Financial Performance Management Exam: Costing and Budgeting

This document presents a comprehensive solution to a Financial Performance Management online exam, addressing key concepts in financial analysis and control. The solution begins with a detailed breakdown of costing methods, including absorption costing and activity-based costing, applied to a multi-product scenario (lipstick, lip balm, and lip gloss), calculating per-unit costs and profitability. It then delves into variance analysis, specifically material usage, price, and mix variances, providing calculations and interpretations of the results. Furthermore, the solution explores sensitivity analysis and its application in managerial decision-making, followed by a comparison of zero-based budgeting and incremental budgeting, outlining their respective advantages and disadvantages and advocating for a combined approach. The document provides a thorough understanding of the key financial concepts and their practical application in business decision-making.

FINANCIAL
PERFORMANCE
MANAGEMENT(ONLINE
EXAM)

Table of Contents
Q1a).............................................................................................................................................3
Q1.b) ...........................................................................................................................................3
Q1.c) ...........................................................................................................................................5
Q1.d) Sensitivity Analysis and how managers cope with uncertainties.....................................6
Q2a).............................................................................................................................................6
Q2.b)............................................................................................................................................7
Q3.Zero based Budgeting and Incremental Budget....................................................................7
REFERENCES................................................................................................................................1

Q1a).
Total labour hours for production(Lipstick)=30000*3=90000 hrs
Total labour hours for production(Lip-balm)=35000*2=70000 hrs
Total labour hours for production(Lip gloss)=3000*2=6000 hrs
Total labour hours=90000+70000+6000=166000
Total Overheads=120000+30000+15000+65000=230000
Overhead absorption rate=230000/166000=1.39
Absorption cost per unit
Lip stick Lip balm Lip gloss
Direct material 5 10 10
Direct labour cost 15 10 10
Overhead cost per unit 4.17 2.78 2.78
Total cost per unit 24.17 22.78 22.78
Profit/loss cost per unit(Lip stick)=22-24.17=2.17(loss)
Profit from lip balm=26-22.78=3.22 per unit
Profit from lip gloss=24-22.78=1.22 per unit.
Q1.b)
Activity-based costing
Lip Stick costs
Set up cost=120000*10=1200000
Dividing by ratio, we get=1200000/25=48000
Total Receiving costs=30000
ratio %=10/22*100=45

receiving costs for lipstick=45/100*30000=13500
Number of orders despatched=15000*20=300000
Dividing by ratio, we get=300000/50=6000.
Machine hrs=30000*4=120000
ratio %=120000/272000*100=44%
Machine costs=44/100*65000=28600
Lip balm costs
Set up costs=120000*14=1680000
Dividing by ratio, we get=1680000/25=67200
Total Receiving costs=30000
ratio %=10/22*100=45
receiving costs for lip balm=45/100*30000=13500
Number of order despatched=15000*20=300000
Dividing by ratio, we get=300000/50=6000
Machine hrs=35000*4=140000
ratio%= 140000/272000*100=51%
Machine costs=51/100*65000=33150
Lip gloss costs
Set up costs=120000*1=120000
Dividing by ratio, we get=120000/25=4800
Total Receiving costs=30000
ratio %=2/22*100=10 %
receiving costs for lip gloss=10/100*30000=3000
Number of order despatched=15000*10=150000
Dividing by ratio, we get=150000/50=3000
Machine hrs=3000*4=12000
ratio%=12000/272000*100=5%
Machine costs=5/100*65000=3250

Particulars Lip stick Lip Balm Lip gloss
Total overhead per
product
96100 119850 14050
Production units 30000 35000 3000
Per unit overhead rate 3.2 3.42 4.68
Direct material cost 5 10 10
Direct labor cost 15 10 10
Cost per unit 23.2 23.42 24.68
Profit/loss from lip stick=22-23.2=(1.2)
Profit from lip balm=26-23.42=2.58
Profit from lip gloss=24-24.68=(0.68)
Q1.c)
Absorption costing refers to capturing all the costs associated with the product which go in
manufacturing. The direct and indirect costs are accounted using this method. On the other hand,
in activity-based accounting all the activities performed are gathered and these costs are
allocated on different basis to each product on the basis of proportion in them or the benefit
derived through them. Adoption for calculating two techniques for calculating cost per unit by
gathering all direct and indirect costs which occurred during production of three different
products direct cost per unit and then calculation of overhead cost per unit by adopting
techniques like absorption and activity based costing. In analysation of techniques of absorption
costing, it can be said that profit margin is good where the overhead costs are divided among the
products on the basis of labour hour worked towards production. This technique of absorption
costing can seem beneficial as in terms of profit. It can be seen that in lip balm production only
the profit margin has been archived while the other products have registered a loss. Speaking of

