Pgd In Strategic Leadership And Management Accounting Essay


Pricing strategy involves evaluating the price you will charge for your product or service, and how this price fits in with your overall marketing plan. Unlike advertising, which overtly disseminates a message, pricing provides a subtler cue about your company, attracting a particular demographic or making a statement about your product's value. A pricing strategy is also a practical matter because your company cannot succeed if you do not earn enough to cover costs.

It is necessary firstly to understand that cost accounting is used in decision making and its budgeting process. So the importances of costs in the pricing strategy of an organisation represent its techniques of cost accounting, including its classification of costs and costing systems and its use in the pricing strategy of an organisation.

The pricing strategy means how much a company charges for a product or services" it is the most difficult and also very important an entrepreneur must have to decided that what price should be taken from the consumer to provide the product and services. There is lot of way to determines that what should be the price of the product and services.

Lady using a tablet
Lady using a tablet


Essay Writers

Lady Using Tablet

Get your grade
or your money back

using our Essay Writing Service!

Essay Writing Service

Cost is the most important part of pricing because it can quite often decide the profit margin which adds up to form the price of the product. So, we will usually here the term Cost Cutting when it comes to large organizations to increase the profit margin but when costs significantly go up they do effect the price of the product but usually manufacturers would like to keep the price constant when there are minor adjustments in cost.  

Pricing decision is a crucial decision every organization has to make, because this will eventually affect their corporate objectives, either directly or indirectly (Monroe 2003:8). For every business entity, irrespective of their line of business and objective, cost minimization and profit maximization is a general factor to be considered and for non-profit making organizations, there will always be the need to reduce cost at all means and to maximize output. A business whether small or big, simple or complex, private or public, is created to provide competitive prices (Ayozie 2008:10). According to Hilton (2005:634), setting the price for an organization's product or service is one of the most crucial decisions a manager faces, and one of the most difficult, due to the number of factors that must be considered. Some of the factors that influence pricing decision are demand, competitors, cost, political, environmental, legal and image-related issues. Horngren, et al (1996:428), buttresses this point by stating that managers are frequently faced with decisions on pricing and profitability of their products. Some of the objectives of business enterprises vary from maximization of profit, minimization of cost, maximization of shareholders fund, becoming a market leader, etc. From the various objectives of business organizations, the primary objective of any business enterprise is to maximize profit and minimize cost, except for charity organizations that are set up primarily not to make profit, but there will be need to minimize cost by all means, therefore the need to set prices, which therefore

connotes that pricing decision arises in virtually all types of organizations, irrespective of their level of activities. According to Lovelock & Wirtz (2004:151), the principal approach to an effective pricing strategy is to manage revenues in ways that support the firms' profitability objectives, which leads to the question; how well can we complement the various factors that influence pricing decision, to achieve our overall objective, which is maximization of profit.

Price of a product is a major element of the marketing mix: Pricing is one of the most important strategic issues because it is related to the product positioning. The price goes in hand with the other marketing mix elements such as product promotion, channel decisions and its features.

Channel of distribution: The cost of distribution and the channel of distribution must also be considered when the price of a product is to be set. It must be considered if the product will be supplied directly to the final consumer or has to pass through the various channels of distribution. For a product that has to pass through the wholesaler, to the retailer and then to the final consumer, the profit of these middle men as they are called must be considered, so that the final price set by the retailer will not affect demand negatively. In some situations, the producer may need to set a standard price, which is known by the wholesaler, the retailer as well as the consumer. For example the Nigerian Bottling Company has set a standard price for the sale of a 35cl bottle of Coca Cola in Nigeria to N40 as at this date, thus both the consumers and the retailers are aware of the standard price. (A.C 1.1)

b) Design a costing system for use within an organization. (AC2.1)

Lady using a tablet
Lady using a tablet


Writing Services

Lady Using Tablet

Always on Time

Marked to Standard

Order Now

A design Dunlop Manufacturing Company.







Prime cost

Variable cost

Fixed cost

Total cost








The cost systems may be classified into different groups based on the common characteristics and nature of costs they cover. The important ways of classification of costs are:

By nature or element: materials, labour, expenses.

