Standard costing
1) Explain the financial planning process in an engineering business.
In order to achieve its objectives and the profit targets, an engineering business must have an adequate financial plan. Explain the main steps in forming a financial plan for a typical engineering company.
Introduction
Financial planning is a process that is continuous, directing and allocating all financial resources to meet planned strategic goals and objectives. The eventually output from the financial planning processes is normally the budget. These are budgeted financial statements, whose foundations are the detail budgets which include the sales and the cash flow forecasts, production and other estimates which usually support the main master budget. (Vance, 2003)
Financial planning can be divided into two major groupings i.e. planning for operations and planning for financing. Sales and production fall under the operations budget while financial planners concentrate on best to finance the operations of the company.
Financial planning involves strategic planning where the goals and the company objectives are established. A mission statement is developed that captures the future plans of the organization. The organization is assessed and all the objectives and its external operating environment are considered and a thorough strategic plan is established. Within the strategic plan is a set of the financial plan or budget.
In order to develop a financial plan a sales budget developed from the sales forecast. To estimate sales the past sales record are various factors that influence sales are analyzed. The sales forecasts must include the expected sales prices. (Drucker, 1999)
Several other budgets also need to be developed like the production budget i.e. budget for raw materials, total labor and all the overhead expenses and the expected inventory. The other expenses like the administrative costs of running the business. These types of expenses are estimated based on past trends and the expected future events.
The budgeted income statement is then prepared from the above information. A few other items are added in the budgeted income statement like the income received from external investments and other financing costs are also included in the budget. The tax department and the finance department should also be consulted and other expenses like taxes and financing costs incorporated into the budgeted. A budgeted balance sheet is then prepared to estimate how much financing is needed to support the estimated sales. The main connection between the budgeted income statement and the balance sheet is the retained earnings. The preparation of the budgeted balance sheet begins with the final balance of the retained earnings. In order to have correct estimates the projected dividends which are forecasted from the existing dividend policies and the intention of the management to pay in the coming financial period. The budget for acquisition of capital assets or their replacement should also be budgeted. Future capital expenditures budget should also be included in case significant amount of capital assets are necessary. (Garrison, Noreen, Brewer, 2009)
2) Examine the factors influencing the decision-making process during financial planning
Preparation of the budget affects the decision making process as the budget allocation affects the final outcome of the budget. Budget may also affect the decision making process as the allocations also affect various other factors of production.
Future developments are catered for in the strategic plans which have a huge impact on the prosperity of the organization. Future development entails massive expenditures and long term commitments that have significant impact on the financial decision making process. In case the firm lacks the ability to secure long term commitments then the financial decisions have to be altered significantly.
The financial decisions plans are also affected by the existing business environment. The nature of the customer, the suppliers, business competitors and also the government affect the final financial decision or the plans of the business. The government makes its major decisions based on the existing financial or economic environment prevailing at that particular moment.
Risks and uncertainty also affect the outcome of most financial decisions and future plans of a business. (Kieso, Weygandt & Warfield, 2007)
3) Analyze Standard costing techniques
A standard costing system records all the standard costs of a product. All the units of stock flow through the stock accounts i.e. from work in progress to the finished and also to the total cost of goods sold at their standard pre-unit cost. When the actual costs have been identified, adjustments are made to return each account balance to the actual from the standard. (Khan, 1993) A standard, as used in management accounting is the budgeted amount for one single unit of the product. Standard costs are arrived at after extensive calculation using engineering estimates of the standard quantities as the factory inputs and the actual budgeted prices of the actual inputs. Standard quantities of the company’s input can be calculated based on the ideal performance or on the actual expected performance. A standard is the budgeted number that’s characterized by a certain identity in its determination and by its formidable ability to motivate and encourage employees and managers to work towards the achievement of the company’s targeted performance. Standard costs are the actual components of the standard costing systems.
Absorption costing apportions all the overheads to the individual products. In order to achieve this, the companies must directly apportion and allocate each service overhead to the major production department. All the direct labor/machine hourly rates are then calculated. All the costs are allocated to various individual departments and it’s assumed that the overhead costs relate directly and precisely to the level of production. The major problem with this concept is that the allocation or the apportionment of the costs is done arbitrary and may not give an accurate view of the activities which are responsible for the costs. A certain product or an activity may show a big loss just because the method used to allocate the costs have changed. Absorption costing is time consuming and requires a lot of concentration and energy to determine and implement an accurate basis of overall overhead allocation and eventual apportionment. However, this process of allocation may interfere with the major causes for all of these costs. Traditional costing concepts separate and split costs between fixed and variable cost.
