BCOE 141 Principles of Marketing Assignments Solutions

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BCOE - 141 - Principles of Marketing

Section A

Question No. 4 - Accounting for Managerial Decisions

Solutions to Assignments 

MCO-05 Accounting for Managerial Decisions

Question 4

(a) What do you mean by accounting reports? What are the different types of reports for internal use? 

An accounting report is a financial report that a business files to show its past and present financial situation. With this report, businesses and financial analysts can also predict their financial situation in the future more easily.

An accounting report might include information from every part of the business, or it might only focus on a small goal, such as determining which department uses the most cash flow. Many businesses that closely follow their finances report accounting at least once per month. They might even do it more often, particularly if they are pursuing company-wide goals related to finances.

An accounting report is typically made up of three types of reports:

• Income statement

• Cash flow statement

• Balance sheet

With these reports, a company can see its financial status over time as well as at one specific snapshot in time. All accounting reports should follow Generally Accepted Accounting Principles (GAAP) as established by the Financial Accounting Standards Board (FASB). These ensure accounting reports follow a set of principles, which include, but are not limited to, consistency, sincerity and good faith.

Consistency means a business is following the same accounting practices from month to month and year to year. Sincerity means the person creating the report (the accountant) is being honest. When people are acting in good faith, it means that everybody involved in every transaction is honest.

When all businesses follow the same principles, it's easier to compare one business to another. This ensures companies do not misrepresent their information so that investors and others outside the company are not misled regarding the company's financial standing.

Types of accounting reports

Accounting reports come in different forms depending on what information a company needs to know. Below are three common types of accounting reports:

Income statement

An income statement is a report that details overall expenses and revenue to determine a company's overall net profit. Sometimes an income statement is called a profit-and-loss report.

To prepare an income statement, accountants use data from ledgers and accounting journals. The statement includes both primary and secondary sources of income to get an accurate number. Similarly, primary and secondary expenses are included in the income statement.

Cash flow statement

A cash flow statement shows where cash is coming from (cash flow sources) and where cash is going (cash flow expenditures). This helps a business see how well they are generating cash. Executives and decision-makers can use this report to see where cash is coming from and then where it is going, which could include:

Business operations

Financing

Investments

A cash flow statement measures the cash flow between two dates. To prepare a cash flow statement, an accountant looks at the cash flow in every account, which may include equity accounts, liability accounts, expense accounts, revenue accounts and asset accounts.

Balance sheet

A balance sheet shows an ending balance at one specific point in time. It often includes balances for assets, liability and equity. The balance sheet gives the business an opportunity to evaluate its financial reserves as well as liquid assets. It also helps potential investors or lenders see the financial state of the company.

Typically, a business sets an accounting cycle, and someone prepares a balance sheet at the end of each cycle. Like an income statement, data for a balance sheet comes from the ledger.

Question No. 2 -Accounting for Managerial Decisions

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MCO-05 Accounting for Managerial Decisions

Question 2

(a) What do you understand by zero base budgeting? How is it different from traditional budgeting?

Zero-based budgeting (ZBB) is a budgeting approach that involves developing a new budget from scratch every time (i.e., starting from “zero”), versus starting with the previous period’s budget and adjusting it as needed. In theory, this forces decision makers to constantly look at the business with fresh eyes, free from the limitations of past assumptions and targets.

Implemented effectively, ZBB is a cost discipline enabling businesses to improve resource planning, employee engagement, and organizational collaboration. Although ZBB is often credited with measures to reduce costs, its approach doesn’t exclusively focus on savings and can help test assumptions, solve problems, and ensure spending is aligned to the growth objectives of the organization. If performance does not meet expectations, ZBB can empower businesses to identify how to best course-correct for the months ahead.

Done right, ZBB can translate into cost savings that fund future strategic initiatives and drive growth.

• Examples on Zero based Budgeting

The good news for zero-based budgeting users is they appear to be moderately more successful at meeting their cost targets. Sixty-three percent of respondents, globally, who did not conduct ZBB did not meet their cost targets, while the same is true for 58 percent of those that did use ZBB. Although ZBB users in the US reported higher cost program failure rates than non-ZBB users (65 percent vs. 57 percent), in all other regions the failure rate for ZBB users was lower than for non-ZBB users (57 percent failure rate vs. 68 percent in Latin America; 52 percent vs. 56 percent in Europe; and 60 percent vs. 71 percent in the Asia Pacific).