By functions: production, selling, distribution, administration, R&D, development,

By traceability: direct and indirect

By variability: fixed, variable, semi-variable

By controllability: controllable, uncontrollable

By normality: normal, abnormal

In each and every business, a division specific to cost centre exists that adds to the cost of an organization, but only indirectly adds to its profit. Typical examples of such cost centre include research and development, marketing and customer service.

Companies may choose to classify business units as cost centres, profit centres, or investment centres. There are some significant advantages to classifying simple, straightforward division's ascots centres, since cost is easy to measure. However, cost centres create incentives for managers to under-fund their units in order to benefit themselves, and this underfunding may result in adverse consequences for the company as a whole.

Forecasting techniques:

In forecasting costs we should analyse the organisation's costs and make out, how they relate to sales.

Fixed costs are largely independent of the level of sales. The costs may be not affected on the sales turnover or number of sales in the organisation. Variable costs depend on turnover or number of sales. For example, distribution costs might be a percentage of turnover, a cost per sale, or a combination of the two. Semi-variable costs contain both fixed and variable components. For example, our power costs might include both a fixed component, the electrical equipments like tubes and bulbs, the heaters, fan or air conditioners and a variable component. Furthermore, the historical data of the organisation needs to be analysed, the suppliers too can be contacted for quotes Here while forecasting the costs, the uncertain costs needs to be controlled. The costs which can be incurred in the organisation due to disasters and calamities, be it natural or human made, should be controlled. This can be done by means of insuring the organisation. If the suppliers are of good nature in terms of business, enter into long-term supply contracts or use forward foreign exchange contracts.


Funding in the organisation is to provide resources, usually in form of money or can be other resources like effort, time, human, help from other private or public institution. The funds can be raised based on short term or long term purposes. The main sources of funding in an organisation are

The profits made by the organisation can be utilised for further growth.

The organisation can take credit from other private or public institutions, like bank, etc.

The organisation can benefit funds in form of donations, which has a very less certainty.

The organisation can get grants from the government, if the organisation provides some means of government support.

The organisation if had a good reputation in the market with it's products and demands, can go into listing and thus generate funds from the shareholders who invest resources.

Standard costs are target costs, which should be attained under specified operating conditions. They are expressed as a cost per unit. We use standard cost system in an AMC Engineering Limited. This company manufactures car bumper mouldings. It has involved three cost for product car bumper moulding. Design standard cost system:

Standard Cost - Material cost

- Lobou cost


Material cost:

monetary investment. Things that incur material costs, for example, are the ingredients of a meal or the parts of a machine. The cost of labor to produce the product is separate from this cost. The Product production's total cost of a product and its eventual sale price are arrived at by combining the material cost with the cost of labor.

Labour cost:

Lady using a tablet
Lady using a tablet

This Essay is

a Student's Work

Lady Using Tablet

This essay has been submitted by a student. This is not an example of the work written by our professional essay writers.

Examples of our work

The direct manufacturing labour costs are the total costs of labourers who work directly on goods being manufactured. It is a useful measurement for a small business to use because it allows us to understand how much of our cost is going toward paying the employees who actually manufacture our products. Calculate this cost by identifying direct labourers and computing their wages.

Manufacturing overhead:

Manufacturing overhead (also known as factory overhead, factory burden, production overhead) involves a company's factory operations. It includes the costs incurred in the factory other than the costs of direct materials and direct labor. This is the reason that manufacturing overhead is often classified as an indirect product cost.

The element of cost for 100 mouldings have been calculated by AMC Engineering as:

Materials: polycarbonate (of specified quality), 200 kilos at $1.10 per kilo matt black

finishing material, 10 litres at $5.40 per litre

labour: 10 hrs at $5.75 per hour

3 hrs at $8.50 per hour

Overhead: 12 hrs at $20 per hour

What is the standard cost of producing 100 bumper moulings and selling prise?


$ $


Polycarbonate: 200 kilos at $1.10 per kilo 220.00

Finishing material: 10 litres at $5.40 per litre 54.00 274.00


10 hrs at $5.75 per hour 57.00

3 hrs at $8.50 per hour 25.50




13hrs at $20 per hour 260.00

Standard cost 617.00

This standard cost will then be used by AMC Engineering to help establish the selling price to the customers, ie: standard cost +price= selling price.

