GREENWICH LONDON2013

COLLEGE

BTEC LEVEL 7 EXTENDED DIPLOMA IN STRATEGIC MANAGEMENT

AND LEADERSHIP

Financial Principles and Techniques

Submitted by: Shyam Hari Maharjan

Assessor: Tim Price
1/11/2013

Table of Contents
Introduction ................................................................................................................................................... 3
1.1 Importance of costs in the pricing strategy of M&S ............................................................................... 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 M&S ................................................................................................. 8
3.2. Creation of master budget ...................................................................................................................... 9
3.3 Compare the Actual Expenditure and income with master budget M&S .............................................. 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 A 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 M&S ...................................................................... 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 M&S .......................................................................... 27
References ................................................................................................................................................... 29
1

Appendix A Financial Ratio of M&S ......................................................................................................... 30

Appendix B Mark and Spencer Financial Statement ................................................................................. 31
Appendix C Balance Sheet ......................................................................................................................... 32
Appendix D Cash Flow Statement .............................................................................................................. 33

Introduction
Marks & Spencer is Europes most profitable retailer with a global brand and global recognition.
Its achievement largely depends on the effective use of
people. An organization may have the latest technology and
the best physical resources and its most valuable asset will
always be its people and the work they do. For Marks &
Spencer, this means that the people who look after customers,
select, merchandise the products, and run the operations, must
aspire to be the best qualified and equipped in retailing.
Marks & Spencers leading position in the highly competitive
marketplace depend on its ability to stay one step ahead of
other retailers, both in the products and services on offer and
how the business is organized to deliver them. As an
organization which recognizes the importance of innovation,
Marks & Spencer tries to nurture flexible and imaginative people, who can set objectives,
establish priorities and allocate proper amounts of time to activities (Spencer, 2012).

1.1 Importance of costs in the pricing strategy of M&S

A 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)
M&S 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). M&S 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 M&S should determine the price in an efficient way. The cost is a major
factor to develop pricing strategy; M&S should focus on various strategies to maintain their
presence in a competitive market. The following pricing strategy should develop by M&S by
considering the various cost involved in unit cost.

M&S adapted pricing structure and promotion strategy to balance the demand and fixing
the affordable price with great value items.
M&S should develop marketing strategies to perform market analysis, sales targeting and
positioning, which helps to price fixing.
M&S 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
3

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

1.2 Design a costing system

A cost is a major source of running business and is involved in all the activities which
organization undertakes. M&S 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 isthe most recent approachh 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 fixed
costs and variable costs are conventionally classified. This normally taken to be; direct
labour, 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 which
resources 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).
Todays 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).
M&S 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 M&S. 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 M&S, I preferred to design an ABC costing system within the organization.
Because the rest of costing system will allocate the cost based on labour hour, machine hour and

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 systems

Costing systems are an important tool for cost control and cost optimization, as well as determine
pricing of product in M&S. 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).
M&S will need to introduce new systems and approaches because of following reasons to
address:
i) Traditional costing systems do not provide sufficient non-financial information
ii) Existing product costing systems is inaccurate, it could not allocate the cost in right
proportion, which may increase the cost of items, so M&S sales were decreased in
2012.
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 M&S. 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.

References
College, L., 2012. Managerial Accounting and Cost Concepts. [Online]
Available at: http://www.lec.edu/adcp/doc/ADM%20301%20Accounting%20for%20Managers.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: Mason
OH.
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. s.l.:C&C offset Printing Co. Ltd..
Spencer, M. a., 2012. Financial Managemetn in a tetail Setting. [Online]
Available at: http://businesscasestudies.co.uk/marks-and-spencer/financial-management-in-a-retailsetting/introduc.html#axzz2FnHDvbpJ
[Accessed 20 12 2012].

2.1 Forecasting techniques to make cost and revenue decisions in M&S

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 welasaa competitive advantagege.
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 how explanatory variables such as prices and
advertising affect sales.
b) Qualitative: No more quantitative evidence is available but sufficient qualitative
information exists.
i)
Predicting the future market share establishing by M&S
ii)
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 M&S.
Forecasting cost means analysis
the 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).

