Monday, March 9, 2020
Decision making in manufacturing organization related to make or buy scenarios. The WritePass Journal
Decision making in manufacturing organization related to make or buy scenarios. INTRODUCTION Decision making in manufacturing organization related to make or buy scenarios. INTRODUCTIONDecision Making: Decision making Theory:LITERATURE REVIEW Make or Buy DecisionsMake or Buy CategoriesInitiation of Make or Buy StudiesLong-term/Short-term ConsiderationsFinancial/Non-Financial ClassificationAspects for ConsiderationReasons / considerations for MakingReasons / considerations for BuyingReasons given for reconsidering Make-Buy Decisions RESEARCH METHODOLOGYData collection TechniquesQualitative and Quantitative Research approachProject PlanReferences.Related INTRODUCTION Manufacturing Organization in Today’s world is constantly facing the challenges of making strategic decisions that affect the sustainability and profitability of the manufacturing Organization. This study will be exploring the aspects of decision making within a manufacturing Organisation as it relates to make or buy scenarios. In other for these decisions to be made an understanding of the decision making process is needed. Decision Making: This involves the processes resulting to a selection of a course of action among several alternatives.(1) To a great extend, the success or failure of companies greatly depends on the quality of their decisions. Decision making Theory: This is a general approach to decision making when the outcomes associated with alternatives are often in doubt. It follows a process of 1. Listing the feasible alternatives. One alternative that should be always considered as a basis for reference is to do        nothing. 2. List the events. (Also called chance events or states of nature) that have an impact on the outcome of the choice but not under the decision maker`s control 3. Calculate the payoff for each alternative in each event The payoff is the total profit or total cost These payoffs can be entered into a payoff table, which shows the amount for each alternative if each possible event occurs.. 4. Estimate the likelihood of each event using past data, executive opinion or other forecasting methods. This is expressed as a probability, making sure that the probabilities sum to 1.0 5. Selecting a decision rule to evaluate the alternatives, such as choosing the alternative with the lowest expected cost. This depends on the amount of information the decision maker has on the events probabilities and the decision maker`s attititude towards risk The types of decision people make depend on how much knowledge or information they have about the situation. (2) Decision making can be examined under three different situations. 1. Decision making under uncertainty. (Events can be listed but their probability cannot be   estimated). 2. Decision making under risk. (Events can be listed and their probability estimated). 3. Decision making under certainty. (A situation where the outcomes are known) Buy or Make decisions are increasingly common as companies, in their efforts to improve efficiency and competitiveness, focus on their core activity which they do best, and contract out peripheral activities.(3) Make or buy decisions rarely depend solely on cost factors. Other factors need to be considered: e.g. Continuity of supplies Retaining skilled labour Employing specialist plant The availability of capital to make and the alternative uses for such capital etc.  Each company therefore engaged in manufacture may have to review periodically the extent to which it will: a)        Make or buy plant, equipment or components b)        Process internally or buy out semi-finished components and materials Decisions may result from changes in the company or market situation. Some firms pursue a policy of specialisation and concentrate their production effort on a fairly narrow front and thus buy out a wide range of commodities. Other companies, however, tend to exercise greater control over the manufacture of equipment, components and the processing of semi-finished materials, minimising the number of the various items bought out.  LITERATURE REVIEW  Make or Buy Decisions a)        MACRO Decisions involve long-term capital expenditure relating usually to products and materials as in questions of vertical integration requiring the determination of policy by senior management e.g. the decision by a print manufacturer to acquire a printing press. b)        MICRO Decisions, which normally relate to buyers e.g. new parts i.e. should these be made or bought in etc. Make or Buy Categories Make or buy decisions may apply in four different situations: a)        Items currently made in consideration being given to buying out. b)        Items currently bought out consideration being given to making in. C)       Items currently part made in consideration being given to placing all the work internally or externally. d)        Items for a new requirement consideration being given to making in or buying out in total or in part. Initiation of Make or Buy Studies Make or buy studies may be initiated by Purchasing or by other departments resulting from: a)        Large price increases being submitted by suppliers b)        Space needed for other more lucrative production commitments c)        Production rationalisation plans d)        Comparative price studies (Value Analysis or ABC analysis). Long-term/Short-term Considerations Make or buy decisions may relate to long-term or short-term needs (i.e. can it be planned or emergency situations?).(5). The extent to which efforts are deployed will depend on value, importance and time-scale. Take the case of a company requiring a minor spare urgently. The part is normally made in but because of a machine breakdown Purchasing is asked to buy out. Obviously, in such a situation an in-depth study will not be mounted involving Finance, Product Development, Market Research etc. Financial/Non-Financial Classification Make or buy studies can be classified as being: a)        financial i.e. they are done on a strictly cost comparison basis b)        non-financial i.e. they are done because of other constraints which will, obviously, have an ultimate financial impact (e.g. secrecy, lack of expertise, time factor etc.) Aspects for Consideration Aspects for consideration in a make or buy study may include: Item currently bought out a)        Is there a patent involved which might incur a Royalty payment? b)        Are the prices being paid the lowest which might be achieved externally? c)        Does the supplier have a greater purchasing power than the buyer for the materials he obtains? d)        Is the raw material readily available to the buyer? e)        Will the withdrawal of business from a supplier jeopardise future supplies should the make in decision be later reversed? Items currently made in: a)        Will the quantities interest the outside supplier? b)        Will new tooling be required and at what cost? c)        Might the part be subject to frequent modification d)        Will a transfer of work create personnel problems?  Reasons / considerations for Making 1)        Making is cheaper than buying (Cost considerations) 2)        To ensure direct control of quality 3)        Delivery times from outside suppliers are too long 4)        No suitable suppliers 5)        To ensure continuity of supply 6)        To utilise spare production capacity (i.e. help to absorb fixed overhead/s) 7)        To retain labour during slack trade declining trade 8)        To maintain secrecy / Design secrecy required 9)        To utilise scrap / surplus materials 10)     Desire to integrate plant operations 11)     Desire to maintain a stable workforce (i.e. in periods of declining sales) 12)     Need to exert direct control over production and / or quality  Reasons / considerations for Buying a)        Buying is cheaper than making (Cost considerations) b)        Quantities required are too small for economical production c)        To avoid cost of specialist plant or labour d)        To augment capacity e)        To utilise the vendors specialist expertise, machinery and/or patents / RD f)         To reduce investment in inventory g)        Transfer of risk to vendor h)       Own company may not be able to make all it needs of the sort of part (may not have the plant capacity.) i)         Desire to maintain a multi-source policy j)         Desire to maintain a stable workforce (i.e. in periods of rising sales) k)        To open up new markets by sourcing overseas l)         Efficient Procurement Reasons given for reconsidering Make-Buy Decisions 1)        Deterioration in suppliers quality performance 2)        Delivery failure or poor service by existing sources 3)        Large price increase 4)        Volume changes, much larger or smaller quantity requirements for item concerned 5)        Pressure to reduce costs 6)        Desire to maintain employment of people or utilisation of plant and physical resources in a downturn 7)        Need to get earlier or more reliable sources 8)        Need for design secrecy 9)        Import substitution 10)     Suppliers withdrawal from a particular market  RESEARCH METHODOLOGY In carrying out research, academics have suggested considering using various types of research approach. The scope of this report is to explore make or buy decision making in manufacturing organization The general principle is that the research strategy or strategies, and the methods or techniques employed, must be appropriate for the questions you want to answer. This systematically describes the general overview of the link between research question and research design. To carry out a good project, one must develop his/her own ideas on how best to carry out the research. There are two different types of research route generally used by authors when carrying out a research, thesis or project, there are fixed and flexible design. (Robson.c, 2002). It compares the two different approaches in carrying out a research to petroleum engineers and explorers respectively: The petroleum engineer has a specific goal in mind, to find oil buried below the surface. Before the engineer begins the investigation on how to acquire the oil a careful study of maps showing features of the geographic area, with this information at hand the engineer will then go and find something specific. To follow the fixed design route, one must generally know what they are looking for, however flexible design encourages one to explore generally. Flexible design could be described as gathering information, going first in one direction and then perhaps retracting that route. On discovering a lake in the middle of a large wooded area, the explorer would take frequent compass readings, check that angle of the sun, takes noted on prominent land marks and then use feedback from each observation to modify earlier information. Carrying out a general research, it is advisable for an initial focus to be mapped out by the researcher as it aids to answer the primary question of (What do I intend to achieve when carrying out this research) The initial stages of carrying out a r esearch can be either problematic or straightforward depending on what sort of research is being carried out. Data collection Techniques The aim of the project is to carefully explore make or buy decision making in manufacturing organizations. In order to carry out a study on make or buy decision making for manufacturing organization. Books, journals, magazines and the internet will be used as a good source to acquire materials which aids in understanding the subject matter. There are different forms and sorts of data which should be considered before selecting the appropriate material. There are two sources of data one being primary and the other being secondary, the fundamental difference are primary data is data gathered at first hand from people in the general population or sample as the case may be. In contrast secondary data is the use and application of data that already exists usually from policy documents, newspapers, magazines and so on. Primary data can sometimes be expensive and can also take a while to collect data as a result of that the source of data that has been collected to build up this report will be mainly secondary. secondary source of data is of better quality because it is usually published so therefore unbiased which means it is not skewed in the favour of research objective. (Robson c., 2002). Qualitative and Quantitative Research approach Qualitative research can be described as an exploratory kind of research; its main purpose is to uncover prevailing trends of an opinion. The approach is concerned with words rather than numbers. This approach aims to investigate an in-depth understanding of its subject matter. Qualitative research is centrally concerned with understanding a thing rather than measuring them. (Robson.c, 2002). Quantitative research In general terms can be described as an approach that is primarily concerned with numbers how it relates to each other rather than words Quantitative research seeks to set up connecting relationships between two or more variables using statically method for testing of the variable’s strength and importance of its relationship. In this project the Qualitative research method will be used extensively as it allows for exploration of the subject to gain in-depth understanding Many models have being put forward as frame work for research design, below is a model that consist of the key components to a successful research. Adapted from Robson (2002). Purpose(s) What is the research trying to achieve? Is the author seeking to change something substantial as a result of this study or trying to explore the effectiveness of something? Theory- Where will the author find the theory that will direct and channel his research? What way will the theory be translated? Research questions- To what questions posed by the author are the research geared to provide answers for? What study is needed to know to correctly answer the research questions? How feasible are the questions poised given the time and the resources available? Methods-What techniques will be used to effectively collect data? To what degree will the data be analysed? How will the author communicate to other academics/ readers the authenticity of data collected Sampling Strategy- How will data be collected? Who will the author seek to interview? What will be the best way in balancing the need to be selective with the need to collect important data needed? Project Plan References. 1. Slack, N., chambers, s. 2007. Operations management. 2. Krajewski, L., Ritzman, L. 2007. Operations management. 3. Parmigiani, A. 2007. Why do firms make or buy? Investigation of concurrent sourcing strategic management Journal 28: 285-311. 4 He, D., Nickerson, JA. 2006. Why do firms make or buy? Efficiency, appropriability, and competition in the trucking industry. Strategic Organisation 4: 43-69. 5. Ashall, D. 2010. Lecture notes on procurement and supply chain management. 6. Mitchell, L. 2010. Lecture notes on Manufacturing Strategy. 7. Robson, C. (2002). Real world research. Michigan: Blackwell publishers.