C) Solution:

Proposed improvements on its costing and pricing system


Direct material

Direct labour


Prime cost

Variable cost

Fixed Cost




Total cost of Sales

Selling price

Less :Total cost of sales






Proposed improvements on its costing and pricing system

The information is best presented in a way which analyses the profit of each product of S

& T Manufacturing 8/-*Company:

Cost of materials

Labour costs


Cost of sales




















Less Cost of Sales











On the basis of this information, product S should be discontinued because it is making a loss. However, this may be a simplistic solution, and other factors will have to be considered, eg. Sales of product T may be linked to sales of S; the overheads of T are likely to increase if S is discontinued.

This Case study brings out two important functions of costing;

. to find out the costs (in this case of each product)

. to give resposnsability to someone for those costs (here for the manager of product S to investigate the reasons for the loss of £ 10,000).

Task Two

Forecasting techniques are used to generate information needed for decision making in different areas of business such as cost and revenues.

Use the data given in the following table and apply one of the forecasting techniques to create cost and revenue trend line that may be used for making relevant decisions.(AC2.1)

Assess the possible sources of funds for KAFCO Ltd. If they want to take up a new project to improve their production facilities.(AC 2.2)

a) Use the data given in the following table and apply one of the forecasting techniques to create cost and revenue trend line that may be used for making relevant decisions. (AC2.1)


Revenue / Cost / Profit

Revenue 1987 = (10+7+12+15+18)/5 = 12.4

Cost 1987 = (8+6.5+9+10.5+12)/5 = 9.2

Profit = (revenue-cost) = (12.4-9.2) = 3.2

Revenue 1988 = (7+12+15+18+24)/5 = 15.2

Cost 1988 = (6.5+9+10.5+12+15)/5 = 10.6

Profit = (revenue-cost) = (15.2-10.6) = 4.6

Revenue 1989 = (12+15+18+24+34)/5 = 20.6

Cost 1989 = (9+10.5+12+15+23)/5 = 13.9

Profit = (revenue-cost) = (20.6-13.9) = 6.7

Revenue 1990 = (15+18+24+34+20)/5 = 22.2

Cost 1990 = (10.5+12+15+23+16)/5 = 9.2

Profit = (revenue-cost) = (22.2-15.3) = 6.9

Revenue 1991 = (18+24+34+20+12)/5 = 21.6

Cost 1991 = (12+15+23+16+12)/5 = 15.6

Profit = (revenue-cost) = (21.6-15.6) = 2.6

Revenue 1992 = (24+34+20+12+26)/5 = 23.2

Cost 1992 = (15+23+16+12+19)/5 = 17

Profit = (revenue-cost) = (23.2-17) =6.2



















1987 0-= 1988 1989 1990 1991 1992

A Graf of Revenue/cost/Profit






0 1987 1988 1989 1990 1991 1992

Revenue trend line






0 1987 1988 1989 1990 1991 1992

Cost trend line






0 1987 1988 1989 1990 1991 1992

Profit trend line

b) Assess the possible source of funds for KAFCO Ltd. If they want to take up a new project to improve their production facilities. (AC 2.2)

KAFCO Ltd. is famous company in the world. If they want take up a new project to improve their production facilities, I think there is no problem to take up for funding. Because if we deeply look about their company history that means their last 5 years revenue , cost and also profit trend line (a), then we can easily understand they can be funds raised base on sort term or long term. But The main possible sources of funding in an organisation are

The profits made by the organisation can be utilised for further growth.

The organisation can take credit from other private or public institutions, like bank, etc.

The organisation can benefit funds in form of donations, which has a very less certainty.

The organisation can get grants from the government, if the organisation provides some means of government support.

The organisation if had a good reputation in the market with it's products and demands, can go into listing and thus generate funds from the shareholders who invest resources.

Task three

Case Scenario 1:

1. A month-by-month cash budget for the first six months

2. A forecast profit and los account for the first six months for this he tells you that his closing stock at 30 June is expected to have a value of £ 3,250, and that he wishes to depreciate the van at 20% per annum.