2.2. Assess the sources of Funds

Funds 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 M&S Alan Stewart clearly stated that the main sources of funds are
following: (M&S, 2012)
Sources
Cash Inflow (Working Capital)
Credit Facility
Issue Bonds

Funds
161.9
1.3 billion
300 million

M&S 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 M&S

The 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 M&Ss future planning more clearly and understand by their employees
(Lawndale, 2004).
The manager of M&S, 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 and promotes effective communication with stakeholders about prepared
budget, and
Address the government, management and employees by allocating the bonus and tax.

3.2. Creation of master budget

Every 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 M&S 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 M&S
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 M&S 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.

Were 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?
9

3.4 Evaluate budgetary monitoring processes

Budget 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 favourable, some time 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. Horngren, 2012).
Manager of M&S 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 M&S. Fixed budget is appropriate for those
departments whose workload does not have a direct link to sales and other departments
operations. The work is determined by stores 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

10

References
Andrews, U. o. S., 2010. Financial Operating Procedures. [Online]
Available at: http://www.st-andrews.ac.uk/media/fop009_budget_monitering.pdf
[Accessed 04 12 2012].
Charles T. Horngren, 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 of
Forecasting Using Excel. New York: Industrial Press Inc., p. 2.
Lawndale, C. o., 2004. Lawndalecity.org. [Online]
Available at: http://www.lawndalecity.org/PDFs/0405Budget/BudgetProcess.pdf
[Accessed 04 12 2012].
M&S, 2012. Annual Report and Financial Statements, s.l.: Royle Print.
Mukherjee A., H. M., 2006. Financial Accounting. New Delhi: Tata MCGraw-Hill Publishing
Company Limited.
Robert D. Lee Jr., R. W. O. P. g. J., 2008. Public Budgeting Systems. 8th ed. London: Jones and
Bartlett.
Solution, B. I., 2012. Budgeting. [Online]
Available at: http://www.is4profit.com/business-advice/finance-andmoney/budgeting/forecasting-costs.html
[Accessed 04 12 2012].
Spyros Makridakis, S. C. W. R. J. H., 1998. Forecasting Methods and Application. 3rd ed. Hoboken:
Wiley & Sons. Inc.

11

Appendix 1 Sales Forecast

Table 1.1
Sales Forecast (Million)
Year

Sales
Sales Growth Rate

2012
9934.3

2011
9740.3

2010
9536.6

2009
9062.1

2008
9022

2.0%

2.1%

5.2%

0.4%

5.1%

2007

8588.1

Appendix 2 Operating cost breakdown

Table 1.2
Breakdown Operating cost
(Million)
Year
Retail Staffing
Retail Occupancy
Distribution
Marketing and related
Support
Total

Ratio
Retailing
Retail
Distribution
Marketing and related
Support

2012
889.2
1030.9
398.1
161.8
515
2995

2011
877.6
1011.8
393.5
142.9
525.5
2951.3

2010
858.4
972.7
394.4
122.9
501.8
2850.2

2009
863.3
948
410.3
127.4
391.6
2740.6

1.32%
1.89%
1.17%
13.23%
-2.00%
1.48%

2.24%
4.02%
-0.23%
16.27%
4.72%
3.55%

-0.57%
2.61%
-3.88%
-3.53%
28.14%
4.00%

1.86%
12.67%
6.90%
-8.61%
-2.37%
4.88%

Total

12

2008
847.5
841.4
383.8
139.4
401.1
2613.2

Appendix 3 Financial Budget

Table 2.1Financial Budget
Year ending
Sales UK
General Merchandise
Food
Sales International
Franchised
Owned
Other Operating income
Total
Cost of sale
Gross Profit
Selling and Distribution
Non-GAAP adjustment to underlying profit
Operating Profit
Finance Income
finance Costs
Profit before tax
Income Tax
Profit after Income tax

2012

2011 Variance

4195.1
4673.1

4233.6
4499.4

379.4
686.7
76.7
10011
(6179.10)
3831.90
(3021.90)
(63.50)
746.50
48.30
(136.80)
658.00
(168.40)
489.60

