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Table of content
Question 1.......................................................................................................................3
Question 2.......................................................................................................................6
Question 3......................................................................................................................11
References......................................................................................................................15
A budget is an estimate of future needs, arranged according to an orderly basis covering some
or all the activities of an enterprise for a definite period of time as "financial and/or a
quantitative statement prepared prior to a definite period of time of the policy to be pursued
during that period for the purpose of obtaining a given objective'(Dawn 2003) .A budget is an
important device managerial control. It provides a standard by which actual operations can be
evaluated to know variations from the planned expenditures. A budget has the following
characteristics
It is prepared in advance and is based on a future plan of actions.
It relates to a future period and is based on objectives to be attained.
It is a statement expressed in monetary and/or physical units prepared for the
implementation of policy framed by the top management.
Now let’s illustrate the flexible budget by using some data. If the production equipment is
required to operate for 5,000 hours during July, the flexible budget for July will be $90,000
($50,000 fixed + $10 x 5,000 MH). If the equipment is required to operate in August for 6,300
hours, then the flexible budget for August will be $103,000 ($50,000 fixed + $10 x 6,300 MH).
If September requires only 4,100 machine hours, the flexible budget for September will be
$81,000 ($50,000 fixed + $10 x 4,100 MH).If the plant manager is required to use more machine
hours, it is logical to increase the plant manager’s budget for the additional cost of electricity and
supplies. The manager’s budget should also decrease when the need to operate the equipment is
reduced.(Bnet.com)
Finally, the flexible budget provides a better opportunity for planning and controlling than does
a static budget. Preparing flexible budgets require the principle of marginal costing. In ballpark
figure future costs, it is usually necessary to begin by looking at cost behaviours in the past. For
costs which are known to be fixed or variable, problems do not arise but when dealing with a
cost which appears to have behaved as mixed costs in the past i.e. partly fixed and partly
variable, problems arise. For instance, in a processing department, the total overhead costs will
be partly fixed and partly variable. The variable part of it may vary with direct labour hours
worked in the department or with the number of machine hours of operation. However, the better
measure of activity will be judged based on a close analysis of the cost behaviour in the past.
Thus, the high-low method may be used to estimate the levels of such costs. (CAT 10, 2008)
In preparing a flexible budget necessitate a proper identification and separation of fixed costs
and variable costs which is not always in line. This separation is principally because fixed costs
are never to be flexed. They remain unchanged regardless of the level of activity. Therefore, it is
Question 2
Why are pricing decisions more difficult for firms with multiple products than for firms with
single products?
Pricing is fully as the task of scenery price for a firm’s products or services depends on the costs
of production. This is a very important aspect of an organizations management policy, and for
company’s with multiple products, this is even more important because firms with single
products simply apportion all their costs to the single product, while those with multiple
products have to choose a method of assign costs that is reasonable and fair, and this is rather
complex.
Cost is a vital issue in price decision making, the problem the multiple product firm has in lain
in virtual neglects on the threshold of the monopolistic or imperfect competition since the
pioneering efforts of chambelion and Joan Robinson .The significant of both is apparently since
it is probably impossible to find a single firm that sells a single products at a single price. This is
theoretically explainable by the fact that the conventional single product firm that is presumably
in equilibrium, when marginal revenue is equal to marginal cost is not in equilibrium. If it can
serve the remaining portion of the demand curve at a price above greater than marginal cost
without adversely disturbing its existing market or more commonly, if there is any accessible
market for which it can produce with its unused capacity at a price above marginal cost. In the
first situation, price discrimination, differs only slightly from the second, multiple-product
production together they constitute the terrain of the firm activities. The assumption of a
products mix does little to meet the needs of the situation for it lends itself to only the crudest
forms of analysis and assumes away some of the most fundamental problems including those
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involved in the manipulation of the firms price and products line. It is common-place of business
practice that the production and sales managers work hand in hand to devise new product
Full cost plus pricing This is a conventional approach to pricing products whereby sales prices
are gritty by calculating the full cost of the product and the accumulation a percentage mark-up
for profit. Obviously this kind of costing is useful to management since a decision based on a
price in excess of full cost ought to guarantee that a company working at normal capacity will
cover all its fixed cost and make a profit.