this technique of absorption costing direct cost has been gathered and indirect costs have been
divided relevant for each and different type of cost.
It can be said that for showing profitability, one has to go for absorption costing on basis
of labour hours. In order to decide upon which activity to be performed and what decision not to
be decided on minimizing cost associated with each activity in order to reduce cost per unit, one
can go for activity based costing to undertake cost analysis.
Q1.d) Sensitivity Analysis and how managers cope with uncertainties
Sensitivity analysis is used to determine how the different values of an independent variable are
affecting a particular dependent variable under a set of assumptions. Sensitivity analyses how
various sources off uncertainty in a mathematical model are contributing to the model's overall
uncertainty. Sensitivity analysis is used to help make predictions in share prices of publicly
traded companies and how interest rates affect bond prices.
The way managers use it to cope up with uncertainty are as follows:
Return on Investment: The analysis can be used to improve decisions on calculations or
modeling. A company uses analysis to identify the data to be collected for future analysis to
evaluate assumptions regarding investment and Return on Investment which can help allocate
assets and resources optimally.
Cost Volume Profit equation: Sensitivity analysis is used to show how CVP model changes
with change in any of the variables for e.g. changes in fixed costs, variable costs, sales price or
sales mix. It is used to show how changes in variables can alter profit.
Forecasting: It can be used to help make predictions in share of public companies. The variables
that affect stock prices including company earnings, the number of shares outstanding, debt to
equity ratios and number of competitors in the industry.
Q2a).
Material Usage Variance
(Standard quantity-actual quantity)*standard price per unit
Standard Quantity:
Alpha=1840(46*40)

Beta=2760(46*60)
Gama=920(46*20)
Alpha
=(1840-2200)*2=-720
Beta
=(2760-2500)*5=1300
Gama
=(920-920)*1=0
i)Total material price variance=(1840+2760+920)-(2200+2500+920)*400=-40000
ii)Material mix variance=(2200+2500+920)*400-(1840+2760+920)*400=40000
iii)Total material yield variance=(1840+2760+920)*400-(2200+2500+920)*400=-40000
Q2.b)
The costs associated with material and occurrence of variance is the issue of purchasing
manager and it is not under control of production manager. The manager handling production is
not among the decision makers who are setting standards mix. Price and quality of products are
considered to be volatile and using planned standard of material and yield variances does not
give proper view of production activity. The standard mix of these products are constant for five
years despite change in quality and market price of the ingredients. It thus results in controlling
variances by production manager who is considering out of date standards for calculating current
variances.
Q3.Zero based Budgeting and Incremental Budget
Zero based budgeting is the method in which the product categories are assessed line wise as to
what is the actual budget required for that product. It assumes the budget is beginning at a
scratch level and revenues for the previous year has equalled expenses. Every function within an
organisation is analysed for its need and costs.
Incremental budgeting means incremental increases happening considering the previous
year budgets. Generally there is an increase taking place in spending. The budget takes in

consideration the new expenditures which can take place and budget is made using actual
performance as a parameter.
Zero based Budgeting or Incremental Budgeting both singly can not suffice the budget to
become a success. An amalgamation of both is required owing to the circumstances. Zero based
Budgeting has its advantages as well as disadvantages. Speaking of demerits if used single as an
approach, it is subjective in nature as it calculates every expense which makes difficult for the
organisation to accomplish. The approach can help in short term planning but it can be
detrimental for long term planning. The budget approach has rigidity in approach while an
organisation can not always stick to the budget. Incremental budgeting is simple and it allows
changes to take place with circumstances. Zero based Budgeting is a time consuming process as
every product category and its requirements have to be assessed separately. Incremental Budget
does not have however complex calculations. In zero based budgeting training sessions take
place of managers and separate time is allotted taking out time from operational activities. Staff
being not given training do not get a know how of the budget planning and thus are unable to
give their suggestions.
Speaking of the merits of zero based budget , it promotes accuracy in forecasting and
covers each category of product and every department requirements. The rigidity in budget doe
not leave room for managerial interference as they have to follow strict guidelines. The going
through line by line approach helps in assessing the current demand of every product and service.
Speaking of demerits of traditional budgeting, it promotes unnecessary spending which
can be on products not providing apt return. On using a combo of budgets, the company can
come to know which products are giving good returns. Incremental budgeting does not take in
consideration market factors which keep changing. It also does not take a comprehensive view of
the various categories of products which the other method considers. Innovative methods are not
being used as in this budget focus is laid on previous year's budget. A combination of both the
budgets will help in correction of measures being taken while also using innovative ideas with
simplicity to make budget reasonable.

REFERENCES
Books and journals
Online
[Online]. Available through: <>
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