343.7
663.6
59.9
9800.2
(6015.60)
3784.60
(2959.70)
12
836.90
96.60
(152.90)
780.60
(182.00)
598.60

2%
3%
1%
2%
-11%

-16%
-7%
-18%

(Figures in Million)

Appendix 4 Cash Budget

Table 2.2 Cash Budget
Year Ending
Cash inflow
Operating Activities(Receives)
Payments(Expenses)
Interest Paid
income Tax paid
Investing Activities
Outflow
Cash inflow/Outflow
Add Financing
Total Cash
Effects of Exchange rate
changes
Add Opening Cash
Net Cash Balance

2012
31/03/12

2011
2010
2009
2/4/2011
3/4/2010 28/03/09

2008
29/03/08

1352.1

1385.2

1349.7

1371.9

1236

135.90
149.10
757.80
1042.80
309.30
(375.10)
(65.80)

146.40
185.30
490.50
822.20
563.00
(501.00)
62.00

163.40
120.70
529.60
813.70
536.00
(629.50)
(93.50)

197.10
81.30
596.90
875.30
496.60
(324.00)
172.60

88.90
166.20
966.20
1221.30
14.70
54.70
69.40

(1.90)
263.50
195.80

(1.20)
202.70
263.50

(2.10)
298.30
202.70

7.80
117.90
298.30

1.50
47.00
117.90

Figures in Million (M&S, 2012)

13

4.1 Recommend Processes that could manage cost reduction

In todays 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 M&S should need to
develop effective and efficient costing system ABC, which can help it to manage and control the
costs. M&S 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, M&S must hold its cost down (Charles T. Horngren, 2012).
The development of cost process helps M&S to identify the major activities of cost driver. The
effective management of cost activities will help M&S 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, M&S 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 M&S. M&S transported products
from distribution centres 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 M&S 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
M&S. The packaging improvements led to a 75% reduction in packaging and delivered
fresher, better quality products. The better packaging reduction initiatives deliver

14

multiple benefits as well as reduce the cost of the product. It helps M&S to successful
reduction of 16.3m cost in 2011/12.
The process adopted by M&S is helpful to reduce the cost of the product. However, these are not
enough satisfactory point for entire businesses. M&S should need to improvements in some
activities to reduce the further cost (selling and distribution, supply chain and raw material, direct
labour, 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 M&S (Inc., 2012).
a) Benchmark: M&S 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 M&S 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 of

Activity-based costing
Activity-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. Horngren, 2012).

Each

15

activity has its own cost driver. For example, one activity of M&S 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 M&S should set a lower price of
commodities compared with other competitors. Why M&S 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 M&S, using this system, M&S 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, M&S 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 labour hours and the prices are not very differed from each other. Therefore, a
manager could not decide easily which product is more benefit to M&S.
Furthermore, when M&S 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 M&S can decide
quickly, which products are more profitable.
M&S 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

Avoiding redundant or inefficient operational processes

Ensuring that the most efficient cost management practices are in place.
16

References
Carter, R., 2012. Sustainable Cost Reduction-A 7 Step Process. [Online]
Available at: http://www.dpss.co.uk/news/sustainable-cost-reduction----7-step-process.php
[Accessed 26 12 2012].
Charles T. Horngren, 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: http://www.schroeder-inc.com/costreduction.html
[Accessed 26 12 2012].

17

Appendix A Absorption costing

Workout 1
Mark & Spencer PLC
Absorption costing
Assumptions
Set ups
Quality inspections
Sales Orders Processed
Machine (machine hour

Coats
Budget Sales (units)
Direct
Labour/unit@10/hour
Direct material cost/unit
Calculations
Set ups
Quality inspections
Sales Orders Processed
Machine (machine hour
Total

500,000.00
300,000.00
350,000.00
400,000.00

Normal
50000

Special
20000

50.00
20.00

60.00
25.00

500,000.0
300,000.0
350,000.0
400,000.0
1,550,000.0
Normal

Labour
Units
Direct Labour hours
Total Overheads/Labour
hour
Direct cost per unit
Direct labour
Direct Material
Indirect costs
Cost per unit
Profit margin 30%
Selling price per unit

