Financial Planning and Cost Management - Manage Budgets and Financial Plans

This article covers various aspects of financial planning and cost management, including break-even point, employee benefits, and compliance with reporting standards. It includes case studies that provide insights on controlling costs and making informed decisions.

RUNNING HEAD: MANAGE BUDGETS AND FINANCIAL PLANS
Financial planning and Cost management

Manage budgets and financial plans 2
Case study 1
The profit and loss statement and department accounts of David shows the financial position
of his business. The P&L report shows a net loss of $2000 and departmental accounts reflect
that Drapery segment has the lowest sales among the four divisions. It can be seen from the
report that the performance of Drapery department was highly affected by the competition as
its sales were only $80,000 which was lowest among all the departments. The report also
reflects all the expenses related to wages and advertising along with the purchase
expenditure. On the basis of these figures, employees can decided to shut down Drapery
segment as it is no longer productive and profitable for the business.
 Apart from sales, the amount of wages of Drapery is also high as compare to
Furniture and Hardware department.
 The information provided in the departmental accounts should also include the
amount of profit earned by each segment. It will help in taking decisions easily
regarding closing down of a department. Moreover the data presented does not shows
the complete picture of the business position and performance.
Case study 2
1. Bifurcation of the expenses
The total operating expenses also contain some variable costs. The portion covered by
variable expenses are 75% and rest are fixed cost. Similarly the cost of goods sold also
includes 60% variable cost and 40% fixed cost. Following calculation is done to determine
the amounts:

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2. In order to see the contribution margin in the report, following calculation is required
to be done:
Contribution (in $) = Sales – Variable costs
Contribution (in %) = (Sales – Variable costs) / Sales
$000
Sales 600
Variable COGS 216
Variable operating expenses 112.5
Contribution (in $) 271.5
Contribution (in %) 45%
3. Improved format for showing actual amount of fixed and variable expenses
$000
Sales 600
Less: Cost of Goods sold
Fixed 144
Variable 216 360
Gross profit 240
Less: Operating
Expenses
Fixed 37.5
Variable 112.5 150
Net Profit 90
Further modifications in the report that contains the amount of contribution margin.
$000
Operating Expenses $000
Fixed (25%) 37.5
Variable (75%) 112.5
Total 150
Cost of Goods sold $000
Fixed (40%) 144
Variable (60%) 216
Total 360

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Sales 600
Less: Variable costs
COGS 216
Operating expenses 112.5 328.5
Contribution Margin 271.5
Less: Fixed Costs 181.5
Net Profit 90
Case study 3
1. The report provided does not reflect the whole information about the cost involved in
sandwich making. It does not contains the information about the number of units
produced on which such costs are incurred. The projected units mentioned are 10000
at a cost of $0.55 per unit. Also, the fixed and variable cost are clearly stated. This
may mislead the manager in taking decisions about the future operations. The
additional information required is that the report should clearly mention the number of
units produced and also bifurcate the expenses as fixed and variable. This
segmentation will help the manager to clearly determine the cost incurred on
production.
2. It is assumed that the cost incurred was at 10708 units of sandwiches and the expected
units are 10000 at per unit cost of $0.55.
Units 10000 10708
Item Cost Per unit Cost Per unit
$ $
Variable cost
Sandwich Fillings 3829 0.38 4100 0.38
Bread 1121 0.11 1200 0.11
Total Variable cost 4950 5300
Fixed cost
Electricity 250 250
Office supplies 300 300
Total Fixed cost 550 550

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Total cost 5500 5850
MEMORANDUM
To: Accounting Department
From: Financial Analyst
Date: April 4, 2018
Subject: Required revised information related to the cost incurred on making
sandwiches
For preparing a revised report in order to give the adequate information about the cost
incurred on sandwiches, the accounting department is required to provide data about the
number of units produced in last quarter along with the clear segmentation of the fixed and
variable cost. Also if any other cost is incurred, the information regarding the same is
required.
Yours Faithfully,
Financial Analyst
Case study 4
Alpha Tennis Coaching Academy can control the cost of its refreshments and equipment. As
it is been observed that the refreshments go out of date, so the academy should keep only that
much stock which is required. Keeping the excessive refreshments in the stock may become
obsolete and would also increase the cost for academy. Also Alpha Tennis should also restrict
the purchase of tennis equipment and should only supply as much as required. This would
help the academy in controlling its cost.

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The cost which cannot be control is the loss of tennis balls. The beginner’s group loses many
tennis balls and it can only be restricted to some extent by putting the barriers around the
courts. Otherwise, preventing the balls from losing is not in hands of managers.
Case study 5
International Accounting Standard 19 is used for the accounting of employee benefits.
According to IAS 19, a company is require to recognize:
 A liability when an employee has rendered services in exchange of employee benefits.
 An expenses when an enterprise enjoys economic benefit which arises from the
services provided by the employees.
The principle stated by the standard is that the cost related to employee benefits should be
recognized in the period in which employee has earned that benefit. Entities are required to
measure and recognize all the kinds of benefits available to the employees. These include
short term, long term, post-employment benefit plans and others (Iasplus.com. 2018).
For the treatment of inventory cost, provisions of IAS 2 are been applied by the companies.
According to it, inventories are measured at net realisable value and lower of cost. The
standard also states methods that are acceptable for determining the cost such as FIFO and
weighted average cost. as per IAS 2, inventories cost does not include selling cost,
administration expenses unrelated to production, storage costs, abnormal waste and interest
costs. Companies are required to keep such thing in mind while reporting their cost of
inventories (Iasplus.com. 2018).
A huge risk is associated with the organizations who do not comply with the requirements of
reporting standards. Also decisions made using the flawed information may result in

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worsening of the company’s position. The risk of facing penalties and degradation of the
position due to faulty representation of the financial data exist in the organization.
Case study 6
 Break-even point
The break-even point is that where there is no profit and no loss. The amount of total cost is
equals to total sales. The sales volume required at which it will break even is:
Break even sales
$
Material cost per unit 100
Labour cost per unit 60
Selling price per unit 250
Fixed cost 900000
BEP (in units) 10000
BEP (in volume) 2500000
If company sells 10000 units at a selling price of $250 per unit, then it will be a no profit and
no loss.
 Profit earned
If company sells planned 12000 units, then the profit will be:
Amount ($)
Sales (12000*250) 3000000
Less: Variable cost
Material costs (12000*100) 1200000
Labour cost (12000*60) 720000
Contribution 1080000
Less: Fixed cost 900000
Net Profit 180000
The company will make a profit of $18000, if the planned number of units are been sold.

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 Volume of sales required to break-even if selling price
(A) Decreases by 10%
$
Material cost per unit 100
Labour cost per unit 60
Selling price per unit 225
Fixed cost 900000
BEP (in units) 13846
BEP (in volume)
311538
5
(B) Increases by 10%
$
Material cost per unit 100
Labour cost per unit 60
Selling price per unit 275
Fixed cost 900000
BEP (in units) 7826
BEP (in volume) 2152174
 Sales volume needed to reach desired profit of $360000
Required sales units = (Fixed cost + Desired profit) / Contribution per unit
Sales required to reach the desired
profit
$
Selling Price 250
Variable cost 160
Contribution per unit 90
Fixed cost 900000
Desired profit 360000
Required sales volume 14000

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References
Iasplus.com. (2018). IAS 19 — Employee Benefits. [Online] Available at:
https://www.iasplus.com/en/standards/ias/ias19 [Accessed 6 April 2018].
Iasplus.com. (2018). IAS 2 — Inventories. [Online] Available at:
https://www.iasplus.com/en/standards/ias/ias2 [Accessed 6 April 2018].