Reference no: EM133697169

Accounting for Leaders

Learning outcome 1: Understanding of financial information as used in management accounting methods and techniques.

Learning outcome 2: Understanding of capital expenditure evaluation techniques as they apply to management decision-making scenarios in the business context.

Learning outcome 3: Demonstrate the following skills and abilities

- Critical analysis of financial statements.
- Application of ratio analysis as strategically applied in the business context.
- Deployment of cost-volume-profit analysis techniques for business-based short-term tactics scenarios.
- The application of relevant revenues and costs applied in the business operational and tactical decision-making context.
- The application of critically oriented strategic capital expenditure projects selection deploying relevant appraisal techniques.

Assignment

Put yourself in the following situation as a Financial Services Team of Sohar Manufacturing Company. You have been requested to provide meaningful financial analysis and information for decision-making concerning financing, capital investment, constrain in production, budgeting, and variance analysis. Accordingly, you are required to write a report (1,600 words) providing information about these areas.

Investment Opportunities
Miss Sonia the Investment Manager has requested some analysis concerning a proposed 5-year investment. The company plans to open a showroom in its selection down to two locations: (1) Bahla (2) Duqm. You must evaluate these options based on the following information. Sohar Manufacturing will lease the showroom initially for five years, and the total initial investment cost is estimated to be OMR 20 million each.

Option one: Bahla
It is expected that the Bahla showroom will increase the overall sales revenue of the company by 11% per annum from 2023, and the variable cost will be forty percent of sales revenue. The fixed overhead cost for the initial three years will be OMR 3,500,000, OMR 2,000,000 and OMR 1,500,000, and zero afterwards. The promotion cost will be OMR 500,000 in the first two years and OMR 200,000 for the next three years. All other operating expenses will be 10% of the total contribution margin. The company will need a working capital investment of OMR 5 million in year two, 80% of which will recover at the end of the project's life. The company follows a straight-line depreciation method and expects to sell the assets at 10% of historical cost in year 5.

Option two: Duqm
On the other hand, if the showroom is opened at Duqm, then it will require fixed overhead costs for four years OMR 2,500,000 in year one, OMR 2,800,000 in year three, OMR 2,100,000 in year four and OMR 2,100,000 in year five. All other operating costs will be 10% per year of the contribution margin. The working capital investment will be OMR 5,500,000 in year three, and 75% will recover in the last year. The sales revenue will increase by 12% per annum, and variable cost will be 47%. The company will follow a similar depreciation and promotional cost strategy as the Bahla showroom.
Cost of capital is assumed to be 12%
Assuming corporation tax in OMAN is 10%

Required

Evaluate the showrooms and comment on which one should be selected (Hints: use NPV and IRR)
Advise management on what to do about the above projects. Your advice should be based on the analysis in (a)
Analyse the sensitivity of the projected NPV to the unit sales and the cost of capital.

Management Accounting for internal management
The management accounting team of Analytic Electronics has also come up with some questions and requests you to explain/answer them for the upcoming board meeting:
What is the point of distinguishing absorption and marginal costing? Why do they report different profits? Explain with an example. (5 Marks)

The management of A&E, a subsidiary of Analytic, is concerned about its inability to obtain enough trained labour to enable it to meet its current budgeted projection:

The available labour cost to spend is OMR 24,000. All the labour are paid at the same hourly rate across the services. You are requested to prepare a plan to produce a higher profit, ensuring that at least 50 per cent of the budgeted sales revenues can be achieved for each service. The fixed cost is OMR 30,000.
Prepare the statement, with explanations, showing the highest profit could be achieved from the limited amount of skilled labour available within the constraint stated.
What steps could the business take to improve profitability considering the labour shortage?

The budgeted output for February 2023 was 1,000 units; however, the actual production was 1,100 units sold for OMR 48,400. There were no inventories at the start or end of February.
The actual production costs were:
Direct labour (1,075 hours) OMR 14,513
Direct Materials (1,170 kg) 13,455
Fixed overheads 5,700
Calculate the variance for March from the available information and use them to reconcile the budgeted and actual profit figures. (8 Marks)
How will a flexible budget help this company identify the budget variance?

Attachment:- Accounting for Leaders.rar