1

2

Table of ContentsIntroduction................................................................................................................................................... 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

3

Appendix A Financial Ratio of Tip Top ......................................................................................................... 30

Appendix B Mark and Tip Top Financial Statement ................................................................................. 31

Appendix C Balance Sheet ......................................................................................................................... 32

Appendix D Cash Flow Statement.............................................................................................................. 33

4

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)

1.1 Importance of costs in the pricing strategy of Tip TopA cost is defined as a resource sacrificed or forgone to achieve a specific product. People consider cost as monetary value. Such as (Pound, dollar and Euros) that must be paid to acquire goods and services. (Horngrer, 2005)

Tip Top objective is profit maximization; to make a good profit their revenues must have exceed than all cost. The major cost (opportunity, differential and sunk) is an important feature of many decisions made in pricing of market mix (College, 2012). Tip Top should be well aware that any positive contribution (that is when marginal revenues exceed the marginal costs) helps to cover fixed costs. The variable cost is changeable according to volume of good acquired by the organization. After full allocation, cost using Activity Base Costing (ABC) involved in cost of sales per unit then after Tip Top should determine the price in an efficient way. The cost is a major factor to develop pricing strategy; Tip Top should focus on various strategies to maintain their presence in a competitive market. The following pricing strategy should develop by Tip Top by considering the various cost involved in unit cost.

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

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Information on market demand, it is possible to vary the prices infinitely to meet current demand exactly.

1.2 Design a costing systemA cost is a major source of running business and is involved in all the activities which organization undertakes. Tip Top Plc. is growing as a market leader with 125 years of retailer history. In terms of costing design it will consider different marketing factors and analysis various costing system available in the current market to adopt best one. Some of them are followers:

A) Activity based Costing (ABC)ABC is the most recent approach to product costing, pioneer by professors Kaplan and Cooper of Harvard University. ABC is an attempt to reflect more accurately in product cost those activities, which influence the level of, suppose overheads; it includes such item as inspection, dispatch, product planning, set up tooling and similar costs (Lucey, 2007).

B) Marginal Cost system: It distinguishes between fixedCosts and variable costs are conventionally classified. This normally taken to be; direct labor, direct material, direct expenses and the variable part of overheads (Lucey, 2007).

C) Job costing system, costs is assigned to a distinct unit, and a job is a task for whichResources are expended in bringing a distinct product to market.

D) Process costing system, the cost object is masses of identical or similar units. The cost of a product is obtained by using broad averages to assign costs to masses of identical or similar units (Horngrer, 2005).

Today’s market is more competitive and getting accurate information about the product is essential to fix prices. So costing becomes more an assessment of the cost of buying products. Information sharing, communication, and trust play major roles in improving the performance of virtual enterprises and integrated supply chains (Cooper, 1991).

Tip Top runs more than 700 stores across the UK and their activities are based on the space covered by it. Its performance and cost allocation system illustrates that the ABC costing system is more suitable for Tip Top. It developed a centrally controlled system to cost controls over targeted business objectives such as saving cost from wastage, maintain supply chain to long term product price fixing.

As a manager of Tip Top, I preferred to design an ABC costing system within the organization. Because the rest of costing system will allocate the cost based on labor hour, machine hour and

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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.

1.3 Propose improvements to the costing and pricing systemsCosting systems are an important tool for cost control and cost optimization, as well as determine pricing of product in Tip Top. It has different types of cost involving into the operations, it needs to have a proper costing system to understand and know about the cost of their product and set the price for selling goods and services in the competitive market. Understanding this cost will give a lot of advantages like fixing product price, fixing margin, fixing the profitable product mix and various management decisions (Hansen D.R., 2006).

Tip Top will need to introduce new systems and approaches because of following reasons to address:

I) Traditional costing systems do not provide sufficient non-financial informationii) Existing product costing systems is inaccurate, it could not allocate the cost in right

proportion, which may increase the cost of items, so Tip Top sales were decreased in2012.

iii) Current costing systems do not encourage improvements and IV) Overhead costs are predominant

The Benefit behind adopting new ABC costing system are follows (College, 2012):

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.

