Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Table of Contents
Introduction................................................................................................................................................... 3
1.1 Importance of costs in the pricing strategy of Tip Top ...............................................................................
3
1.2 Design a costing system.............................................................. 4
1.3 Propose improvements to the costing and pricing systems ..................................................................... 5
References..................................................................................................................................................... 6
2.2. Assess the sources of Funds................................................................................................................... 8
3.1 Appropriate budgetary targets for Tip Top .................................................................................................
8
3.2. Creation of master budget ...................................................................................................................... 9
3.3 Compare the Actual Expenditure and income with master budget Tip Top ..............................................
9
3.4 Evaluate budgetary monitoring processes............................................................................................. 10
References................................................................................................................................................... 11
Appendix 1 Sales Forecast.............................................................. 12
Appendix 2 Operating cost breakdown....................................................................................................... 12
Appendix 3 Financial Budget ..................................................................................................................... 13
Appendix 4 Cash Budget ............................................................................................................................ 13
4.1 Recommend Processes that could manage cost reduction.................................................................... 14
4.2 Evaluate the potential for the use of Activity-based costing................................................................. 15
References................................................................................................................................................... 17
Appendix an Absorption costing................................................................................................................. 18
Appendix B Activities Based costing ......................................................................................................... 19
5.1 Financial appraisal methods to analyses competing investment projects ............................................. 20
5.2 Make a justified strategic investment decision for Tip Top ......................................................................
21
5.3 Report on the appropriateness of a strategic investment decision........................................................ 22
References................................................................................................................................................... 23
Appendix 1 Cash Flow................................................................................................................................ 24
Appendix 2 Net Present Value.................................................................................................................... 24
Appendix 3 Internal Rate of Return ............................................................................................................ 25
6.2 Apply financial ratios to improve the quality of financial information ................................................ 26
6.3 Recommendations on the strategic portfolio of Tip Top.......................................................................... 27
References................................................................................................................................................... 29
2
Introduction
In the field of furnishing industry, the name Tip Top furniture Pvt. Ltd is as a substitute for
majestic and excellence. Tip Top furniture Pvt. Ltd is the most personalized furniture industry in
Kerala. The major market of furniture industry in Kerala is handled by Tip Top furniture Pvt. Ltd.
Tip Top furniture Pvt. Ltd has large expertise in the field of handy crafting.
Tip Top furniture Pvt. Ltd is principally exporting their products into provincial countries, and
Arabian countries. Tip Top furniture Pvt. Ltd is imperial name in the Gulf countries also. (Tip
Top, 2015)
Tip Top adapted pricing structure and promotion strategy to balance the demand and
fixing the affordable price with great value items.
Tip Top should develop marketing strategies to perform market analysis, sales targeting
and positioning, which helps to price fixing.
Tip Top is a renowned market leader in the retailer market so what it finalizes the price
of product probably base on Real Time Pricing system because with the
accurate
Information on market demand, it is possible to vary the prices infinitely to meet current
demand exactly.
Number of units, which will not exactly represent the cost driver. In this way, the price of items
will increase which is exactly not relevant to another store.
More accurate product cost information helps managements determine which products
are more profitable.
More Detailed information on the costs of activities and their cost drivers helps managers
control costs
In these reasons, new costing systems needed based on activities undertaken by Tip Top. Such a
system should identify critical success factors (CSFs), develop measures and metrics that assess
performance in those key areas, and use those measures to plan and control operations to
improve organizational performance and, thus competitiveness.
References
College, L., 2012. Managerial Accounting and Cost Concepts. [Online]
Available at: http://www.lec.edu/adcp/doc/ADM%20301%20Accounting%20for%20Managers.pdf
[Accessed 22 12 2012].
Cooper, K., 1991. The Design of Cost Management System. London: Prentice-Hall International.
Hansen D.R., M. M. G. L., 2006. Cost Management: Accounting and Control. South Western: Mason
OH.
Horngrer, C. T., 2005. Management and Cost Accounting. London: Pearson Education Limited.
Horngrer, C. T., 2005. Management and Cost Accounting. 3rd ed. England: Pearson Education Limited.
Lucey, T., 2007. Costing. 6th ed. sol.: C&C offset Printing Co. Ltd...
