Financial Performance Analysis Exam - Finance Module, Semester 1

This document presents a comprehensive solution to a financial performance exam, addressing key concepts in cost accounting and financial analysis. The solution begins with an overhead cost allocation problem using both traditional absorption costing and activity-based costing (ABC), comparing the results and discussing the advantages of each method. It then delves into sensitivity analysis, explaining how it helps managers cope with uncertainties in decision-making. The second question focuses on variance analysis, calculating material usage, mix, and yield variances, and critically evaluating the limitations of variance analysis in assessing production manager performance. Finally, the solution explores budgeting techniques, comparing and contrasting zero-based budgeting (ZBB) and incremental budgeting (IB), highlighting their roles in planning and coordination within an organization. The document provides detailed calculations, explanations, and critical evaluations of the concepts, offering a thorough understanding of financial performance measurement and management.

Financial performance (online exam)

Contents
Question 1...................................................................................................................................................4
Question 2...................................................................................................................................................7
Question 3...................................................................................................................................................9

Question 1
a.
Total Overhead cost
Setup costs 120000
Receiving 30000
Despatch 15000
Machining 65000
230000
Overhead absorption rate:
Lipstick Lip-balm
Lip-
gloss
Production Volume 30000 35000 3000
Labour hour per unit 3 2 2
total labour hours 90000 70000 6000 166000
Total Overhead rate
230000 /
166000
1.385542
2
Cost per unit:
Lipstick Lip-balm
Lip-
gloss
Sales 22 26 24
Raw material 5 10 10
Labour cost 5 5 5
Overheads rate 4.16 2.77 2.77
Cost 14.16 17.77 17.77
Profit per unit 7.84 8.23 6.23
Units 30000 35000 3000

Profit 235301.20
288012.0
5
18686.7
5
b.
Cost
Driver
Setup costs 120000 25 setups
Receiving 30000 22 deliveries
Despatch 15000 50 despatched
Machining 65000 12
machinin
g
Cost driver data:
Machine hours per unit 4 4 4
Number of setups 10 14 1
Number of deliveries received 10 10 2
Number of orders despatched 20 20 10
Cost per setup
120000/2
5 4800
Cost per receiving activity
30000 /
22
1363.636
4
Cost per despatch
15000 /
50 300
Cost per machining activity
65000 /
12
5416.666
7
Allocation of overheads to each
product
Lipstick Lip-balm Lip-gloss
Setup costs 48000 67200 4800 12000

0
Receiving 13636.4 13636.4 2727.28 30000
Despatch 6000 6000 3000 15000
Machining
21666.66
7
21666.66
7 21666.67 65000
89303.06
7
108503.0
7 32193.95
Production Volume 30000 35000 3000
Overhead cost per unit
2.976768
9
3.100087
6 10.73132
Sales price (per unit) 22 26 24
Material cost (per unit) 5 10 10
Labour hours (per unit) 3 2 2
Overhead cost per unit 2.98 3.10 10.73
Profit 11.02 10.90 1.27
c) Critically evaluate the results obtained from 1a and 1b above and discuss why you think one
technique is better than the other.
On the basis of the calculation alluded to above, it can be inferred that the two approaches
contain different categories of products and quantities. As long as there is a specific amount of
demand. The value of absorption for three products is 235301, 288012 and 18686. While the cost
per unit gain for ABC is 11.02, 10.90 and 1.27 aggregate.
Absorption costing- This costing accounting approach considers the association between prices,
overhead operations and purchased goods, and applies indirect costs less selectively than
conventional costing systems. Even so, it is impossible to delegate a commodity to secondary
charges, such as marketing and workplace compensation. Absorption costing is a way of
collecting and assigning expenses involved with the manufacturing process of particular goods.

This method of costing is needed by the financial statements to generate an inventory value as set
out in the statement of financial position. A commodity can absorb a wide range of variable
costs. These charges shall not be known as expenditures for the month in which the company
accounts for them. Rather, they stay in stock as an asset until the same time as the stock is sold;
at that stage, they are paid at the expense of the products sold.
ABC costing- This costing is a costing method that describes operational activities and transfers
all products and services to the expenditure of each task in compliance with the actual
consumption of each activity. As a consequence, this model assigns more operating costs to
direct expenses than typical ones. This costing management study analyzes the correlation
between costs, operating costs and goods generated and applies administrative costs less
objectively to goods than to traditional costs. Even so, it is difficult to attribute a product to
secondary costs, such as advertising and wages at the office. The first step in ABC is to define
the expenses that we want to distribute. This is the most important step in the whole phase, since
they do not want to lose time on an unnecessarily large project plan. For example, if we were to
calculate the maximum expense of a distribution network, we would consider the promotional
and warehouse management costs associated with that channel, but disregard the analysis costs
when they apply to goods, not networks.
d) Discuss how sensitivity analysis helps managers to cope with uncertainties.
The Sensitivity Analysis describes how different values of an independent variable influence a
particular factor under some circumstances. Sensitivity analysis is a key plan that describes how
goal criteria are impacted by adjustments in additional uncertainty called input factors. This
approach is also known as a testing or numerical simulation. This is a method of predicting the
outcome of the case given a set of variables. An analytical tool will determine if the variable
variations affect the outcome by producing a given set of variables. When the sensitivity
assessment is carried out, the subjective and input factors – or research variables – are carefully
analyzed. The analyst explores how parameters shift and how the output signal affects the target.
Sensitivity review may be used to estimate the share prices of public companies. Includes market
income, portfolio numbers, deficit ratios and the number of competitive players in the market,
some of the variables that impact stock prices. Through selecting different forecasts or

