Faculty of Business and Law
School of Economics, Finance & Accounting
Assignment Brief
Module Title:
Accounting for Business
Assignment Number:
2
Module Code:
289ACC
Assignment Title:
Business Case Study
Assignment Weighting:
50%
Release Date:
19/11/21
Module Leader:
Simon Horsman
Submission
Time and Place:
18:00 03/12/21
Online submission through Aula ONLY
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 – PS Ltd
As set out on page 2 and generally, this assignment requires you to write a draft business report to address the various issues within the case study. You are the Personal Assistant to Chris Roberts. 3 months ago, Chris was appointed by ABCD Plc, the parent company of Parker Seating Ltd (PS), as General Manager to turn PS around.
In his/her late 30’s, after a business degree, Chris qualified as an accountant before joining ABCD as part of a trouble-shooting team. PS is his/her first independent command, so to speak. You are part of the turnaround team. It’s ABCD that pays both your salaries.
The last few years have been very difficult for PS, a UK-based company whose principal activity is the manufacture of furniture, which it distributes to retailers. It has only survived through the support of its parent company, ABCD plc, to whom it currently owes a significant debt.
ABCD has reached the point where it is prepared to take drastic action, including closing down PS. So PS needs rapidly to improve its financial performance, advancing on all fronts; as appropriate increasing revenue, and reducing costs and capital employed. Cash is available from ABCD if the case is strong.
Below is the brief you have received from Chris Smith:
Please draft a report to go out in my name as follows:
Highest level of confidentiality
Readership – ABCD’s PS Steering Committee plus PS’s top tier managers
2,500 words maximum. Remember that clarity (e.g. from headings and bullet points) is the cardinal virtue in this organisation. Brevity is a bonus, so less than 2,500 words is good.
But never cut corners or mislead – if something is complex or you just don’t know (or cannot say) then make that clear, why, and ideally, how and when you can get back to clarity. Repetition kills credibility because it tells the reader that you don’t know what you’ve already said. Spell-checks are there to make everyone look literate. And as my time is more valuable than yours, you must do the proofreading.
You have a few leads with which to start but I need from you elaboration, exploration and, in some cases, a recommendation. Specifically, I’m looking for the following:
As per normal for ABCD, an Executive Summary of the report to follow. Include here any comments you feel I should be to making about our prospects coming out of the Covid pandemic.
Re Cash budgeting – the finance department have passed me some alarming figures. What’s going on? We all need to know. Recommendations would be welcome including recommendations as to where we need to investigate.
See Document 2
Comments on a possible new product line. See Document 3
Comments on absorption costing and overhead recovery.
See Document 4
Comments on the Faststitch-Bondright decision and capital investment appraisal.
See Document 5.
Budgeting – where should PS be going? What Does Beyond Budgeting offer us?
See Document 6
+ + + + + + +
You have therefore carried out some background research and have obtained the following documents.
Document 1 – Past Unaudited Income Statements – Years to 30th September
The following summary annual income statements relate to Parker Seating Ltd.
Year
2021
2020
2019
2018
2017
£000
£000
£000
£000
£000
Turnover
6,304
6,367
6,431
6,495
6,560
Cost of Sales
(5,989)
(6,049)
(6,109)
(6,170)
(6,232)
Gross Profit
315
318
322
325
328
Operating Expenses
(490)
(495)
(500)
(505)
(510)
Operating Profit/(loss)
(175)
(183)
(178)
(180)
(182)
Document 2 – Cash budget
Parker Seating Ltd’s Finance Department has prepared the following cash budget and budgeted income statement for the first 6 months of 2022, a period in which the company is expected to return to profit.