Saturday, February 22, 2020
INITIAL PUBLIC OFFERINGS (IPO) PAPER Essay Example | Topics and Well Written Essays - 1000 words
INITIAL PUBLIC OFFERINGS (IPO) PAPER - Essay Example It builds batteries for power in cars, torches etc. It also makes batteries that are used in UPS. It provides appliances to run automotives such as cranes, road rollers etc. It is also a major provider for aerospace and defense utilities. ENERSYS claims to be the largest industrial battery provider in the whole world(ENERSYS, 2005). It has built its customer base in over 100 countries over the past few years. It is the primary supplier in Motive power such as supplying power facilities to railway, Reserve Power such as batteries for cars. The company was previously known as Yuasa Inc, but it was acquired from a Japanese owner in 2000 and changed its name to ENERSYS Inc in 2001(Yahoo, 2012). ENERSYS Performance ENERSYS’s current stock price is $ 33.85 and retrospectively looking, its stock price has fluctuated between the ranges of $ 22-35 over the past three years(Yahoo, 2012). ENRSYS revenue was $ 1.92 billion in 2009, $ 1.58 billion in 2010 and $ 1.96 billion in 2011. ENERSY S’s net income was $ 81 million in 2009; it dropped to $ 62 million in 2010 and jumped up to $ 113 million in 2011. ENERSYS’s total assets were $ 1.4 billion in 2009, $ 1.6 billion in 2010 and $ 1.8 billion in 2011. ENERSYS’s total liabilities were $ 8.18 million in 2009, $ 8.67 million in 2010 and $ 8.49 million in 2011. ... ENERSYS experienced a slump in 2010 as its revenue was lower at $ 1.58 billion but it recovered and increased its revenue to $ 1.96 billion. Moreover, ENERSYS has increased its assets constantly over the three year period and it is mainly due to success in operations which has earned positive net income and increase in owners’ contribution to the company. The shareholders’ have also contributed generously to the company as the company’s objective of maximizing shareholder wealth has constantly grown as Earning per share has increased over the past three years, and that despite increase in owners’ equity. This shows that the company meets the expectations of its owners. Reason for choosing ENERSYS ENERSYS has been chosen because it is a dominant energy equipment provider not only in America but all over the world. It is a global leader in providing electronic appliances and is the most well known brand in its industry. It is one of very few companies that h ave its headquarters in other continents such as Europe and Asia. ENERSYS has been chosen also due to the fact that its financials are pleasing to the eye as they have achieved tremendous success during the past decade and earns net income in millions. ENERSYS always meets its shareholders expectations which can be seen as there earnings per share are constantly growing over the past few years. ENERSYS Return on Equity has also increased from 8% in 2010 to 12% in 2011. ENERSYS IPO ENERSYS was formed as a result of an acquisition between Morgan Stanley Partners and Yuasa Inc in 2000. In 2001, it changed its name to ENERSYS. In 2002, it acquired the reserve power and motive business of Energy Storage Group. ENERSYS
Wednesday, February 5, 2020
Epstein-Barr Virus Research Paper Example | Topics and Well Written Essays - 1750 words - 1
Epstein-Barr Virus - Research Paper Example the presence of a virus in the cultured specimen and the three published their discovery the same year with the development of antibodies and mononucleosis taking place later. Consequently, the three scientists were able to observe the development of antibodies to the virus (Robertson 18). Perhaps the most common relationship of EBV with any other virus is in relationship to the TTV. In this case, the relationship regards the association between these two viruses and their infection of B-cell lymphoma and the Hodgskin lymphoma (Figueiredo et al. 736). In line with this, an increase in the tolerance of contagion within the first 48 hours of infection with the virus called herpes simplex indicates a demonstration of the conversion of EBV. In effect, this phenomenon implies that it is feasible to have TTV and EBV viruses in the same B cell (Figueiredo 736). Medical practitioners point out that Epstein-Barr is one of the most common infections that affected human beings. In line with this, experts suggested that the infection affected approximately 95% of the adult population by the time that they reached 40 years of age. In effect, this implies that the disease can affect any individual despite their geographical location and almost the entire world’s population has once suffered the disease. Nonetheless, most incidents of Epstein-Barr do not indicate the presence of symptoms in a person. In addition, an incidence of the infection puts an individual at a risk of mononucleosis with approximately 35-40% of those infected likely to develop this condition (Schueler, Beckett, and Gettings). A series of a standardized process characterizes the progression of EBV. First, EBV attacks the B-cells at the point of CR-2 (CD 21) while using the glycoprotein (GP 350/220). However, it could also attack the epithelial cells that do not possess the CD 21. This affects the epithelial cells that infect the Blymphocyte resulting to the latency stage. The cells infected exhibit
Tuesday, January 28, 2020
Pharmacological Profiles of Several Common Drugs
Pharmacological Profiles of Several Common Drugs 2.3 Profile of Pheniramine Maleate (31) Chemical name: (3RS)-N,N-Dimethyl-3-phenyl-3-(pyridine-2-yl)propan-1-amine(Z)-butenedioate Empirical formula: C20H24N2O4 Chemical structure: Figure 2.3:Structure of Pheniramine Maleate 2.3.1 Physical properties Molecular weight: 356.4 Appearance and colour: White or almost white crystalline powder. Solubility: Very soluble in water, freely soluble in ethanol (96 %)in methanol and in methylene chloride. Therapeutic category:Pheniramine maleate belongs to H1-antagonist pharmacological group on the basis of mechanism of action and also classified in Antihistamine, Decongestant. Dosage: Tablet , Powder, Solution 2.3.2 Pharmacology Pheniramine maleate is an antihistamine used for alleviation of allergy symptoms. Manufacturers frequently list the over-the-counter medication as pheniramine maleate or a derivative. Drug industries also often combine the formulation with other medications for relief of other symptoms. Consumers can generally find the ingredient in an oral solution or tablet form. Certain ophthalmic solutions also contain pheniramine maleate, which provides relief from allergy symptoms associated with the eyes. Allergic reactions are autoimmune responses to certain antigens. When allergens enter the bloodstream, the body releases histamine, which binds with and activates receptor sites, located throughout the body, producing physical symptoms. The pharmacological action of pheniramine maleate involves blocking the receptor sites for the histamine H1, found in the heart, central nervous system, smooth muscle, and vascular endothelium cells. Blocking the receptor sites reduces or inhibits the symptoms. The antihistamine is frequently used for seasonal allergies, such as hay fever, or environmental allergies, such as animal dander. By blocking histamine receptor sites, pheniramine maleate can reduce or eliminate itching, watery eyes, runny noses, and skin irritations. Allergy related skin irritations might include the itching, redness, and swelling associated with eczema or uticaria, commonly referred to as hives (40). The medication may produce a sedative effect when binding to sites in the central nervous system. It also may produce an anticholinergic effect by dilating or relaxing smooth muscle. These side effects sometimes allow pheniramine maleate to be used as treatment for motion sickness or the inner ear condition known as Meniere’s disease. 2.4 Profile of Phenylephrine Hydrochloride (78) Chemical name:(R)-(-)-1-(3-Hydroxyphenyl)-2-methylaminoethanol hydrochloride Empirical formula:C9H13NO2HCL Chemical structure: Figure 2.4 : Structure of Phenylephrine Hydrochloride 2.4.1 Physical properties Molecular weight:203.67 Appearance and colour: White or practically white odourless crystals Solubility: Freely soluble in water and alcohol Therapeutic category: Phenylephrine is a sympathomimetic amine that acts predominantly on ÃŽ ±-adrenergic receptors. It is mainly used to treat nasal congestion, but may also be useful in treating hypotension and shock, hypotension during spinal anaesthesia, prolongation of spinal anaesthesia, paroxysmal supraventricular tachycardia, symptomatic relief of external or internal hemorrhoids, and to increase blood pressure as an aid in the diagnosis of heart murmurs. Dosage: Cream, Solution, Ointment, Injection, Liquid, Tablet, Suppository 2.4.2 Pharmacology In general, ÃŽ ±1-adrenergic receptors mediate contraction and hypertrophic growth of smooth muscle cells. ÃŽ ±1-receptors are 7-transmembrane domain receptors coupled to G proteins, Gq/11. Three ÃŽ ±1-receptor subtypes, which share approximately 75% homology in their transmembrane domains, have been identified: ÃŽ ±1A (chromosome 8), ÃŽ ±1B (chromosome 5), and ÃŽ ±1D (chromosome 20). Phenylephrine appears to act similarly on all three receptor subtypes. All three receptor subtypes appear to be involved in maintaining vascular tone. The ÃŽ ±1A-receptor maintains basal vascular tone while the ÃŽ ±1B-receptor mediates the vasocontrictory effects of exogenous ÃŽ ±1-agonists. Activation of the ÃŽ ±1-receptor activates Gq-proteins, which results in intracellular stimulation of phospholipases C, A2, and D. This results in mobilization of Ca2+ from intracellular stores, activation of mitogen-activated kinase and PI3 kinase pathways and subsequent vasoconstriction. Phenylephrine produces its local and systemic actions by acting on ÃŽ ±1-adrenergic receptors peripheral vascular smooth muscle. Stimulation of the ÃŽ ±1-adrenergic receptors results in contraction arteriolar smooth muscle in the periphery. Phenylephrine decreases nasal congestion by acting on ÃŽ ±1-adrenergic receptors in the arterioles of the nasal mucosa to produce constriction; this leads to decreased edema and increased drainage of the sinus cavities. 2.5 Profile of Dextromethorphan (79) Chemical name:(1R,9R,10R) 4 methoxy 17 methyl – 17 azatetracyclo[7.5.3.0{1,10}.0{2,7}]heptadeca-2,4,6-triene Empirical formula:C18H25NO Chemical structure: Figure 2.5 : Structure of Dextromethorphan 2.5.1 Physical properties Molecular weight:271.39 Appearance and colour: It is a White crystalline powder Solubility: 1-5 g/100 mL at 21 Â ºC Therapeutic category: Dextromethorphan usually used in the treatment of respiratory infections and allergic conditions Dosage: Tablet , Syrup, Capsule, Suspension 2.5.2 Pharmacology Dextromethorphan is an opioid-like drug that binds to and acts as antagonist to the NMDA glutamatergic receptor, it is an agonist to the opioid sigma 1 and sigma 2 receptors, it is also an alpha3/beta4 nicotinic receptor antagonist and targets the serotonin reuptake pump. Dextromethorphan is rapidly absorbed from the gastrointestinal tract, where it enters the bloodstream and crosses the blood-brain barrier. The first-pass through the hepatic portal vein results in some of the drug being metabolized into an active metabolite of dextromethorphan, dextrorphan, the 3-hydroxy derivative of dextromethorphan. 2.6 Profile of Diphenhydramine (80) Chemical name: 2-(diphenylmethoxy)-N,N-dimethylethanamine Empirical formula:C17H21NO HCL Chemical structure: Figure 2.6 : Structure of Diphenhydramine 2.6.1 Physical properties Molecular weight:291.82 Appearance and colour: It is a White crystalline powder Solubility: Soluble in DMSO, acetone, water Therapeutic category: Diphenhydramineis a first-generationantihistamine possessing anticholinergic, antitussive, antiemetic, and sedative properties that is mainly used to treat allergies. It is also used in the management of drug-induced parkinsonism and other extrapyramidal symptoms. The drug has a strong hypnotic effect and is FDA-approved as a non-prescription sleep aid, especially in the form of diphenhydramine citrate Dosage: Capsule 2.6.2 Pharmacology Diphenhydramine is an inverse agonist of the histamineH1receptor. It is a member of the ethanolamine class of antihistaminergic agents. By blocking the effects of histamine on the capillaries, it can reduce the intensity of allergic symptoms. Diphenhydramine also crosses the blood–brain barrier (BBB) and antagonizes the H1 receptors centrally. Its effects on central H1 receptors cause drowsiness. Like many other first-generation antihistamines, diphenhydramine is also a potent antimuscarinic (a competitive antagonist of muscarinic acetylcholine receptors), and, as such, at high doses can cause anticholinergic syndrome. The utility of diphenhydramine as