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ReferencesCollege, L., 2012. Managerial Accounting and Cost Concepts. [Online]Available at: h t t p : // www . l e c.ed u / ad c p / d o c /A D M % 20 3 01 % 20 A c cou n ti n g % 2 0 f or % 20 M ana g e r s.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: MasonOH.

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: h t t p : // b u s i n e s s c a s e s t ud i e s .c o .u k / m a r k s - a nd - sp e nce r / f i nan c i a l - m anage m en t - i n - a - r e t a i l - s e t ti n g / i n t r od u c.h t m l #ax zz 2Fn HD v bpJ [Accessed 20 12 2012].

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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 Topii) 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 analysisThe 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).

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2.2. Assess the sources of FundsFunds means money invested in assets, which can produce income, e.g. securities, plant and machinery (Mukherjee A., 2006). Funds also refer monetary value which is used to operate daily business activities and invest in assets to produce new product. Funds are raised by organization for short term or long term; it depends upon their financial planning.

The Chief Finance Officer of Tip Top Alan Stewart clearly stated that the main sources of funds are following: (Tip Top, 2012)

Sources FundsCash Inflow (Working Capital) 161.9Credit Facility 1.3 billionIssue Bonds 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.

3.1 Appropriate budgetary targets for Tip TopThe budget process consists of activities that encompass the development, implementation, and evaluation of a plan for the provision of services and capital assets. Good budget process characterizes the Tip Top’s future planning more clearly and understand by their employees (Lawndale, 2004).

The manager of Tip Top, should implement quantitative technique for the budgeting process, to analysis the time series of financial activities, which helps a manager to understand past trends and using that information they should able to prepare excellent budget for future targets.

During the budget process manager should consider in following factors.

Establishes linkages to broader goals Focuses budget decisions on results and outcomes

Examples: Estimated revenue growth by 2.5 billion at the end of 2013 and 100M of savings, reducing the total cost from 600m to 500m by mid-2013

Involves a n d p r o m o t e s e f f e c t i v e c o m m u n i c a t i o n w i t h s t a k e h o l d e r s a b o u t p r e p a r e d budget, and

Address the government, management and employees by allocating the bonus and tax.

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3.2. Creation of master budgetEvery organization prepares the master budget at the end of financial year using previous data and forecast some important headings sales budget, cash budget and fixed budget etc. which must cover all the cost related to sales and other fixed and variable cost.

The managers of Tip Top must follow the budgetary cycles during prepare the master budget. (Robert D. Lee Jr., 2008) describes some unavoidable steps.

Preparation and Submission: The entire senior manager prepares a draft budget including every head, which covers all the costing for a year. After collecting the draft budget from all the stores, the department heads and Chief Executives prepare final estimated budget and will be submitted to directors for further approved.

Approved: The Board of directors approved the budget after fully comparisons with last year activities and analysis the sources cover all the expenditures.

The financial and cash budget is presented in table 1.3 and 1.4 illustrate the example of estimated budget.

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.

If the turnover is higher than budgeted, analysis the reasons. We’re setting targets too low? was the increase in sales a one-off or the start of a trend? Have sales been brought forward from future months? Will sales in those months now we lower than originally forecast?

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3.4 Evaluate budgetary monitoring processesBudget monitoring is the continuous process, which ensure the target objectives is achieved or not, in terms of expenditure and income. (Andrews, 2010)

The budgets are not always favorable, somet ime went adverse too because of its limitations. The manager must know why a variance occurred in order to pinpoint problems and take corrective action. The Error! Reference source not found. Present the variance between sales, income, expenses and tax. In the table 1.3 the static budget underestimated both sales and costs. It's called a static budget variance because the actual activity differed from what was expected in the master budget. But flexible budget variance arises because the company had different revenues and costs than expected for the actual unit sold. This will happen because changes in sales unit price, fixed cost and variable cost per unit different than planned on the budget (Charles T. Horngrer, 2012).

