The Financial Accountant Of Northfield Component Accounting Essay

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This task is to investigate the issues and problem with the sales budget and cashflow of the company. The analysis shows that the forecast of the cashflow is in negative figures which is not acceptable for the company to continue. The negative cashflow shows that the firm has serious issues in its operations and the company is unable to keep the liquidity and can cause potential financial and operational problems in the future.

It is found that the high cost on purchase is a main issue for the negative cashflow of the company which refers to the sales and purchase of the first year's figure. The proportion of net sales is 75% which is very high for the company. The decrease of sale/purchase has decresed in the following year by approx 30% which builds the £49k surplus for the company in the month of February.

It is due to high purchase the company is currently using the high services form the vendor which needs to cut down the cost for the betterment of the company's profit. The company is in accumulative deficit of cashflow which is not acceptable and not in the favor of company because the entity can not survive longer with negative cashflow provision. This issue can be overcome by finding new vendor for a raw material with less cost. The company also needs to maintain its sales/purchase ratio of 40 to 40 percent otherwise this particular problem will continue and damage the company retention.

Another problem highlighted is high variance among the actual and estimated figures and low growth in terms of revenue recognition. The increase in sales figures in a month of August and September is 2.32% and 11.32% while variance increased by 66% in the same month. The company has to increase its strategic alliance with other companies to enhance the sales figures perfectly for the sake of organizational long term survival and productivity.

Task-2: North Seaton Engineering Company

Net Present Value (NPV):

Net Present Value (hereafter NPV) is the most widely used tool to assess the economic compatibility of a particular project. This technique is a time series of cash flows for both ingoing and outgoing is called NPV. It is a sum of all the present values of the individual cash flows (Edwin & Ruud, 2000). NPV is one of the key tool to analyze the business performance and used as central tool to appraise the long term project with discounted cashflow techniques and time value of money factor.

Profitability index (PI), also called the Profit Investment Ratio (PIR) is another widely used ratio to do financial analysis. This is used to rank the projects and it is used with the NPV of the project. If the PI of the project comes greater than 1, then can invest in the project otherwise not recommended.

Initial outlay

Project A in millions

Project A

(45000)

Project B

Project B

year

Undiscounted cashflow

Discounted cashflow

Undiscounted cashflow

Discounted cashflow

1

180,000

169,811

60,000

56,604

2

230,000

204,699

120,000

106,800

3

280,000

235,093

250,000

209,905

4

120,000

95,051

250,000

198,023

Sum of cash flow

704,644

571,332

Less initial investment

450,000

450,000

NPV

254,655.14

121,331.58

The above table shows clearly that both projects have positive NPV and hence both projects can be selected but the yield of project A is higher than project B, so the company must choose Project A for the investment purpose. Let's now move towards on IRR.

Internal Rate of Return (IRR):

Internal Rate of Return (IRR) is another widely used tool to do project analysis. IRR is the rate on which the NPV of a project becomes zero. If the computed IRR is greater than the discount rate then the project should be taken.

Initial outlay

Project A in millions

Project A

(45000)

Project B

Project B

year

Undiscounted cashflow

Discounted cashflow

Undiscounted cashflow

Discounted cashflow

1

180,000

169,811

60,000

56,604

2

230,000

204,699

120,000

106,800

3

280,000

235,093

250,000

209,905

4

120,000

95,051

250,000

198,023

Sum of cash flow

704,644

571,332

Less initial investment

450,000

450,000

IRR

21.88%

34.78%

Above figures shows that the project B has higher return and company should consider investment in project B.

Payback Period:

Payback period is based on the cash in flow from the projects. Payback period helps in analyzing the length of period to recover the initial investment invested in the business.

Project A: the payback period = 2.32 years

Project B: the payback period = 3.38 years

So the project A is more suitable for the company to proceed.

Accounting Return

Total return yielded from the projects is known as accounting return. The computed result of the same is mentioned below,

Initial outlay

Project A in millions

Project A

(45000)

Project B

Project B

year

Undiscounted cashflow

Discounted cashflow

Undiscounted cashflow

Discounted cashflow

1

180,000

169,811

60,000

56,604

2

230,000

204,699

120,000

106,800

3

280,000

235,093

250,000

209,905

4

120,000

95,051

250,000

198,023

Sum of cash flow

704,644

571,332

Less initial investment

450,000

450,000

AAR

157%

127%

Task-3

All the investment appraisal techniques used in the above section are excellent. There are some pros and cons associated with each method. Payback Period, IRR and ARR have one thing common that it would not take the present value in its consideration that is why relying on any of these appraisal method would not be as beneficial for the companies. By contrast the usage of NPV is far more better than that because with the help of this particular method, one can actually finds the net effect on the company's bottom line. NPV which is known as the most important tool for project evaluation is identifying to select Yellow Company for investment. By considering the same, the company should go with project A.

Task-4

Actual Result:

sales

7500 units

937,500

Ratio

Fixed Cost

170,000

18.13333

Material Cost

7500 Units

420,000

44.8

Labor

7500 Units

285,000

30.4

Overheads

7500 Units

90,000

9.6

Total cost

965,000

Contribution margin

(27,500)

Break even analysis figures are mentioned below,

If the material cost increased to 54, labor cost increased to 38 and overhead cost increased to then the company would be on the break even position and the above mentioned table would be like this.

Sales

7500 Units

 

900,000

Ratio

Fixed Cost

120,000

13.33333

Material Cost

7500 Units

405,000

45

Labor

7500 Units

285,000

31.66667

Overheads

7500 Units

90,000

10

 

 

T.C

900,000

 

 

 

Contribution Margin

-

 

 

 

 

 

 

Increase in sales and labor, fixed and overhead cost will result in negative contribution margin and the same is mentioned in the below table

Sales

7500 Units

 

937,500

Ratio

Fixed Cost

170,000

18.13333

Material Cost

7500 Units

420,000

44.8

Labor

7500 Units

285,000

30.4

Overheads

7500 Units

90,000

9.6

 

 

T.C

965,000

 

 

 

Contribution Margin

(27,500)

 

 

 

 

 

 

Task-5

Fixed & variable Cost

Variable costs are expenses that change in proportion to the activity of a business, while the cost incurred as fixed is called fixed cost. A company has to bear fixed cost regardless with the quantity of its production but variable cost can be varied from the quantity.

Marginal & Absorption Costing

Absorption costing is a traditional product costing technique used in the Cost & management Accounting. In absorption costing technique, both fixed & variable prduction overheads (and factory overheads (FOHs)) are fully absorbed into the cost of production. Factory overheads are calculated on the estimation/absorption basis instead of taking actually incurred factory overheads' figure. By Contrast, in marginal costing technique, only variable production overheads are included into the cost of production (or cost of sales).

Activity Based Costing

A costing technique change with the activities of an organization is called activity based costing. This particular method is also known as Just in Time (JIT) process costing.

Standard Costing

Standard costing is an important subtopic of cost accounting. Standard costs are usually associated with a manufacturing company's costs of direct material, direct labor, and manufacturing overhead.

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