Assessment Information This assignment is an individual assignment designed to assess the following learning outcomes: 2. Apply numeracy skills and qualitative judgment to aid financial decision making. 3. Understand apply and evaluate management accounting concepts and techniques in decision making. Coursework Assignment You have just started a new job as general manager of Pooma Sports Ltd a UKbased company whose principal activity is the distribution of sports clothing and equipment. After discussions with a number of senior managers at Pooma Sports Ltd, you have concluded that the current budgeting system is not operating effectively and that the company does not employ a strategic planning process. You have therefore carried out some background research on budgeting and strategic planning and have obtained the following documents (available on the module Moodle page). Document 1 – A journal article on the behavioural aspects of budgeting (Raghunandan, M., Ramgulam, N. and RaghunandanMohammed, K. (2012) ‘Examining the behavioural aspects of budgeting with particular emphasis on public sector/service budgets.’ International Journal of Business and Social Science 3, (14) 110117) Assignment Brief Template Page 1 of 15 ? ??????????????????Document 2 – Income statements The following income statements relate to Pooma Sports Ltd. Yearended 31/01/16 31/01/15 01/02/14 02/02/13 28//01/12 29//01/11 30/01/10 ????????????????£000 £000 £000 £000 £000 £000 £000 ?????????????????????????Turnover 3,146 ? ? ? 3,648 ? ? ? 4,678 ? ? ? 5,254 ? ? ? 6,129 ? ? ? 6,473 6,398 Cost of Sales ? ? ? ? 2,204 2,402 ? ? ? 3,759 ? ? ? 3,657 ? ? ? 4,276 ? ? ? 3,957 4,617 Gross Profit ? ? ? ? 942 1,246 ? ? ? 919 ? ? ? 1,597 ? ? ? 1,853 ? ? ? 2,516 1,781 1,367 1,344 ? ? ? 3,226 ? ? ? 2,736 ? ? ? 2,878 ? ? ? 2,678 3,163 ??????????????????????????????????????????????????????????????????????????Operating ?Expenses ????????????????????????????????????????Operating Profit Net Interest ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? 2 425 ? ? ? 98 ? ? ? 2,038 ? ? ? 1,139 ? ? ? 1,025 ? ? ? 162 ? ? 1,384 Taxation 79 ? ? 42 ? ? 545 ? ? 288 ? ? 263 ? ? 89 ? ? 388 425 98 2,038 1,139 1,025 162 1,382 ????????????????????????????????????????????Profit (Loss) before Tax ???????????????????????????????????????????????Profit (Loss) for Period 346 ? ? 56 ? ? 1,493 ? ? 851 ? ? 762 ? ? 73 ? ? 996 ?????????The last seven years have been very difficult for the company, and it has survived through the support of its parent company, to whom it currently owes a total of £10,039,000. However, the company now intends to engage in a number of income generating, cost saving and efficiency measures in order to improve its financial performance. Pooma Sports have recently embarked on a major sponsorship deal. Although this will increase costs in the shortterm, management hope it will enhance awareness of the brand and increase sales and return the company to profitability in the longer term. Assignment Brief Template Page 2 of 15 Document 3 – New product line Pooma Sports Ltd are considering introducing a new style of Rugby boot to the market. The boot has been developed and is ready to go into production. However, management need to decide whether to manufacture the boot in a new factory unit near their main premises in North West England or to outsource production to a partner company. Information relevant to this decision is given in the following table: Sales price (per pair) Direct materials cost (per pair) Direct labour cost (per pair) Buyin cost from outsourced manufacturer Fixed manufacturing overheads Fixed administrative overheads Fixed selling and distribution overheads Breakeven point (pairs of boots) Margin of safety at budgeted profit level Unit sales required to achieve budgeted profit of £250,000 (pairs of boots) £80.00 £20.00 £15.00 £0.00 £100,000 £50,000 £40,000 4,223 57% 9,778 £80.00 £0.00 £0.00 £50.00 £0 £50,000 £40,000 3,000 74% 11,334 Assignment Brief Template Page 3 of 15 Inhouse Outsourced manufacture manufacture Document 4 – Cash budget Pooma Sports Ltd’s Finance Department has prepared the following cash budget and budgeted income statement for the first 6 months of 2018, a period in which the company is expected to return to profit. Cash budget Opening balance RECEIPTS: Cash sales Credit sales Total receipts PAYMENTS: Cash purchases Credit purchases Operating expenses Fixed overheads Production labour Administration labour 35 Jan £000 100 91 206 297 30 496 199 99 Budgeted income statement Sales 303 Feb Mar £000 £000 99 276 95 103 212 223 307 326 32 35 90 96 225 203 40 40 63 69 34 33 