Manager of Tip Top should able to find out the reason of budget variance by following some guidelines, which is mentioned below:

preparing a set of flexible budgets for different sales levels. Prepare an income statement, performance report as shown in table 1.3. Review the result

to determine which variance is controlled and which is not. Static budget – expected volume of sales estimated before the financial year. Flexible budget- actual volume of sales not known until the end of the year.

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 department’s operations. The work is determined by store’s 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

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ReferencesAndrews, U. o. S., 2010. Financial Operating Procedures. [Online]Available at: ht t p: / /ww w .s t -a ndr e ws . ac .uk/ m e dia/ f op009_budg e t_ m oni t e ring.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 ofForecasting Using Excel. New York: Industrial Press Inc., p. 2.

Lawndale, C. o., 2004. Lawndalecity.org. [Online]Available at: ht t p: / /ww w .la w nd a le c i t y .org/PDFs / 0405Budg e t / Budg e t P ro c e ss.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 PublishingCompany Limited.

Robert D. Lee Jr., R. W. O. P. g. J., 2008. Public Budgeting Systems. 8th ed. London: Jones andBartlett.

Solution, B. I., 2012. Budgeting. [Online]Available at: ht t p: / /ww w .is4pro f i t . c om / busin e s s -a dvic e /fin a n c e -a n d - mon e y /budgeting / fo r e c a st i n g -c ost s .ht m l [Accessed 04 12 2012].

Spyros Makridakis, S. C. W. R. J. H., 1998. Forecasting Methods and Application. 3rd ed. Hoboken: Wiley & Sons. Inc.

Year 2012 2011 2010 2009 2008 2007Sales 9934.3 9740.3 9536.6 9062.1 9022 8588.1

Sales Growth Rate 2.0% 2.1% 5.2% 0.4% 5.1%

Retailing 1.32% 2.24% -0.57% 1.86%Retail 1.89% 4.02% 2.61% 12.67%Distribution 1.17% -0.23% -3.88% 6.90%Marketing and related 13.23% 16.27% -3.53% -8.61%Support -2.00% 4.72% 28.14% -2.37%

Total1.48% 3.55% 4.00% 4.88%

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Appendix 1 Sales ForecastTable 1.1

Sales Forecast (Million)

Appendix 2 Operating cost breakdownTable 1.2

Breakdown Operating cost(Million)Year 2012 2011 2010 2009 2008Retail Staffing 889.2 877.6 858.4 863.3 847.5Retail Occupancy 1030.9 1011.8 972.7 948 841.4Distribution 398.1 393.5 394.4 410.3 383.8Marketing and related 161.8 142.9 122.9 127.4 139.4Support 515 525.5 501.8 391.6 401.1Total 2995 2951.3 2850.2 2740.6 2613.2

Ratio

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Appendix 3 Financial BudgetTable 2.1Financial BudgetYear ending 2012 2011 Variance

2%3%1%2%

-11%

-16%-7%-18%

Sales UKGeneral MerchandiseFood

4195.14673.1

379.4686.7

76.7

4233.64499.4

343.7663.659.9

Sales InternationalFranchisedOwnedOther Operating incomeTotal 10011 9800.2Cost of sale (6179.10) (6015.60)Gross Profit 3831.90 3784.60Selling and Distribution (3021.90) (2959.70)Non-GAAP adjustment to underlying profit (63.50) 12Operating Profit 746.50 836.90Finance Income 48.30 96.60finance Costs (136.80) (152.90)Profit before tax 658.00 780.60Income Tax (168.40) (182.00)Profit after Income tax 489.60 598.60

(Figures in Million)