Cash budget
January
February
March
April
May
June
£
£
£
£
£
£
Opening balance
(4,976)
(5,182)
(16,736)
(30,421)
(43,095)
(55,467)
RECEIPTS:
Cash sales
65,655
66,559
68,066
68,946
69,209
69,467
Credit sales
205,425
198,285
202,361
208,324
212,424
214,651
Total receipts
271,080
264,844
270,427
277,270
281,632
284,118
PAYMENTS:
Cash purchases
(66,128)
(69,093)
(72,171)
(74,751)
(77,165)
(79,662)
Credit purchases
(65,583)
(64,173)
(65,039)
(65,866)
(66,108)
(66,094)
Operating expenses
(16,800)
(17,640)
(18,300)
(18,756)
(18,994)
(19,003)
Fixed overheads
(10,500)
(10,500)
(10,500)
(10,500)
(10,500)
(10,500)
Production labour
(106,096)
(108,627)
(111,677)
(113,715)
(115,076)
(116,478)
Administration costs
(6,180)
(6,365)
(6,425)
(6,356)
(6,162)
(5,854)
Total payments:
(271,286)
(276,398)
(284,111)
(289,944)
(294,004)
(297,590)
Net cash flow
(206)
(11,554)
(13,685)
(12,674)
(12,371)
(13,472)
Balance c/f
(5,182)
(16,736)
(30,421)
(43,095)
(55,467)
(68,939)
Budgeted income statement
January
February
March
April
May
June
£
£
£
£
£
£
Sales
263,940
268,920
276,390
281,370
283,860
286,350
Cost of sales
(225,648)
(229,905)
(236,291)
(240,549)
(242,678)
(244,806)
Gross profit
38,293
39,015
40,099
40,821
41,183
41,544
Operating expenses
(17,640)
(18,300)
(18,756)
(18,994)
(19,003)
(18,784)
Fixed overheads
(15,500)
(15,500)
(15,500)
(15,500)
(15,500)
(15,500)
Administration costs
(6,180)
(6,365)
(6,425)
(6,356)
(6,162)
(5,854)
Total expenses
(39,320)
(40,165)
(40,682)
(40,850)
(40,665)
(40,138)
Operating profit/(loss)
(1,028)
(1,150)
(583)
(28)
518
1,406
The following information is relevant to the cash budget:
Credit customers are allowed one month’s credit on sales;
Credit suppliers allow one month credit on raw materials purchases;
Production labour is included in the cost of sales in the budgeted income statement.
The following information from the budgeted Statement of Financial Position is also available.
Jan
Feb
Mar
Apr
May
Jun
£
£
£
£
£
£
Trade receivables
198,285
202,361
208,324
212,424
214,651
216,883
Trade payables
64,173
65,039
65,866
66,108
66,094
66,046
Inventories
Finished goods
39,594
45,183
51,069
57,365
64,451
72,327
Raw materials
55,637
62,901
70,437
78,167
86,738
96,241
Document 3 – New product line
Parker are considering introducing a new line of sofa. The sofa has been developed and is ready to go into production. However, management need to decide whether to manufacture the sofa in a new factory unit near their main premises in North West England or to outsource production to a supplier company.
Information relevant to this decision is given in the following table:
In-house manufacture
Outsourced manufacture
Sales price (per sofa)
£550.00
£550.00
Direct materials cost (per sofa)
£220.00
£0.00
Direct labour cost (per sofa)
£200.00
£0.00
Buy-in cost from outsourced manufacturer
£0.00
£500.00
Fixed manufacturing overheads
£550,000
£0
Fixed administrative overheads
£150,000
£150,000
Fixed selling and distribution overheads
£125,000
£125,000
Break-even point (sofas)
6,347
5,500
Unit sales (sofas)required to achieve a budgeted profit of £500,000
10,193
15,500
Margin of safety at budgeted profit level
38%
65%
In addition, the following profit-volume chart has been produced:
Document 4 – Full (absorption) costing
Parker Seating 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
Lounge Furniture
Dining furniture
Bedroom Furniture
Mainte
-nance
Adminis
-tration
Total
Direct materials (£)
437,102
669,033
557,528
0
0
1,663,663
Direct labour (£)
184,691
282,690
235,575
0
0
702,956
Direct costs
621,793
951,724
793,103
0
0
2,366,619
Overheads
Indirect labour (direct labour)
10,299
15,764
13,137
0
0
39,200
Rent (floor area)
14,377
17,775
17,644
1,359
1,046
52,200
Machine insurance (machine value)
979
1,489
3,779
254
–
6,500
Heating (floor area)
2,864
3,541
3,515
271
208
10,400
Machine power (machine hours)
3,675
3,325
2,800
0
0
9,800
Machine depreciation (machine value)
1,175
1,786
4,534
304
0
7,800
Total apportioned overhead costs
33,370
43,680
45,409
2,188
1,254
125,900
Re-apportion maintenance (machine hours)
820
742
625
(2,188)
0
0
Re-apportion administration (employees)
462
429
363
0
(1,254)
–
Total re-apportioned overhead costs
34,652
44,851
46,397
0
0
125,900
Machine hours
21,356
19,322
16,271
Overhead absorption rate per machine hour (£)
1.62
2.32
2.85
The costing team have been reviewing the overhead costing methodology and have prepared the following proposal for a revised costing method.
