Question

Part B Budgeting & Performance Evaluation for Alwyn Industries The company provides some details for the period 2020 for preparing necessary budgets (a) Sales Details The Company estimates that it can get maximum profits if it charges $ 200 (selling price) for one of its products. The marketing manager of the company had indicated that at $ 200 selling price, the company would be able to sell 1,000 units in the first quarter of 2020. The company also expects that sales would go up by 100 units over previous quarter sales (like 1000, 1100 and so on....) Selling price is expected to be same throughout the year. (b) Inventory details Alwyn Industries maintains at the end of each quarter an inventory of 10% of the next quarter's sales. This allows the company to better meet its customers' needs in case the customers experience a sudden surge in demand. The opening inventory for first quarter 2020 has been estimated to be 200 units (c) Divisional Performance Alwyn Industries has to divisions (A & B) working within the company. The CEO of the company is wondering whether divisional performance evaluation will be fruitful for them since the company has two divisions operating with certain targets. The head of those divisions report the following results for the quarter ending 2019, which is given below: Particulars Operating Income Average Total Assets INct Sales Division 900.000 2300000 TASCOXOXOXO Division B 1,951,600 633COOOO L Required (1) As a Management Accountant of Alwyn Industries, you are required to prepare (1) Sales Budget (ii) Production Budget for four quarters of year 2020 (based on information given above (in a and b) (20 marks) (2) Evaluate the divisional performance (A & B) using ROI for the quarter ending 2019 (10 marks) (3) Explain any three advantages and disadvantages of ROI as a measure of performance. (10 marks) (10+10+10 + 10-40 marks) END OF TMA QUESTIONS

Answer 1

Please find the answers in below:

Ans 1:

Ans 1 Ans 1 (i) Sr. No Particulars A Sales Units ТВ Price per Unit Total Sales Revenue (A*B) Sales Budget Q1 Q2 1000 1100 200 200 Q3 1200 2001 Q4 1300 200 Total 4600 200 200,000 220,000 240,000 260,000 920,000 Ans 1 (ii) Sr. No A B Particulars Sales Units Planned Ending Inventory Production Budget Q1 Q2 1000 1100 2401 Q3 1200 260 Q4 1300 0 Total 4600 0 220 Total Production Required (A + B) Beginning Inventory Units to be Produced (C-D) 1220 200 1340 220 1460 240 1300 260 4600 200 D 1,020 1,120 1,220 1,040 4,400 Note: Assuming the closing inventory for the last quarter is NIL.

Ans 2: Division A is better performing as per ROI calculation.

Ans 2 Divisional Performance by ROI Division A Operating Income 900,000 Average Total Assets 2,500,000 Net Sales 7,500,000 Division B 1,951,600 6,500,000 5,243,600 ROI (Return on Investments) Operating Income Average Total Assets Operating Income Average Total Assets 900,000 2,500,000 1,951,600 6,500,000 ROI 36% 30%

Ans 3:

Advantages of ROI as a measure of performance:

1. It is an efficiency measure. It ensures that the assets are deployed in such a manner that it generates more than the required rate of return for the investors/business. It ensures that time & money are not wasted.
2. It is used to while comparing 2 or more investment opportunities to select higher return generating projects. It provides a good comparative analysis.
3. It is easy to calculate and provide effective information to the investors/manager. It is also used as a tool to find the performance of an investment division.

Disadvantages of ROI as a measure of performance:

1. The time value of money is ignored in this calculation as it only shows the past performance of the company.
2. By selecting different accounting policies the numbers of the profits can be manipulated and which will, in turn, affect the ratio calculated. Also, it may affect while comparing the ROI of different companies, one has to make sure similar policies are followed to prepare the books of accounts.
3. Some times a project may not generate financial benefits but which may generate wealth for the business, those projects might be ignored if a decision is made only by calculating ROI.