484 475 177 150 276 426 Feb Mar £000 £000 318 343 182 196 136 147 203 182 50 50 34 33 286 265 150 118 Apr May £000 £000 426 546 113 127 240 264 354 391 39 44 105 117 182 164 40 40 76 88 32 31 474 485 120 94 546 640 Apr May £000 £000 378 423 216 242 162 181 164 148 50 50 32 31 246 229 84 47 Jun £000 640 152 296 448 55 136 148 40 106 30 514 66 705 Jun £000 508 290 218 133 50 30 213 5 ????????81 250 40 60 ????????Total payments: Net cash flow Closing balance Cost of sales Gross profit Operating expenses Fixed overheads 173 130 225 50 Jan £000 ???????Administration labour 35 Total expenses 310 Operating profit 180 ???????The following information is relevant to the cash budget: 1. Credit customers are allowed one month’s credit on sales; 2. Credit suppliers allow one month credit on raw materials purchases; 3. Production labour is included in the cost of sales in the budgeted income statement. Assignment Brief Template Page 4 of 15 The following information from the budgeted Statement of Financial Position is also available. Trade receivables Trade payables Finished goods inventory Raw materials inventory Jan £000 212 90 49 19 Feb £000 223 96 57 21 Mar £000 240 105 67 23 Apr £000 264 117 80 26 May £000 296 133 97 30 Jun £000 355 164 129 38 Assignment Brief Template Page 5 of 15 Document 5 – Full (absorption) costing Pooma Sports Ltd’s product costing team have provided you with the following information on the current method used to charge overhead costs to products. The table shows each overhead cost and the apportioned and reapportioned costs by cost centre together with the apportionment bases used. Department Direct materials (£) Direct labour (£) Direct costs Overheads Indirect labour (direct labour) Rent (floor area) Machine insurance (machine value) Heating (floor area) Machine power (machine hours) Machine depreciation (machine value) Total apportioned overhead costs Reapportion maintenance (machine hours) Reapportion administration (employees) Total reapportioned overhead costs Total reapportioned overhead costs Machine hours Overhead absorption rate per machine hour (£) Sports Shoes Sports Clothing Sports Equipment 875,000 437,500 1,312,500 201,072 270,406 58,121 54,081 42,857 69,746 696,283 9,602 5,566 711,452 711,452 16,271 43.73 Mainte nance 0 0 0 0 20,831 3,914 4,166 0 4,697 33,608 33,608 0 0 Admini Total stration 0 2,611,000 0 1,305,500 0 3,916,500 0 600,000 16,024 800,000 0 100,000 3,205 160,000 0 150,000 0 120,000 19,229 1,930,000 0 0 19,229 0 0 1,930,000 686,000 1,050,000 343,000 525,000 1,029,000 1,575,000 157,641 241,287 220,330 272,409 15,068 22,896 44,066 54,482 56,250 50,893 18,082 27,476 511,438 669,442 12,603 11,403 7,084 6,578 531,125 687,423 531,125 687,423 21,356 19,322 24.87 35.58 Assignment Brief Template Page 6 of 15 The costing team have been reviewing the overhead costing methodology and have prepared the following proposal for a revised costing method. Department Direct materials (£) Direct labour (£) Direct costs Overheads Indirect labour (employees) Rent (employees) Machine insurance (machine hours) Heating (employees) Machine power (machine hours) Machine depreciation (machine hours) Total apportioned overhead costs Reapportion maintenance (machine value) Reapportion administration (floor area) Total reapportioned overhead costs Total reapportioned overhead costs Machine hours Overhead absorption rate per machine hour (£) Sports Shoes 686,000 343,000 1,029,000 140,000 220,330 37,500 37,333 56,250 45,000 536,414 23,131 48,511 608,056 608,056 21,356 28.47 Sports Clothing 1,050,000 525,000 1,575,000 130,000 272,409 33,929 34,667 50,893 40,714 562,611 35,147 59,977 657,735 657,735 19,322 34.04 Sports Equipment 875,000 437,500 1,312,500 110,000 270,406 28,571 29,333 42,857 34,286 515,453 89,220 59,536 664,209 664,209 16,271 40.82 Mainte nance 0 0 0 100,000 20,831 0 26,667 0 0 147,498 147,498 0 0 Admini Total stration 0 2,611,000 0 1,305,500 0 3,916,500 120,000 600,000 16,024 800,000 0 100,000 32,000 160,000 0 150,000 0 120,000 168,024 1,930,000 0 0 168,024 0 0 1,930,000 The Sales Director has expressed the view that this new method is superior because it reduces the overheads chargeable to the Sports Clothing and Sports Equipment profit centres, both of which have struggled to increase sales and make profits over the past few years. The reduction in overhead costs charged to these departments will help them to increase sales, by reducing prices, and maintain or increase profits at the same time. Assignment Brief Template Page 7 of 15 Document 6 – Capital investment appraisal The Sports Equipment department is considering