000) * 100 = 17 %
3. Working Capital = Current Assets – Current Liabilities
2019 = 1100 – 1300 = -200
2020 = 1700 – 500 = 1200
4. Current Ratio = Current Assets / Current Liabilities
2019 = 1100 / 1300 = 0.85: 1
2020 = 1700 / 500 = 3.4: 1
5. Acid – test ratio = (Current Assets – Inventory) / Current Liabilities
2019 = (1100 – 200) / 1300 = 0.69
2020 = (1700 – 1200) / 500 = 1: 1
12 of 21

6. Debt – to – Equity Ratio = Total Debt / Total Equity
2019 = 1900 / 600 = 3.16: 1
2020 = 1500 / 2000 = 0.75: 1
7. Earnings per share = Earnings available for equity shareholders / Outstanding number
of shares
2019 = 70 / (500 / 0.5) = 70 / 1000 = 0.07
2020 = 190 / (1200 / 0.50) = 190 / 2400 = 0.08
Analysis:
From the above calculated ratios, it can be asserted that the operating profit and net profit of
the firm seem to increasethe reason being due to enhancing performance recorded of
company.The working capital ratio of the firm represents that the enterprise is able to achieve
its present period obligation. The liquidity positioning of the company is better than before and
it is working with full efficiency and effectiveness.
The current ratio of the company in year 2019 is recorded as 0.85 that is counted lesser in
disparitywith year 2020. The ideal current ratio results from1.50 to 3which seems to be
accurate andenough. Thecurrent proportion is limited of what one represents that the factor has
problems regarding liquidity. In any case, from above assessment, it is examined that the
business had the choice to work on something quite alikein year 2020.
The debt – equity ratio of business recorded in year 2019 is 3.16 which denotes that company
isassociated with risky factors. In addition, it shows that the organisation has obtained
assets of the company and advances in their capital. The own assets of the business are
limited and obligations are all more at certainpoint which make the company unsafe in
reference to speculations. In any case, there is a fall in such amountin year 2020 which
is 0.75 that depicts that the company has reimbursed their obligations and
reclaimedsame that makes the business safe and sound. Further obligation equity
quantitymust not be more than 2 in any company. The EPS of enterprise are worked
on in year 2020 when contrasted with year 2019 as it reflects in the above calculation
carried out. Higher earnings per share imitatesthat the company is able to meet
investor expectations related to organisation(Ferracuti and Stubben, 2019).
13 of 21

14 of 21

(b) Critical evaluation of the Balanced Scorecard as a method of assessing performance.
15 of 21

(c)
The balanced scorecard is denoted to as a tool that evaluate, identifies,improve and assistances
the corporate in supervisory the numerous operations of the professional and rendering the
results of the business. This technique in the management concept works as a presentation bar
which benefits the management to keep aorder of the enactment of the special functions of the
business (Gorjian, Ebadi, and Yildizhan, 2021). A balanced scorecard also helps in
arrangement and monitoring business design after examining processes such as Flexible and
simple management configurations, Joint unit associations, Top-level support well-disciplined
staff, without which it won't work carefully and effectively. A balanced scorecard includes
different events in a successively operating business which could be clarified such as Clients,
Finance, Learning, growth and expansion,Business Process, Business
working(GhodratiZoeram, Azinfar,NabaviChashmi and Dadashi, 2021).
Following explains the ways how a balanced scorecard is a great tool in management and
accounting:
1. It integrates four central issues, interior management, learning, client development and
monetary aspects too.
2. It assists with deciphering a hierarchical objective, missions and systems into genuine
activities and result.
3. It advances better essential preparation and profitable strategy detailing also.
4. It likewise gives a superior comprehension to staff individuals from the organization and
outside investors to convey the methodology and plans on schedule and survey the plans.
5. Comprehends the determined vision as to how the business is treated in the present times
and how they will be treated in the future.
6. It helps in puttingup , objectives and estimating the advancement goals of the undertaking
and field-tested policies up to this point.
7. It helps to convey in a better and professional manner about breaking down choices taken by
directors and superiors in a business(Lennox, and Wu, 2022).
16 of 21

Question 4
(a) Calculation of variances:
£ Favourable (F)/Adverse
(A)
1. Material price variance
(Standard Price – Actual Price) * Actual
Quantity
(5 – 1.67) * 30 99.9 F
2. Material usage variance
(Standard Quantity – Actual Quantity) *
Standard Price
(25 – 30) * 5 25 A
3. Total material cost variance
Standard Cost – Actual Cost
125 – 50.1 74.9 F
4. Labour rate variance
(Actual Rate – Standard rate) * Actual
Hours
(2.25 – 4) * 2 3.5 A
17 of 21