However, companies using ZBB tend to report higher barriers to effective cost management, which suggests ZBB may be more difficult to implement and use than other cost management methods. Two barriers that ZBB users rate particularly high are “weak/unclear business case” (42 percent vs. 25 percent for non-ZBB users) and “poorly designed tracking and reporting” (43 percent vs. 23 percent for non-ZBB users)

In the US, high-cost targets and high failure rates suggest companies might be misapplying zero-based budgeting, using a tactical approach to pursue aggressive targets that likely require strategic cost actions. In Brazil, where ZBB first rose to prominence, declining usage seems to be driven by implementation challenges.

Use of ZBB is expected to remain flat in the Asia Pacific, except in China, where it is expected to rise—perhaps due to lower implementation barriers and lower failure rates.

In Europe, use of zero-based budgeting is relatively low but expected to hold steady. Cost targets in the region are much less aggressive than elsewhere; also, structured approaches to cost management are much less common. In this environment, ZBB—as a structured approach—may be appealing to some companies simply because it is better than nothing.

• How zero-based budgeting is different from traditional budgeting

The ZBB methodology operates in stark contrast to traditional annual budgeting approaches. Traditional annual budgets are often produced by taking the previous year’s actuals and adding a few percentage points to account for wage rises and inflation. This simplified and incremental budgeting can lead to inefficiencies and missed opportunities for greater cost savings.

ZBB requires organizations to build their annual budget from zero each year (thus its name) to help verify all components of the annual budget are cost-effective, relevant, and drive improved savings.

Here is a brief outline of the principles of both traditional cost-cutting and a zero-based approach.

MCO-05 Accounting for Managerial Decisions

Solutions to Assignments 

MCO-05 Accounting for Managerial Decisions

Question No. 1 - MCO-05

Solutions to Assignments 

MCO-05 Accounting for Managerial Decisions

Question 1

(a) Distinguish among variable, fixed and semi-variable costs. Why is this distinction important?

• Fixed Cost

A cost that doesn’t change in a short term, irrespective of how the volume of production or the sales may change is the fixed cost. This cost is usually a constant cost for a basic operation of businesses or in other words it is a basic operating cost of a business which is crucial and can’t be avoided. The value of fixed cost determines the cost of the product and thus the profit and loss incurred by the business.

We can understand the fixed cost with the help of many examples. For example, if you are living in a rented place, you must have negotiated the cost of the place or the rent for a term that is on the rental agreement. This cost will not change as long as the rental agreement is valid. The rent is the fixed cost here. Similarly, another example is the property tax. Fixed costs are usually incurred at regular intervals (for example monthly rent) so sometimes we call them the period costs.

• Variable Cost

These are the costs that vary as the total cost to the organization when the output (number of items or services produced by the unit/business) varies. In other words, we say that a variable cost varies in exactly the same proportion as the output varies.

Therefore, as sales increase the variable costs will increase. For example, a variable cost for a bakery would be the cost of the flour. Similarly, in other businesses, the variable cost will be determined by the raw materials and the output of the business. For example, with massage therapy, oil may be used and there may be the cost of laundering one or two towels. This will constitute the variable cost.

Thus we see that the variable costs are those costs which vary directly in proportion to change in the volume of production/output. Hence we can say that the cost which changes in the same proportion as the units produced, is the variable cost. Some of the examples of variable cost are direct expenses, direct labour, direct material etc.

• Semi-Variable Cost

This cost is a cost which has elements of both fixed cost as well as the variable cost. So a cost that contains the components of both the fixed as well as the variable cost is said to be a semi-variable cost. In other words, we say that a cost that remains fixed up to a certain level of production and changes with the change in the volume of production beyond this level is a semi-variable cost. We can see the fixed part as a base level cost that is always incurred while as the variable portion of the cost is an additional cost which changes as we change the volume of production.