3. A forecast Balance Sheet as at 30 June. (AC. 3.2)


Jim Smith

Cash budget for the six months ending 30 June 19


Capital introduced


Jan Feb Mar Apr May Jun

£ £ £ £ £ £


_ 1,250 3,000 4,000 4,000 4,500

Total receipts for month

10,000 1,250 3,000 4,000 4,000 4,500






_ 4,500 4,500 3,500 3,500 3,500

750 600 600 650 650 700

Total payments for month

6,750 5,100 5,100 4,150 4,150 4,200

Net cash flow

Add bank balance (overdraft) at beginning of month

3,250 (3,850) (2,100) (150) (150) 300

_ 3,250 (600) (2,700) (2,850) (3,000)

Bank balance (overdraft) at the end of month

3,250 (600) (2,700) (2,850) (3,000) (2,700)


Jim Smith

Forecast profit and loss statement for the six months ending 30 June 19

£ £

Sales 22,750

Purchases 23,500

Less Closing stock 3,250

Cost of sales 20,250

Gross profit 2,500

Less overheads :

Expenses 3,950

Depreciation of van (6,000 x 20%):2, ie six months 600


Net loss (2 ,050)


Jim Smith

Forecast balance sheet as at 30 June 19

£ £

Fixed assets

Van at cost6,000 Less depreciation to date 600


Current assets

Stock 3,250

Debtors 6,000


Less current liabilities

Creditors 4,000

Bank overdraft 2,700


Working capital 2,550




Opening capital 10,000

Less net loss 2,050

Closing capital 7,950

Select appropriate budgetary targets for Jim Smith's business such as increased sales and profit target for next three years and discuss the relevant cost and financing consequences. (AC 3.1.)

Case Scenario 2:

From the following information for the month of January, you are to prepare an operating statement by comparing the actuals with the master budget figures which will be used to the senior management of the business.(AC3.3)


Operating Statement


Less: variable cost materials





Less Fixed Overheads









21,500 ADV







700 ADV

4,300 ADV

250 ADV



5,250 ADV





26,750 ADV

2,850 ADV



29,600 ADV

Evaluate budgetary monitoring process in one of your known company.(Ac. 3.4)

Evaluating budgetary monitoring process brief note to managers:

All of the actual figures are adverse to the budget. The cumulative effect is that actual profit is 49% of that budgeted.

Variances that need particular investigation are sales, labour and fixed overheads.

For sales, sub-variances should be calculated which show

changes in the selling price

changes in the number of units sold

For labour, sub-variances should be calculated which show

changes in wages rates

changes in the efficiency of the workforce

For fixed overheads, sub-variances should be calculated by the management accountant which show :

changes in costs

changes in output, multiplied by the overhead rate per unit

Although the adverse variances for materials and variable overhead will probably be classed as not significant (both being within 2.5 per cent of budget), a watch should be kept for more significant variances of price and usage to see if the variance is more attributable to one than the other

All-in-all, urgent action needs to be taken to ensure that, in the future, actual figures are more in line with those of the budget.

Task Four

Recommended processes that could manage cost reduction in the organisation.(AC 4.1)

Cost reduction is a planned and positive approach to reduce expenditure. It starts with an assumption that current or planned cost levels are too high and looks for ways of reducing them without reducing effectiveness.

An example of cost reduction techniques:

Value analysis CIMA defines value analysis as 'a systematic inter-disciplinary examination of factors affecting the cost of a product or service, in order to devise means of achieving the specified purpose most economically at the required standard of quality and reliability. The aim in a value analysis exercise is to eliminate unnecessary costs without reducing the use value, the esteem value or the exchange value of the item under consideration.

Work study - This means of raising the production efficiency of an operating unit by the reorganisation of work. The two main parts to work study are method study and work measurement. Method study is the most significant in the context of cost reduction. It looks at the way in which work is done and attempts to develop easier and more effective methods in order to reduce costs.

Variety reduction - This involves standardisation of parts and components which can offer enormous cost reduction potential for some manufacturing industries. Variety reduction can also be used to describe the standardisation or simplification of an organisation's product range.

a) Product costing techniques are created and implemented to aid manufacturers in allocating costs to production items. Several methods have been developed, and provided different results.

In according with (Monden, Y. and J. Y. Lee. 1993)

"A manager in the United States generally expects to use cost information to make

decisions about pricing or investments, while a Japanese manager expects to use cost information to reduce costs.

Kaizen costing is a Japanese technique used to manage costs during a product's planning and design stages and has been used by some Japanese firms for over twenty years."