Monday, January 20, 2020
How to Make a Simple Birthday Cake :: Expository Process Essays
How to Make a Simple Birthday Cake Have you ever wanted to make a birthday cake for a loved one? Well, here is how to make a simple birthday cake. All you'll need is a little time, love, and a few items from the grocery store. You will need a boxed cake mix (the favorite of the birthday person), shortening, eggs, oil, flour, and birthday candles (the number will depend on the age of the birthday person.) When you get home, you will need to gather a few items: a large mixing bowl, a large cake pan, an electric mixer or a large mixing spoon, a spatula, and measuring cups and spoons. First, you will need to wash your hands and work area. Read through the directions on the cake box to be sure you have everything you need. Then, gather all of your equipment and food items in your work area, organize it according to the order you will use them in making your cake. Be sure to preheat your oven to the appropriate temperature before you begin. Next, put the dry cake mix into your large mixing bowl. Then, put the prescribed amount of water, oil, and eggs into the mix. Then, with the electric mixer or mixing spoon mix the batter until it is smooth and free of clumps. Next, grease the large cake pan with the shortening. If you wish, you can wrap your fingers with wax paper to keep them from getting greasy. Then, flour the pan lightly. If you do this over the garbage can it will be easier to clean your work area later. Next, pour the cake batter into the cake pan, using the rubber spatula to scrape all of the batter off of the sides of the bowl. Be sure the batter is level in the pan so it will rise evenly. Next, place the cake on the top rack of the oven and bake for the amount of time specified on the box, the time is usually around thirty minutes. While the cake is baking clean up you work area. After the cake is done remove it from the oven. If you push a toothpick to the bottom and it comes out clean it is done. Turn off the oven and let the cake cool. After the cake has had ample time to cool, you are ready to spread the icing on the cake.
Sunday, January 12, 2020
Management Accounting
Overall requirement * Explain how management accounting can supply information to assist the management of the organisation. * You are not required to investigate and report on the organisation’s actual management accounting system (even if you can find out). * You are to write a 1500 word report as though you were a management consultant writing to the board of directors. * WE DO NOT WANT ANY NUMBERS UNLESS YOU CREATE THEM TO DEMONSTRATE AN IDEA * This is like assessment 1a – you are to imagine and create! This is a report * It has an introduction A main body (see the next slides) * A conclusion How your marks will build up * Background to the organisation showing good reading of appropriate sources 25% * Review of the nature and role of management accounting 10% * An analysis of the organisation, showing its information needs, the management accounting techniques it might use and decisions it could then make. 50% * The strengths and weaknesses of your analysis  œ for example the additional information you would have liked in order to improve your analysis. 15% Background to the organisation The reason for this is to introduce your organisation (briefly) and to show what a manager in this organisation will do. Later you will show how m. a. helps. * A manager will make decisions about the organisation’s products, processes etc. – therefore your introduction will cover this. * This introduction will reveal the kind of problems that your organisation faces and must overcome. * We do not want the history of the organisation and any information that you will not use later. * Choose your organisation carefully – one that you can understand. You need to be able to imagine the kinds of decisions that a manager might make. Review of the nature and role of management accounting * A definition (with reference) * Some idea of what management accounting does and what it does not do. * Some examples of the techniques and methods of m. a. * You have been studying this since week 5 and so it should not be a problem * DO NOT TRY TO BE TOO CLEVER. IN PREVIOUS YEARS STUDENTS HAVE MENTIONED ABC, JUST IN TIME AND THROUGHPUT ACCOUNTING. Do not do this as you probably do not understand these techniques and will only show that this is so. Keep to what you know! An analysis of the organisation, showing its information needs, the management accounting techniques it might use and decisions it could then make. * This is the hard part that attracts the most marks * You are to link part 1 and part 2 – you organisation’s needs to the techniques and methods of management accounting * What does m. a. Do that will help this organisation? * How can it improve processes? * How can it compete better? * How can it choose between products? * How can it use m. a. for pricing? Planning, controlling, motivating, organising etc * Difficult – but you are applying what you have learned to the problems of the organisation. The strengths and weaknesses of your analysis * This was badly done in assessment 1b * WE DO NOT WANT THE S&W OF THE COMPANY * What aspects of your analysis are strong. Where do you feel that your recommendations are strong and secure? Give examples. * Where do you feel your recommendations are weak perhaps due to lack of information about the company or lack of your knowledge and experience of management accounting. Give examples. Management Accounting Use the following to answer question 1: Marger, Inc. , provided the following data for two recent months: [pic] |1. |Which of the following classifications best describes the behavior of Cost T? | |A) |Variable | |B) |Fixed | |C) |Mixed | |D) |None of the above | 2. |The following data pertains to activity and maintenance costs for two recent years: | | | | | |[pic] | | |Using the high-low method, the cost formula for maintenance would be: | |A) |$1. 50 per unit. | |B) |$1. 25 per unit. | |C) |$3,000 plus $1. 50 per unit. | |D) |$6,000 plus $0. 75 per unit. | |3. Rible Company has observed that at an activity level of 8,000 units the cost for maintenance is $15,000, and at 10,000 units the| | |cost for maintenance is $16,500. Using the high-low method, the cost formula for maintenance is: | |A) |$15,000 plus $0. 15 per unit. | |B) |$9,000 plus $0. 75 per unit. | |C) |$1. 65 per unit. | |D) |$1. 875 per unit. | |4. |Which of the following types of firms likely would have a high pr oportion of variable costs in its cost structure? | |A) |Public utility. | |B) |Airline. | |C) |Fast food outlet. |D) |Architectural firm. | |5. |Factory overhead is an example of a: | |A) |mixed cost. | |B) |fixed cost. | |C) |variable cost. | |D) |irrelevant cost. | Use the following to answer question 6: Buffo Company fabricates metal folding chairs. Data concerning the company's revenue and cost structure follow: [pic] |6. |If Buffo plans to produce and sell 3,000 units next month, the expected contribution margin would be: | |A) |$30,750. |B) |$74,250. | |C) |$26,750. | |D) |$96,500. | Use the following to answer question 7: Frank Company operates a cafeteria for its employees. The number of meals served each week over the last seven weeks, along with the total costs of operating the cafeteria are given below: [pic] Assume that the relevant range includes all of the activity levels mentioned in this problem. |7. |Using the high-low method of analysis, the variable cost per mea l served in the cafeteria would be estimated to be: | |A) |$1. 50. | |B) |$2. 0. | |C) |$2. 80. | |D) |$1. 00. | Use the following to answer question 8: Stewart Company is attempting to classify costs according to their cost behavior. Data concerning activity and costs are listed below: [pic] |8. |If Stewart Company sells 1,150 units in March and this activity is within the relevant range, the expected total cost would most| | |likely be closest to: | |A) |$2,610. 50. | |B) |$1,774. 00. |C) |$4,343. 92. | |D) |$4,384. 50. | |9. |A disadvantage of the high-low method of cost analysis is that: | |A) |it cannot be used when there are a very large number of observations. | |B) |it is too time consuming to apply. | |C) |it uses two extreme data points, which may not be representative of normal conditions. | |D) |it relies totally on the judgment of the person performing the cost analysis. | Use the following to answer question 10: Marger, Inc. provided the following data for two recent months: [pic] |10. |Which of the following classifications best describes the behavior of Cost U? | |A) |Variable | |B) |Fixed | |C) |Mixed | |D) |None of the above | |11. |Fox Company's contribution margin ratio is 20%. If the degree of operating leverage is 15 at the $225,000 sales level, net | | |operating income at the $225,000 sales level must equal: | |A) |$2,250. | |B) |$6,750. | |C) |$3,000. | |D) |$5,063. | |12. |Korn Company sells two products, as follows: | | | | | |[pic] | | |Fixed expenses total $300,000 annually. The expected sales mix in units is 60% for product Y and 40% for product Z. How much is | | |Korn's expected break-even sales in dollars? | |A) |$300,000 | |B) |$420,000 | |C) |$475,000 | |D) |$544,000 | |13. |Brown Company has sales of 2,000 units at $70 per unit. Variable expenses are 40% of the selling price. If total fixed expenses | | |are $44,000, the degree of operating leverage is: | |A) |0. 79. | |B) |1. 40. | |C) |3. 50. | |D) |2. 10. | Use the following to answer question 14: Budget data for the Bidwell Company are as follows: [pic] |14. |If fixed expenses increased $31,500, the break-even sales in units would be: | |A) |34,500 units. | |B) |80,500 units. | |C) |69,000 units. | |D) |94,500 units. Use the following to answer question 15: Evergreen Corp. has provided the following data: [pic] |15. |The number of units needed to achieve a target net operating income of $49,500 would be: | |A) |1,238 units | |B) |2,750 units. | |C) |3,200 units. | |D) |2,057 units. | Use the following to answer question 16: A manufacturer of premium wire strippers has supplied the following data: [pic] |16. The company's degree of operating leverage is closest to: | |A) |20. 09 | |B) |7. 73 | |C) |1. 86 | |D) |55. 64 | Use the following to answer question 17: Consider the following budgeted data f or Urqhart Corporation: [pic] |17. If the unit contribution margin is increased by 10%, the total fixed expense is decreased by 20%, and all other data remain as | | |in the budget, net operating income will be: | |A) |$102,500. | |B) |$105,000. | |C) |$ 90,000. | |D) |$ 93,750. | Use the following to answer question 18: The costs of publishing a grade school textbook can be assumed to be as follows: [pic] Each book sells for $10 per copy. |18. |The unit contribution margin for each copy of the book is: | |A) |$5. 5. | |B) |$4. 15. | |C) |$5. 40. | |D) |$7. 15. | |19. |If a company decreases the variable expense per unit while increasing the total fixed expenses, the total expense line relative | | |to its previous position will: | |A) |shift downward and have a steeper slope. | |B) |shift downward and have a flatter slope. | |C) |shift upward and have a flatter slope. | |D) |shift upward and have a steeper slope. | Use the following to answer question 20: A company that makes organic fertilizer has supplied the following data: [pic] |20. |The company's degree of operating leverage is closest to: | |A) |3. 50 | |B) |1. 49 | |C) |9. 54 | |D) |2. 