Business Finance: Methods to Reduce Costs and Cash Flow Forecast

This report discusses the examination of cost information to identify variable, fixed, or semi-variable costs. It outlines methods to reduce costs, including activity-based costing and absorption costing. The report also includes a cash flow forecast for 12 months and evaluates the performance of the company based on budget information. It considers financial and non-financial implications with external factors affecting the cost and provides recommendations to the company.

Time constrained project
Business Finance

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................3
TASK 1............................................................................................................................................3
Methods of attributing indirect costs...........................................................................................4
TASK 2............................................................................................................................................9
Methods to reduce costs...............................................................................................................9
TASK 3..........................................................................................................................................11
Preparing the Cash Flow Forecast of 12 months.......................................................................11
TASK 4..........................................................................................................................................14
Evaluating performance of company based on information of budget......................................14
Considering the financial and non-financial implications with external factors affecting cost
base............................................................................................................................................15
Recommendations to the company............................................................................................16
CONCLUSION..............................................................................................................................16
REFERENCES..............................................................................................................................18

INTRODUCTION
Business finance is defined as the process of raising and managing the funds of the
company. By planning, analysing and controlling the operations are the main functions of the
financial manager that they must perform to attain goals. The current assignment is based on the
Dysonica which is the successful international company used to do innovations. This report will
outline the examination of cost information in order to identify variable costs, fixed cost or semi-
variable costs. Further this current report will outline the methods in order to reduce the cost in
the organization. Moreover, this report will also include the cash flow forecast that is based on
12 months’ budget to have proper spending, cost reduction and finance management. At the end
this report will outline the performance of the organization by budget forecasted. It will also
consider financial and non- financial implications with external factors that impact the cost.
TASK 1
Expense Type Reason
Raw Materials Variable Cost Raw materials are the variable
cost as the amount of raw
materials used varies with the
level of production by the
company.
Machinery Fixed Cost Machinery expense is a fixed
cost because the cost incurred
does not change with the level
of production.
Factory and Storage Rent Fixed Cost Factory and storage has to be
paid even if the production
units are zero. Hence it is

categorised as fixed cost.
Direct labour Variable Cost Direct labour is a type of
variable cost. Because as the
number of units produced
increases the labour cost also
increases.
Utilities Semi Variable Cost Utilities includes electricity,
water, etc. expenses. It is
categorised under semi
variable cost because a certain
amount is fixed as required to
be paid even at zero level of
production and rest amount is
incurred in accordance with
the level of production.
Office and Sales Staff Fixed Cost Office and sales staff have to
be paid at all levels of
production at same rate.
Hence it is fixed cost.
Insurance Fixed Cost Insurance cost is constant at
all levels of production as it is
a fixed cost.
Logistics Variable Cost Transportation cost are
covered in logistics. Hence it
is a variable cost dependent of
the production units.
Methods of attributing indirect costs
Absorption costing: The absorption costing is also known as full costing which is the
best managerial accounting method in order to capture the costs that is associated with the
manufacturing of the product (Nan, 2019). This cost used to allocate the fixed overheads to the
units that is produced over the period. This cost helps the company to allocate the fixed

overheads costs whether the products are sold or not. In this type of costing the more cost is
added at the ending of inventory which is carried out by the company in the balance sheet of next
year.
Assumption: It is assumed that the firm produces and sells 10,000 units yearly.
Absorption Costing
Attributing indirect costs
Indirect Cost Attribution Per Unit Cost
Machinery Cost (fixed
manufacturing overhead)
(£1500 x 12) / 10000 Units 18
Factory And Storage Rent
(fixed manufacturing
overhead)
(£18000 x 12) / 10000 Units 21.6
Office and Sales Staff (fixed
manufacturing overhead)
(£9000 x 12) / 10000 Units 10.8
Insurance (fixed
manufacturing overhead)
(£500 x 12) / 10000 Units 0.6
Total Fixed Manufacturing
Overheads
51
Utilities (Variable
manufacturing overhead)
(£500 x 12) / 10000 Units 0.6
Logistics (Variable
manufacturing overhead)
(£3000 x 12) / 10000 Units 3.6
Total Variable
Manufacturing Overhead
4.2
Calculating Per Unit Cost
Particulars Formula Value
Direct Material Cost per Unit £15000 * 12 / 10000 units 18
Direct Labour Cost per Unit £17500 * 12 / 10000 units 21
Variable Overhead per Unit 4.2
Fixed Overhead per Unit 51