The tribulations with this method become palpable when you have two or more admiring
products that use the same overheads, i.e. they are produced in identical factory, how do you
assign the rental costs of the factory to the product?
This is done by using the number of machine hours i.e. the hours spent in converting the raw
materials into finished goods in the factory expended by the products, totalling it and dividing
the cost of the rental by this total amount, and finally allocating it to the products.
Activity Based Costing Since demand for paradigm ABC points out to this nature of intricacy in
pricing by compound products in a different way from single products. The ABC has
materialized with the initiation of advanced manufacturing technology; many funds have been
used for non-volume related support activities such as conception of machines product
scheduling, first item inspects and data processing. The wider the range and the more
multifarious the products the more support services will be required to assist the efficient
manufacture of the products.
For instance, comparing linking factory A which produces 10000 units of 1 product, shoes and
factory B which produces 1000units each of them slightly different version of the shoes.
Supporting activity costs in factory B are likely to be a lot higher than factory A such as setting-
up machines and product scheduling for instance, factory A will only used to set-up structure
once but factory B will have to structure at least several times for different products.
The major ideas behind activity base cost are activities such as requesting, machine assembly,
production scheduling, dispatching cause costs and material handling. Producing products
creates demand for activities and thus costs are assigned to a product on the basis of the products
consumptions of the activities.
L M M O Total
$ $ $ $ $
Direct labour 70 120 500 1500 2200
Overheads 800 2000 7000 21000 30800
950 3050 9500 30500 44000
Units product 10 10 100 100
Cost per unit $ 95 $ 305 $ 95 $ 305
Workings
1 $ 3080/440 machine hrs = $7per MH
2 $ 10920/14 production runs = $780 per prod-run
3 $ 9100/14 production runs = $ 680 per prod-run
4 $ 7700/14 production runs = $550 per prod-run
Conclusion
Production Absorption costing Activity based costing differences
Unit cost Unit cost
$ $ $
L 95 428 +333
M 305 512 +207
N 95 131 +36
O 305 215 -90
D The statistics imply obviously that decisions, the price product proves to be a multifaceted
choice in which an organization with multiple products selects the system in which to
operate turnover.
SMEs and their market power via the relationship between the firm and its customers and
suppliers why Bank credits are very important to them and yet so difficult for them to obtain via
swot analysis
SWOT Analysis is a tool for auditing an organization and its environment. It is the first stage of
planning and helps marketers to focus on key issues. It is a general technique which can find
suitable applications across diverse management functions and activities. SWOT stands for
strengths, weaknesses, opportunities, threats. Strengths and weaknesses are internal factors while
opportunities and strength are external. Performing a SWOT analysis involves the generation of
strengths, weaknesses, opportunities, and threats concerning a task, individual, department, or
organization.
SWOT analysis can provide a framework for identifying and analysing strengths, weaknesses,
opportunities, and threat. This can also provide an impetus to analyse a situation and develop
suitable strategies and tactics, a basis for assessing core capabilities and competences. Moreover,
this can provide the evidence for, and cultural key to change and a stimulus to participation in a
group experience SME’s
Strength
The relationship that exists between supplier and firm in a typical SME is such that the
firm has a high tendency to take goods on credit thereby increasing accounts payables.
SMEs have the power to survive amidst the high rivalry from fellow SMEs who may be
bigger as well as from large companies.
Opportunity
The loans usually involve high processing costs of monitoring the accounts receivables
and inventory which is often pledged as collateral and the primary information is based
on the value of the collateral and not strong financial ratios of the SME.
Customers in SME industries usually have access to taking goods on credit. This is
because it is usually a family or small group of biz. This is also allowed by SMEs
because their agreement power is low while the haggle power of customer is usually
high ,thus, they try to attract and keep customers so that they don’t have to go another
place.
Threats
Larger enterprises are also subject to more public inspection by law as they receive
press attention. Thus, their accounts are audited and contain more details. So banks are
better able to get hard information from them and reliability.
The most used and most reliable is overdrafts and bank loans although the rates charged
may be more expensive as the bank seeks to protect its investment in SME projects.