41 | |21. Trumbull Company budgeted sales on account of $120,000 for July, $211,000 for August, and $198,000 for September. Collection | | |experience indicates that none of the budgeted sales will be collected in the month of the sale, 60% will be collected the month| | |after the sale, 36% in the second month, and 4% will be uncollectible. The cash receipts from accounts receivable that should be| | |budgeted for September would be: | |A) |$169,800. | |B) |$147,960. |C) |$197,880. | |D) |$194,760. | Use the following to answer question 22: Young Enterprises has budgeted sales in units for the next five months as follows: [pic] Past experience has shown that the ending inventory for each month should be equal to 10% of the next month's sales in units. The inventory on May 31 fell short of t his goal since it contained only 400 units. The company needs to prepare a Production Budget for the next five months. |22. |The desired ending inventory for August is: | |A) |540 units. |B) |680 units. | |C) |720 units. | |D) |380 units. | Use the following to answer question 23: Balmforth Products, Inc. makes and sells a single product called a Bik. It takes three yards of Material A to make one Bik. Budgeted production of Biks for the next five months is as follows: [pic] The company wants to maintain monthly ending inventories of Material A equal to 20% of the following month's production needs. On January 31, this target had not been attained since only 2,000 yards of Material A were on hand. The cost of Material A is $0. 80 per yard. The company wants to prepare a Direct Materials Purchases Budget. |23. |The desired ending inventory of Material A for the month of March is: | |A) |9,300 yards. | |B) |7,140 yards. | |C) |3,100 yards. | |D) |8,400 yards. | Use the following to answer question 24: The Gomez Company, a merchandising firm, has budgeted its activity for December according to the following information: * Sales at $500,000, all for cash. * Merchandise Inventory on November 30 was $250,000. * The cash balance at December 1 was $20,000. Selling and administrative expenses are budgeted at $50,000 for December and are paid for in cash. * Budgeted depreciation for December is $30,000. * The planned merchandise inventory on December 31 is $260,000. * The cost of goods sold represents 75% of the selling price. * All purchases are paid for in cash. |24. |The budgeted cash receipts for December are: | |A) |$125,000. | |B) |$375,000. | |C) |$530,000. | |D) |$500,000. | Use the following to answer question 25: Young Enterprises has budgeted sales in units for the next five months as follows: [pic] Past experience has shown that the ending inventory for each month should be equal to 10% of the next month's sales in units. The inventory on May 31 fell short of this goal since it contained only 400 units. The company needs to prepare a Production Budget for the next five months. |25. |The beginning inventory in units for September should be: | |A) |460 units. | |B) |6,800 units. | |C) |540 units. | |D) |680 units. | Use the following to answer question 26: May Company, a merchandising firm, has budgeted sales as follows for the third quarter of the year: [pic] Cost of goods sold is equal to 65% of sales. The company wants to maintain a monthly ending inventory equal to 130% of the Cost of Goods Sold for the following month. The inventory on June 30 is less than this ideal since it is only $65,000. The company is now preparing a Merchandise Purchases Budget. |26. |The desired beginning inventory for September is: | |A) |$117,000. |B) |$ 76,050. | |C) |$ 91,000. | |D) |$ 59,150. | Use the following to answer question 27: Smith Company makes and sells a single product called a Pod. Each Pod requires 1. 4 hours of labor at a labor rate of $9. 60 per hour. Smith Company needs to prepare a Direct Labor Budget for the second quarter of the year. |27. |The budgeted direct labor cost per Pod would be: | |A) |$13. 44. | |B) |$9. 60. | |C) |$7. 38. | |D) |$11. 00. | |28. Self-imposed budgets typically are: | |A) |not subject to review by higher levels of management since to do so would contradict the participative aspect of the | | |budgeting processing. | |B) |not subject to review by higher levels of management except in specific cases where the input of higher management is | | |required. | |C) |subject to review by higher levels of management in order to prevent the budgets from becoming too loose. | |D) |not critical to the success of a budgeting program. |29. |Shocker Company's sales budget shows quarterly sales for the next year as follows: | | | | | |[pic] | | |Company policy is to have a finished goods inventory at the end of each quarter equal to 20% of the next quarter's sales. | | |Budgeted production for the second quarter of the next year would be: | |A) |7,200 units. |B) |8,000 units. | |C) |8,800 units. | |D) |8,400 units. | |30. |The Carlquist Company makes and sells a product called Product K. Each unit of Product K sells for $24 dollars and has a unit | | |variable cost of $18. The company has budgete d the following data for November: | | | | | | | | |* Sales of $1,152,000, all in cash. | | | | | | | |* A cash balance on November 1 of $48,000. | | | | | | | | |* Cash disbursements (other than interest) during November of $1,160,000. | | | | | | | |* A minimum cash balance on November 30 of $60,000. | | | | | | | | |If necessary, the company will borrow cash from a bank. The borrowing will be in multiples of $1,000 and will bear interest at | | |2% per month. All borrowing will take place at the beginning of the month. The November interest will be paid in cash during | | |November. | | | | | |The amount of cash that must be borrowed on November 1 to cover all cash disbursements and to obtain the desired November 30 | | |cash balance is: | |A) |$20,000. | |B) |$21,000. | |C) |$37,000. | |D) |$38,000. | Use the following to answer question 31: The following materials standards have been established for a particular product: pic] |31. |What is the materials quantity variance for the month? | |A) |$1,740 U | |B) |$4,350 U | |C) |$4,590 U | |D) |$1,836 U | Use the following to answer question 32: The following standards for variable manufacturing overhead have been established for a company that makes only one product: pic] |32. |What is the variable overhead spending variance for the month? | |A) |$3,010 F | |B) |$3,010 U | |C) |$10,435 U | |D) |$10,435 F | Use the following to answer question 33: The following materials standards have been established for a particular product: [pic] |33. What is the materials quantity variance for the month? | |A) |$5,050 U | |B) |$5,125 U | |C) |$9,292 U | |D) |$9,430 U | Use the following to answer question 34: Arrow Industries employs a standard cost system in which direct materials inventory is carried at standard cost. Arrow has established the following standards for the prime costs of one unit of product. [pic] During May, Arrow purchased 160,000 pounds of direct material at a total cost of $304,000. The total direct labor wages for May were $37,800. Arrow manufactured 19,000 units of product during May using 142,500 pounds of direct material and 5,000 direct labor hours. |34. |The direct material price variance for May is: | |A) |$16,000 favorable. |B) |$16,000 unfavorable. | |C) |$14,250 favorable. | |D) |$14,250 unfavorable. | |35. |Perkins Company, which has a standard cost system, had 500 pounds of raw material X in its inventory at June 1, purchased in May| | |for $1. 20 per pound and carried at a standard cost of $1. 00 per pound. The following information pertains to raw material X for | | |the month of June: | | | | |[pic] | | |The unfavorable materials purchase price variance for raw material X for June was: | |A) |$ 0. | |B) |$130. | |C) |$140. | |D) |$150. | |36. |If variable manu facturing overhead is applied on the basis of direct labor-hours and the variable overhead spending variance is | | |favorable, then the: | |A) |actual variable manufacturing overhead rate exceeded the standard rate. |B) |standard variable manufacturing overhead rate exceeded the actual rate. | |C) |actual direct labor-hours exceeded the standard direct labor-hours allowed for the actual output. | |D) |standard direct labor-hours allowed for the actual output exceeded the actual hours. | Use the following to answer questions 37-38: The Odle Company makes and sells a single product called a Kitt. Odle employs a standard costing system. Each Kitt has a standard cost of 5 pounds of material at $12 per pound and 0. 9 direct labor hours at $15 per hour. There were no inventories of any kind on June 1. During June, the following events occurred: – Purchased 17,000 pounds of material at a total cost of $190,000. – Used 15,000 pounds of material to produce 2,400 Kitts. – Used 1,900 hours of direct labor time at a total cost of $38,000. |37. |To record the incurrence of direct labor cost and its use in production, the general ledger would include what kind of entry to | | |the Labor Rate Variance account? | |A) |$ 9,500 credit. | |B) |$ 9,500 debit. | |C) |$15,200 debit. | |D) |$ 2,000 debit. | |38. |Odle Company purchased material on account. The entry to record the purchase of materials will include a: | |A) |credit to Work in Process. | |B) |debit to Accounts Receivable. | |C) |credit to Accounts Payable. | |D) |credit to Raw Materials Inventory. | Use the following to answer question 39: The Geurtz Company uses standard costing. The company makes and sells a single product called a Roff. The following data are for the month of August: – Actual cost of direct material purchased and used: $65,560 – Material price variance: $5,960 unfavorable – Total materials variance: $22,360 unfavorable – Standard cost per pound of material: $4 Standard cost per direct labor hour: $5 – Actual direct labor hours: 6,500 hours – Labor efficiency variance: $3,500 favorable – Standard number of direct labor hours per unit of Roff: 2 hours – Total labor variance: $400 unfavorable |39. |The labor rate variance was: | |A) |$3,900 favorable. | |B) |$3,900 unfavorable. | |C) |$3,100 unfavor able. | |D) |$3,100 favorable. | |40. |Home Company manufactures tables with vinyl tops. The standard material cost for the vinyl used per Type-R table is $7. 80 based | | |on six square feet of vinyl at a cost of $1. 30 per square foot. A production run of 1,000 tables in January resulted in usage of| | |6,400 square feet of vinyl at a cost of $1. 20 per square foot, a total cost of $7,680. The quantity variance resulting from the | | |above production run was: | |A) |$120 favorable. | |B) |$480 unfavorable. | |C) |$520 unfavorable. | |D) |$640 favorable. | Use the following to answer question 41: The Chase Company has a standard cost system in which manufacturing overhead is applied to units of product on the basis of direct labor-hours (DLHs). The company recorded the following activity and cost data relating to manufacturing overhead for October: [pic] |41. |The fixed overhead budget variance for September was: | |A) |$2,700 favorable. | |B) |$2,700 unfavorable. | |C) |$5,400 favorable. | |D) |$5,400 unfavorable. | Use the following to answer question 42: A furniture manufacturer has a standard costing system based on machine-hours (MHs) as the measure of activity. Data from the company's flexible budget for manufacturing overhead are given below: [pic] |42. What was the fixed overhead budget variance for the period to the nearest dollar? | |A) |$2,440 F | |B) |$1,200 U | |C) |$1,999 U | |D) |$704 F | Use the following to answer question 43: A manufacturing company has a standard costing system based on direct labor-hours (DLHs) as the measure of activity. Data from the company's flexible budget for manufacturing overhead are given below: [pic] |43. |How much overhead was applied to products during the period to the nearest dollar? | |A) |$79,118 | |B) |$76,035 | |C) |$77,440 | |D) |$80,145 | Use the following to answer question 44: The Chase Company has a standard cost system in which manufacturing overhead is applied to units of product on the basis of direct labor-hours (DLHs). The company recorded the following activity and cost data relating to manufacturing overhead for October: [pic] |44. |The amount of fixed overhead cost contained in the company's overhead budget for September was: | |A) |$45,900. | |B) |$54,768. | |C) |$49,920. | |D) |$47,703. | |45. |Baxter Corporation's master budget calls for the production of 5,000 units of its product monthly. The master budget includes | | |indirect labor of $144,000 annually; Baxter considers indirect labor to be a variable cost. During the month of April, 4,500 | | |units of product were produced, and indirect labor costs of $10,100 were incurred. A performance report utilizing flexible | | |budgeting would report a spending variance for indirect labor of: | |A) |$1,900 unfavorable. | |B) |$700 favorable. | |C) |$1,900 favorable. | |D) |$700 unfavorable. | Use the following to answer question 46: Wicks Company has established a flexible budget for manufacturing overhead based on direct labor-hours. Budgeted costs at 100,000 direct labor-hours are as follows: [pic] |46. |If Wicks Company plans to operate at 90,000 direct labor-hours during the next period, the flexible budget would show indirect | | |labor costs of: | |A) |$144,000. | |B) |$63,000. | |C) |$90,000. | |D) |$81,000. | Use the following to answer questions 47-48: The Steff Company has the following flexible budget (in condensed form) for manufacturing overhead: [pic] The following data concerning production pertain to last year's operations: – The company used a denominator activity of 15,000 direct labor-hours to compute the predetermined overhead rate. – The company made 6,850 units of product and worked 14,200 actual hours during the year. – Actual variable overhead was $15,904 and actual fixed overhead was $30,850 for the year. – The standard direct labor time is two hours per unit of product. |47. The fixed overhead budget variance was: | |A) |$3,450 unfavorable. | |B) |$3,450 favorable. | |C) |$850 unfavorable. | |D) |$1,200 favorable. | |48. |The fixed element of the predetermined overhead rate was (per DLH): | |A) |$4. 