Tip Top, M. a., 2012. Financial Management in a detail setting. [Online]
Available at: http://businesscasestudies.co.uk/marks-and-spencer/financial-management-in-aretail- setting/introduc.html#axzz2FnHDvbpJ
[Accessed 20 12 2012].
2.1 Forecasting techniques to make cost and revenue decisions in Tip Top
Forecasting is the process of predicting the future. Whether it is predicting future demand, sales
and production. It is an important yet unavoidable task that is an integral part of almost all
business activities. (Kenneth D. Lawrence, 2009) Good forecasts can lead to lower costs,
increased customer satisfaction as Walesa competitive advantage.
Forecasting situations widely vary in time, factors determining actual outcomes, types of data
and many other aspects (Spyros Makridakis, 1998). To deal with such diverse applications,
several techniques have been developed. These are:
a) Quantitative: Sufficient quantitative information is available.
I)
Time Series: To predict the continuation of previous data such as the sales growth
or gross national product.
ii)
Explanatory: Understanding h o w e x p l a n a t o r y v a r i a b l e s s u c h a s
p r i c e s a n d advertising affect sales.
b)
Qualitative:
No m o r e q u a n t i t a t i v e e v i d e n c e i s a v a i l a b l e b u t
s u f f i c i e n t q u a l i t a t i v e information exists.
I)
predicting the future market share establishing by Tip Top
ii)
Forecasting how large portion of customers will affect by the increase and
decrease of pricing strategy.
I prefer to use quantitative
techniques for forecasting sales
because of easy to access
previous activities, which can be
quantified in the form of
numerical data and past pattern
carry over for future planning.
The trend diagram below shows
the clear information about the
sales pattern of Tip Top.
Forecasting cost means analysis
The previous costing activities and generates the cost related to sales turnover. Fixed costs are
largely independent of the level of sales and variable costs depend on turnover, number, or sales.
This circumstance illustrates that sales turnover and costs are interrelated with each other. The
forecast techniques help managers to analysis the cost activities to make a decision about cost
and revenue (Solution, 2012).
The Chief Finance Officer of Tip Top Alan Stewart clearly stated that the main sources of funds
are following: (Tip Top, 2012)
Sources
Cash Inflow (Working Capital)
Credit Facility
Issue Bonds
Funds
161.9
1.3 billion
300 million
Tip Top has allocated 9 million for an Innovation Fund, and further 1 million short-term funds
for smaller initiatives such as low carbon food products and hydrogen fuel cell powered
forklift truck trials.
3.3 Compare the Actual Expenditure and income with master budget Tip Top
the budgeting is the main important financial activities and the major focusing factors are
expenditure and revenue, which it will cover. Comparing the actual expenditure with budget
helps increase the ability to predict cost accurately. Department head can easily recognize the
fluctuation of fix cost and variable costs adjust in line with sales volumes achieved (usage
variance). Analysis the reason for any change in the relationship between costs and turnover
(price variance). Have unit costs changed (are the new unit costs likely to continue in the future)?
(Solution, 2012)
The table 1.3 shows that the group income of Tip Top increased by 2% because of strong
performances in food and international business. However, operating costs were also up by 1.5%
due to investment in IT, high advertising campaigns and growth in selling space (rent).
The efficient control and appropriately planned budget easily monitored and if something going
wrong, it could be managed in time. The manager should capable of analysis, which factors
behind unable to achieve the target. Therefore, the following reasons must review during the
period.
Should choose the right budget process suitable for Tip Top. Fixed budget is appropriate for
those departments whose workload does not have a direct link to sales and other departments
operations. The work is determined by stores supervisor not by number of sales like an
administrative and marketing. It is suitable for some specific projects, which is not necessary to
complete within the financial year and the budget should extent for expenses in further period.
Example- Capital expenditure budget, advertising and promotion program is types of fixed
budget.
However, cash budget is more appropriate to control costs and income according to budgetary
policies and targets. So, all budgets are not necessarily important to every business and
References
Andrews, U. o. S., 2010. Financial Operating Procedures. [Online]
Available at: http://www.st-andrews.ac.uk/media/fop009_budget_monitering.pdf
[Accessed 04 12 2012].