Special

5
50000
250000

6 Total
20000
120000 370000

50.00
20.00
20.95
90.95
27.28
118.23

60.00
25.00
25.14
110.14
33.04
143.18

4.19

18

Appendix B Activities Based costing

Workout 2
Mark & Spencer PLC
Activities Based Costing
Assumptions
Cost Pool
Set ups
Quality inspections
Sales Orders Processed
Production
Coats
Budget Sales (units)
Direct
Labour/unit@10/hour
Direct material cost/unit
Cost Driver
Number of setup
Number of inspection
Number of order
Machine hour

Coats
Pool
Set ups
Quality
inspections
Sales
Orders
Processed
Production

Normal

Cost Driver
500,000.00 Number of setup
300,000.00 Number of inspection
350,000.00 Number of order
400,000.00 Machine hour
Normal
Special
50000
20000
50.00
20.00

60.00
25.00

30
500
2000
400000

70
1500
4000
150000

Special

Cost/Unit

Cost/Unit

Special
350,000

Normal
3

Special
17.50

Driver
30

Driver
70

Total
100

Costs
500,000

Driver
rate
5,000

500

1500

2000

300,000

150

75,000

225,000

11.25

2000
400000

4000
150000

6000
550000

350,000
400,000
1,550,000

58.33
1
5,209

116,667
290,909
632,576

233,333
109,091
917,424

2
6
13

11.67
5.45
45.87

Direct cost per unit

Direct labour
Direct Material
Indirect costs
Cost per unit
Profit margin 30%
Selling price per unit

Normal
50.00
20.00
13.00
83.00
24.90
107.90

Special
60.00
25.00
45.87
130.87
39.26
170.13

19

Normal
150,000

5.1 Financial appraisal methods to analyses competing investment projects

The 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 M&S should analyse,
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.
Horngren, 2012).Recently M&S have invested 900 million in project A, where many projects
had been taking place continuously until 2014/15. Using some appraisal techniques, analyse 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 M&S?
Charles T. Horngren (2012) discuss four popular methods of analysing 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.
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
20

time value of money so they are more appropriate for long-term capital investments, such as
M&S invested in supply chain and new technology. Management of M&S often uses a
combination of methods to make final capital investment decisions.

5.2 Make a justified strategic investment decision for M&S

The 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. Horngren, 2012).
Calculating Payback period (Assumption)

M&S 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
investments net cash inflows and the investment cost (capital expenditure). If the present value
of the investments net cash inflows exceeds the initial cost of investment, thats the best
investment decision (Charles T. Horngren, 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
21

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.
Horngren, 2012).
The Apindix 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 M&S. The next investment of 200 million in the new stores 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 decision

M&S 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, M&S just calculate the
Payback period up to five consecutive years until 2016. PP illustration shows that M&S 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 M&S 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.

22

References
ACCA, 2010. Financial Management. Workingham: Kaplan Financial Limited.

Charles T. Horngren, W. T. H. J. M. S. O., 2012. Financial and Managerial Accounting. 3rd ed.
New Jersey: Pearson Prentic Hall.

23

Appendix 1 Cash Flow

Example 1

Cash Flow (Assumption)

Supply Chain and Technology
Year
(million)
Investment
(250.00)
2012
40
2013
45
2014
60
2015
65
2016
70
280
Calculating Payback period
2012
(210.00)
2013
(165.00)
2014
(105.00)
2015
(40.00)
2016
30.00
Months
Payback
Period

New Store development

(million)
(200.00)
35
40
50
60
60
245
(165.00)
(125.00)
(75.00)
(15.00)
45.00

4.7 years

4.3 years

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

Appendix 2 Net Present Value

Example 2

Calculation of Net Present Value

Supply Chain and
New Store
Year
Technology(million) development(million) Rate
Rate
Investment
(250.00)
(200.00)
6%
6%
2012
40.00
35.00
37.73
33.02
2013
45.00
40.00
40.05
35.60
2014
60.00
50.00
50.38
42.00
2015
65.00
60.00
51.50
47.52
2016
70.00
60.00
52.31
44.83
280.00
245.00 231.97
202.97
Total PV
Investment
250
200
Net Present Value
(18.03)
2.97
Note: Interest rate and cash flow are presented based on Assumption
24