15. | |B) |$3. 00. | |C) |$2. 00. | |D) |$1. 15. | Use the following to answer question 49: Barrick Company has established a flexible budget fo r manufacturing overhead based on direct labor-hours. Total budgeted costs at 200,000 direct labor-hours are as follows: [pic] |49. |At an activity level of 170,000 direct labor-hours, the flexible budget for factory overhead would show the budgeted amount for | | |utilities as: | |A) |$ 85,000. | |B) |$140,000. | |C) |$160,000. | |D) |$100,000. | Use the following to answer question 50: The Steff Company has the following flexible budget (in condensed form) for manufacturing overhead: [pic] The following data concerning production pertain to last year's operations: – The company used a denominator activity of 15,000 direct labor-hours to compute the predetermined overhead rate. – The company made 6,850 units of product and worked 14,200 actual hours during the year. – Actual variable overhead was $15,904 and actual fixed overhead was $30,850 for the year. – The standard direct labor time is two hours per unit of product. |50. |The fixed overhead cost applied to work in process was: | |A) |$27,400. | |B) |$30,000. | |C) |$30,850. | |D) |$13,700. | Management Accounting Overall requirement * Explain how management accounting can supply information to assist the management of the organisation. * You are not required to investigate and report on the organisation’s actual management accounting system (even if you can find out). * You are to write a 1500 word report as though you were a management consultant writing to the board of directors. * WE DO NOT WANT ANY NUMBERS UNLESS YOU CREATE THEM TO DEMONSTRATE AN IDEA * This is like assessment 1a – you are to imagine and create! This is a report * It has an introduction A main body (see the next slides) * A conclusion How your marks will build up * Background to the organisation showing good reading of appropriate sources 25% * Review of the nature and role of management accounting 10% * An analysis of the organisation, showing its information needs, the management accounting techniques it might use and decisions it could then make. 50% * The strengths and weaknesses of your analysis  œ for example the additional information you would have liked in order to improve your analysis. 15% Background to the organisation The reason for this is to introduce your organisation (briefly) and to show what a manager in this organisation will do. Later you will show how m. a. helps. * A manager will make decisions about the organisation’s products, processes etc. – therefore your introduction will cover this. * This introduction will reveal the kind of problems that your organisation faces and must overcome. * We do not want the history of the organisation and any information that you will not use later. * Choose your organisation carefully – one that you can understand. You need to be able to imagine the kinds of decisions that a manager might make. Review of the nature and role of management accounting * A definition (with reference) * Some idea of what management accounting does and what it does not do. * Some examples of the techniques and methods of m. a. * You have been studying this since week 5 and so it should not be a problem * DO NOT TRY TO BE TOO CLEVER. IN PREVIOUS YEARS STUDENTS HAVE MENTIONED ABC, JUST IN TIME AND THROUGHPUT ACCOUNTING. Do not do this as you probably do not understand these techniques and will only show that this is so. Keep to what you know! An analysis of the organisation, showing its information needs, the management accounting techniques it might use and decisions it could then make. * This is the hard part that attracts the most marks * You are to link part 1 and part 2 – you organisation’s needs to the techniques and methods of management accounting * What does m. a. Do that will help this organisation? * How can it improve processes? * How can it compete better? * How can it choose between products? * How can it use m. a. for pricing? Planning, controlling, motivating, organising etc * Difficult – but you are applying what you have learned to the problems of the organisation. The strengths and weaknesses of your analysis * This was badly done in assessment 1b * WE DO NOT WANT THE S&W OF THE COMPANY * What aspects of your analysis are strong. Where do you feel that your recommendations are strong and secure? Give examples. * Where do you feel your recommendations are weak perhaps due to lack of information about the company or lack of your knowledge and experience of management accounting. Give examples. Management Accounting Running Head: MANAGEMENT ACCOUNTING The Management Accountant in Business [Name of the Writer] [Name of the Institution] The Management Accountant in Business Introduction Tesco Public Limited Company is a merchandising retailer and a grocery retailer multinational chain which has it’s headquarter in Cheshunt in the United Kingdom. Tesco as compared to its counterparts, Walmart and Carrefour, is the world’s third largest retail store with regard to the revenues that it generates. Tesco stands as the second largest retail stores of the world with regard to its profits, with Walmart being the first.Tesco has its retail stores spread across almost 14 countries of the world of Asia, North America and Europe. Tesco public limited company is the market leader in its home country United Kingdom with a market share of almost 30%. Tesco was founded by Jack Cohen in 1919 which operated as a group of stalls in the market. After its inception today Tesco plc operates across diverse areas of clothing, electronics, furniture, books, financial services and internet services. Tesco is listed at the London Stock Exchange and is a part of the FTSE 100 index having a market capital of approximately ? 24. billion and a symbol of TSCO. Tesco has been operating with seven business segments, namely, Tesco Superstores, Tesco express, Tesco metro, Tesco extra, One stop, Tesco Homeplus, and Dobbies. The market share of Tesco as recorded in 2012 was 30. 2% which was the highest as compared to its European counterparts. Tesco has developed its marketing headline to be, â€Å"Every little helps†. The tag line is represented in all the print and TV advertisements of Tesco which represents the value that Tesco offers to its customers against the price that they pay, with the value being more than the price of the products.Tesco not only works for company profits but also for the community at large in which it operates. Tesco has a value of contributing 1. 8% of its profi ts to the charitable organizations. Tesco has a culture based on its values of trust and respect. Tesco employees and management believe that the customers would come back to visit the stores for their shopping if they are satisfied with the products and the service. Tesco believes that the success of the company as a whole depends on the contribution of the employees and the customer satisfaction.Management accounting is also used in making strategic management decisions (Dixon & Smith, 1993) . Tesco has seven core strategies on which it operates in the long run. The foremost strategy of Tesco is to grow the United Kingdom core business from where it started its operations and expanded globally. The United Kingdom being the largest business operating unit of Tesco generates the largest share of revenues and profits; therefore Tesco needs to develop this major segment of the business.Tesco also has a goal of being the world’s largest retailer which it has been able to achieve since 1997 and has become the leading retail store in almost eight of its international retail stores. Tesco was originally a food retailer when it started operating and from then onwards it has aimed at becoming the strongest brand in the non-food items as well. Besides the growth in the United Kingdom segment Tesco has also a strategy of growing its retail stores in the other markets in which it has presence. Tesco believes in serving the community and working for its welfare so that the corporate responsibility of Tesco is fulfilled.Tesco also aims to make high value brands at very competitive prices. Tesco aims to build brands that are highly appealing to the customers and also in providing the customers with quality products. Tesco also builds teams that are very committed to their work and has developed leaders who are dedicated and hard working. The leaders at Tesco have a major responsibility of building teams and working for the attainment of the organizational goals (Tesc o, 2013). Tesco works closely with the customers and continuously collects their feedback by engaging focus groups in the feedback collection process.The research center facilitates the identification of the research areas and the areas of concern in the profit centers. The customer feedback collected enables Tesco to make changes to the business processes so that they better meet the customer needs. Tesco also works closely with its suppliers to develop the best brands and also bring in a variety of offers for the customers. Tesco works with a number of suppliers including the FMCG companies and the local suppliers providing goods for the regional retail stores.Management Accounting Functions at Tesco Management Accounting is distinguished from Financial Accounting as being an accounting constituent that is concerned with the measurement, analysis and the reporting of information regarding the financial and non-financial operations of the business, and taking decisions which are ne cessary for the attainment of goals of the organization (Bhimani & Langfield, 2007). Management accounting is concerned with the attainment of organizational goals and for serving the strategies of the organization (Durden, n. , p. 2). Hence, management accounting is concerned with the accounting information which is intended to be used within the organization and for the achievement of the goals of the organization. Management accounting is used in organizations to make decisions regarding the competitiveness of the business by the collection, processing, and the communication of the information which will hence help the management of the business in planning, controlling and evaluating the processes of the business and the strategies of the company.The controllers in the large organizations are basically the leaders who run the management accounting function of the company and the controller then reports the accounting information to the finance heads which helps them in taking or ganizational wide decisions. At Tesco the management accountants are known for having a number of responsibilities including the collection of information from the different cost and profit centers, evaluation of the information, and the identification of the appropriate solutions to the problems faced by the cost or profit centers.The management accountants have a responsibility of identifying the appropriate and the