Appendix 4 Cash BudgetTable 2.2 Cash Budget

Year Ending2012 2011 2010 2009

2 / 4 / 2011 3 / 4 / 2010 28 / 0 3 / 09

1385.2 1349.7 1371.9

146.40 163.40 197.10185.30 120.70 81.30

490.50 529.60 596.90 822.20 813.70 875.30

200831/03/12 29/03/08

Cash inflowOperating Activities(Receives)Payments(Expenses)Interest Paid income Tax paid Investing Activities Outflow

1352.1

135.90149.10757.80

1236

88.90166.20966.20

1042.80 1221.30

Cash inflow/OutflowAdd Financing

309.30(375.10)

563.00 536.00 496.60( 501.0 0 ) ( 629.5 0 ) ( 324.0 0 )

62.00 (93.50) 172.60

(1.20) (2.10) 7.80202.70 298.30 117.90

14.7054.70

Total CashEffects of Exchange ratechangesAdd Opening Cash

(65.80)

(1.90) 263.50

69.40

1.5047.00

Net Cash Balance 195.80 263.50 202.70 298.30 117.90Figures in Million (Tip Top, 2012)

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4.1 Recommend Processes that could manage cost reductionIn today’s competitive market, holding the market share and sustain the business is more

challenging than the past. To be a success and come over from this situation Tip Top should need

to develop effective and efficient costing system ABC, which can help it to manage and control

the costs. Tip Top needs to know what it costs to produce various goods; the set selling price

should cover costs and provide a profit. To remain competitive with other retailer such as

Sainsbury, John Lewis and Tesco, Tip Top must hold its cost down (Charles T. Horngrer, 2012).

The development of cost process helps Tip Top to identify the major activities of cost driver. The

effective management of cost activities will help Tip Top to reduce the operating cost as well as

indirect cost linked with the production of goods.

The reduction in cost (or increases in add value) that can be maintained over the longer term and

not just simple short term price changes that are then readjusted when the commercial climate

improves. To effective reduced cost, Tip Top need to adopt not only a cross-functional

approach, but also engage with the supply chain (Carter, 2012).

a) Effective transport management

Transport is one of the major cost driver activity of Tip Top. Tip Top transported

products from distribution centers to stores across the U.K. The good discussion between

logistic team and retailer team in stores, can successful management of delivery could in

fact help stores to plan more effectively and maintain better stock levels on the sales

floor. The efficient delivery of product increased fuel efficiency and Tip Top was able to

reduce the transportation cost by 2.1 million in 2011/12.

b) Staff recruitment process

The best management of staff will help to reduce the cost. The improvements in

recruitment and selection processes have led to a 61% reduction in cost per application

contracted. So far this has reduced the cost over 1.5 million in the recruitment process.

c) New Technology

The latest technological innovation, the new vacuum packing system implemented in Tip

Top. The packaging improvements led to a 75% reduction in packaging and delivered

fresher, b e t t e r q u a l i t y p r o d u c t s . 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

i n i t i a t i v e s d e l i v e r

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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.

4.2 Evaluate the potential for the use ofActivity-based costingActivity-based costing: It divides the total

production process into activities and then assigns

costs to products based on how much the

production uses those activities to make the

product ( Charles T . Horngrer, 2 0 1 2 ). Each

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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. Why Tip Top must use the activity base

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. Therefore, ABC costing can

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).

having a structured approach to making cost reduction initiatives a success

Able to identifying and avoiding inefficiencies in business practices

Increasing profitability and enhanced shareholder value

having benchmarks to measure costs against other competitors

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Avoiding redundant or inefficient operational processes

Ensuring that the most efficient cost management practices are in place.

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ReferencesCarter, R., 2012. Sustainable Cost Reduction-A 7 Step Process. [Online]Available at: ht t p: / /ww w .dpss . c o.uk/ne w s/ s ustain a ble -c os t - r e du c t i on- - - -7 - s t e p - proc e ss.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: ht t p: / /ww w .s c hro e d er - inc . c om / c ostr e du c t i on.ht m l [Accessed 26 12 2012].