Comparison between american manufacturers costing system and japanese costing system

Applying its cost reduction

Standard Costing Concepts

Kaizen Costing Concepts

Cost control system concepts.

Assume current manufacturing conditions.

Meet cost performance standards

Cost reduction system concepts.

Assume continuous improvement in manufacturing.

Achieve cost reduction targets.

Standard Costing Techniques

Kaizen Costing Techniques

Standards are set annually or semiannually.

Cost variance analysis involving standard costs

and actual costs.

Investigate and respond when standards are not met.

Cost reduction targets are set and applied monthly.

Continuous improvement (Kaizen) is implemented during the year to attain target profit or to reduce the gap between target profit and estimated profit.

Cost variance analysis involving target Kaizen costs and actual costs reduction amounts.

Investigate and respond when target Kaizen amounts are not attained

For a Japanese firm, like Daihatsu, that uses target costing, a new product project is established when a new product is proposed. The actual costing system is implemented during the initial design stage. There are 6 plans involved in the product process:

Plan 1 - Production, Distribution, and Sales Plan (which includes projections of contribution margins from sales).

Plan 2 - Projected Parts and Materials Costs.

Plan 3 - Plant Rationalization Plan (projected reductions in manufacturing variable costs).

Plan 4 - Personnel Plan (for direct labor work force and service department personnel).

Plan 5 - Facility Investment Plan (capital budget and depreciation).

Plan 6 - Fixed Expense Plan (for prototype design costs, maintenance costs, advertising

 and sales promotion expenses, and general and administrative expenses).


These six projections and plans become the annual profit budget or "target":

Cost improvement through Kaizen is obtained by reducing variable and fixed costs. Functional analysis is applied at the design stage for a new product, and a target cost for each function is set. The functional target costs are summed, and the result is a product target cost. After the first year of production for a new product, the actual cost of the previous period becomes the starting point for further cost reduction. This process of continuous improvement is known as kaizen costing and encourages continual improvements by tightening the "standards."

Variable costs and fixed cost reductions are determined by separate methods. For variable costs, the actual prior year's production cost serves as a standard base for current production. A reduction rate is then decided and variances are monitored. For fixed costs, the total budgeted amount is considered a target which is lowered by a reduction rate. Actual performance is compared to the budgeted amount with any reduction being considered favorable. The figure below provides a graphic view of Daihatsu's cost reduction approach


Kaizen Costing Cost Base and Cost Reduction Amount

"For Daihatsu, standard costs are steadily reduced by continuous improvement efforts towards the target cost. While the target cost is established during the design stage, standard costs (as well as other cost reduction techniques) are used during the production stage to attain the target cost. Thus, the standard costing system tracks progress in achieving the target cost.

Cost reduction techniques include standard costing. However, standard costing has limited applicability and can lead to undesirable results. For example, to minimize the purchase price variance, a purchasing manager may purchase a cheaper, lower quality part. As a result, the quality of the product is likely to be reduced, and the company may experience higher overall costs in the form of rework or warranty problems. In contrast, Kaizen costing is performed on a company-wide basis and can be used in planning, design, and other processes as well as production. Kaizen costing activities do not reduce the overall quality of the product; they do ensure that expenditures result in the receipt of appropriate value." (Monden, Y. and J. Y. Lee. 1993)

Evaluate the potential for the use of activity based costing (ABC) for that organisation.(AC 4.2)

In order to evaluate the potential for the use of activity based costing(ABC) for an organisation it is important to understand that Activity Based Costing(ABC) it is a costing system for evaluating the distribution of all components of a project including its labour, time, cost, sale and performance practices in order to increase their competitive potential.Allocating costs based on ABC concepts does not guarantee that indirect costs will be accurately attributed to products or services considering its estimation approach.

Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead. It then assigns the cost of those activities only to the products that are actually demanding the activities.

Let's discuss activity based costing by looking at two products manufactured by the same company

Product 124 is a low volume item which requires certain activities such as special engineering, additional testing, and many machine setups because it is ordered in small quantities

A similar product, Product 366, is a high volume product-running continuously-and requires little attention and no special activities. If this company used traditional costing, it might allocate or "spread" all of its overhead to products based on the number of machine hours. This will result in little overhead cost allocated to product 124, because it did not have many machine hours

This will result in little

.. However, it did demand lots of engineering, testing, and setup activities

In contrast, Product 366 will be allocated an enormous amount of overhead (due to all those machine hours), . but it demanded little overhead activity

The result will be a miscalculation of each product's true cost of manufacturing overhead

.. Activity based costing will overcome this shortcoming by assigning overhead on more than the one activity, running the machine.