most cost efficient distribution systems. This role of management accounting in Tesco is related to the establishment and administration of effective control mechanisms. Another management accounting function of Tesco is the sales forecasting, which is related to the identification of the needs of the customers, sales volumes and the effects of seasonal fluctuations on the sales. The management accountants have also the responsibility of ordering the right quantity of supplies at the right time.The management accountants are also responsible for developing cost, sales and profit budgets and to make capital investment plans. The management accountants also are responsible for the comparison of the plans and budgets with the benchmarks set and the identification of the discrepancies. The management accountants work towards taking the corrective measures in case of variances between the actual and the standard budgets. The task of standard costing is assigned to them which they use to take decisions which are useful for achieving the organizational goals.The group strategy section of the financial reports shows the management roles in Tesco. The customer researches are conducted to know the extent of their satisfaction and their needs. The management accountants also plan the growth rates in the different markets across the world. The management roles are also highlighted in the capital expenditures section of the annual reports of Tesco. The capital expenditure plans are made by the management accountants. Tesco has planned for major capital expend itures which will enable it to diversify and move into expansion phases worldwide throughout all its retail chains.The management accountants are also responsible for evaluating and critically analyzing the cash position of Tesco. The management accountants are charged with the responsibility of generating cash sources and reducing the capital expenditures of the retail stores. The working capital is reduced in 2012 which has enabled Tesco to have increased cash inflows (TESCO, 2012). Functions of Modern Management Accounting at Tesco The roles of management accountants in the modern era have increased and have been very diverse in the organizations.The management accountants have many responsibilities including the formulation of accounting policies, statistical reports, administration of tax policies, coordination of the reports, preparation and the interpretation of the annual reports and the financial statements of organizations, audit of the accounting transactions and the reco rds, compilation of the business costs, costing and planning of inventories, and the interpretation of the statistical reports of the organization.At Tesco the management accountants are engaged in making budgets including annual as well as monthly budgets. The budgets prepared are used for planning the resources and the supplies required for the operations of the business. The management accountants at Tesco are responsible for looking ahead and predicting the future of the business. The management accountants prepare reports which are used within Tesco and are intended for internal use by the management rather than the outside stakeholders.The reports prepared are kept confidential because they serve as the basis of the development of the strategies of Tesco. The management accountants have a dual reporting role within Tesco in that they are responsible for developing and managing the teams within Tesco and at the same time reporting to the chief financial officers and the financi al departments. The management accountants at Tesco provide information related to the forecasts and plans, they perform variance analysis and monitor the cost centers.Therefore they serve to be the controllers as well as the financial planners for Tesco. The management accountants gather financial information from all the department of Tesco, organize the data, analyze and interpret and then report their findings to the financial departments of Tesco. Therefore, the management accounting plays a very key role in Tesco. The management accounting over the years have also developed many management systems (Anthony & Govindarajan, 2007).The management accountants are reported to by all the accounting departments and they are responsible for presenting their financial suggestions to the financial executives for the implementation of the plans. The management accountants at Tesco are therefore charged with the overall responsibility of managing and interpreting very large amounts of acco unting information, and then reporting their findings to the chief financial officers. References Tesco PLC. (2013). Our Strategy. Retrieved from: http://www. tescoplc. com/index. asp? pageid=12 Tesco PLC. (2012).Annual Report and Financial Statements. Retrieved from: http://www. tescoplc. com/files/reports/ar2012/files/pdf/tesco_annual_report_2012. pdf Durden, C. (n. d). The role of management accounting in organizational Control systems: preliminary evidence of an organic Approach. pp. 1-50. Retrieved from: http://www. afaanz. org/openconf/2008/modules/request. php? module=oc_proceedings&action=view. php&a=Accept+as+Paper&id=570 Anthony, R. N. , & Govindarajan, V. (2007). Management control systems. USA: Irwin/McGraw-Hill. Bhimani, A. , & Langfield-Smith, K. (2007). Management Accounting Running Head: MANAGEMENT ACCOUNTING The Management Accountant in Business [Name of the Writer] [Name of the Institution] The Management Accountant in Business Introduction Tesco Public Limited Company is a merchandising retailer and a grocery retailer multinational chain which has it’s headquarter in Cheshunt in the United Kingdom. Tesco as compared to its counterparts, Walmart and Carrefour, is the world’s third largest retail store with regard to the revenues that it generates. Tesco stands as the second largest retail stores of the world with regard to its profits, with Walmart being the first.Tesco has its retail stores spread across almost 14 countries of the world of Asia, North America and Europe. Tesco public limited company is the market leader in its home country United Kingdom with a market share of almost 30%. Tesco was founded by Jack Cohen in 1919 which operated as a group of stalls in the market. After its inception today Tesco plc operates across diverse areas of clothing, electronics, furniture, books, financial services and internet services. Tesco is listed at the London Stock Exchange and is a part of the FTSE 100 index having a market capital of approximately ? 24. billion and a symbol of TSCO. Tesco has been operating with seven business segments, namely, Tesco Superstores, Tesco express, Tesco metro, Tesco extra, One stop, Tesco Homeplus, and Dobbies. The market share of Tesco as recorded in 2012 was 30. 2% which was the highest as compared to its European counterparts. Tesco has developed its marketing headline to be, â€Å"Every little helps†. The tag line is represented in all the print and TV advertisements of Tesco which represents the value that Tesco offers to its customers against the price that they pay, with the value being more than the price of the products.Tesco not only works for company profits but also for the community at large in which it operates. Tesco has a value of contributing 1. 8% of its profi ts to the charitable organizations. Tesco has a culture based on its values of trust and respect. Tesco employees and management believe that the customers would come back to visit the stores for their shopping if they are satisfied with the products and the service. Tesco believes that the success of the company as a whole depends on the contribution of the employees and the customer satisfaction.Management accounting is also used in making strategic management decisions (Dixon & Smith, 1993) . Tesco has seven core strategies on which it operates in the long run. The foremost strategy of Tesco is to grow the United Kingdom core business from where it started its operations and expanded globally. The United Kingdom being the largest business operating unit of Tesco generates the largest share of revenues and profits; therefore Tesco needs to develop this major segment of the business.Tesco also has a goal of being the world’s largest retailer which it has been able to achieve since 1997 and has become the leading retail store in almost eight of its international retail stores. Tesco was originally a food retailer when it started operating and from then onwards it has aimed at becoming the strongest brand in the non-food items as well. Besides the growth in the United Kingdom segment Tesco has also a strategy of growing its retail stores in the other markets in which it has presence. Tesco believes in serving the community and working for its welfare so that the corporate responsibility of Tesco is fulfilled.Tesco also aims to make high value brands at very competitive prices. Tesco aims to build brands that are highly appealing to the customers and also in providing the customers with quality products. Tesco also builds teams that are very committed to their work and has developed leaders who are dedicated and hard working. The leaders at Tesco have a major responsibility of building teams and working for the attainment of the organizational goals (Tesc o, 2013). Tesco works closely with the customers and continuously collects their feedback by engaging focus groups in the feedback collection process.The research center facilitates the identification of the research areas and the areas of concern in the profit centers. The customer feedback collected enables Tesco to make changes to the business processes so that they better meet the customer needs. Tesco also works closely with its suppliers to develop the best brands and also bring in a variety of offers for the customers. Tesco works with a number of suppliers including the FMCG companies and the local suppliers providing goods for the regional retail stores.Management Accounting Functions at Tesco Management Accounting is distinguished from Financial Accounting as being an accounting constituent that is concerned with the measurement, analysis and the reporting of information regarding the financial and non-financial operations of the business, and taking decisions which are ne cessary for the attainment of goals of the organization (Bhimani & Langfield, 2007). Management accounting is concerned with the attainment of organizational goals and for serving the strategies of the organization (Durden, n. , p. 2). Hence, management accounting is concerned with the accounting information which is intended to be used within the organization and for the achievement of the goals of the organization. Management accounting is used in organizations to make decisions regarding the competitiveness of the business by the collection, processing, and the communication of the information which will hence help the management of the business in planning, controlling and evaluating the processes of the business and the strategies of the company.The controllers in the large organizations are basically the leaders who run the management accounting function of the company and the controller then reports the accounting information to the finance heads which helps them in taking or ganizational wide decisions. At Tesco the management accountants are known for having a number of responsibilities including the collection of information from the different cost and profit centers, evaluation of the information, and the identification of the appropriate solutions to the problems faced by the cost or profit centers.The management accountants have a responsibility of identifying the appropriate and the most cost efficient distribution systems. This role of management accounting in Tesco is related to the establishment and administration of effective control mechanisms. Another management accounting function of Tesco is the sales forecasting, which is related to the identification of the needs of the customers, sales volumes and the effects of seasonal fluctuations on the sales. The management accountants have also the responsibility of ordering the right quantity of supplies at the right time.The management accountants are also responsible for developing cost, sales and profit budgets and to make capital investment plans. The management accountants also are responsible for the comparison of the