Appendix 3 Internal Rate of Return

Example 3

IRR (Trial and error basis)

Supply New
Chain Store
Year
1
2
3
4
5
T. Cash
Inflow
Investment
NPV
IRR

Investment
Cash Inflow
Cash Inflow
Cash Inflow
Cash Inflow
Cash Inflow

6%

4%

3.50%

6%

(250.00)
40.00
45.00
60.00
65.00
70.00

(200.00)
35.00
40.00
50.00
60.00
60.00

(250.00)
37.74
40.05
50.38
51.49
52.31

(250.00)
38.46
41.61
53.34
55.56
57.53

(250.00)
38.65
42.01
54.12
56.64
58.94

(200.00)
33.02
35.60
42.00
47.52
44.83

(200.00)
32.71
34.94
40.81
45.77
42.78

(200.00)
32.86
35.27
41.39
46.64
43.79

280.00

245.00

231.96
(250.00)
(18.04)

246.50
(250.00)
(3.50)

250.35
(250.00)
0.35
3.50%

202.97
(200.00)
2.97

197.02
(200.00)
(2.98)

199.95
(200.00)
(0.05)
6.50%

25

7%

6.50%

6.1 Analyse financial statements to assess the financial viability of M&S

The statements prepared by M&S to present the information about the finance are known as financial
statements. There are two basic statements, which are Income Statements and Balance Sheet. M&S
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 analyse the financial statements is assessing the financial viability of M&S. It is
about being able to generate sufficient income to meet operating payments and maintaining service levels
(Housing, 2009). The financial statement of M&S 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)
b)
c)
d)
e)
f)
g)
h)

Comparative statements
Common-size Statement
Trend Analysis
Statement of changes in Working Capital
Funds Flow Analysis
Cash Flow Analysis
Ratio Analysis
Cost-Volume-Profit Analysis

6.2 Apply financial ratios to improve the quality of financial information

The ratio is one of the most important financialtoolsl which analysing the financial strength and weakness
of the M&S. 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 M&S are explained below:

a) Liquidity ratios measure the

capacity of M&S to meet short-term
financial commitments as they
become due (Corporation, 2012).
Current ratio: The current ratio is
73%, which is less than the
minimum of 1:1 ratio. This
circumstance shows that there may
26

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 M&S 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 M&S, which is adequate to pay for
daily operation and other direct costs.
Gross profit margin ratio: It shows how efficiently,
M&S is using materials and labour 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% to
7% 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 M&S

The financial statement of M&S clearly demonstrated their business performance, efficiency and
weakness. After analysis of its statements and financial ratios, M&S 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, M&S should develop strategic plans of effective waste management,
control over wage inflation and improvement needed in the process (tilling, over time) and
procurement.
b) M&S 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, M&S should efficiently manage its debts and minimise the investment
activities.
c) For better benefits, M&S 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: M&S have decided to go online store to compete growing e-commerce, which
will reduce the capital investments in store space by 200 million.
e) M&S should introduce e-payroll system, which will help to save cost of buying paper.
f) Introduce new advance technology in store

27

28

References
Corporation, S. B. D., 2012. Liquidity Ratios. [Online]
Available at: http://www.smallbusiness.wa.gov.au/liquidity-ratios
[Accessed 03 01 2013].
Housing, T. R. o. C., 2009. Financal viability. [Online]
Available at: http://www.rch.nsw.gov.au/NR/rdonlyres/F54F4338-56D4-4753-A6D768AEFF73D5C2/0/Financialviability_web.pdf
[Accessed 31 12 2012].
Karunakar Patra, J. K. P., 2006. Accounting & Finance For Management. 1st ed. New Delhi: Sarup and
Sons.
Morningstar, 2012. Mark & Spencer Group PlC-MKS. [Online]
Available at:
http://tools.morningstar.co.uk/uk/stockreport/default.aspx?tab=10&vw=bs&SecurityToken=0P00007OL2
]3]0]E0WWE$$ALL&Id=0P00007OL2&ClientFund=0&CurrencyId=GBP
[Accessed 20 11 2012].
Spencer, M. a., 2012. Annual Report 2012, s.l.: Royle Print.