purchasing a new piece of equipment to help save costs and make the production process more efficient. There are two options for the new piece of equipment. The Superstitcher will further automate production processes for equipment that needs stitching such as footballs and baseball mitts. The Gluemaster will improve production processes and product quality for items requiring adhesive, such as tennis and squash balls. The following information about the cash flows, profits and capital investment appraisal measures has been provided to you. The company’s cost of capital is currently 5%. Superstitcher Cash flow Year (£) 0 1,000,000 1 70,000 2 140,000 3 238,000 4 350,000 5 490,000 5* 112,000 5% Factors value (£) 1.0000 1,000,000 0.9524 66,668 0.9070 126,980 0.8638 205,584 0.8227 287,945 0.7835 383,915 0.7835 87,752 NPV = 158,844 Cumulative cash flow (£) 1,000,000 930,000 790,000 552,000 202,000 288,000 400,000 Cumulative cash flow (£) 1,300,000 812,500 406,250 48,750 113,750 195,000 325,000 Payback period Accounting rate of return 14.0% Internal rate of return Gluemaster Cash flow Year (£) 0 1,300,000 1 487,500 2 406,250 3 357,500 4 162,500 5 81,250 5* 130,000 4 years 5 months 9.1% 5% Factors value (£) 1.0000 1,300,000 0.9524 464,295 0.9070 368,469 0.8638 308,809 0.8227 133,689 0.7835 63,659 0.7835 101,855 NPV = 140,775 Depreciation (£) 260,000 260,000 260,000 260,000 260,000 3 years 4 months Accounting rate of return 9.0% Payback period Internal rate of return 9.6% Present Depreciation (£) Profit (£) 130,000 60,000 38,000 150,000 290,000 112,000 400,000 Profit (£) 227,500 146,250 97,500 97,500 178,750 130,000 325,000 Present Assignment Brief Template Page 8 of 15 200,000 200,000 200,000 200,000 200,000 *The second cash flow in year 5 for each option represents the sales proceeds on the disposal of the equipment at the end of its life (residual value). The Superstitcher will not be fully effective until a number of new product lines requiring stitching have been introduced over the next few years, whereas the Gluemaster will reduce costs and improve efficiency on existing product lines. Only one of the two pieces of equipment can be purchased in the near future due to a lack of investment capital. Assignment Brief Template Page 9 of 15 Assignment requirements You are required to write a report for the Board of Directors of Pooma Sports Ltd (italicized words in brackets indicate the approximate word count for each section). The report should cover the following key areas: 1. An executive summary outlining the key challenges that the company is facing and the main outcomes from the analysis work you have under taken so far (250300 words). 2. A discussion of the need for budgets and strategic planning focusing on whether budgets are actually needed or should be dispensed with (Document 1) (225275 words). 3. A discussion of the breakeven analysis of the proposed new Rugby boot (Document 3) with particular emphasis on the following areas : a. An explanation of the different types of cost behaviour and why all fixed costs are in reality stepped fixed costs (90110 words). b. A review of the risk and return offered by the two manufacturing options with reference to the concept of operating gearing and a recommendation on which option Pooma Sports Ltd should choose (210240 words). 4. A discussion of the reasons for the differences between the net cash flows and the operating profit in the statements above (Document 4), and in particular why net cash flow remains negative when the company returns to profit at the end of the sixmonth period (325375 words). 5. A discussion of the original and proposed costing methods above (Document 5) with particular emphasis on the following areas: a. A critical appraisal of the reasons for the choice of apportionment bases used in both the original and proposed costing methods (275325 words); b. A critical appraisal of the Sales Director’s view that the proposed costing method is superior because it reduces the overheads chargeable to the Sports Clothing and Sports Equipment cost centres (180 210 words). 6. A critical appraisal of the results of the capital investment appraisal of the Superstitcher and Gluemaster (Document 6) with particular emphasis on the following areas: a. A discussion of the reasons for the apparent conflicts between the investment advice provided by each method (375425 words); Assignment Brief Template Page 10 of 15 b. A discussion of the risk and return presented by each option and a recommendation as to which option should be chosen, given the lack of investment capital available to the company (170200 words).