Total 94.2
It is predicted from the above table that the absorption costing helps the company to have
the both the cost while having the production. The cost includes the fixed and variables that
helps them to know about the cost per unit of every overhead. This is the most suitable method
for the company as it helps them to recover its cost of production.
Marginal costing: Marginal costing refers to the costing technique in which the variable
cost is charged on the units of costs. The fixed costs over the period is written off completely
against the contribution. This cost is defined as having change in the total cost by adding the or
the extra quantity is produced by adding one (Hayes, 2019). This is the most useful cost for the
cited organization as it helps the company to have profit planning. By this it makes the company
to determine the profitability by increasing the production units. This cost in helpful for the
company in order to know about selling price, export decisions and buy or production decisions.
Attributing indirect costs
Indirect Cost Attribution Amount
Fixed Manufacturing
Overheads:
Machinery Cost (fixed
manufacturing overhead)
£1500 * 12 £18000
Factory And Storage Rent
(fixed manufacturing
overhead)
£18000 * 12 £216000
Office and Sales Staff (fixed
manufacturing overhead)
£9000 * 12 £108000
Insurance (fixed
manufacturing overhead)
£500 * 12 £6000
Total Fixed Manufacturing
Overhead
£348000
Variable Manufacturing
Overhead:
Utilities (Variable £500*12 / 10000 £0.6

manufacturing overhead
Logistics (Variable
manufacturing overhead
(£3000 x 12) / 10000 Units £3.6
Total Variable
Manufacturing Overhead
£4.2
Calculating Per Unit Cost
Particulars Formula Value
Direct Material Cost per Unit £15000 * 12 / 10000 units £18
Direct Labour Cost per Unit £17500 * 12 / 10000 units £21
Variable Overhead Cost per
Unit
£4.2
Total £43.2
(plus fixed manufacturing
overheads of £348000 per
year)
From the above table it is seen that the marginal cost of the company is increasing. This
costing helps the company to have good profitability. As in this cost the fixed and variable cost is
shown differently because it predicts that the fixed cost cannot be gained over the time. But this
not true as the fixed cost can be recovered by having the better production. This makes the
company to have better production by recovering it fixed and variable cost.
Activity-based costing: The activity based costing refers to the system that helps the
company to find the cost of production. This used to breakdown the overhead costs among the
other related activities in the business. As the company used to do innovation and used to
manufacture the products this costing helps them to know about the where the overall money is
going. This also helps the company to recognize the different products that is required to have
the different indirect expenses (Cidav and et.al., 2020). By this manager of the company used to
provide the accurate cost of production. This makes the company to have better decisions and
produce the products by having the cheaper production method. By using this method it helps the
company to assign the overheads and indirect costs that is related with the goods and services.
Activity-Based Costing

Assumptions
Activity Cost
Pool
Estimated
Overheads
Cost Driver Expected
Activity
Actual Activity
Machinery Cost £1500 * 12 =
£18000
Machine Hours 100 hours 70 hours
Factory and
Storage Rent
£18000 * 12 =
£216000
Number of
Factory and
Warehouses
5 factories 4 factories
Utilities £500 * 12 =
£6000
Consumed
Power
10000 KWh 8000 KWh
Office and Sales
Staff
£9000 * 12 =
£108000
Number of
Employees
120 Employees 110 Employees
Insurance £500 * 12 =
£6000
Number of Units
Produced
12000 units 10000 units
Logistics £3000 * 12 =
£36000
Number of
kilometre
850 km 400 km
Attributing indirect costs
Activity Computing the result Result in per unit
Machinery Cost £18000 / 100 £180
Factory and Storage Rent £216000 / 5 £43200
Utilities £6000 / 10000 £0.6
Office and Sales Staff £108000 / 120 £900
Insurance £6000 / 12000 £0.5
Logistics £36000 / 850 £42.35
Allocating the cost in each activity to the actual level of activity
Activity Computing the result Result
Machinery Cost £180 * 70 £12,600
Factory and Storage Rent £43200 * 4 £172,800