| Marginal costing | Absorption costing | |||||
| Sales | 20000 units @ 100 | 2000000 | 2000000 | |||
| open stock | 0 | 0 | ||||
| variable | 20000 @10 | 200000 | 200000 | |||
| Closing stock | -232000 | 2320000 | ||||
| contribution | 1568000 | -520000 | ||||
| Fixed mach and toiling heat 20000 | 20000 | |||||
| Adm and selling exp | 35000 | 35000 | ||||
| Profit and loss | 1513000 | -575000 | ||||
| Assumption: working hours per day is 12 and monthly days are 30 | ||||||
| I.e. total hours per year are 4320 hrs. | ||||||
| Total production is equal to 4320 @ 100 = 432000 units | ||||||
| Sales are predicted to be 20000 units per year | ||||||
| Total units produced 43200 per year | ||||||
| closing stock under marginal costing = 10 units per hour * 12 hours *30 days* 12 months i.e. | ||||||
| 43200 units per year less 20000 sales, closing stock equals to 23200 units @ 10 = 232000 | ||||||
| (marginal costing) | ||||||
| Absorption costing closing stock is equivalent to 23200 @100 i.e. 2320000 | ||||||
4) List the total resources and associated costs required to complete the whole project for a two year production run.
| Squidging | Banging | Thumping | packaging | Total | ||
| cost of the machine | 10000 | 20000 | 5000 | 0 | 35000 | |
| operators | 86400 | 43200 | 0 | 43200 | 172800 | |
| maintenance | 320 | 360 | 300 | 1800 | 2780 | |
| Maintenance by op | 0 | 0 | 0 | 0 | 0 | |
| running exp | 108000 | 129600 | 43200 | 280800 | ||
| installation exp | 450 | 540 | 180 | 0 | 1170 | |
| Add elect + mechan | 450 | 450 | 450 | 0 | 1350 | |
| Training ex (idling) | 25 | 30 | 10 | 0 | 65 | |
| Training operators | 10 | 10 | 10 | 0 | 30 | |
| commissioning mac | 600 | 720 | 240 | 1560 | ||
| commissioning ope | 600 | 600 | 600 | 0 | 1800 | |
| Total exp for one year | 206855 | 195510 | 49990 | 45000 | 497355 | |
| For two years | 413710 | 391020 | 99980 | 90000 | 994710 | |
| Assumptions | ||||||
| 30 days per month i.e. working days per month | ||||||
| 12 hrs daily working hours | ||||||
| Maintenance cost have been assumed to be equivalent to the running costs + fitters exp. | ||||||
- Produce a plan with appropriate time scales for completing the project.
Produce a project plan covering installation, commissioning, training and operating production for two years.
| 7-9/8/2013 | 8-10/8/2013 | 9-12/8/2013 | 13/8/2013 | 13/8/2013-2015 | ||||||||
| installation | commission | trainning | operating | Production | ||||||||
- Plan the human resources requirement and costs associated with each stage of the project. Plan the human resources required listing the requirements on a weekly basis and costs on a monthly basis.
Weekly and Monthly Hr requirements and other costs.
| first week | Hr | weekly | Hr | monthly exp | Hr | |
| cost of the machine | 35000 | 0 | 0 | 0 | 0 | |
| operators | 280 | 4 | 280 | 4 | 1200 | 4 |
| maintenance | 4.50462963 | 4.51 | 19.30555556 | |||
| Maintenance by op | 0 | 0 | 0 | |||
| running exp | 455 | 455 | 1950 | |||
| installation exp | 1170 | 6 | 0 | 0 | ||
| Add elect + mechan | 1350 | 8 | 0 | 0 | ||
| Training ex (idling) | 65 | 0 | 0 | |||
| Training operators | 30 | 1 | 0 | 0 | ||
| commissioning mac | 1560 | 0 | 0 | |||
| commissioning ope | 1800 | 12 | 0 | 0 | ||
| Total exp for one week | 41714.50463 | 31 | 739.51 | 4 | 3169.305556 | 4 |
References
Vance, D. (2003) Financial analysis and decision making: tools and techniques to solve
financial problems and make effective business decisions. New York: McGraw-Hill.
Drucker, F.(1999) Management Challenges of the 21st Century. New York: Harper Business,
Garrison, H., Noreen, E., Brewer, C. (2009)Managerial Accounting. McGraw-Hill Irwin.
Kieso, D. E., Weygandt, J. J., & Warfield, T. D.( 2007) Intermediate Accounting (12th Ed.). Hoboken, NJ: John Wiley & Sons,.
Khan, M. (1993) Theory & Problems in Financial Management. Boston: McGraw Hill
Higher Education.
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