Direct cost per unitDirect labor Direct Material Indirect costsCost per unitProfit margin 30%Selling price per unit

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Appendix an Absorption costing

Workout 1

M a r k & Tip Top ic Absorption costingAssumptionsSet ups £500,000.00Quality inspections £300,000.00Sales Orders Processed £350,000.00Machine (machine hour £400,000.00

CoatsBudget Sales (units)

Normal50000

Special20000

DirectLabor £50.00 £60.00Direct material cost/unit £20.00 £25.00

CalculationsSet ups £500,000.0Quality inspections £300,000.0Sales Orders Processed £350,000.0Machine (machine hour £400,000.0 Total £1,550,000.0

LaborUnitsDirect Labor hoursTotal Overheads/Labor

hour £4.19

Normal SpecialTotal

370000

5 650000 20000

250000 120000

£50.00 £60.00£20.00 £25.00£20.95 £25.14£90.95 £110.14£27.28 £33.04

£118.23 £143.18

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Appendix B Activities Based costingWorkout 2

M a r k & Tip Top ic Activities Based CostingAssumptionsCost Pool Cost DriverSet ups £500,000.00 Number of setupQuality inspections £300,000.00 Number of inspectionSales Orders Processed £350,000.00 Number of orderProduction £400,000.00 Machine hourCoats Normal SpecialBudget Sales (units) Direct Labor/unit@10/hour

50000

£50.00

20000

£60.00Direct material cost/unitCost D r iv e r

£20.00 £25.00

Number of setup 30 70Number of inspection 500 1500Number of order 2000 4000Machine hour 400000 150000

Coats Normal Special Cost/Unit Cost/Unit

Pool Driver Driver Total CostsDriver

rate Normal Special Normal SpecialSet ups 30 70 100 £500,000 £5,000 £150,000 £350,000 £3 £17.50Qualityinspections 500 1500 2000 £300,000 £150 £75,000 £225,000 £2 £11.25SalesOrdersProcessed 2000 4000 6000 £350,000 £58.33 £116,667 £233,333 £2 £11.67Production 400000 150000 550000 £400,000 £1 £290,909 £109,091 £6 £5.45

£1,550,000 £5,209 £632,576 £917,424 £13 £45.87

Dir e c t cost p e r unit No r mal SpecialDirect labor Direct Material Indirect costs Cost per unitProfit margin 30%Selling price per unit

£50.00 £60.00£20.00 £25.00£13.00 £45.87£83.00 £130.87£24.90 £39.26

£107.90 £170.13

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5.1 Financial appraisal methods to analyses competing investment projectsThe business spends money on new non-current assets it is known as capital investment. That

spending may be for buying new equipment, building new plants, automatic production, new IT,

introduce innovation in terms of great returns as an interest, revenue, and compete with

competitor in the current situation. The largest amount of money is spent irregularly with

expected to generate long-term benefit (ACCA, 2010).

Capital Budgeting

The process of making capital investment decision is often referred to as capital budgeting. It is

planning to invest in long-term assets in a way that returns the most profitability to the company.

Capital investment decisions affect all business, it becomes more efficient by automating stock

management and implementing new advanced technologies. Manager of Tip Top should

analyses, whether these new technologies introduced into the company are good investments?

Managers can use various investment appraisal techniques to analysis the new investment

(Charles T. Horngrer, 2012).Recently Tip Top have invested £900 million in project A, where

many projects had been taking place continuously until 2014/15. Using some appraisal

techniques, analyses their investment on two projects supply chain and technology and new

stores of about £213 million and £170 million respectively. Is this investment decision is

beneficial to Tip Top?

Charles T. Horngrer (2012) discuss four popular methods of analyzing potential capital

investments:

1) Payback Period (PP)

2) Rate of Return (ROR)

3) Net Present Value (NPV)

4) Internal rate of return (IRR)

The first two methods, payback and rate of return, are fairly quick and easy and work well for

capital investments that have short life span of three to five years. This provides valuable

information to management on how fast the cash invested will be recovered.