Utilities £0.6 * 8000 £4800
Office and Sales Staff £900 * 110 £99,000
Insurance £0.5 * 10000 £5,000
Logistics £42.35 * 400 £16,940
Total overhead cost at the
production of 10000 units
£311,140
Allocating Total Cost
Details Result
Total Cost £311,140
Number Of Units 10,000
Per unit Overhead £31.1140
Calculating Per Unit Cost
Details Amount
Direct Material £18
Direct Labour £21
Production Overheads £31.11
Per Unit Cost £70.11
From the above calculations of the activity based budgeting it helps the company to find
the actual cost of production. In this cost there are several overheads that is multiplied with the
per unit cost. By calculating this cost it helps company to recognize the different products that is
required to have the different indirect expenses. As there are different cost drivers that helps the
company to know that about the every cost driver incurred in the production.
TASK 2
Methods to reduce costs
Activity-based costing: The advantages and disadvantages of activity based costing is as
described below:
Advantages

1. Accurate production costs: The activity based costing used to bring the high level
of accuracy and reliability in order to determine the production cost incur by the
company (Areena, 2019). By this it helps the company to make the proper and
accurate budget for production.
2. Better decision-making: ABC technique helps the company's manager to make
the proper decisions that helps them to have more reliable data. This makes the
company to decide the fix selling of the products and have more accurate data.
Disadvantages
1. Expensive and hard: Activity-based costing is the expensive technique of costing
and it is very complex in understanding. As this costing used to contain the
multiple cost drivers so it is very complex in order to perform. This system is
proved to be the most expensive method of costing.
2. Difficulties in measurement: This is another great drawback of this costing as it
used to create difficulty in order to measure the cost and implement it. This
system used to require the management in order to estimate and measure the cost
drivers (Zheng and Abu, 2019). These measurements are very costly for the
company and needed to be upgraded on regular basis.
Absorption costing: The advantages and disadvantages of absorption costing is as
described below:
Advantages
1. Helps in considering fixed costs: The absorption cost used to determine the fixed
cost production that helps in determining the better policy. This also makes the
company to know about total cost covered in the production (Wang and Tang,
2019). It is very important for the company to know about the cost covered that
helps them to know about the profitability.
2. Helps in avoiding underpricing: This costing method helps the company to have
the proper pricing of the products by determining the overall cost of production.
By considering the proper prices of the product helps them to have the better
productivity and profitability in the market.
Disadvantages

1. Inaccurate distribution of fixed costs: The inaccurate distribution of the fixed
overheads provides the difficulty for the company. This makes the company to be
in difficulty in order to have the proper apportionment of the fixed cost.
2. Difficulty in decision-making: This costing method is not suitable as it provide
the difficulty in order to have the proper management decisions (Moisello and
Mella, 2020). The decision-making is basically related to the product mix, buying
decisions and others. This method is not helpful for the business as this only
includes the fixed costs.
TASK 3
Preparing the Cash Flow Forecast of 12 months
Cash Flow Forecast
Parti
cular
s Months
May June July
Augu
st
Septe
mber
Octob
er
Nove
mber
Decem
ber
Janua
ry
Febru
ary
Marc
h April
Cash
Inflo
ws
Balan
ce
-
4230
0
-
7980
0
-
11600
0
-
14324
0
-
16087
6
-
17566
6.40
-
17744
4.88
-
161934
.75
-
11840
0.57
-
26992.
72
126398.
27
Capit
al 20000
Estim
ated
Sales 25000
3500
0
4900
0 68600 96040
13445
6
18823
8.40
26353
3.76
368947
.26
51652
6.17
72313
6.64
101239
1.29
Total
Cash
Inflo
45000 -
7300
-
3080
-
47400
-
47200
-26420 12572 86088.
88
207012
.51
39812
5.60
69614
3.92
113878
9.56