Charles T. Horngrer, W. T. H. J. M. s. O., 2012. Financial and Managerial Accounting. 3rd Ed.
New Jersey: Pearson Prentice Hall.
Kenneth D. Lawrence, R. K. K. S. M. L., 2009. Introduction to Forecasting. In: Fundamentals of
Forecasting Using Excel. New York: Industrial Press Inc., p. 2.
Lawndale, C. o., 2004. Lawndalecity.org. [Online]
Available at: http://www.lawndalecit y.org/PDFs/0405Budget/BudgetProcess.pdf
[Accessed 04 12 2012].
Tip Top, 2012. Annual Report and Financial Statements, sol.: Royal Print.
Mukherjee A., H. M., 2006. Financial Accounting. New Delhi: Tata McGraw-Hill Publishing
Company Limited.
Robert D. Lee Jr., R. W. O. P. g. J., 2008. Public Budgeting Systems. 8th ed. London: Jones and
Bartlett.
Solution, B. I., 2012. Budgeting. [Online]
Available at: http://www.is4profit.com/business-advice/finance-andmoney/budgeting/forecasting-costs.html
[Accessed 04 12 2012].
Spyros Makridakis, S. C. W. R. J. H., 1998. Forecasting Methods and Application. 3rd ed. Hoboken:
Wiley & Sons. Inc.
Sales
Sales Growth Rate
2012
9934.3
2011
9740.3
2010
9536.6
2009
9062.1
2008
9022
2.0%
2.1%
5.2%
0.4%
5.1%
2007
8588.1
2012
889.2
1030.9
398.1
161.8
515
2995
2011
877.6
1011.8
393.5
142.9
525.5
2951.3
2010
858.4
972.7
394.4
122.9
501.8
2850.2
2009
863.3
948
410.3
127.4
391.6
2740.6
1.32%
1.89%
1.17%
13.23%
-2.00%
1.48%
2.24%
4.02%
-0.23%
16.27%
4.72%
3.55%
-0.57%
2.61%
-3.88%
-3.53%
28.14%
4.00%
1.86%
12.67%
6.90%
-8.61%
-2.37%
4.88%
2008
847.5
841.4
383.8
139.4
401.1
2613.2
2012
4195.1
4673.1
2011 Variance
4233.6
4499.4
379.4
343.7
686.7
663.6
76.7
59.9
10011
9800.2 2%
(6179.10)
(6015.60) 3%
3831.90
3784.60 1%
(3021.90)
(2959.70) 2%
(63.50) 12
746.50
836.90 -11%
48.30
96.60
(136.80)
(152.90)
658.00
780.60 -16%
(168.40)
(182.00) -7%
489.60
598.60 -18%
(Figures in Million)
2012
31/03/12
2010
3/4/2010
1352.1
1385.2
1349.7
1371.9
1236
135.90
149.10
757.80
1042.80
309.30
(375.10)
(65.80)
146.40
185.30
490.50
822.20
563.00
(501.00)
62.00
163.40
120.70
529.60
813.70
536.00
(629.50)
(93.50)
197.10
81.30
596.90
875.30
496.60
(324.00)
172.60
88.90
166.20
966.20
1221.30
14.70
54.70
69.40
(1.90)
263.50
(1.20)
202.70
263.50
(2.10)
298.30
202.70
7.80
117.90
298.30
1.50
47.00
195.80
2009
28/03/09
2008
29/03/08
2011
2/4/2011
117.90
The b e t t e r p a c k a g i n g r e d u c t i o n
Multiple benefits as well as reduce the cost of the product. It helps Tip Top to
successful reduction of 16.3m cost in 2011/12.