incorporating different variables, the analysis of potential asset prices can be optimized. It may
also be used to measure the impact of interest rate changes on bond rates. In this case, the
individual bond yields are distinct, while the bond prices are based. Sensitivity analysis helps
managers to evaluate the factors why the investment would end in a lesser cost, which would
have an effect on the net profit. Managers decide whether to deal with the threats found in a new
organization or program, after using sensitivity analyzes. Sensitivity research is a method of
evaluating when a situation varies from the key assumptions. It is meant to track the risk level of
the plan. It helps to decide if the output depends on a given input quality.
Question 2
(a) Calculate the following variances for the last month:
(i) The material usage variance for each ingredient and in total
Should use
(KG)
Did
use
(KG)
Difference(K
G)
Standar
d
cost/kg
($)
Variance(
$)
Alpha 1840 2200 360A 2 720A
Beta 2760 2500 260F 5 1300F
Gam
ma 920 920 1
5520 5620 580F
(ii) the total material Mix variance.
AQSM
AQA
M
Difference(KG
)
Standard
cost/kg
($)
Variance($
)
Alpha 1873.33 2200 326.67A 2 653.34A
Beta 2810 2500 310F 5 1550F

Gamm
a 963.67 920 16.67F 1 16.67
5620 5620 913.33F
(iii) Yield variance
SQSM AQSM
Difference(K
G)
Std
cost/kg
($)
Variance($
)
Alpha 1840
1873.3
3 33.33A 2 66.66A
Beta 2760 2810 50A 5 250A
Gamm
a 920 936.67 16.67A 1 16.67
5520 5620 333.33A
(b) Discuss the problems with the current system of calculating and reporting variances for
assessing the performance of the production manager.
Variance Analysis focuses on the analysis of changes between the company's budgeted and real
financial results. The reasons of the discrepancy between the real result and the planned results
are evaluated to demonstrate points of change for the organization. At times, it is often a
symptom of ambitious budgets and, thus, budgets should be updated in those situations. Analysis
of variance as just an exercise is based on the financial outcomes, which are discharged much
later upon quarterly closure; there may be a time gap that may have an impact on corrective
action to a certain large extend. Not all causes of variation can also be included in accounting
records, which makes it impossible to operate on variances.
If the budgetary control is not carried out, taking into account the thorough study of each aspect,
the fiscal exercise may be carried out loosely, and is required to differ from the real estimates.
After this analysis of variances, this may not be a good method. Standard Costing is historically
suited to companies engaged in the making of product lines in mass manufacturing conditions.

Issues start when cost management is tried to apply to institutions engaged in the making of
small batches of unique designs thanks to the shortage of cultural benchmark tests for newly
designed product lines. While new guidelines could be established for each new batch of
customized products, the length of time required to oversee the full procedure for product lines
with such a short shelf life may well not end up making it virtually possible. There are a number
of problems with variance analysis which maintain many firms from using it. The finance
department shall compile the differences at the end of each month before comparing the findings
to the management board. Variance analysis has a significant downside is that it takes a very
long time to analyze the impact of the variance and thus the preventive intervention is delayed.
The tracking tool results in a substantial lag in time and thus the execution of control
mechanisms would be greatly delayed. The variance analysis has a significant downside is that it
takes a long time to analyze the impact of the variance and thus the corrective action is
postponed. The tracking tool results in a substantial lag period and thus the execution of control
steps would be substantially delayed.
Question 3
Budgeting based on zero (ZBB) is a way to create a budget from the beginning. The budget is
not focused on tentative budgets. Instead, the strategy finishes at 0. Before adding it to the key
function for zero-based financial planning, all expenses must be clarified. Zero-based budgeting
(ZBB) is a strategy which aims to align corporate contributions to financial goals. This strategy
is the method to reduce the deficit, with the emphasis on where it is sufficient to decrease
spending. This strategy helps organizations to create a zero annual budget and studies have been
done to ensure that any component of the annual budget is costly, reasonable, and savings-based.
ZBB's role in planning and coordination:
In order to relate them to the operating regions of the organization where spending can firstly be
integrated, and measured against previous results and current goals, ZBB promotes high-level
strategic objectives to be integrated into the budgetary process. ZBB also enhances departmental
teamwork and collaboration and motivates staff by including them in decision making.
Furthermore, potential changes are also taken into consideration in the preparation of a proposal

outside past procedures in the next year. If in the previous year's budget any disadvantage or
error has been detected by no organization up to now, it is very difficult to prepare a sufficient
budget for the coming years. The zero loss budgeting method resolves these aspects.
Incremental budgeting: Incremental budgeting is a type of budgeting process based on the
assumption that a new budget can best be formed by only making any small changes to the
current budget. The true budget for fiscal scrutiny is, in other terms, used to apply or deducted
additional changes to determine new budget figures from the base sums. Incremental budgeting
is generally referred to as the most conservative method for financial planning of all forms.
Detailed projections are not required, since they are using the schedule for this timeframe to
predict the future plan. Sometimes, only a few assumptions are required in the budgeting phase.
Finally, the simplicity of the strategy tends to save resources in budgetary management for
company activities.
Role of IB in planning and coordination:
Incremental budgets are necessary to illustrate the financial implications of the proposals,
explain the means to execute these plans as well as provide a way to measure, analyze and track
the results that have been accomplished as compared to the plans. Incremental budgeting is an
important component of administrative preparation focused on the concept of making a small
change to today's budget to fulfill the new budget. The Budget can therefore avert imminent
emergencies. The most recent estimates are determined using only incremental quantities. The
incremental budget is not controlled, but a policy is followed. There are no rules. The combined
budget plans are further expected to be the starting point for the present year's forecasts for the
expense incurred in the previous year. The plan used for the financial crisis year will be a guide
for planning on the spending assignment for the next year. An outline of the advantages and
pitfalls of incremental budgeting will help us better understand the principle.