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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

21

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.

5.2 Make a justified strategic investment decision for Tip TopThe investment decision is very important decision for companies to sustain their business in a

competitive market. If the company was unable to invest in new technology and develop supply

chain, according to the current demand company will lose their market share. Therefore, the new

investment behind various factors exist such as the internal and external environment. The major

three investment appraisal will use for analysis the decision made in new projects.

a) Payback period: Payback is the length of time it takes to recover, in net cash inflows, the cost

of the capital outlay (Charles T. Horngrer, 2012).

Calculating Payback period (Assumption)

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

investment’s net cash inflows and the investment cost (capital expenditure). If the present value

of the investment’s net cash inflows exceeds the initial cost of investment, that’s 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

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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 store’s IRR is 6.5%, which means it is good decision to invest because the IRR is higher than the expected rate of return.

5.3 Report on the appropriateness of a strategic investment decisionTip Top has made an investment decision in two project supply chain and new stories about the cost of 250 million and 200 million respectively. In the initial phase, Tip Top just calculate the Payback period up to five consecutive years until 2016. PP illustration shows that Tip Top should able to return their cost within 4.7 years and 4.3 years from both projects, which is a good decision of investment.

Later, managers of Tip Top realized that the first one project (supply chain and technology) investment decision was a wrong. Because the two appraisal NPV and IRR clearly showed that, the first project NPV is negative by 18.4 million and IRR is lower by 2.5% than the estimated rate of 6%. According to that information, the investment decision made in first project should need to review and if possible, it is better to not undertaking that project.

Furthermore, the second project new store development investment decision is very good decision. After analysis of three different appraisal approaches, all indicates the investment will return the cost within the period and earn more than expectation. Payback period with unequal cash inflow will fully recover the cost by 4.3 years. In addition, another two methods NPV and IRR both are positive by 3.5 million, because IRR also calculated based on Present value. IRR must need to be zero in final year. The example of IRR shows the rate of return is 6.5%, which is slightly greater than the estimated rate of 6%. According to all these post appraisals tells us that the second project investment is a better decision than first one.

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ReferencesACCA, 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.

YearSupply Chain and

Technology(million)New Store

development(million) Rate RateInvestment (250.00) (200.00) 6% 6%

2012 £40.00 £35.00 £37.73 £33.022013 £45.00 £40.00 £40.05 £35.602014 £60.00 £50.00 £50.38 £42.002015 £65.00 £60.00 £51.50 £47.522016 £70.00 £60.00 £52.31 £44.83

Total PV £280.00 £245.00 £231.97 £202.97Investment 250 200Net Present Value (18.03) £2.97

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Appendix 1 Cash FlowExample 1

Cash Flow (Assumption)Supply Chain and Technology New Store development

Year (Million) (Million)Investment (250.00) (200.00)

2012 40 352013 45 402014 60 502015 65 602016 70 60

280 245Calculating Payback period

2012 (210.00) (165.00)2013 (165.00) (125.00)2014 (105.00) (75.00)2015 (40.00) (15.00)2016 30.00 45.00

Months 7 3

PaybackPeriod 4.7 years 4.3 years

Note: Payback period = 4 + cash returned/total cash inflow

Appendix 2 Net Present ValueExample 2

Calculation of Net Present Value

Note: Interest rate and cash flow are presented based on Assumption

SupplyChain

NewStore 6% 4% 3.50% 6% 7% 6.50%

Year Investment (250.00) (200.00) (250.00) (250.00) (250.00) (200.00) (200.00) (200.00)

1 Cash Inflow £40.00 £35.00 37.74 38.46 38.65 £33.02 £32.71 £32.86

2 Cash Inflow £45.00 £40.00 40.05 41.61 42.01 £35.60 £34.94 £35.27

3 Cash Inflow £60.00 £50.00 50.38 53.34 54.12 £42.00 £40.81 £41.39

4 Cash Inflow £65.00 £60.00 51.49 55.56 56.64 £47.52 £45.77 £46.64

5 Cash Inflow £70.00 £60.00 52.31 57.53 58.94 £44.83 £42.78 £43.79T. CashInflow £280.00 £2 4 5 . 0 0 £231.96 £246.50 £250.35 £202.97 £197.02 £199.95