Department
Lounge Furniture
Dining furniture
Bedroom Furniture
Mainte
-nance
Adminis
-tration
Total
Direct materials (£)
437,102
669,033
557,528
0
0
1,663,663
Direct labour (£)
184,691
282,690
235,575
0
0
702,956
Direct costs
621,793
951,724
793,103
0
0
2,366,619
Overheads
Indirect labour (employees)
9,147
8,493
7,187
6,533
7,840
39,200
Rent (employees)
14,377
17,775
17,644
1,359
1,046
52,200
Machine insurance (machine hours)
2,438
2,205
1,857
0
0
6,500
Heating (employees)
2,427
2,253
1,907
1,733
2,080
10,400
Machine power (machine hours)
3,675
3,325
2,800
0
0
9,800
Machine depreciation (machine hours)
2,925
2,646
2,229
0
0
7,800
Total apportioned overhead costs
34,987
36,698
33,623
9,626
10,966
125,900
Re-apportion maintenance (machine value)
1,509
2,294
5,823
(9,626)
0
0
Re-apportion administration (floor area)
3,166
3,914
3,885
0
(10,966)
0
Total re-apportioned overhead costs
39,662
42,906
43,331
0
0
125,900
Machine hours
21,356
19,322
16,271
Overhead absorption rate per machine hour (£)
1.86
2.22
2.66
The Sales Director has expressed the view that this new method is superior because it reduces the overheads chargeable to the Dining and Bedroom Furniture 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.
Document 5 – Capital investment appraisal
The Bedroom Furniture profit centre is considering purchasing equipment to save costs and make the production process more efficient. There are two options.
The Faststitch will further automate production processes for items that needs stitching such as mattresses. The Bondright will improve production processes and product quality for items requiring adhesives, such as bed frames and chests of drawers.
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 6%.
Faststitch
Year
Cash flow (£)
6% Factors
Present value (£)
Depreciation (£)
Profit (£)
Cumulative cash flow (£)
0
(500,000)
1.0000
(500,000)
(500,000)
1
160,000
0.9434
150,944
(88,000)
72,000
(340,000)
2
140,000
0.8900
124,600
(88,000)
52,000
(200,000)
3
125,000
0.8396
104,950
(88,000)
37,000
(75,000)
4
105,000
0.7921
83,171
(88,000)
17,000
30,000
5
90,000
0.7473
67,257
(88,000)
2,000
120,000
5*
60,000
0.7473
44,838
180,000
NPV =
75,760
180,000
Payback period
3 years 9 months
Accounting rate of return
12.9%
Internal rate of return 11.3%
Bondright
Year
Cash flow (£)
6% Factors
Present value (£)
Depreciation (£)
Profit (£)
Cumulative cash flow (£)
0
(700,000)
1.0000
(700,000)
(700,000)
1
127,000
0.9434
119,812
(123,000)
4,000
(573,000)
2
148,000
0.8900
131,720
(123,000)
25,000
(425,000)
3
176,000
0.8396
147,770
(123,000)
53,000
(249,000)
4
198,000
0.7921
156,836
(123,000)
75,000
(51,000)
5
226,000
0.7473
168,890
(123,000)
103,000
175,000
5*
85,000
0.7473
63,521
260,000
NPV =
88,548
260,000
Payback period
4 years 3 months
Accounting rate of return
13.2%
Internal rate of return 9.7%
*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 Faststitch will not be fully effective until a number of new product lines requiring stitching have been introduced over the next few years, whereas the Bondright will reduce costs and improve efficiency on existing product lines.