The process adopted by Tip Top is helpful to reduce the cost of the product. However, these are
not enough satisfactory point for entire businesses. Tip Top should need to improvements in
some activities to reduce the further cost (selling and distribution, supply chain and raw material,
direct labor, machine usage hour etc.), which can reduce the entire business expenses and
able to make sufficient profit margin. The following recommendation must follow to improve
cost reduction in Tip Top (Inc., 2012).
a)
Benchmark: Tip Top should research similar organizations for cost comparison and
identify appropriate benchmarks and best practices in cost management to reduce the
cost in identified areas.
b) Cost management Plan: Define cost management approaches consistent with the business
direction and develop the plan to improve problematic area.
c) Conduct Cost reduction assessments: Examine the cost reduction goals with present costs
to determine how they measure up. Examine both long term and short-term reduction
needs for Tip Top and develop ways to overcome barriers to cost reduction.
d) Conduct business practice reviews: Regularly review the business practices; such as new
real time stock management and electronic payroll system, which will help to increase the
performance of the business, can lead reduce the business cost.
e) Measurement and tracking: Select appropriate tools like a feedback, suggestions from
customer and analysis of financial statement, profit and loss statement and cash flow
measures and tracking the accurate reduction of cost in various activities.
Each
Activity has its own cost driver. For example, one activity of Tip Top is packaging the food and
clothes, it allocates the indirect cost based on the machine hours. The following diagram shows
the activities and its cost drivers.
ABC system is an advance-costing system, which can allocate the direct and indirect costs based
on their activities to determine the cost of products. It helps Tip Top should set a lower price of
commodities compared with other competitors.
costing? The traditional costing usually use one cost driver to allocate the costs, which is not
appropriate for particular products, may increase the cost of production. Nevertheless, ABC uses
a separate allocation driver for each activity. So that the cost of products is more generic and
accurate.
ABC costing system is potential to use in Tip Top, using this system, Tip Top should able to
make a better decision about the product, which will help to increase the profitability. For
example, the Workout 1 based on absorption costing, Tip Top was produced two different
products (Normal coat and special cost) and its unit price are 118.23 and 143.18 respectively.
Where overheads were allocated based on labor hours and the prices are not very differed from
each other. Therefore, a manager could not decide easily which product is more benefit to Tip
Top.
Furthermore, when Tip Top has used ABC costing in Workout 2 to allocate overheads, there
were big gaps between two products unit price by 62.38.
capable to identify the cost driver, which will help manager to allocate costs appropriately based
on activities.
The above example clearly present that using ABC system, managers of Tip Top can
decide quickly, which products are more profitable.
Tip Top should achieve the following benefits by using an ABC costing system (Inc.,
2012).
Ensuring that the most efficient cost management practices are in place.
References
Carter, R., 2012. Sustainable Cost Reduction-A 7 Step Process. [Online]
Available at: http://www.dpss.co.uk/news/sustainable-cost-reduction----7-step-process.php
[Accessed 26 12 2012].
Charles T. Horngrer, W. T. H. J. M. S. O., 2012. Financial and Managerial Accounting. 2012
Ed. New Jersey: Pearson Prentice Hall.
Inc., S. &. S., 2012. Cost Reduction. [Online]
Available at: http://www.schroeder-inc.com/costreduction.html
[Accessed 26 12 2012].
Labor
Units
Direct Labor hours
Total Overheads/Labor
hour
Direct cost per unit
Direct labor
Direct Material
Indirect costs
Cost per unit
Profit margin 30%
Selling price per unit
500,000.00
300,000.00
350,000.00
400,000.00
Normal
50000
Special
20000
50.00
20.00
60.00
25.00
500,000.0
300,000.0
350,000.0
400,000.0
1,550,000.0
Normal
Special
Total
5
6
50000
20000
250000
120000 370000
4.19
50.00
20.00
20.95
90.95
27.28
118.23
60.00
25.00
25.14
110.14
33.04
143.18
Coats
Pool
Set ups
Quality
inspections
Sales
Orders
Processed
Production
Normal
Cost Driver
500,000.00 Number of setup
300,000.00 Number of inspection
350,000.00 Number of order
400,000.00 Machine hour
Normal
Special
50000
20000
50.00
20.00
60.00
25.00
30
500
2000
400000
70
1500
4000
150000
Special
Cost/Unit
Cost/Unit
Driver
30
Driver
70
Total
100
Costs
500,000
Driver
rate
5,000
500
1500
2000
300,000
150
75,000
225,000 2
11.25
2000
400000
4000
150000
6000
550000
350,000
400,000
1,550,000
58.33
1
5,209
116,667
290,909
632,576
233,333 2
109,091 6
917,424
11.67
5.45
45.87
Normal
50.00
20.00
13.00
83.00
24.90
107.90
Special
60.00
25.00
45.87
130.87
39.26
170.13
Normal
150,000
Special
Normal
350,000 3
13
Special
17.50
However, these two methods could not sufficient, if the capital investments have longer period.
