Financial Management and Decision Making Assignment Sample

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1. Introduction - Budgeting & Cost Classification for Financial Decision Making

Financial management refers to the process of managing and controlling funds and financial resources of the business entity. Cost in accounting implies total of all the expenses that are incurred for acquiring raw material, product, labour and machinery. Budgeting refers to the process of allocating an accurate amount of financial resources so that firm’s operations could be effectively carried out. Regulatory and legal framework in accounting refers to the general rules and regulations that need to be followed while formulating financial statements. Primrose Ltd is the retail organisation in UK and involved in providing a large number of consumer goods and services. This report will discuss changes in the price and cost system of Primrose to improve overall efficiency. It will also include a profit statement and cash budget of the company. Further, various advantages and disadvantages of budgeting will be discussed along with methods and measures for enhancing cash flow. This analysis serves as an Online assignment help resource for Financial Management and Decision Making.

2. The Need Of Classification Of Cost In Primrose

Classification of cost refers to the process of categorising total expenses of the company under diverse heads such as direct, fixed, variable, sunk, opportunity and operating. The need and importance of cost classification could be understood through following points:

Planning and budgeting: Cost classification in Primrose will help in undertaking planning by determining the potential cost of the project (Batt, Rikhardsson and Karlsson, 2021). By identifying the nature of cost manager will be able to allocate an appropriate amount of financial resources that aid in effectively budgeting. This helps organization in effectively sourcing all the resources on time so that financial burden on company could be reduced.

Performance evaluation: The process of cost classification aids organization in effectively evaluating and analysing the company’s performances that support in identifying the firm’s efficiency (Need of cost classification, 2023). Through cost classification an organization is able to distinguish cost under direct, indirect, controllable and uncontrollable segment that helps in determining the effectiveness as well as efficiency of different departments within the company. This performance evaluation helps firm in taking accurate and effective actions so that firm’s efficiency could be improved.

Effective decision making: Cost classification helps manager in taking effective decision by classifying total expenses into the category of avoidable or unavoidable, relevant or irrelevant and sunk or incremental (Saunois et al, 2019). This distinguish help firm in taking effective and efficiency decision by evaluating advantages and disadvantage of different alternatives.

Financial reporting: Cost classification helps firm in distinguishing the cost based on measurable and non-measurable, Product or period that helps in preparing accurate financial statements. This helps in depicting the actual financial position of the company and supports in ensuring the compliance with legal frameworks and accounting standard.

3. Profit Statement

The profit statement through marginal and absorption costing method are as follows:

Marginal Costing Profit Statement
Jan-24	Feb-24
Production Levels	500 Units	380 Units
£	£	£	£
Sales	15000	19000
Opening Inventory	0	3200
Variable costs of production @ £16	8000	6080
Variable	750	950
Less closing inventory	-3200	-1280
Cost of Sales	-5550	-8950
Contribution	9450	10050
-4000	-4000
Less fixed selling costs	-2000	-2000
Profit	3450

Absorption Costing Profit Statement
Jan-24		Feb-24
Production Levels	500 Units		380 Units
	£	£	£	£
Sales	15000	19000
Opening Inventory	0	5200
Variable cost of costs of production @ £16	8000	6080
Variable Cost Commission	750	950
Fixed Production Cost	4000	4000
Total	12750	16230
Less closing inventory	-5200	-2080
Cost of Sales	-7550	-14150
Contribution	7450	4850
Less fixed selling costs	-2000	-2000
Profit	5450	2850

Production and Sales Recorded were:
				Jan-24	Feb-24
Production	£500	£380.00
Opening Inventories	0	£200
Closing Inventories	£200	£80
Sales	300	500

From the above table, it has been depicted that while calculating the marginal costing only variable cost has been considered as the production cost. On the other side, in the absorption costing method variable and fixed cost both are treated as the part of production cost. Profit in the absorption costing method is higher than the marginal costing method as abrogation method includes both variable and fixed cost while calculating the cost per unit cost of the product.

