|1. Be able to apply cost concepts to the decision-making process|
|1.1 explain the importance of costs in the pricing strategy of an organisation|
|1.2 design a costing system for use within an organisation|
|1.3 propose improvements to the costing and pricing systems used by an organisation|
|2. Be able to apply forecasting techniques to obtain information for decision making|
|2.1 apply forecasting techniques to make cost and revenue decisions in an organisation|
|2.2 assess the sources of funds available to an organisation for a specific project|
|3. Be able to participate in the budgetary process of an organisation|
|3.1 select appropriate budgetary targets for an organisation|
|3.2 participate in the creation of a master budget for an organisation|
|3.3 compare actual expenditure and income to the master budget of an organisation|
|3.4 evaluate budgetary monitoring processes in an organisation|
|4. Be able to recommend cost reduction and management processes for an organisation|
|4.1 recommend processes that could manage cost reduction in an organisation|
|4.2 evaluate the potential for the use of activity-based costing|
|5. Be able to use financial appraisal techniques to make strategic investment decisions for an organisation|
|5.1 apply financial appraisal methods to analyse competing investment projects in the public and private sector|
|5.2 make a justified strategic investment decision for an organisation using relevant financial information|
|5.3 report on the appropriateness of a strategic investment decision using information from a post- audit appraisal|
|6. Be able to interpret financial statements for planning and decision making|
|6.1 analyse financial statements to assess the financial viability of an organisation|
|6.2 apply financial ratios to improve the quality of financial information in an organisation’s financial statements|
|6.3 make recommendations on the strategic portfolio of an organisation based on its financial information|
|Notes on exactly what must be done to succeed in the assessment are written below, then followed by a reminder of the content of the module, organised according to the assessment criteria above.
Assessment Criteria Notes
For this unit, where possible, learners should use information, examples and research from their own organisations or one that they are familiar with. Where work-based assignments are not possible, case studies could be used so that learners have the opportunity to successfully meet the assessment criteria.
Learners should provide clear explanations of the function of forecasting and appraisal tools in the managerial decision-making process, giving relevant examples of current business practice. Learners should be able to demonstrate the use of forecasting techniques and interpret information arising from project appraisal and calculate ratios, using appropriate spreadsheet presentations.
For 1.1, learners need to explain the importance of costs in the pricing strategy of their chosen organisation.
For 1.2, the costing system that learners design must be appropriate for use in the organisation they are designing the system for. In order to show full understanding, learners could describe other systems they considered in this process and explain the reasons behind their final design. There must also be evidence of research into cost classifications and control mechanisms.
In 1.3, learners need to propose improvements to the costing and pricing systems used in their chosen organisation. They could justify their recommendations by stating the benefits their proposed improvements would bring to the organisation.
For 2.1, learners need to apply forecasting techniques to make cost and revenue decisions in/for their chosen organisation. The assessment should give learners the opportunity to utilise a range of techniques. Learners will need to state why they used a particular technique, the limitations of the technique, and how the information derived from applying the technique can be used to make cost and revenue decisions.
For 2.2, learners need to assess the sources of funds available to their chosen organisation for a specific project. The assessment should give the opportunity to research a range of possibilities for funding.
For 3.1, it might be useful if an assessment also covers 2.1. Learners can use forecasting techniques as part of the process of selecting appropriate budgetary targets for their chosen organisation. Learners need to explain why the budgetary targets they have selected are appropriate for their chosen organisation.
For 3.2, learners need to demonstrate how they have participated in the creation of a master budget in/for their chosen organisation.
For 3.3, learners need to compare actual expenditure and income to the master budget of their chosen organisation. This may involve calculating budget variances and articulating what they mean and what might have caused them. They should also be able to judge the materiality of the variances.
When evaluating the budgetary monitoring processes in their chosen organisation for 3.4, learners should be able to recognise the generic limitations of budget variances and how this might be different for types of budgets, for example fixed versus flexible.
For 4.1, the recommendations should take account of the idiosyncrasies of the organisation in question. Learners should consider at least three processes that could manage cost reduction before making any recommendations. Learners need to explain the difficulties that may need to be overcome when implementing the recommended processes.