PS’ lack of investment capital means that only one of the two pieces of equipment can be purchased in the near future, unless it goes to its parent, ABCD Plc.
+ + + + + + + + +
Document 6 – A journal article on budgeting and Beyond Budgeting (Rickards, R.C. (2006). ‘Beyond Budgeting: Boon or Boondoggle?’ Investment Management and Financial Innovations 3, (2) 62-76)
Continued
Assignment requirements
You are required to write a report for the Board of Directors of Parker Seating Ltd (italicized words in brackets indicate the approximate word count for each section).
The report should cover the following key areas:
An executive summary outlining the key challenges that the company is facing and the main outcomes from the analysis work you have undertaken. (250-300 words).
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 six-month period (350-400 words).
A discussion of the break-even analysis of the proposed new sofa (Document 3) with particular emphasis on the following areas:
An explanation of the different types of cost behaviour and why all fixed costs are in reality stepped fixed costs (90-110 words).
A review of the risk and return offered by the two manufacturing options and a recommendation on which option Parker Seating Ltd should choose. You may find useful the concept of operating gearing (200-240 words).
A discussion of the original and proposed costing methods above (Document 5) with particular emphasis on the following areas:
A critical appraisal of the reasons for the choice of apportionment bases used in both the original and proposed costing methods (200-250 words);
A critical appraisal of the Sales Director’s view that the proposed costing method is superior because it reduces the overheads chargeable to the Dining and Bedroom Furniture profit centres (100-150 words).
A critical appraisal of the results of the capital investment appraisal of the Faststitch and Bondright (Document 6) with particular emphasis on the following areas:
A discussion of the reasons for the apparent conflicts between the investment advice provided by each method and the say these conflicts might be resolved (300-350 words);
A discussion of the risks and returns presented by each option and a recommendation as to which option should be chosen, given the shortage of investment capital available to the company (125-175 words).
A critical discussion of the budgeting, including the Beyond Budgeting model focusing on the benefits it could bring to Parker Seating Ltd and the challenges they would face if they decided to introduce it (Document 6) (325-425 words).
GUIDELINES TO THIS ASSIGNMENT
Criteria for Assessment
This assignment will summatively assess learning outcome 3.
Analyse various techniques used in performance strategies.
Assessment Criteria
Marks will be awarded according to the following criteria:
10%
An executive summary outlining the key challenges that the company is facing and the main outcomes from your analysis work.
20%
A discussion of the reasons for the differences between the net cash flows and the operating profit in the statements provided and any matters arising.
15%
A discussion of break-even analysis in the context of the proposed new sofa.
15%
A discussion of the original and proposed costing methods.
20%
A critical appraisal of the methods and the results of the capital investment appraisal of Faststitch and Bondright
15%
A critical discussion of the Beyond Budgeting model, its benefits and challenges.
5%
Referencing, spelling and language used.
Word Count
The word count is approximately 2,250 (see guidance below on word count for each section). There will be a penalty of a deduction of 10% of the mark (after internal moderation) for work exceeding the word limit by 10% or more. The word limit includes quotations, but excludes any lists of contents and references.
How to submit your assessment
The assessment must be submitted by 18:00:00 on 03/12/21. No paper copies are required. You can access the submission link through the module web.
Your coursework will be given a zero mark if you do not submit a copy through Turnitin. Please take care to ensure that you have fully submitted your work.
All work submitted after the submission deadline without a valid and approved reason (see below) will be given a mark of zero.
The University wants you to do your best. However, we know that sometimes events happen which mean that you can’t submit your coursework by the deadline – these events should be beyond your control. If this happens, you can apply for an extension to your deadline for up to two weeks, or if you need longer, you can apply for a deferral, which takes you to the next assessment period (for example, to the resit period following the main Assessment Boards). You must apply before the deadline. You will find information about the process and what is or is not considered to be an event beyond your control at https://share.coventry.ac.uk/students/Registry/Pages/Deferrals-and-Extension.aspx
Students MUST keep a copy and/or an electronic file of their assignment.