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Appendix 3 Internal Rate of Return

Example 3

IRR (Trial and error basis)

Investment (250.00) (250.00) (250.00) (200.00) (200.00) (200.00)

NPV (18.04) (3.50) 0.35 2.97 (2.98) (0.05)

IRR 3.50% 6.50%

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6.1 Analyze financial statements to assess the financial viability of Tip TopThe statements prepared by Tip Top to present the information about the finance are known as financial statements. There are two basic statements, which are Income Statements and Balance Sheet. Tip Top prepares these two documents to disclose the true profit or loss and the financial position of assets and liabilities on a particular date (Karunakar Patra, 2006).

According to the American Institute of Certified Public Accountants, ‘Financial statements are prepared for the purpose of presenting a periodical review of reports on the progress of the management and deal with the status of investment in the business and the result achieved during the period under review.’

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) Comparative statementsb) Common-size Statementc) Trend Analysisd) Statement of changes in Working Capital e) Funds Flow Analysisf) Cash Flow Analysis g) Ratio Analysish) Cost-Volume-Profit Analysis

6.2 Apply financial ratios to improve the quality of financial informationThe ratio is one of the most important financial tools l which analysing the financial strength and weakness of the Tip Top. The financial ratio helps to assess the performance of the financial information and provide up to date information for the management, creditors and shareholders (Karunakar Patra, 2006). Some important ratios for management of Tip Top are explained below:

a) Liquidity ratios measure the capacity of Tip Top to meet short-term financial commitments as they become due (Corporation, 2012).

Current ratio: The current ratio is

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73%, which is less than the minimum of 1:1 ratio. This circumstance shows that there may

28

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.

b) Profitability ratio: Profitability ratio measures the profit made by Tip Top, which is adequate to pay for daily operation and other direct costs.

Gross profit margin ratio: It shows how efficiently, Tip Top is using materials and labor in the production process and gives an indication of the pricing, cost structure, and production efficiency of the company. The bar diagram indicates there were not significant changes in gross profit in the last three years by 38%.

The operating profit ratio also decreases from 9% to7% than last year. These figures not really satisfied for stakeholders and it need to reduce operating expenses to increase their profit margin.

6.3 Recommendations on the strategic portfolio of Tip TopThe financial statement of Tip Top clearly demonstrated their business performance, efficiency and weakness. After analysis of its statements and financial ratios, Tip Top should need to conscious in some key areas for better performance and long run of business. Which are explained in point wise.

a) 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

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29

ReferencesCorporation, S. B. D., 2012. Liquidity Ratios. [Online]Available at: h t t p : // www . s m a ll bus i n e s s. w a. g o v .au /li q u i d i t y - r a ti os [Accessed 03 01 2013].

Housing, T. R. o. C., 2009. Financial viability. [Online]Available at: h t t p : // www . r c h.nsw. g o v .au / NR /r do n l y r e s / F54 F 43 3 8 - 56 D 4 - 475 3 - A 6 D 7 - 68 A E F F73 D 5 C 2 / 0 / Fi n an c i a l v i a b i l it y _ w eb.p d f [Accessed 31 12 2012].

Karunakar Patra, J. K. P., 2006. Accounting & Finance for Management. 1st Ed. New Delhi: Syrup andSons.

Morningstar, 2012. Mark & Tip Top Group Plc.-MKS. [Online] Available at: h tt p : // t oo l s. m o r n i n g s t a r .co . u k / u k / s t oc k r ep o r t / d e f a u lt .a spx ? Tab= 1 0 & v w =BS&Secu r it y To k en=0P00007 O L2 ] 3 ] 0 ] E0WWE$$ A l gi d =0P00007 O L2 & Cl i e n t Fun d =0 &C u rr e nc y I d= GB P [Accessed 20 11 2012].