plans and budgets with the benchmarks set and the identification of the discrepancies. The management accountants work towards taking the corrective measures in case of variances between the actual and the standard budgets. The task of standard costing is assigned to them which they use to take decisions which are useful for achieving the organizational goals.The group strategy section of the financial reports shows the management roles in Tesco. The customer researches are conducted to know the extent of their satisfaction and their needs. The management accountants also plan the growth rates in the different markets across the world. The management roles are also highlighted in the capital expenditures section of the annual reports of Tesco. The capital expenditure plans are made by the management accountants. Tesco has planned for major capital expend itures which will enable it to diversify and move into expansion phases worldwide throughout all its retail chains.The management accountants are also responsible for evaluating and critically analyzing the cash position of Tesco. The management accountants are charged with the responsibility of generating cash sources and reducing the capital expenditures of the retail stores. The working capital is reduced in 2012 which has enabled Tesco to have increased cash inflows (TESCO, 2012). Functions of Modern Management Accounting at Tesco The roles of management accountants in the modern era have increased and have been very diverse in the organizations.The management accountants have many responsibilities including the formulation of accounting policies, statistical reports, administration of tax policies, coordination of the reports, preparation and the interpretation of the annual reports and the financial statements of organizations, audit of the accounting transactions and the reco rds, compilation of the business costs, costing and planning of inventories, and the interpretation of the statistical reports of the organization.At Tesco the management accountants are engaged in making budgets including annual as well as monthly budgets. The budgets prepared are used for planning the resources and the supplies required for the operations of the business. The management accountants at Tesco are responsible for looking ahead and predicting the future of the business. The management accountants prepare reports which are used within Tesco and are intended for internal use by the management rather than the outside stakeholders.The reports prepared are kept confidential because they serve as the basis of the development of the strategies of Tesco. The management accountants have a dual reporting role within Tesco in that they are responsible for developing and managing the teams within Tesco and at the same time reporting to the chief financial officers and the financi al departments. The management accountants at Tesco provide information related to the forecasts and plans, they perform variance analysis and monitor the cost centers.Therefore they serve to be the controllers as well as the financial planners for Tesco. The management accountants gather financial information from all the department of Tesco, organize the data, analyze and interpret and then report their findings to the financial departments of Tesco. Therefore, the management accounting plays a very key role in Tesco. The management accounting over the years have also developed many management systems (Anthony & Govindarajan, 2007).The management accountants are reported to by all the accounting departments and they are responsible for presenting their financial suggestions to the financial executives for the implementation of the plans. The management accountants at Tesco are therefore charged with the overall responsibility of managing and interpreting very large amounts of acco unting information, and then reporting their findings to the chief financial officers. References Tesco PLC. (2013). Our Strategy. Retrieved from: http://www. tescoplc. com/index. asp? pageid=12 Tesco PLC. (2012).Annual Report and Financial Statements. Retrieved from: http://www. tescoplc. com/files/reports/ar2012/files/pdf/tesco_annual_report_2012. pdf Durden, C. (n. d). The role of management accounting in organizational Control systems: preliminary evidence of an organic Approach. pp. 1-50. Retrieved from: http://www. afaanz. org/openconf/2008/modules/request. php? module=oc_proceedings&action=view. php&a=Accept+as+Paper&id=570 Anthony, R. N. , & Govindarajan, V. (2007). Management control systems. USA: Irwin/McGraw-Hill. Bhimani, A. , & Langfield-Smith, K. (2007). Management Accounting Running Head: MANAGEMENT ACCOUNTING The Management Accountant in Business [Name of the Writer] [Name of the Institution] The Management Accountant in Business Introduction Tesco Public Limited Company is a merchandising retailer and a grocery retailer multinational chain which has it’s headquarter in Cheshunt in the United Kingdom. Tesco as compared to its counterparts, Walmart and Carrefour, is the world’s third largest retail store with regard to the revenues that it generates. Tesco stands as the second largest retail stores of the world with regard to its profits, with Walmart being the first.Tesco has its retail stores spread across almost 14 countries of the world of Asia, North America and Europe. Tesco public limited company is the market leader in its home country United Kingdom with a market share of almost 30%. Tesco was founded by Jack Cohen in 1919 which operated as a group of stalls in the market. After its inception today Tesco plc operates across diverse areas of clothing, electronics, furniture, books, financial services and internet services. Tesco is listed at the London Stock Exchange and is a part of the FTSE 100 index having a market capital of approximately ? 24. billion and a symbol of TSCO. Tesco has been operating with seven business segments, namely, Tesco Superstores, Tesco express, Tesco metro, Tesco extra, One stop, Tesco Homeplus, and Dobbies. The market share of Tesco as recorded in 2012 was 30. 2% which was the highest as compared to its European counterparts. Tesco has developed its marketing headline to be, â€Å"Every little helps†. The tag line is represented in all the print and TV advertisements of Tesco which represents the value that Tesco offers to its customers against the price that they pay, with the value being more than the price of the products.Tesco not only works for company profits but also for the community at large in which it operates. Tesco has a value of contributing 1. 8% of its profi ts to the charitable organizations. Tesco has a culture based on its values of trust and respect. Tesco employees and management believe that the customers would come back to visit the stores for their shopping if they are satisfied with the products and the service. Tesco believes that the success of the company as a whole depends on the contribution of the employees and the customer satisfaction.Management accounting is also used in making strategic management decisions (Dixon & Smith, 1993) . Tesco has seven core strategies on which it operates in the long run. The foremost strategy of Tesco is to grow the United Kingdom core business from where it started its operations and expanded globally. The United Kingdom being the largest business operating unit of Tesco generates the largest share of revenues and profits; therefore Tesco needs to develop this major segment of the business.Tesco also has a goal of being the world’s largest retailer which it has been able to achieve since 1997 and has become the leading retail store in almost eight of its international retail stores. Tesco was originally a food retailer when it started operating and from then onwards it has aimed at becoming the strongest brand in the non-food items as well. Besides the growth in the United Kingdom segment Tesco has also a strategy of growing its retail stores in the other markets in which it has presence. Tesco believes in serving the community and working for its welfare so that the corporate responsibility of Tesco is fulfilled.Tesco also aims to make high value brands at very competitive prices. Tesco aims to build brands that are highly appealing to the customers and also in providing the customers with quality products. Tesco also builds teams that are very committed to their work and has developed leaders who are dedicated and hard working. The leaders at Tesco have a major responsibility of building teams and working for the attainment of the organizational goals (Tesc o, 2013). Tesco works closely with the customers and continuously collects their feedback by engaging focus groups in the feedback collection process.The research center facilitates the identification of the research areas and the areas of concern in the profit centers. The customer feedback collected enables Tesco to make changes to the business processes so that they better meet the customer needs. Tesco also works closely with its suppliers to develop the best brands and also bring in a variety of offers for the customers. Tesco works with a number of suppliers including the FMCG companies and the local suppliers providing goods for the regional retail stores.Management Accounting Functions at Tesco Management Accounting is distinguished from Financial Accounting as being an accounting constituent that is concerned with the measurement, analysis and the reporting of information regarding the financial and non-financial operations of the business, and taking decisions which are ne cessary for the attainment of goals of the organization (Bhimani & Langfield, 2007). Management accounting is concerned with the attainment of organizational goals and for serving the strategies of the organization (Durden, n. , p. 2). Hence, management accounting is concerned with the accounting information which is intended to be used within the organization and for the achievement of the goals of the organization. Management accounting is used in organizations to make decisions regarding the competitiveness of the business by the collection, processing, and the communication of the information which will hence help the management of the business in planning, controlling and evaluating the processes of the business and the strategies of the company.The controllers in the large organizations are basically the leaders who run the management accounting function of the company and the controller then reports the accounting information to the finance heads which helps them in taking or ganizational wide decisions. At Tesco the management accountants are known for having a number of responsibilities including the collection of information from the different cost and profit centers, evaluation of the information, and the identification of the appropriate solutions to the problems faced by the cost or profit centers.The management accountants have a responsibility of identifying the appropriate and the most cost efficient distribution systems. This role of management accounting in Tesco is related to the establishment and administration of effective control mechanisms. Another management accounting function of Tesco is the sales forecasting, which is related to the identification of the needs of the customers, sales volumes and the effects of seasonal fluctuations on the sales. The management accountants have also the responsibility of ordering the right quantity of supplies at the right time.The management accountants are also responsible for developing cost, sales and profit budgets and to make capital investment plans. The management accountants also are responsible for the comparison of the plans and budgets with the benchmarks set and the identification of the discrepancies. The management accountants work towards taking the corrective measures in case of variances between the actual and the standard budgets. The task of standard costing is assigned to them which they use to take decisions which are useful for achieving the organizational goals.The group strategy section of the financial reports shows the management roles in Tesco. The customer researches are conducted to know the extent of their satisfaction and their needs. The management accountants also plan the growth rates in the different markets across the world. The management roles are also highlighted in the capital