• Formula For Semi-Variable Costs

We can understand the concept of semi-variable cost with the help of some of the following examples. For example, a popular cellular network provides you with a certain service for a fixed nominal charge. Say, for example, you get 1 GB data per day if you subscribe to a monthly plan of ‘x’ rupees. So this ‘x’ rupees is a fixed cost which will not change unless you start to use more data than 1 GB. In case your data usage exceeds 1 GB, the same company will charge you extra money. This charge will be proportional to the amount of extra data that you use. Let this extra charge be ‘y’ rupees per unit of extra data used. Then the cost of the final bill will be:

Cost (C) = x + Ny; 

where ‘N’ is the number of units that you consumed apart from the 1 GB that cost you x rupees.

The semi-variable costs can thus be separated into two terms. The fixed cost portion and the variable portion. We write:

Semi-variable cost = Fixed cost + variable cost

Variable cost per unit = change in cost/change in output

As a result, the semi-variable cost is also called the mixed cost and a semi-fixed cost.

• Why Variable Costs Are Important

The important point about variable costs is that they do not rise and fall based upon the company’s activities. In fact, they can rapidly increase, decrease or eliminate your profit margin and lead your company into a sudden profit or a steep loss. In addition, variable costs are important to consider when establishing prices. In short, knowing and managing variable costs is essential as you respond to changes in the marketplace and in your company’s growth patterns.

• How to Use Costs to Your Company’s Advantage

A solid understanding of your company’s fixed and variable costs is what allows us to identify the profitable price level for its products or services. You can use this knowledge to identify your break-even point, which is the number of units or dollars at which total revenues equal total costs.

You can also use this information to identify economies of scale, which is rooted in the fact that as output increases, fixed costs are spread over a larger number of output items (products or services).

Break-even analysis is an important assessment method that all business owners should perform.

There is a lot more we could discuss when it comes to fixed and variable costs. To dig in deeper, we encourage you to review the resources shared below, and stay tuned for future articles on our blog with examples and other details relating to costs.

(b) How cash flow statement is different from income statement? What are the additional benefits to different users of accounting information from cash flow statement?

• Difference of Definition of Income Statement and cash flow statement 

The income statement is one of the major parts of the financial statement. It is used to represent the revenues, gains, expenses and losses from operating and non-operating activities of the company. When the total revenues (including gains) exceed the total expenses, then the result would be the net income while if the total expenses (including losses) exceed total revenues, then the result would be the net loss.

Here operating activities state the activities which are related to the day-to-day business of the company like manufacturing, purchasing, selling and distribution of goods and services. Non- operating activities means the activities which are related to purchase or sale of investments, assets, payment of dividend; taxes; interest and foreign exchange gains or losses.

The cash flow statement is also an important part of the financial statement of a company. It is used to represent the cash inflows and outflows during the year from operating, investing and financing activities. The statement reflects the position of cash and cash equivalents at the beginning and end of the accounting year. It shows the movement of cash during the period.

Here operating activities include the basic activities of the company like manufacturing, purchasing, selling and distribution of goods and services. Investing activities include the purchase and sale of investments and assets. Financing activities include the issue and redemption of shares or debentures and other financing activities related to the dividend, interest, etc.

• Other key differences 

The major difference between an income statement and cash flow statement is cash, i.e. the income statement is based on an accrual basis (due or received) while the cash flow statement is based on the actual receipt and payment of cash.

The income statement is classified into two main activities operating and non-operating, whereas the cash flow statement is divided into three activities operating, investing and financing.

The income statement is helpful in knowing the profitability of the company, but the cash flow statement is useful in knowing the liquidity and solvency of business which determines the present and future cash flows.

Incomes statement is based on accrual system of accounting, wherein incomes and expenses of a financial year are considered. On the other hand, cash flow statement is based on cash system of account, which only considers actual money inflows and outflows in a particular financial year.

The income statement by to taking into account various records and ledger accounts. As against this, cash flow statement is prepared considering the income statement and balance sheet.

Depreciation is considered in the income statement, but the same is excluded from cash flow statement because it is a non-cash item.

• Conclusion

The preparation of the income statement and the cash flow statement is mandatory for all business organisations. The two statements are used by the readers (stakeholders, i.e. creditors, investors, suppliers, competitors, employees, etc.) of financial statement to know about the company’s performance, stability and solvency position. These statements are also used for the purpose of internal and tax audit.