Tip Top, M. a., 2012. Annual Report 2012, sol.: Royal Print.

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Appendix a Financial Ratio of Tip TopRatios 2012 2011 2010ProfitabilitySales 2% 2% 5%OP -20% -2%Gross Profit Margin 38% 38% 38%Operating Profit Margin 7% 9% 9%ROE % 19.22 20.92 20.72ROCE % 18.18 19.01 17.24Financial HealthGearing 90% 48% 70%Interest cover ratio x 4.90 8.5 5.3Current ratio r 0.73 0.74 0.8Growth %DPS % 8.28 6.39 -34.41EPS % -4.37 8.61 17.97Cash FlowCash Flow per share p 68.06 67.06 66.85

Note: (p) = Pence, (M) = Million, r = Ratio, (x) =Multiple

Year ending 2012 2011 2010Sales UKGeneral MerchandiseFood

4195.1 4233.6 41524673.1 4499.4 4415.9

Sales InternationalFranchised Owned Total

379.4 343.7 297.7686.7 663.6 671

9934.3 9740.3 9536.6Cost of sale (6179.10) (6015.60) -5918.1Gross Profit 3755.20 3724.70 3618.50Selling and Distribution (3021.90) (2959.70) -2831.5Other Operating income 76.7 59.9 56.9Non-GAAP adjustment to underlying profit (63.50) 12 8.1Operating Profit 669.80 836.90 852.00Finance Income 48.30 42.30 12.9finance Costs (136.80) (98.60) -162.2Profit before tax 581.30 780.60 702.70Income Tax (168.40) (182.00) -179.7Profit after Income tax 412.90 598.60 523.00

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Appendix B Mark and Tip Top Financial StatementIncome Statement

GBP in Millions

Source: (Tip Top, 2012)

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Appendix C Balance Sheet(GBP in Millions)

2012 2011 2010Fiscal Year Ends 31/03/12 2/4/2011 3/4/2010

Intangible 584.3 527.7 452.8Tangible 4,805.80 4,678.20 4,744.40Investments 61.6 37.8 147.4Other 361.5 458.7 288.4Total 5,813.20 5,702.40 5,633.00

Stock 681.9 685.3 613.2Debtors 254.6 251.9 281.4Cash and Securities 523.6 704.5 625.6Total 1,460.10 1,641.70 1,520.20

Total Assets 7,273.30 7,344.10 7,153.20

Current 2,005.40 2,210.20 1,890.50Non-Current 2,489.10 2,456.50 3,076.80Total 4,494.50 4,666.70 4,967.30Share Capital 695.7 651.4 643Reserves 2,094.50 2,022.10 1,525.60Shareholders’ Funds 2,790.20 2,673.50 2,168.60Minorities -11.4 3.9 17.3Total 2,778.80 2,677.40 2,185.90

Total Liabilities and Equity 7,273.30 7,344.10 7,153.20

Source: (Morningstar, 2012)

GBP in Millions

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Appendix D Cash FlowStatement

Year Ending2012(£000) 2011(£000) 2010(£000)31/03/12 2/4/2011 3/4/2010

Cash inflowOperating Activities(Receives)Payments(Expenses)Interest Paidincome Tax paid Investing Activities Outflow

1352.1

135.90149.10757.80

1385.2

146.40185.30

490.50 822.20

1349.7

163.40120.70529.60

1042.80 813.70Cash inflow/OutflowAdd Financing

309.30(375.10)

563.00 ( 501.0 0 )

62.00(1.20)

202.70

536.00(629.50)

Total CashEffects of Exchange rate changesAdd Opening Cash

(65.80)(1.90)

263.50

(93.50)(2.10)298.30

Net Cash Balance 195.80 263.50 202.70GBP in Millions except per share data