5. Labour efficiency variance
(Actual Hour – Standard Hour) * Standard
Rate
(2 – 3) * 4 4 A
Standard Actual
Standard
Quantity
Standard
Price
Standard
Cost
Actual
Quantity
Actual
Price
Actual Cost
Material 25 5 125 30 1.67 50.1
Labor 3 4 12 2 2.25 4.5
18 of 21

(a) Critical evaluation of standard costing as a method of cost control:
Standard costing further can be explained as a important technique that is useful in making
understand certain reasons behind incurring expenses during production process and how it
can be monitored. It is more helpful for concerns that relates to manufacturing department. It
takes in account two aspects that defines performance measurement which is done with the
help of two parameters such as standard and actual performance.
For computation ofstandard cost of a company manager are needed to compare actual results
with standard so recorded for a given period. Variance that results after such records denotes
the variation observed between actual and expected results. Preventive measure can be taken
by the business for covering such difference which would help to improve performance
facilitated at present point of time.There are various type of variance which can be described
as Overhead, price and lab ourvariance.
The significance of standard costing is statedbelow:
 This technique helps to understand comparison between actual results and the
standards set so far by the organization. With the help of standard costing business can
control cost related to labor, unwanted expenditures and improve efficiency of the
business.
 Every firm whether small or large is expected to decide what cost can be controlled and
minimized. Standard costing is helpful to plan for future and unforeseen situations
which can affect working of business in market. It helps to plan in advance what can be
done and how losses can be covered & minimized.
 Itis all about budget and estimations. These standards are obtained from industries best
practices.
 Standard costing helps in improving the cost of the product such as material cost, labor
cost overhead etc.
 It also helps to understand where the business is lacking in its operational work and
where it is lagging behind others in competition and reasons responsible for it.
Disadvantages of standard costing are listed below:
19 of 21

 Computation of Variances is a lengthy process and it may be found beneficial or
unfavourable at times. Involving a lot of operations might miss processing relating to
variances.
 Standard costing might lead to complicated and complex situations because most of
the time it is possible that it might only consider unfavourable variances that will
demotivate staff of the business to work towards achievements of goals in a company.
 There are times when the variances are not recorded by staff and workers. This result
problematic situations for business.
20 of 21

REFERENCES
Alabi, F.Z., 2021. Accounting System and Financial Reporting Quality of Microfinance Banks
in Kwara State, Nigeria(Doctoral dissertation, Kwara State University (Nigeria)).
Barzegar, M., 2021. The effect of accounting comparability on the quality of financial
reporting and discretionary accruals. Journal of Accounting and Management
Vision. 4(44). pp.34-47.
Carr, K.M., Aier, J.K. and Cao, J., 2021. Did PCAOB rules on ethics, independence, and tax
services influence financial reporting for income taxes?. Journal of Accounting and
Public Policy. 40(5). p.106845.
Dadashzadeh, G., MohammadzadehSalteh, H., Hejazi, R. and Taghizadeh, H., 2020. Strategies
for Inhancing Financial Reporting Immunization in Iran: Grounded Theory
Approach. Management Accounting.
Ferracuti, E. and Stubben, S.R., 2019. The role of financial reporting in resolving uncertainty
about corporate investment opportunities. Journal of Accounting and
Economics. 68(2-3). p.101248.
GhodratiZoeram, A., Azinfar, K., NabaviChashmi, S.A. and Dadashi, I., 2021. Chief
Executive Officer's (CEO) Testosterone Level and Fraudulent Financial
Reporting. Empirical Research in Accounting. 11(3). pp.27-46.
Lennox, C.S. and Wu, X., 2022. Mandatory internal control audits, audit adjustments, and
financial reporting quality: Evidence from China. The Accounting Review. 97(1).
pp.341-364.
Mukhlisin, M., 2020. Level of Maqāsid ul-Shari’āh’s in financial reporting standards for
Islamic financial institutions. Journal of Islamic Accounting and Business Research.
Nurunnabi, M., 2021. International Financial Reporting Standards Implementation: A Global
Experience. Emerald Group Publishing.
Pamungkas, I.D. and Utomo, S.D., 2018. Fraudulent financial reporting: An application of
fraud pentagon theory to association of Southeast Asian nations corporate governance
scorecard. J. Advanced Res. L. &Econ.. 9. p.1729.
21 of 21