4. Difference Between Marginal And Abortion Costing System

The difference between the marginal costing and absorption costing could be understood through following points:

Basis	Marginal costing	Absorption costing
Meaning	The marginal costing refers to the additional cost that has received due to production of one additional product. Further, it helps in determining as the change in the production cost due to manufacturing of new additional product.	Absorption costing refers to the costing method that includes both Variable and fixed cost (Difference in Marginal and absorption costing, 2024). This method emphasises that cost represented in the balance sheet should be defined as capitalized cost until the product has been sold out.
Types	Marginal private, external and social cost (Su and Baird, 2023).	Variable and fixed cost absorption method.
Valuation of inventory	Inventories are valued based on the variable production cost.	Full and final inventory cost has been taken as the value of inventory.
Treatment of fixed overhead	It is believed that variable costs are necessary for decision making because of which marginal cost are treated as period cost.	Fixed overhead are treated as product costing as product could be produced without the fixed resources.
Impact on profits	Higher profits are received if the value of inventory decreases.	Absorption costing provides higher profit due to increase in the value of inventory (McFarlane and Clark, 2021).
Effect of magnitude of stock	The difference in the opening and closing stock does not have impact on price and cost of production.	The unit price of production is impacting due to the change in the value of opening and closing stock.
Per unit cost	In marginal costing, per unit cost does not change due to production.	Per unit cost is highly proportioned with the production level in Absorption costing.

Difference in profit in marginal and absorption costing:The profit generated in marginal and absorption costing methods are different due to the treatment of fixed production overhead. In the absorption costing method, the fixed overhead are treated as the part of inventory valuation whereas in marginal costing the fixed overhead are written off in the particular year (Adafin, Rotimi and Wilkinson, 2021). Further the production level is not undertaken in abrogation cost which results in difference in the unit cost of the product and services.

5. Cash Budget

Budget is the plan that indicates the income and expenditure of company over a period of time. There are various types and approaches of budgeting which are as follows:

• Zero based budgeting: This is the budgeting technique in which budgets are prepared from scratch or zero level in the new financial year.
• Activity based budgeting: This is another budgeting technique that includes evaluation of all the activities for the cost estimation (Alin, Cosmin and Ioana, 2019).
• Incremental budgeting: It is the traditional budgeting method which includes preparing budget based on the pervious year outcome.
• Cash budget: Cash budget indicates the estimation of the total cash inflow and outflow of the business entity over a period of time. Following is the hypothetical cash budget of the organization:

Particular	January (in £)	February (in £)	March (in £)	April (in £)
Opening cash balance	10000	70000	119500	166500
Sales	150000	165000	180000	200000
Total cash inflows	160000	235000	299500	366500
Cash outflows
Purchases	50000	70000	82000	88000
Wages	15000	18000	22000	25000
Other expenses	25000	27500	29000	32000
Sum of cash outflows	90000	115500	133000	145000
Cash deficit / surplus	70000	119500	166500	221500

6. Benefit And Problem Of Budgeting

Budgeting refer to the estimation and predication regarding the total cash inflow and outflow of the business entity (Rivito and Mulyani, 2019). This budget is undertaken on quarterly, weekly, monthly or annual basis. The various benefit and limitation of budgeting for the Primrose could be understood through the following points:Benefits:

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• Supports in managing the firm’s funds: Budgeting helps Primrose in effectively utilizing the company’s funds that result in managing the overall financial resources of business entity.
• Effective resource allocation: Budgeting process involves determining the need of funds for each department and focuses towards allocating an effective amount of finances so that the firm’s operation could be effectively carried out. Budgeting helps in mitigating the scope of underutilisation of funds of business entity by allocating the accurate funds.
• Supports in achieving objective: Budgeting helps in effectively arranging all the required resources on timely basis which assists in attaining the overall objective and goals of business entity (Jawada, AL-Yasarb and Alic, 2019). This also supports in effectively allocating funds so that operation of firm could not be hampered.
• Effective decision: The process of budgeting is undertaken after evaluating past performance of the company which helps firm in taking informed decision. Organization are able to take effective decision reading what to produce, where to produce and how much to produce which result in improving overall organization’s performance.
• Support in determining issues: The major element of budgeting involves forecasting that helps firm in determining the potential issues that would occur in the near future (Asatiani et al, 2019). This provides assistance to the firm in taking proactive actions so that all the issues and obstacles could be overcome.
• Monitoring performance: Budgeting is also considered as the key performance indicator based on which overall performance of the organization could be evaluated. The difference in allotted fund and the actual fund helps in determining the firm’s overall efficiency and productivity.

Limitation of Budgeting:

• Inflexibility: Budgets lack the flexibility which creates issues in undertaking changes based due to occurrence of any unexpected circumstances. The decision taken in budget is rigid which creates issue for manager in introducing any changes due to shift in the market condition.
• Time consuming: Budgeting is considered as time intensive exercise which highly impacts the overall working of the business entity (Limitation of budgeting, 2023). Manager in Primrose needs to evaluate every aspect of the company that require high amount of time and impact the overall efficiency of firm.
• Complexity: Each organization comprises of the large number of department which create difficulty in collecting and structuring large amount of information.
• Difficult allocation: Firm usually face issue in allocating the appropriate amount of funds to each department (Alabdullah, 2019). The budgeting method used by for fund allocation may not be liked by the departmental manager that results in creating issue in effective working of organization.
• Ignore non monetary aspects: The nature of budget is quantitative that ignores the non-monetary aspect of each organization. Not including all the qualitative aspect into budget result in gaining inadequate outcome.

7. Various Methods For Improving Cash Flow

Management of cash flow is crucial in each organization as it helps in maintaining balance between the inflows and outflow within the business entity. It is various crucial in managing firm’s cash flow so that funds requirement could be fulfilled and legal obligation could be mitigated by the firm. Various measures for improving overall cash flow while preparing budget are as follows:

Identifying cash inflow: While preparing budget, organization should focuses over determining the total cash inflows by predicting the sales of the company (Mazzi et al, 2019). While preparing the budget organization should evaluate all the internal and external factors that will help in estimating the accurate amount of cash inflow. This assists firm in effectively formulating budget based on the accurate amount of cash inflow.

Determining cash outflow: For effectively managing overall cash flow, firm should involve towards identifying the accurate amount of cash outflow that will aid in formulating the most accurate budget.

Lease over buying: It has determined that organizations usually prefer buying equipment which helps in reducing the cash outflow of the company. However, buying may result in huge fund investment which negatively impact on overall profitability. To overcome the issue, manager should focuses on leasing assets that help in managing the cash flow of the company.

Offering discounts: An accurate balance should be maintained in the cash receivable and payable so that cash flow of firm could be managed. Firm should offer discount on early payment which will help in timely receiving payment and support in managing cash flow.

Shifting to cloud accounting: Organization should shift to cloud accounting which will help in effectively analysing the real time data of the company. This technology also assists in forecasting the cash inflow and outflow that result in formulating the effective budgets for the company.

Optimising inventory management: Over or under investment towards the inventory also result in negatively impacting on overall cash flow of the company (Syverson, 2019). Firm should involve towards evaluating the past data and focus over analysing the current trends based on which inventory should be managed. ABC analysis should be used by the company for inventory management that helps in managing the cost and overall cash flow of the business entity. ABC analysing involves identifying the importance of particular inventory by analysing value of goods and services.

Expanding cash payable cycle: For maintaining an effective cash flow, a business entity should be involved towards extending cash payable time that will help in maintaining an effective amount of cash within the organization. Firm should pay all the bills on their deadline which helps in holding an effective amount of cash at all the time that result in better cash flow of the company.