Because these models, do not consider the time value of money. The NPV and IRR, factor in the
Time value of money so they are more appropriate for long-term capital investments, such
as Tip Top invested in supply chain and new technology. Management of Tip Top often uses a
combination of methods to make final capital investment decisions.
Tip Top will get back their investment within 4.7 years and 4.3 years from two different projects
according to information collected from Example 1. This information helps manager to decide
which project is good for investment.
b) Net Present Value: The NPV is the net difference between the present value of the
investments net cash inflows and the investment cost (capital expenditure). If the present value
of the investments net cash inflows exceeds the initial cost of investment, thats the best
investment decision (Charles T. Horngrer, 2012).
Formula for calculation PV
The Example 2 shows that NPV of Supply chain and technology is negative by 18.3 million that
means management investment decision in this project return rate is less than the desired. In the
21
Other project new store development, NPV is positive by 2.97 million, which shows that the
investment decision over this project is a good because this project earns more than the required
rate of return.
c) Internal Rate of Return (IRR)
The internal rate of return (IRR) is the rate of return (based on discounted cash flows) a company
can expect to earn by investing in a capital asset. It is the interest rate that makes the NPV of the
investment equal to zero. The higher the IRR, the more desirable the project (Charles T.
Horngrer, 2012).
The Appendix 3 illustrate that the IRR of Supply chain and technology is 3.5%, which is very
less return of 25a 5 year periodstment over 5 years period, therefore this figure indicate that the
investment is not beneficial for Tip Top. The next investment of 200 million in the new stores
IRR is 6.5%, which means it is good decision to invest because the IRR is higher than the
expected rate of return.
References
ACCA, 2010. Financial Management. Wokingham: Kaplan Financial Limited.
Charles T. Horngrer, W. T. H. J. M. S. O., 2012. Financial and Managerial Accounting. 3rd Ed.
New Jersey: Pearson Prentice Hall.
(Million)
(250.00)
40
45
60
65
70
280
(Million)
(200.00)
35
40
50
60
60
245
(210.00)
(165.00)
(105.00)
(40.00)
30.00
(165.00)
(125.00)
(75.00)
(15.00)
45.00
4.7 years
4.3 years
Months
Payback
Period
Investment
Cash Inflow
Cash Inflow
Cash Inflow
Cash Inflow
Cash Inflow
6%
4%
3.50%
6%
(250.00)
40.00
45.00
60.00
65.00
70.00
(200.00)
35.00
40.00
50.00
60.00
60.00
(250.00)
37.74
40.05
50.38
51.49
52.31
(250.00)
38.46
41.61
53.34
55.56
57.53
(250.00)
38.65
42.01
54.12
56.64
58.94
(200.00)
33.02
35.60
42.00
47.52
44.83
(200.00)
32.71
34.94
40.81
45.77
42.78
7%
6.50%
(200.00)
32.86
35.27
41.39
46.64
43.79
280.00
245.00
231.96
(250.00)
(18.04)
246.50
(250.00)
(3.50)
250.35
(250.00)
0.35
3.50%
202.97
(200.00)
2.97
197.02
(200.00)
(2.98)
199.95
(200.00)
(0.05)
6.50%
The main purpose of analyses the financial statements is assessing the financial viability of Tip Top.
It is about being able to generate sufficient income to meet operating payments and maintaining service
levels (Housing, 2009). The financial statement of Tip Top shows the clear picture of revenue, which
can cover the cost of sales and other operating expenses as well as how much profit made in this year than
last year.
Some of the important financial analysis tools are
a)
b)
c)
d)
e)
f)
g)
h)
Comparative statements
Common-size Statement
Trend Analysis
Statement of changes in Working Capital
Funds Flow Analysis
Cash Flow Analysis
Ratio Analysis
Cost-Volume-Profit Analysis
Not be enough current assets to meet short-term financial obligation when they are
due.
The Gearing ratio sharply increased from 48% to 90% in 2012, these figures present that Tip Top gearing
ratio will target its objectives. If these will keep going continuously, their financial health will improve so
quickly.