Activity based costing recognizes that the special engineering, special testing, machine setups, and others are activities that cause costs-they cause the company to consume resources. Under ABC, the company will calculate the cost of the resources used in each of these activities. Next, the cost of each of these activities will be assigned only to the products that demanded the activities. In our example, Product 124 will be assigned some of the company's costs of special engineering, special testing, and machine setup. Other products that use any of these activities will also be assigned some of their costs. Product 366 will not be assigned any cost of special engineering or special testing, and it will be assigned only a small amount of machine setup.

Activity based costing has grown in importance in recent decades because (1) manufacturing overhead costs have increased significantly, (2) the manufacturing overhead costs no longer correlate with the productive machine hours or direct labor hours, (3) the diversity of products and the diversity in customers' demands have grown, and (4) some products are produced in large batches, while others are produced in small batches.

Task Five

Calculate the following values for the two investment proposals.(AC 5.1)

Their estimated budget for investment is £ 1,700m.

Net Present Value (NPV)

ii) Accounting Rate of Return (ARR) based on the average investment cost ; and

iii) Payback Period

Based on the results of the calculations in 5.1 above make a justified strategic investment decision for the organisation. Assess the viability of the projects and recommend a choice. (AC 5.2)

Report on the appropriateness of a strategic investment decision using information from a post audit appraisal. In this part you are required to discuss the suitability of the above capital budgeting techniques. (AC 5.3)

Calculate the following values for the two investment proposals.(AC 5.1)

Net Present Value (NPV)

ii) Accounting Rate of Return (ARR) based on the average investment cost; and

iii) Payback Period



Project A & B


Cash inflow A(m)

Discount factor

Present value(A)

Present inflow B(m)

Present value B(m)


( 1700)































ARR of project A= average investment cost x 100 / investment

=615 x 100 / 1700


ARR of project B= 592.5 x 100 / 1700

= 34.86%


PBP OF project A

(cash flows in millions)


Cash Flow











Payback Period = 3 +30 x 365 / 790

Payback Period = 3 + 13.86

Payback Period = 3 years 14 days

PBP of project B

(cash flows in millions)


Cash Flow











Payback Period = 3 +30 x 365 / 750

Payback Period = 3 + 14.6

Payback Period = 3 years 15 days

Based on the results of the calculations in 5.1 above make a justified strategic investment decision for the organisation. Assess the viability of the projects and recommend a choice. (AC 5.2)

Investment decision is the decision to commit the resources, including capital, people, know-how etc. of a firm to a given project with the intention of achieving greater financial and other benefits in the future (Butler 1993).

With this, in the process of strategic decisions on investment, it is important to focus on financial information that is related to the financial strengths of the company including the tangible and intangible assets of the company. This include land, buildings, plant, equipments and inventories; together with the patents, brands, know-how and people (Butler). All of these are important in order for the decision makers to focus on the different assets on hand of the company, which will help in order to assert the capability of the company to handle a given project. In addition, it is also important to focus on financial and statistical information that are related to the environment of the prospect investment. This will focus on the current changes in the demands of a product in a given place, together with the economic conditions.

Making justifiable decisions about the viability of the projects

Use of Net Present Value to make decisions

NPV rule is choosing a project if it costs less than the PV of its cash flows. More generally: take a project if its Net Present Value is positive.

Considering both these values it is better to project A as its net present value 225.o9 is higher than the net present value project B of which net present value is (168.86).

Use of Internal Rate of Rate calculation to make decisions

ARR rule for selecting a project is; choose a project if and only if ARR > Cost of Capital. According to the results, results shows that internal rate of return is less than to zero in project A while ARR rate of return is 36% in project A. Therefore it is better to project than project B.

Accounting Rate of Rate calculation for making taials conducted

Merits of the Internal Rate of Return are it considers time value of money, considers all cash flows occurring over the life time and considers with the stakeholders' wealth maximization objectives.

