Accounting for Business

Document 1

The Chair of the Board of Vardy Virtual Viewing Ltd recently attended a conference at which “beyond budgeting” principles were discussed, and believes it would help to improve the financial performance of the company. She has asked you to look into this further and you have obtained the following articles on the application of “beyond budgeting” in the UK and beyond.

Document 2: New product line

Vardy Virtual Viewing Ltd are considering changing one of their main production processes. If the process at one of their touch screen production plants is implemented, it will have a significant impact on the cost structure of one of their most popular lines of virtual reality headsets.

Document 3 – Cash budget

Vardy Virtual Viewing Ltd’s Finance Department has prepared the following cash budget and budgeted income statement for the first 3 months of the 2021/22 budget year, a period in which the company is expected to return to profit.

Document 4 – Full (absorption) costing

Vardy Virtual Viewing 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 profit centre together with the apportionment bases used.

Document 5 – Capital investment appraisal

Vardy Visual Viewing Ltd is planning on purchasing a new piece of automatic screen coating equipment to make production processes more efficient and help save costs.
There are two options for the new piece of equipment. The Fastcoat will further automate production processes for small products such as mobile phone screens. The Speedscreen will improve production processes and product quality for larger High Definition products.
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%.

You are required to write a report for the Board of Directors of Vardy Virtual Viewing 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 (250-300 words).
    2. With reference to Document 1 above:
      • A critical appraisal of the main business benefits claimed by advocates of the “beyond budgeting” approach (125-150 words);
      • A critical discussion of the main challenges that Vardy Virtual Viewing Ltd would face if they decided to implement the beyond budgeting” approach and how they could be overcome (200-225 words)
    3. A discussion of the break-even analysis of the current and proposed new production process (Document 2) including:
      • A review of the risk and return offered by the two processes with reference to the concept of operating gearing (250-300 words);
      • A justified recommendation on which process Vardy Virtual Viewing Ltd should choose (100-150 words).
    4. A discussion of the reasons for the significant deterioration of the cash balance in the cash budget above (Document 3), given the operating profits recorded in the budgeted income statement (325-375 words).
    5. A discussion of the basis and reasons for charging overheads to individual production profit centres (Document 4) with particular emphasis on the following areas:
      • Using the figures in the tables above, an explanation of the basis of the overhead charges to the Home Cinema profit centre. (275-300 words);
      • Using the figures in Document 4 above for illustration purposes, a critical discussion of the process of absorption costing. (180-200 words).
    6. A critical appraisal of the results of the capital investment appraisal of the Fastcoat and Speedscreen (Document 5) with particular emphasis on the following areas:
      • A critical discussion of the advantages and disadvantages of each capital investment appraisal method (200-250 words);
      • A discussion of the risk and return presented by the Fastcoat and Speedscreen options and a recommendation as to which option should be chosen, given the lack of investment capital available to the company (200-250 words).