财政预算报告.doc

Introduction

Tricol plc a company who makes a range of furniture and kitchenware. And one of its most popular products is the ‘Zupper’ expandable table.
The purpose of writing this report is to do the variance analysis, project evaluation and to compare the budget and actual data by using the technique.

Findings
Part A
Possible Reason for Variances

1. Material

Direct Material – Total - ￡2,400 F made up:

Direct Material Usage –￡8,000 F
(Level of significance –usage/total budgeted Material costs = 8,000/64,000 = 12.5% > 3%, should be reviewed)
800 kg less materials are used than budgeted for the actual level of production. Possible reason may be using the higher-grade material with less wastage. Or the new machinery use less materials and incurs less wstage.

Direct Material Price –￡5,600 A
(5,600/64,000=8.75% >3%)
It is ￡1 per kg more expensive than planned
Possible reason:
New material supplier does not give discounts for materials.
Hither-grade materials have been used which is more expensive.

2. Labour

Direct Labour Total - ￡6,400A

Direct Labour Rate –￡3,520A
(3,520/28,800=12.2%>3%)
On average, the actual labour rate is ￡1/hour higher than budgeted
Possible reason:
The wage settlement is higher than expected
The new machine requires trainings so that overtime required more than expected.

Direct labour Efficiency - ￡2,880 A (2,880/28,800=10%>3%)
Actually, more than 320 labour hours have been used than budgeted. Possible reason:
New machinery requires more hours for training..
Human resource issues – the skilled operatives is not enough.

3．Total Overhead - ￡400 F
(400/3,200=12.5%>3%)
Unpredicted increase in insurance and Administration costs
Possible reason:
New machinery brings more expensive insurance, higher maintenance and additional administrative costs.

Part B
1. Key assumptions made:
a) There is no taxation and inflation.
b) Assumed that there is no vary given return market rate.
c) The total cost of the project will be payable at the start
d) The expected revenue from the investment – this is the expected Net Cash Flow after deduction of all relevant costs

2. Payback
Payback in this case is 4.125 years (total investment-return period is five years). So the company can get back the investment.

The Net Present Value is ￡- 64，800. It indicates that the project does not appear to be financially viable.

Conclusion
Part B
This project is available because the payback is 4.125years.
But the Net Present Value (NPV) is negative. So the project is not available.
However, we should use the conclusion of the Net Present Value because the Net Present Value (NPV) considered the time value of money.

Recommendations
Part A
Recommendations for management action:
1. All the variances should be analysis because all of them are above 3%, the level of significance.
2. Particularly, the direct labour variances need further investigation – why is the company paying a higher wage rate but the labour productivity is lower than planned.

Part B
1. To consider the effect of the new facilities on company’s own staff – in terms of employment and redeployment opportunities.
2. To consider any changes in any other areas, like social, political, economic, legal and technological factors.
3. Whether it is possible for the company to raise the sufficient funds – to consider if the current cash flow position can support such an investment.

Appendix
Part A
1.Table 1 Tricol plc Flexed Budget for June
Tricol plc Flexed Budget For June

Fixed Budget
2,000 units
Flexed Budget
1,600 units
Actual
1,600 units
Variance

￡
￡
￡
￡
A/F
Direct Material
10*4*2,000=
80,000
10*4*1,600=
64,000
61,600
2,400
F
Direct Labor
2*9*2,000=
36,000
2*9*1,600=
28,800
35,200
6,400
A
Variable Production Overheads
2*2,000=
4,000
2*1,600=
3,200
3,200
0

Insurance costs
2,200
2,200
2,400
200
A
Depreciation
1,500
1,500
1,500
0

Rent and Rates
2,500
2,500
2,500
0

Administration Overheads
2,000
2,000
2,200
200
A
Fixed Overheads
8,200
8,200
8,600
400
A
Total
128,200
104,200
108,600
4,400
A

2. Further Variance Analysis
The calculation of the variances

a) Direct material total :
(Budgeted Quantity*Budgeted Price) – (Actual Quantity*Actual Price)
=(4kg*1,600*￡10per kg) - (5,600kg*￡11 per kg)=￡64,000-￡61,600=￡2,400 F

b) Direct material usage :
Budgeted price* (Budgeted Quantity – Actual Quantity)
=￡10per kg * (4kg * 1,600-5,600kg)= ￡8,000 F

c) Direct material price :
Actual Quantity* (Budgeted price – Actual price)=5,600kg*(￡10 per kg -￡11 per kg)
=￡5,600A

d) Direct labor total :
Budgeted Hours*Budgeted Rate – Actual hours*Actual Rate
=(2hours*1600*￡9)- ￡35200=￡6,400A

e) Direct labor rate :
Actual Hours*(Budgeted Rate – Actual Rate)
=3,520hours*(￡9-￡10)= ￡3,520A

f) Direct labor efficiency :
Budgeted Rate*(Budgeted Hours – Actual Hours)
=￡9-(2hours*1600-3520hours)= ￡2,880A

g) Total overhead :
(Budget Variable Overhead + Budget Fixed Overhead) - (Actual Variable Overhead + Actual Fixed Overhead) = (£4000 + £8200) - (£3200 + £8600) = £400 F

Part B
1. Payback period method
Year
Yearly net
cash flow
￡
Cumulative
cash flow
￡
0
(1,000,000)
(1,000,000)
1
160,000
(840,000)
2
160,000
(680,000)
3
320,000
(360,000)
4
320,000
(40,000)
5
320,000
280,000
Net cash benefits
280,000
280,000
Payback = 4 + 40,000/320,000= 4.125 years

2. Discount cash flow technique(net present value)

Calculation of Net Present Value（NPV）at 10%
Year
Annual
cash flow
Present value
factors at 10%
Present
Value

￡

￡
￡
0
(1000,000)
1.000

(1,000,000)
1
160,000
0.909
145,440

2
160,000
0.826
132,160

3
320,000
0.751
240,320

4
320,000
0.683
218,560

5
320,000
0.621
198,720
935,200
Net Present Value （NPV）

(64,800)