ws 0
Cash
Outfl
ows:
Raw
Mater
ials 15000
2100
0
2940
0 41160 57624
80673.
60
11294
3.04
15812
0.26
221368
.36
30991
5.70
43388
1.98
607434.
78
Rent 18000
1800
0
1800
0 18000 18000 25000 25000 25000 25000 25000 25000 25000
Utiliti
es 2500 2500 2500 2500
Telep
hones 1000 1000 1000 1000
Water 100 100 100 100
Misce
llaneo
us 50 50 50 50 50 50 50 50 50 50 50 50
Acco
untant
's Fee 1500
Insura
nce 500 500 500 500 500 500 500 500 500 500 500 500
Salari
es 26500
2650
0
2650
0 26500 26500 26500 26500 31800 31800 31800 31800 31800
Vehic
les:
New
Van 5000
New
Car 15000 200 200 200 200 200 200 200 200 200 200 200
Mark 1250 1750 2450 3430 4802 6722.8 18823 26353. 36894. 51652. 72313. 101239.

eting
Costs 0 .84 38 73 62 66 13
Logis
tics 3000 3000 3000 4500 4500 4500 4500 4500 4500 4500 4500 4500
Machi
nery 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500 1500
Total
Cash
Outfl
ows 87300
7250
0
8520
0 95840
11367
6
14924
6.40
19001
6.88
24802
3.63
325413
.08
42511
8.32
56974
5.65
775823.
90
Net
Cash
Flow
-
42300
-
7980
0
-
1160
00
-
14324
0
-
16087
6
-
17566
6.40
-
17744
4.88
-
16193
4.75
-
118400
.57
-
26992.
72
12639
8.27
362965.
66
Budget refers to the estimation of the profits and expenses for the particular period of
time and these are utilized by the organizations. This is basically the financial plan that helps the
company to enhance its performance by having the proper planning of the expenditure (Keynia
and et.al., 2022). The main aim of Dysonica in order to prepare the budget is to make the
organization financially stable which helps them to attain its objectives. The budgeting helps the
company to track the spending, used to save money and makes the company to have less
expenditure. This helps the company to prepare the better financial decisions, ready for any
contingencies and have tracked of the long-term financial goals. There are some importance of
making the budget in the company which is described below:
1. Budgeting keep organization organized: By making the proper budget it helps the
organization to be organized. This makes the cited organization to know abut its
expenses, debt payments and bills that they have to pay.
2. Helps for contingencies: The proper planning of the budget helps the company to
prepare for nay occurrence of the emergency in the future. This makes the
company to have good profitability as they are already ready with the
emergencies.

