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Intermediate Management Accounting Portfolio Case Study Assignment Help

Background: Farmset Corporation

Farmset Corporation is a company that grew from humble beginnings, with shareholders comprising a collection of village-based cooperatives in the highlands of Papua New Guinea, whose main source of income was from growing Arabica coffee on their small plots of land. Following a period of high coffee prices, the company expanded their business interests significantly to include the following: poultry farming, green-bean processing, green-bean exporting, a printing press, a bulk fuel distributorship, fuel service stations, new and used car sales, a mechanical workshop, paper packaging manufacturing, and coffee plantation management services.

The Managing Director Andy Birk originally came as a volunteer to assist the cooperatives, and was integral to the growth of the business entity from cooperatives to a company. 'Accounting records' consisted of a multi-column cashbook and a notebook containing narratives of non-cash transactions. Having a healthy balance in the bank account was an indication of 'good' performance, and during tougher times, very low-interest government-backed loans were easily accessible via the many development banks that were set up to encourage local businesses during that era.

A year ago, Anthony Joseph, a chartered accountant was employed to spruce up the accounting records and overall management process of the company.  After a prolonged analysis and study of the various business interests of the company, he decided to engage the assistance of a former colleague to help with the enormous task that lay ahead.

Required:

Assume that you are Anthony Joseph, and that you have identified several critical issues that need to be brought to the attention of the Managing Director and ultimately, the Board of Directors (mainly village elders representing the various village cooperatives).

You are required to submit two (2) reports to Andy Birk to address the various issues identified.

In your submission, you are encouraged to use examples that are specific to this business to present and argue your points. (Use your initiative to think about the various products and activities associated with the many business interests of a company like Farmset). You should not just provide a textbook summary of the theory and principles.

(Please read the Guidelines available on Blackboard prior to writing up your reports. There are strict requirements as regards formatting and layout)

Issue 3:

In the past, Andy Birk made most business decisions regarding new ventures and new products and services based primarily on the requests of the major shareholders, and his 'pet' interests. Anthony Joseph and Zac Anthony are concerned that this approach to decision making coupled with an insufficient level of understanding of the relationship between business activities and the cost of those activities (cost behaviour) will ultimately result in financial ruin.

In your submission:

(a) Explain the benefits arising from having a good understanding of how costs behave, and briefly explain two (2) commonly-used methods to derive a cost function

(b) Discuss the difficulties that may be faced in the process of gathering information for such analysis in general.

Issue 4:

In trying to encourage Andy Birk to make informed decisions, and for the company to become proactive in the pricing of products and services, Anthony and Zac are keen to undertake a Cost-Volume-Profit analysis(CVP) of the various income generating activities within Farmset.

In your submission:

(a) Explain the various benefits CVP analysis modelling can provide for planning purposes, particularly in the light of such a diverse range of products and services sold by Farmset, and

(b) Explain why the assumptions necessarily made in undertaking CVP analysis can cause problems for businesses in reality.

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Issue 3

The benefits resulting from the understanding of the modus operandi pertaining to the behavior of costs primarily include the ease of making decisions which would in the future prove to be cost-effective and also result in the ensuring of the financial stability for the respective organization. As a result, it would help in the management of finances in an effective and efficient manner. The case study implies that Andy Birk, Managing Director of Farmset Corporation must have an incredible knowledge with regard to the link between the activities relating to business and the costs which can be incurred over such kinds of activities. The two most commonly used methods for the derivation of cost function by companies include the high low method and regression analysis. These methods are quite frequently applied by various enterprises and industries. The high low method involves the segregation of the fixed and variable costs of the company thereby laying emphasis over the highest level of activity and the lowest level of activity thereby making a comparative analysis of the costs at these levels. The regression analysis is based on the estimation of relationship amongst variables as far as statistical reports are concerned. For example, the case study involves the relationship between the business activities to be carried out by Farmset Corporation and the costs involved in such activities (Chatterjeeand Hadi, 2015). It also involves the defining of relationship between production and sales. Such a method has been used by a plethora of companies in the food industry in order to achieve the desired results in the interest of the growth of their business by the virtue of attracting and appealing new customers. As a result, it is imperative that if the Managing Director of Farmset Corporation Andy Birk applies these methods, it would help in the handling of finances on part of Farmset Corporation in the desired manner as far as the food industry of Papua New Guinea is concerned. However, there are certain difficulties involved in the procurement of the required information with reference to the analysis involved in the viability of the determination of the relationship between the business activities to be carried out by Farmset Corporation and the costs involved in such activities. These difficulties mainly involve the procurement of relevant data from the concerned company which pertain to the benefits involved in the cost function methods as far as the financial and audit reports are concerned. The reasons for such difficulties mainly imply the policy of the company pertaining to confidentiality with reference to the maintenance of data privacy. The aspect of data privacy implies the sensitivity related to the information of customers. However, by the virtue of the utilization of the regulations and frameworks relating to the freedom of information, the data relevant to the analysis can be obtained to a considerable level. As a result, the viability of the application of the methods related to the behavior of costs can be inferred and taken into account in the interest of the welfare of Farmset Corporation. As mentioned previously, these are the most commonly used methods by various corporations in order to determine and identify cost behavior for the purpose of the establishment of an incredible relationship between the business activities to be carried out by Farmset Corporation and the costs involved in such activities(Johansson and Kriström, 2018). Such a knowledge possessed by Andy Birk would be quite beneficial for Farmset Corporation in terms of finances thereby implying that it does not plunge into liquidation as a result of financial crisis. The risk factors are also be taken into account with regard to production and delivery of goods and services as per the demands of the customers which would eventually result in the generation of profits and revenues. The key thing in order to derive a comprehensive solution involves the appealing and attracting of customers by Farmset Corporation in an effective and efficient manner.