8. International Regulations And Its Impact

International financial accounting regulatory bodies

There are large numbers of international financial accounting bodies that provide guideline which Primrose need to follow for overcoming all the legal obligations. The international accounting standard provides large number of regulation and standard which are known as International accounting standard. Further GAAP is another accounting body that was published by the UK financial reporting council (FRC).

Standards and principles

Following are various accounting principle and standards that followed in accounting:

Revenue recognition: This principle stated that organization should recognise and considered its revenue when the amount has been earned rather than the time when cash is received (Dokulil, Popesko and Kadalová, 2022). This is based on the principle that accruals accounting should be followed over cash accounting.

Cost principle: This Principle explicated that historical cost of the assets should be considered rather than the market value of the fixed assets.

Time period principle: Under this, primrose needs to report its financial statement over a specific period of time.

Full disclosure principle: This principle entails that the firm should provide all the necessary information in their financial statement to depict accurate position of the company.

Consistency principle: The consistency principle denotes that organization should follow one accounting method for period of time.

Impact on primrose

The standard and principle of accounting helps in creating positive impact on the overall working and reputation of the primrose which are mentioned below:

Support in fostering transparency: By aligning company’s financial statement with the standards and principle, Primrose would be able to create a positive image in the mindset of the customers. This indicates that firm is following an ethical way of working and depicting correct financial position to the investors. This also contributes towards fostering trust and transparency in the global financial market.

Attract investors: Primrose is able to attract investors that help in increasing organization’s capital access (Sandi et al, 2021). Alignment with international accounting standard depicts that firm is providing accurate information reading the company’s financial position that helps in attracting the large number of customers.

Enhance accountability: International accountings standard supports Primrose in decreasing the information gap between the entrusted individual and the capital provider that result in increasing overall accountability.

Reduce cost of capital: It has determined that International accounting standard and principle help in mooring overall financial reporting that aids in improving quality of financial data. This reliable and clear financial reporting contributed towards sourcing capital at lower cost. Further this standard assists in reducing risk of the company results in enhancing confidence of stakeholders.

9. Reflection

For sharing my perception regarding the legal framework and international regulatory in financial accountings Gibbs reflective model will be used. Under this, six stages of the cycle will be evaluated that help in depicting the impact of international accounting standard on my overall professional development (Gibbs’ reflective model, 2024). I have identified that my knowledge regarding legal framework and international accounting standard will help in me in effectively formulating financial statement in the future which help in overall professional development. I will able to provide accurate and reliable information to the stakeholder and this will support in fostering a trust and transparency among others. My knowledge regarding the legal framework will help me in easily acquiring the job role of financial accountant that will aids in overall growth and development.

Further this project has developed my understanding regarding the marginal and absorption cost method which will help in estimating most accurate cost in future. Due to this knowledge, I will be able to effectively analyse the nature of cost and I am capable in suggesting most effective measure for managing cost which result in my overall development. I have identified that absorption costing method provide more accurate and reliable profits as it cover both fixed and variable cost. This helps me in effectively evaluating firm’s profitability and support in suggesting most optimum recommendation to the business entity. Additionally, I have identified that budgeting knowledge and understanding various measures for optimum cash flow will assist in creating an effective cash budget. I will able to predicting the potential cash inflow by effectively analysing past data that result in taking most optimum and effective decision. I have also developed knowledge regarding the preparation of cash budget which will help me in effectively determining the deficient and surplus in cash balance and assist me in taking effective investment decision.

Additionally, I have developed knowledge regarding the preparation of cash budgets which will help me in effectively determining the deficiency and surplus in cash balance and assist me in taking effective investment decisions. My understanding of Financial Management and Decision Making has deepened, equipping me to provide accurate financial analyses and recommendations.