Use of Pay Back Periods to make decisions

Payback period is the period taken by the projects to bridge the cost incurred by making profit by projects itself. It fails to capture the cash inflows earned after the payback period; it is not an appropriate method of measuring the profitability of an investment project as it does not consider all cash inflows yielded by the project; it fails to take into account the pattern of the cash inflows; it is unable in determining the target payback period and it is not consistent with the objectives of

Maximizing the market value of the firms' shares.


Report on the appropriateness of a strategic investment decision using information from a post audit appraisal. In this part you are required to discuss the suitability of the above capital budgeting techniques. (AC 5.3)

projects are intended to make profits over time, by achieving the goals set for each year while ensuring the come true of overall organization mission and vision. So when the recommendations made based on a post audit appraisal for investment project decisions. The firms' investment decisions would generally include expansion, acquisition, modernization or replacement of the long term assets. The nature of the investment decisions will fall into the following categories; whether or not to undertake an investment, when there are alternative choices for an investment, selecting which of the mutually exclusive investments to undertake; when capital for spending is in short supply, deciding which investments to undertake with the money that is available.

To make sound decisions some factors have to be considered in order to make better decision making.

The project viability

Project long term financial yielding ability

Project's out come on the presence of financial crisis and

Capital and Revenue expenditure.

Expenditure refers to spending on goods or services. Business expenditure may be classified as capital or revenue in nature. Capital expenditure refers to spending on long-term assets. Long-term assets are mainly fixed assets which are used in business operations over several periods. Expenditure on plant, equipments and buildings are examples of capital expenditure. Capital expenditure is recorded in long-term asset accounts instead of in expense accounts. Revenue expenditure differs from capital expenditure. Revenue expenditure refers to expenditure on goods and services which are expected to be used up within an accounting period. Such expenditure is treated as expenses and is charged to the profit and loss account. Examples of revenue expenditure being rent, wages, utilities, and cost of goods sold. When an item of expenditure is capitalized, it is treated as a fixed asset and is shown in the balance sheet. However, if the same item is 'expensed', it affects the profit or loss for the period

Task six


i) Gross Profit ratio: Gross profit/sales x 100

2007=1008/2400 x100=42%


ii) Net profit ratio: net profit/sales x 100

2007=93/2400 x 100=3.87%

2006=80/ 2100 x 100=3.81%

iii) Inventory turnover in days: average inventory/ cost of sales x 365 days

2007=264/1392 x 365=69 times [ Ave. inventory= 208+320/2=264]

2006=208/1155 x 365=65 times

iv. Trade receivables turnover in days = debtors x 365days /credit sales

2007= 360 x 365 /2400=54.75times

2006=231 x 365 / 2100=40.15 times

v) Return on capital employed = profit x 100 / cap. employed

2007= 44 x100 /228=19.3%

2006=22 x 100/158=13.9%

vi) Interest cover ratio= operating profit x 100 /interest

2007=228 x 100 /91=250.55%

2006=158 x 100 /56=282.14%

Comment on the relative performance of the company for the two years based on the ratios calculated and what this tells you about the company and Suggestions as to how EACH of the ratios might be improved.

(AC 6.1& 6.2)

Gross Profit ratio: 2007=1008/2400 x100=42%


We can say that in 2007 gross profit ratio 42% and the other hand in 2006 gross profit ratio 22%.So we can say that the cost of good sold increased and needs sales decrease

Net profit ratio: net profit/sales x 100

2007=93/2400 x 100=3.87%

2006=80/ 2100 x 100=3.81%

Net profit ratio is very poor in both year.

iii) Inventory turnover in days: average inventory/ cost of sales x 365 days

2007=264/1392 x 365=69 times [ Ave. inventory= 208+320/2=264]

It means 2007 is better turn . so it is improving.and it is good.

Return of capital employed is also good.

If Interest cover ratio is more than 1.5 % then it is good for the company.hare the condition of the company is goos.

The suggession is that that in 2007 gross profit ratio 42% and the other hand in 2006 gross profit ratio 22%.So we can say that the cost of good sold Should increased and needs sales to decrease.

Make recommendations, with reasons based on the ratios you have calculated whether or not Sarah should invest in the company. (AC 6.3)

Yes, Sarah should invest in the company.Because the condition of the company is good.