Checks will be made on your work using anti-plagiarism software and approved plagiarism checking websites.
Plagiarism
As part of your study you will be involved in carrying out research and using this when writing up your coursework. It is important that you correctly acknowledge someone else’s writing, thoughts or ideas and that you do not attempt to pass this off as your own work. Doing so is known as plagiarism. It is not acceptable to copy from another source without acknowledging that it is someone else’s writing or thinking. This includes using paraphrasing as well as direct quotations. You are expected to correctly cite and reference the works of others. The Centre for Academic Writing provides documents to help you get this right. If you are unsure, please visit www.coventry.ac.uk/caw. You can also check your understanding of academic conduct by completing the Good Academic Practice quiz available on Aula.
Moodle includes a plagiarism detection system and assessors are experienced enough to recognise plagiarism when it occurs. Copying another student’s work, using previous work of your own or copying large sections from a book or the internet are examples of plagiarism and carry serious consequences. Please familiarise yourself with the CU Harvard Reference Style (on Moodle) and use it correctly to avoid a case of plagiarism or cheating being brought. Again, if you are unsure, please contact the Centre for Academic Writing, a Progress Coach or a member of the course team.
Return of Marked Work
You can expect to have marked work returned to you within 15 working days. If for any reason there is a delay you will be kept informed. Marks and feedback will be provided online. Marks will have been internally moderated only, and will therefore be provisional; your mark will be formally agreed later in the year once the external examiner has completed his/her review.
Detailed Assessment Criteria
10%
An executive summary outlining the key challenges that the company is facing and the main outcomes from the analysis.
Effectively summarises all elements of the assignment.
7-10%
Summarises the elements of the assignment but lacking somewhat in credibility or completeness.
4-6%
Falling short of a good summary in terms of credibility, completeness or both.
1%
20%
A discussion of the reasons for the differences between the net cash flows and the operating profit in the statements provided.
Effectively covers all the elements of the task with good reference to the module textbook.
14-20%
Covers most elements of the task with reasonable reference to the module textbook.
8-13%
Partially covers one of the elements of the task with some reference to the module textbook.
1-7%
15%
A discussion of the break-even analysis of the proposed new sofa.
Effectively covers all the elements of the task with good reference to the module textbook and maybe other sources.
10-15%
Covers most elements of the task with reasonable reference to sources.
7-9%
Effectively covers 1of the elements of the task or partially covers 2 of the elements of the task with some reference to the module textbook.
1-6%
15%
A discussion of the original and proposed costing methods.
Effectively covers all elements of the task with good reference to sources, including the module textbook.
11-15%
Effectively covers most of the elements of the task or partially covers both of the elements of the task with reasonable reference to the module textbook.
6-10%
Somewhat covering the task or failing to be properly evidenced.
1-5%
20%
A critical appraisal of the results of the capital investment appraisal of the Superstitcher and Bondright
Effectively covers all elements of the task with good reference to sources, including the module textbook.
13-20%
Effectively covers one of the elements of the task or partially covers both of the elements of the task with reasonable reference to the module textbook.
8-12%
Falling short of covering all elements of the task and/or making inadequate use of sources.
1-7%
15%
A critical discussion on the context of this company of budgeting and the Beyond Budgeting model, its benefits and challenges.
Effectively covers the nature of the budgeting task, the Beyond Budgeting model, its benefits and challenges with good reference to the article provided plus at least one more article and the module textbook.
11-15%
Helping readers somewhat to understand the budgeting task and the Beyond Budgeting model.
6-10%
Falling short of helping readers well to understand the budgeting task and the Beyond Budgeting model.
1-5%
5%
Referencing, spelling and language used.
Referencing complies with current Coventry University standards (Harvard or APA 7). Spelling accurate. Language is appropriate and persuasive.
4-5%
Two out of the three requirements above are achieved.
2-3%
One out of the three requirements above are achieved.
1%
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