Management Accounting

Management Accounting



Management Accounting

Business Idea and Fundraising Requirement

A group of young entrepreneurs have set up a new bakery retail business under the name of 'Simpson and Simpson' (S&S). The company will be located in Nottingham, UK. According to the market analysis, estimated cost of transforming the new idea into a material business will require approximately £ 0.32 million. Capital structure for the new business will be composed of equity and debt financing. In accord with the financing need, the management plans to raise £ 2.1 million via own capital and £ 0.11 million through debt financing. Leverage from XYZ bank will be acquired for the coming ten years. The loan payment will be made on monthly basis.

Overview of New Business and Products

Simpson and Simpson (S&S) is a start-up business by a group of young entrepreneurs. The new business will serve in the UK bakery retail industry with a wide range of products and services. The business will offer fresh and supreme quality organic bakery products in dairy free, wheat and gluten products. Research shows considerable growth in the demand of organic bakery products to growing health concerns among British citizens. Hence, S&S will offer quality bakery products including muffins, pastries and bread. In addition to this, S&S will offer dairy free products including pastries and muffins for vegetarians.

Based on certain assumptions, product costs for S&S are comprised of direct material, direct labour and other overheads. Since demand for bakery products is increasing day-by-day, S&S will need to compete with pre-established business of two main competitors including Frank Roberts & Sons and Evron Foods (The Federation of Bakers, 2013, p. n.d.). According to industry analysis, sales of these two companies have show consistent improvement over the past four years (The Federation of Bakers, 2013, p. n.d.). Sales forecast show that S&S has a potential to match up with the pace of existing market competition and focus on quality of offered products will enable the company to make a slow and steady place in the market.

Cost Computation

According to Mintel (2011, p. n.d.), UK market for natural and organic bakery products has increased over the past few years.

In order to set an appropriate cost price, it is assumed that S&S will start-up with moderate growth during initial years of existence. Debt and equity financing will generate sufficient funds to meet the financial requirements of establishing S&S business. Additionally, any change in technology is assumed to be constant, which means same acquired machinery and equipment can be used for S&S products. Moreover, short and long term rate of interest will be same i.e. 8%. Business profits will be taxed at a constant rate of 30%.

In the light of above assumptions, unit costs of S&S products are composed of direct labour, material and overheads. Detailed cost break-up is attached in appendix. On the other hand, unit price of offered products is determined and set on competitive pricing basis.

Cost Behaviour

When starting a new business, different type of costs are incurred ...