10. References

Books and Journals

• Adafin, J., Rotimi, J.O. and Wilkinson, S., 2021. An evaluation of risk factors impacting project budget performance in New Zealand. Journal of Engineering, Design and Technology, 19(1), pp.41-61.
• Alabdullah, T.T.Y., 2019. Management accounting and service companies' performance: Research in emerging economies. Australasian Accounting, Business and Finance Journal, 13(4), pp.100-118.
• Alin, M.I., Cosmin, G.B. and Ioana, M.L., 2019. Cash-flow budgeting and avoiding risks within companies. Agricultural Management/Lucrari Stiintifice Seria I, Management Agricol, 21(3).
• Asatiani, A., Apte, U., Penttinen, E., Rönkkö, M. and Saarinen, T., 2019. Impact of accounting process characteristics on accounting outsourcing-Comparison of users and non-users of cloud-based accounting information systems. International Journal of Accounting Information Systems, 34, p.100419.
• Batt, C., Rikhardsson, P. and Karlsson, T., 2021. Exploring the impact of organizational context on budgeting. Corporate Ownership and Control, 18(4), pp.134-151.
• Dokulil, J., Popesko, B. and Kadalová, K., 2022. Factors with a major effect on the budgetary control process–An empirical study from the Czech Republic. Amfiteatru Economic, 24(59), pp.236-250.
• Jawada, R.H., AL-Yasarb, A.R.A. and Alic, A.A.M., 2019. Using (ABC) method based on cost accounting system to support quality service and competitive advantage. International Journal of Innovation, Creativity and Change, 9(7), pp.289-305.
• Mazzi, F., Slack, R., Tsalavoutas, I. and Tsoligkas, F., 2019. Country-level corruption and accounting choice: Research & development capitalization under IFRS. The British Accounting Review, 51(5), p.100821.
• McFarlane, V. and Clark, S.P., 2021. A detailed energy budget analysis of river supercooling and the importance of accurately quantifying net radiation to predict ice formation. Hydrological Processes, 35(3), p.e14056.
• Rivito, A. and Mulyani, S., 2019. The Effect of Budget Participation on Local Government Performance with Organizational Commitment as Moderating Variable. Journal of Accounting Auditing and Business, 2(2), pp.90-103.
• Sandi, H., Afni Yunita, N., Heikal, M., Nur Ilham, R. and Sinta, I., 2021. Relationship Between Budget Participation, Job Characteristics, Emotional Intelligence and Work Motivation As Mediator Variables to Strengthening User Power Performance: An Emperical Evidence From Indonesia Government. Morfai Journal, 1(1), pp.36-48.
• Saunois, M., Stavert, A.R., Poulter, B., Bousquet, P., Canadell, J.G., Jackson, R.B., Raymond, P.A., Dlugokencky, E.J., Houweling, S., Patra, P.K. and Ciais, P., 2019. The global methane budget 2000–2017. Earth System Science Data Discussions, 2019, pp.1-136.
• Su, S. and Baird, K., 2023. The impact of the emphasis on budgets and budget difficulty on budget value and job stress: the mediating role of organisational fairness. In Advances in Management Accounting (Vol. 34, pp. 145-175).
• Syverson, C., 2019. Macroeconomics and market power: Context, implications, and open questions. Journal of Economic Perspectives, 33(3), pp.23-43.

Online

• Difference in Marginal and absorption costing. 2024. Online. Available through: < https://www.shiksha.com/online-courses/articles/difference-between-marginal-costing-and-absorption-costing/#:~:text=The%20main%20difference%20between%20marginal,are%20treated%20as%20product%20costs. >
• Limitation of budgeting. 2023. Online. Available through: < https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-business-budgeting#:~:text=Disadvantages%20of%20budgeting,-There%20are%20also&text=a%20budget%20could%20be%20inflexible,become%20stressed%20and%20under%20pressure>
• Need of cost classification. 2023. Online. Available through: < https://www.toppr.com/guides/fundamentals-of-accounting/fundamentals-of-cost-accounting/classification-of-costs/>
• Gibbs’ reflective model. 2024. Online. Available through: <https://www.mindtools.com/ano9qiu/gibbs-reflective-cycle>

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