3. Helps in controlling spending: As the budget of all the expenses is already
prepared it makes the organization to control the spending. By making the budget
it helps the company to have easy control on the expenses and know about the
future contingencies as well (Grizzle, 2018). This makes the company to set the
boundaries of spending by which the company can have good productivity.
4. Helps to gain financial goals: As the budget id prepared in advance it makes the
company to track the working which helps them to achieve the financial goals.
This makes the organization focused and have the clear goals by which they used
to attain the financial goals.
TASK 4
Evaluating performance of company based on information of budget
From the above predicted table it is shown that the company is having the negative net
cash flows for more than half year. As the total cash inflows were less and the outflows were
more which used to have the negative net cash flows. In order to improve this the company must
focus on the working capital management. By having the proper working capital management it
helps the company to operates efficiently. They must have the proper monitoring of the financial
resources and have better use of current assets and current liabilities. This will help the company
to have proper and smooth functioning of the expenses and helps them to have positive net cash
flows. As the company is operating internationally the cost of raw material is increasing at the
increasing rate which used to have effect on the profitability and productivity. The organization
must focus on reducing the waste and have optimum utilization of the resources in order to do
production. Further it is seen that the rent of the company is increased after five months and it is
doubled which also affected the net cash flows. The marketing costs of the company is
increasing which shows that company is spending more on the promotion of the products as it is
operating globally. The increase in the marketing costs and raw material makes the company to
incur the loss. The company must do less expenditure on the marketing costs and raw material
which helps them to grow in the international market. In order to reduce the marketing costs the
company can used the new and innovative strategies and make the targeted customers. This will
help the organization to have less marketing costs by having the targeted customers by producing
trending products.

Considering the financial and non-financial implications with external factors affecting cost base
Cost base refers to the original value or it can be the purchase price of the product of the
company. This helps the company to have the proper calculations of the capital gain or losses
(Camilleri, 2018). By calculating this it makes the company to know about they are working in
profits or incurring losses. There are some financial and non-financial implications that used to
affect the cost base which is described below:
Financial Implications
1. Improper liquidity: As the company is not having the adequate capital in the
starting in order to set up the business. This used to cause increase in the losses
and used to cause the financial implication on the company. The social factor also
affect the liquidity of the company as the company is not focusing on the trend of
the customer which used to incur the loss.
2. High marketing costs: Marketing cost refers to the expenses that the organization
used to do in order to promote the product in the market (Britt-Lutter, Dorius and
Lawson, 2018). As the company is having less liquidity and they are having high
marketing cost which causes loss. The cited organization is working globally so it
must lower down the marketing cost in order to increase sales.
Non- Financial Implications
1. Unskilled employees: This is the great non-financial implication that is faced by
the company. The unskilled labours and employees in the organization used to
have great impact on the cost base. This used to have improper use of resources
which lead to increase in the cost of raw material.
2. Low target market: As the company is spending its more cost on marketing the
product but they are having less target market. By this it makes the company to
incur the loss and have negative cash flows (Ahmed, Alabdullah and Shaharudin,
2020). They must focus on the social market which helps them to grow and have
good profitability in the market.
Recommendations to the company
There are following recommendations to the company that helps the to attain the
profitability in the global market which is described below:

1. It is recommended to the company that they must adopt the variance analysis.
This helps them to have the study on the deviations of the actual outcome with the
planned budget (Zhuo, Shao and Yang, 2018). By this it will make the company
to have the proper management of the work and improves the performance of the
firm.
2. Further it is recommended to the company that they must have the proper
utilization of the resources. This will help them to have reduction in the cost of
raw material and have greater production.
3. It is also suggested to the company that they must adopt the marginal costing
method which helps them to know about the cost in order to add one more unit
(Brouwer and et.al., 2019). This cost will analyse the cost of the products and
fixed cost over the period.
4. It is further recommended to the company that they must make the SMART
objectives that helps them to attain goals. By having the better productions makes
them to attract the customers in order to buy their products online and offline as
well. This will help the company to have good productivity and profitability in the
market.
CONCLUSION
From the above report it is concluded about identification of the fixed, variable and semi-
variable costs. Further this report has evaluated about the three indirect cost that includes the
absorption costs, marginal costing and activity based costing. These methods of costing is
described by using the examples by using the calculations. This report has evaluated about the
methods in order to reduce the costs of the company by identifying the advantages and
disadvantages of absorption and activity based budgeting. Further this report used to show about
the 12 months cash flow forecast that helps the company to know about its profitability. It has
also evaluated about the meaning an importance of making the budget in the company. At the
end of this report it is evaluated about the performance of the Dysonica that is based on the cash
flow forecast for 12 months. The report has also evaluated about the financial and non financial
implication that used to have impact on the cost base.

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