29

Appendix A Financial Ratio of M&S

Ratios
Profitability
Sales
OP
Gross Profit Margin
Operating Profit Margin
ROE
ROCE
Financial Health
Gearing
Interest cover ratio
Current ratio
Growth
DPS
EPS
Cash Flow
Cash Flow per share

2012

2011

2010

2%
-20%
38%
7%
19.22
18.18

2%
-2%
38%
9%
20.92
19.01

5%
38%
9%
20.72
17.24

x
r
%
%
%

90%
4.90
0.73

48%
8.5
0.74

70%
5.3
0.8

8.28
-4.37

6.39
8.61

-34.41
17.97

68.06

67.06

66.85

%
%

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

30

Appendix B Mark and Spencer Financial Statement

Income Statement
Year ending
Sales UK
General Merchandise
Food
Sales International
Franchised
Owned
Total
Cost of sale
Gross Profit
Selling and Distribution
Other Operating income
Non-GAAP adjustment to underlying profit
Operating Profit
Finance Income
finance Costs
Profit before tax
Income Tax
Profit after Income tax
GBP in Millions

Source: (Spencer, 2012)

31

2012

2011

2010

4195.1
4673.1

4233.6
4499.4

4152
4415.9

379.4
686.7
9934.3
(6179.10)
3755.20
(3021.90)
76.7
(63.50)
669.80
48.30
(136.80)
581.30
(168.40)
412.90

343.7
663.6
9740.3
(6015.60)
3724.70
(2959.70)
59.9
12
836.90
42.30
(98.60)
780.60
(182.00)
598.60

297.7
671
9536.6
-5918.1
3618.50
-2831.5
56.9
8.1
852.00
12.9
-162.2
702.70
-179.7
523.00

Appendix C Balance Sheet

(GBP in Millions)

Fiscal Year Ends

Intangible
Tangible
Investments
Other
Total
Stock
Debtors
Cash and Securities
Total
Total Assets
Current
Non-Current
Total
Share Capital
Reserves
Shareholders Funds
Minorities
Total
Total Liabilities and Equity

2012
31/03/12
584.3
4,805.80
61.6
361.5
5,813.20
681.9
254.6
523.6
1,460.10
7,273.30
2,005.40
2,489.10
4,494.50
695.7
2,094.50
2,790.20
-11.4
2,778.80

2011
2/4/2011
527.7
4,678.20
37.8
458.7
5,702.40
685.3
251.9
704.5
1,641.70
7,344.10
2,210.20
2,456.50
4,666.70
651.4
2,022.10
2,673.50
3.9
2,677.40

2010
3/4/2010
452.8
4,744.40
147.4
288.4
5,633.00
613.2
281.4
625.6
1,520.20
7,153.20
1,890.50
3,076.80
4,967.30
643
1,525.60
2,168.60
17.3
2,185.90

7,273.30

7,344.10

7,153.20

Source: (Morningstar, 2012)

GBP in Millions

32

Appendix D Cash Flow

Statement
Year Ending
Cash inflow
Operating Activities(Receives)
Payments(Expenses)
Interest Paid
income Tax paid
Investing Activities
Outflow
Cash inflow/Outflow
Add Financing
Total Cash
Effects of Exchange rate changes
Add Opening Cash
Net Cash Balance

2012(000)
31/03/12

2011(000)
2010(000)
2/4/2011
3/4/2010

1352.1

1385.2

1349.7

135.90
149.10
757.80
1042.80
309.30
(375.10)
(65.80)
(1.90)
263.50
195.80

146.40
185.30
490.50
822.20
563.00
(501.00)
62.00
(1.20)
202.70
263.50

163.40
120.70
529.60
813.70
536.00
(629.50)
(93.50)
(2.10)
298.30
202.70

GBP in Millions except per share data

33