To increase the profitability, Tip Top should develop strategic plans of effective waste
management, control over wage inflation and improvement needed in the process (tilling,
over time) and procurement.
b) Tip Top had invested huge sum of amount in various projects, was funded by internal cash
inflow
And other operating income, therefore it faced a shortage of short-term liquidity. To come over
from this situation, Tip Top should efficiently manage its debts and minimize the investment
activities.
c) For better benefits, Tip Top should restructure their supply chain and implement new information
system (automated stock management system in store).
d) To reduce the operating costs, it will need to manage expenditure carefully and efficiently as
possible. Example: Tip Top have decided to go online store to compete growing e-commerce,
which will reduce the capital investments in store space by 200 million.
e) Tip Top should introduce e-payroll system, which will help to save cost of buying paper.
f) Introduce new advance technology in store
28
References
Corporation, S. B. D., 2012. Liquidity Ratios. [Online]
Available at: http://www.smallbusiness.wa.gov.au/liquidity-ratios
[Accessed 03 01 2013].
Housing, T. R. o. C., 2009. Financial viability. [Online]
Available at: http://www.rch.nsw.gov.au/NR/rdonlyres/F54F4338-56D4-4753-A6D768AEFF73D5C2/0/Financialviability_web.pdf
[Accessed 31 12 2012].
Karunakar Patra, J. K. P., 2006. Accounting & Finance for Management. 1st Ed. New Delhi: Syrup and
Sons.
Morningstar, 2012. Mark & Tip Top Group Plc.-MKS. [Online]
http://tools.morningstar.co.uk/uk/stockreport/default.aspx?
Tab=10&vw=BS&SecurityToken=0P00007OL2
] 3]0] E0WWE$$Algid=0P00007OL2&ClientFund=0&CurrencyId=GBP
[Accessed 20 11 2012].
Tip Top, M. a., 2012. Annual Report 2012, sol.: Royal Print.
29
Available
at:
2012
2011
2010
2%
-20%
38%
7%
19.22
18.18
2%
-2%
38%
9%
20.92
19.01
5%
38%
9%
20.72
17.24
x
r
%
%
%
90%
4.90
0.73
48%
8.5
0.74
70%
5.3
0.8
8.28
-4.37
6.39
8.61
-34.41
17.97
68.06
67.06
66.85
%
%
2012
2011
2010
4195.1
4673.1
4233.6
4499.4
4152
4415.9
379.4
686.7
9934.3
(6179.10)
3755.20
(3021.90)
76.7
(63.50)
669.80
48.30
(136.80)
581.30
(168.40)
412.90
343.7
663.6
9740.3
(6015.60)
3724.70
(2959.70)
59.9
12
836.90
42.30
(98.60)
780.60
(182.00)
598.60
297.7
671
9536.6
-5918.1
3618.50
-2831.5
56.9
8.1
852.00
12.9
-162.2
702.70
-179.7
523.00
2012
31/03/12
584.3
4,805.80
61.6
361.5
5,813.20
681.9
254.6
523.6
1,460.10
7,273.30
2,005.40
2,489.10
4,494.50
695.7
2,094.50
2,790.20
-11.4
2,778.80
7,273.30
2010
2011
3/4/2010
2/4/2011
527.7 452.8
4,744.40
4,678.20
147.4
37.8
458.7 288.4
5,633.00
5,702.40
685.3 613.2
251.9 281.4
704.5 625.6
1,520.20
1,641.70
7,153.20
7,344.10
1,890.50
2,210.20
3,076.80
2,456.50
4,967.30
4,666.70
651.4 643
1,525.60
2,022.10
2,168.60
2,673.50
3.9 17.3
2,185.90
2,677.40
7,344.10
7,153.20
2012(000)
31/03/12
2011(000)
2010(000)
2/4/2011
3/4/2010
1352.1
1385.2
1349.7
135.90
149.10
757.80
1042.80
309.30
(375.10)
(65.80)
(1.90)
263.50
146.40
185.30
490.50
822.20
563.00
(501.00)
62.00
(1.20)
202.70
163.40
120.70
529.60
813.70
536.00
(629.50)
(93.50)
(2.10)
298.30
195.80
263.50
202.70