For 4.2, in order to evaluate the potential for the use of activity-based costing, learners will first need to describe what it is and explain how it works.
For 5.1, learners need to demonstrate how they have applied financial appraisal methods to analyse competing investment projects in the public and private sector. Learners need to compare and analyse a minimum of two projects in each sector and apply a minimum of three appraisal methods. They need to use some of the results from this analysis exercise to make a justified strategic investment decision for an organisation (AC5.2). They must also show that they can use sensitivity analysis and relevant qualitative information when making their investment decision.
A different scenario could be used for 5.3. Learners should already have information from a post-audit appraisal of a strategic investment decision made in an organisation, and they should supply the strengths and weaknesses of the investment decision before making conclusions on its appropriateness.
For 6.1, learners will not need to produce the financial statements. Their analysis should utilise at least three different financial statements when assessing the financial ability of their chosen organisation.
For 6.2, the ratios applied to improve the quality of financial information in their chosen organisation need to cover liquidity, profitability and efficiency with at least two in each category.
For 6.3, learners need to make recommendations on the strategic (rather than operational) portfolio of their chosen organisation. They need to include the alternatives that were considered before arriving at the recommendations.
Unit Content – linked to Assessment Criteria
1. Be able to apply cost concepts to the decision-making process
Costs and prices: absorption and marginal costing – their nature, similarities, differences and use in pricing; relationship to pricing policy; influences on pricing strategy
Cost systems: classifications in terms of object; function, product/service and behaviour; opportunity cost, recording and analysing costs; job costing; batch costing; process costing; contract costing; standard costing; variance calculations; variance analysis and management by exception
Responsibility and control of systems: cost centre; profit centres; investment centres; accountable management; planning and control methods
2. Be able to apply forecasting techniques to obtain information for decision making
Forecasting techniques: forecasting costs; cash flow forecasts; scatter graphs; linear regression; time series methods; forecasting and price movement; using indices, limitations of index numbers; forecasting problems and limitations; place of qualitative data; recommendations
Funds: sources; supporting proposals for obtaining funds internally and externally; gearing ratios; effect of different types of funding on shareholder and market perception; selecting appropriate sources of funds for different projects – comparison of costs
3. Be able to participate in the budgetary process of an organisation
Target setting: comparison to previous years; links between targets; realism; organisational objectives
Process: importance to management; the steps in the process from subsidiary/ functional to master budget; relationship to cost and quality control, resource utilisation and profitability; computer-assisted processes
Budgets: types; flexible and fixed budgets; zero-based budgeting
Monitoring process: budgeted and actual figures, accounting for and investigating variances; favourable and adverse variances; the need for prompt and relevant corrective action; behavioural issues relating to budgeting eg management participation authority, performance evaluation
4. Be able to recommend cost reduction and management processes for an organisation
Cost reduction: purpose compared with cost control (standard costing and budgetary control); value analysis and value engineering; difficulties with introducing cost reduction programmes; quality and value, Total Quality Management (TQM), measuring the costs of quality
Activity-based costing: development of activity-based costing (ABC); use in calculating costs and pricing policy; activity-based budgeting; merits and limitations of these systems
5. Be able to use financial appraisal techniques to make strategic investment decisions for an organisation
Investment: definition; capital and revenue expenditure; types and interaction with risk; sensitivity analysis
Investment appraisal: accounting rate of return; payback period and cash flows, discounted cash flow – net present value and internal rate of return, time value of money and allowance for inflation in money and real rates of discount, taxation and project appraisal; post-audit
6. Be able to interpret financial statements for planning and decision making
Statements: estimates and assumptions relating to the profit and loss account; balance sheet and cash flow statement; use of spreadsheets in financial planning; financial resource audits and the use of balanced scorecards – Kaplan and Norton
Financial ratios: employment of financial ratios internally and externally; financial profiles of organisations; calculation of key ratios reflecting business liquidity; efficiency and profitability
Interpretation and limitations of ratio analysis: emphasis on the interpretation of ratios and encouragement of the use of contingency and risk analysis to justify and make strategic portfolio decisions
This Assignment is based upon the Pearson Edexcel Strategic Management and Leadership from August 2010 Programme Specification found at http://www.lcbuk.org/pdf/Edexcel_level7_SML.pdf