Issue 4

Benefits CVP analysis modelling

The cost volume profit analysis refers to the planning process that a management uses to predict the future volume of activity, profits received, sales made and costs incurred (Ismail, Izah and Wan Hussin, 2015). This analysis helps in computing how changes in sales and costs will affect the income of a company in future course of time. In order to examine the profits, costs and prices with respect to changes in sales volume, a cost volume profit analysis proves to be beneficial. Cost Volume Profit is an effective tool that would help Farmset to make informed decisions and be proactive in the pricing of its products and services. Farmset is involved in the agricultural business but recently showed its interest in expanding the business operations into poultry farming, a printing press, fuel service stations, and a varied range of other services (Farmset Limited, 2019). Although investing in all these business operations requires efforts and relevant strategies, it requires strategies to maintain its cost and profits with respect to its sales volume. For this purpose, Farmset hired Anthony Joseph, a chartered accountant to look into the accounting records and overall management process of the company. As a part of improving the business operations of the company, Anthony and Zac are interests in undertaking a Cost Volume Profit analysis of the various income generating activities within Farmset. This analysis will help Anthony to analyses which products and services will be beneficial for Farmset and how these products and services will generate maximum amount of revenue. In order to reach a fixed level of profit, cost volume profit analysis will help explain the sales volume required by Farmset. Moreover, this analysis will help Anthony to decide on the revenue the company should target so as to ensure that there are no losses incurred. In addition to that cost volume profit analysis also highlights the expected budget of the company and in this context, it would be beneficial for Anthony to decide the expected budget for the new expansions. This will also help in calculating the fixed costs and measure the amount of risk associated with any further investment (Choo and Tan, 2011).

Limitations of CVP Analysis

The assumption necessarily made in undertaking CVP analysis can also cause problems for businesses in reality. Although the company can have benefits from this analysis, it would still lack at certain areas. Since Anthony is suggesting to undertake a cost volume profit analysis he may face the issue of and precision and accuracy as this analysis needs estimates and approximation in assembling necessary data. In this analysis, sales in total cost assumed to be linear but this may not be true in some cases. For example, if a sales more units in a day, there are chances of decrease in the variable cost per unit more operating efficiency in the factory. It is often a misconception that the productivity and efficiency of operations will tend to remain constant in case of CVP analysis. But the validity of this assumption may not be always true. Anthony may also face the issue of segregating the variable and fixed costs. This issue is often faced by many companies.The CVP approach to analysis will be beneficial, but it is limited in the amount of information required for a multi-product operation. Managers mostly prefer analysis on a single product rather than for multi-product operations. For instance, businesses involved in restaurants industry will face the issue of using CVP analysis due to a varied range on their menus. If that restaurant wishes to have many variable cost ratios, that will be a difficult situation since the analysis has to be done for each specific product. In this context, Anthony might think of any other analysis to be used. In most of the cases has been analyzed at the CVP analysis unable to provide actual answers for solving problems but provides the answer for hypothetical questions better. For this reason, Anthony might have to decide on the CVP analysis data identified and how to further utilize it. Therefore it becomes very important for a manager to make appropriate decisions while making changes in the business operations and finance (Chen, Wang and Qiao, 2013).

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