expenditures section of the annual reports of Tesco. The capital expenditure plans are made by the management accountants. Tesco has planned for major capital expend itures which will enable it to diversify and move into expansion phases worldwide throughout all its retail chains.The management accountants are also responsible for evaluating and critically analyzing the cash position of Tesco. The management accountants are charged with the responsibility of generating cash sources and reducing the capital expenditures of the retail stores. The working capital is reduced in 2012 which has enabled Tesco to have increased cash inflows (TESCO, 2012). Functions of Modern Management Accounting at Tesco The roles of management accountants in the modern era have increased and have been very diverse in the organizations.The management accountants have many responsibilities including the formulation of accounting policies, statistical reports, administration of tax policies, coordination of the reports, preparation and the interpretation of the annual reports and the financial statements of organizations, audit of the accounting transactions and the reco rds, compilation of the business costs, costing and planning of inventories, and the interpretation of the statistical reports of the organization.At Tesco the management accountants are engaged in making budgets including annual as well as monthly budgets. The budgets prepared are used for planning the resources and the supplies required for the operations of the business. The management accountants at Tesco are responsible for looking ahead and predicting the future of the business. The management accountants prepare reports which are used within Tesco and are intended for internal use by the management rather than the outside stakeholders.The reports prepared are kept confidential because they serve as the basis of the development of the strategies of Tesco. The management accountants have a dual reporting role within Tesco in that they are responsible for developing and managing the teams within Tesco and at the same time reporting to the chief financial officers and the financi al departments. The management accountants at Tesco provide information related to the forecasts and plans, they perform variance analysis and monitor the cost centers.Therefore they serve to be the controllers as well as the financial planners for Tesco. The management accountants gather financial information from all the department of Tesco, organize the data, analyze and interpret and then report their findings to the financial departments of Tesco. Therefore, the management accounting plays a very key role in Tesco. The management accounting over the years have also developed many management systems (Anthony & Govindarajan, 2007).The management accountants are reported to by all the accounting departments and they are responsible for presenting their financial suggestions to the financial executives for the implementation of the plans. The management accountants at Tesco are therefore charged with the overall responsibility of managing and interpreting very large amounts of acco unting information, and then reporting their findings to the chief financial officers. References Tesco PLC. (2013). Our Strategy. Retrieved from: http://www. tescoplc. com/index. asp? pageid=12 Tesco PLC. (2012).Annual Report and Financial Statements. Retrieved from: http://www. tescoplc. com/files/reports/ar2012/files/pdf/tesco_annual_report_2012. pdf Durden, C. (n. d). The role of management accounting in organizational Control systems: preliminary evidence of an organic Approach. pp. 1-50. Retrieved from: http://www. afaanz. org/openconf/2008/modules/request. php? module=oc_proceedings&action=view. php&a=Accept+as+Paper&id=570 Anthony, R. N. , & Govindarajan, V. (2007). Management control systems. USA: Irwin/McGraw-Hill. Bhimani, A. , & Langfield-Smith, K. (2007).
Saturday, January 4, 2020
Cost of Capital for a Business Essay Example Pdf - Free Essay Example
Sample details Pages: 6 Words: 1742 Downloads: 4 Date added: 2017/06/26 Category Business Essay Type Argumentative essay Did you like this example? The cost of capital is an expected return that the provider of capital plans to earn on their investment. Capital used for funding a business should earn returns for the capital providers who risk their capital. For an investment to be worthwhile, the expected return on capital must be greater than the cost of capital. Don’t waste time! Our writers will create an original "Cost of Capital for a Business Essay Example Pdf" essay for you Create order In other words, the risk-adjusted return on capital (that is, incorporating not just the projected returns, but the probabilities of those projections) must be higher than the cost of capital. The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company will include the risk-free rate plus a risk component, which itself incorporates a probable rate of default (and amount of recovery given default). For companies with similar risk or credit ratings, the interest rate is largely exogenous. Cost of equity is more challenging to calculate as equity does not pay a set return to its investors. Similar to the cost of debt, the cost of equity is broadly defined as the risk-weighted projected return required by investors, where the return is largely unknown. The cost of equity is therefore inferred by comparing the investment to other investments with similar risk profiles to determine the market c ost of equity. The cost of capital is often used as the discount rate, the rate at which projected cash flow will be discounted to give a present value or net present value. Cost of debt The cost of debt is computed by taking the rate on a risk free bond whose duration matches the term structure of the corporate debt, then adding a default premium. This default premium will rise as the amount of debt increases (since the risk rises as the amount of debt rises). Since in most cases debt expense is a deductible expense, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity (earnings are after-tax as well). Thus, for profitable firms, debt is discounted by the tax rate. Basically this is used for large corporations only. The formula can be written as (RF + credit risk rate) (1-T), where T is the corporate tax rate and Rf is the risk free rate. Cost of equity Cost of equity = Risk free rate of return + Premium expected for risk Expected return The expected return (or required rate of return for investors) can be calculated with the dividend capitalization model, which is That equation is seen as, Expected Return = dividend yield + growth rate of dividends. Industry Cost of Capital: In layman language industry cost of capital is the average cost of the industry. It includes large firms to small firms cost in the same industry. There are advantage and disadvantage of considering the industry cost of capital. Advantage: When a new company wants to start a business or enter into particular industry they do not know the cost of capital. Because there are many hidden cost is involved in it. So it is advisable to start a business taking into consideration of industry cost of capital. Disadvantage: Many a times it happens that industry cost of capital is high as many large player are into business. So the average becomes high. For taking into consideration that if small company wants to enter into business and they take a industry cost of capital as a benchmark than decision may prove wrong. So, I have taken a example of automobile ancillary business for calculation of industry cost of capital. AUTOMOBILE ANCILLARY UNITS I have studied the capital structure of the automobile ancillary smes in NCR region . Company % of % of cost of cost of WACC Remark as name equity Debt equity Debt per industry Denso auto 11.91 88.08 45.03 0.3438 5.66 Below Motherson 76.08 23.91 12.75 1.71 10.01 Below Harigh 73.21 26.89 0 17.26 4.64 Below ANG auto 36.55 64.44 72.15 6.92 30.82 Above Roto pumps 67.61 32.38 0.33 5.78 2.09 Below Subros ltd. 32.97 67.02 41.37 30.18 33.86 Above Amtek auto 36.59 63.40 0.0647 0.6011 0.394 Below Amtek India 53.10 46.89 0.4307 0.3803 40.70 Above Bharat seets 56.17 43.28 0.0143 14.08 6.1 Below Clutch auto 7.86 92.14 3.35 39.22 62.46 Above TOTAL 452.05 548.43 175.45 116.47 196.8 AVERAGE 45.2 54.8 17.5 11.6 19.6 The cost of equity is 17.5 that means industry is paying higher interest to their equity shareholders. That indicates the industry is attractive in terms of investment. The cost of debt is 11.6 which imply that industry is getting loan on a moderate rate. Private firms There are three major differences between public and private firms in terms of analyzing optimal debt ratios. One is that unlike the case for publicly traded firms, we do not have a direct estimate of the market value of a private firm. Consequently, we have to estimate firm value before we move to subsequent stages in the analysis. The second difference relates to the cost of equity and how we arrive at that cost. Although we use betas to estimate the cost of equity for a public firm, that usage might not be well diversified. Finally whereas publicly traded firms tend to think of their cost of debt in terms of bond ratings and default spreads, private firms tend to borrow from banks. Banks assess default risk and charge the appropriate interest rates. To analyze the optimal debt ratio for a private firm, we make the following adjustments. First, we estimate the value of the private firm by looking at how publicly traded firms in the same business are priced by the market. Thus, if publicly traded firms in the businesses have market values that are roughly three times revenues, we would multiply the revenues of the private firm by this number to arrive at an estimated value. Second, we continue to estimate the costs of debt for a private firm using a bond rating, but the rating is synthetic, based on interest coverage ratios. We tend to require much higher interest coverage ratio is to arrive at the same rating, to reflect the fact that banks are likely to be more conservative in assessing default risk at small, private firms. Company cost of capital: company cost of capital is the rate of return expected by the existing capital provider. It reflects the business risk of existing asset and the capital structure currently employed. If a firms wants to use its companys cost of capital, popularly called weighted average cost of capital, for evaluating a new investment. Two conditions should be satisfied. The business risk of the new investment is the same as the average business risk of existing business. In other words new investment will not change the risk complexion of the firm. The capital structure of the firm will not be affected by the new investments. Put differently, the firm will continue to follow the same financing policy. Firms specific factors Firms Tax rate The tax rate benefits from debt increase as the tax rate goes up .in relative terms, firms with higher taxes rates will have higher optimal debt ratios than will firms with lower tax rates, other things being equal. It also follows that a firms optimal debt ratio will increase as its tax rate increases. At a 0 percent tax rate, the optimal debt ratio is zero for all three firms. Without the benefits that accrue from taxes, the rationale for using debt disappears. As the tax rate increases, the optimal debt ratios increase for all three firms but significant at different rates. Pretax returns on the firm The most significant determinant of the optimal debt ratio is a firms earnings capacity. In fact, the operating income as a percentage of the market value of the firm is usually good indicator of the optimal debt ratio number is high the optimal debt ratio will also be high. A firm with higher pretax earnings can sustain much more debt as a proportion of the market value of the firm because debt payments can be met much more easily from prevailing earnings. Variance in operating income The variance in operating income analysis in two ways. First it plays a role in determining the current beta: firms with high variance in operating income tend to have high beta. Second the volatility in operating income can be one of the factors determining bond ratings at different levels of debt ratings drop off much more dramatically for higher variance firms as debt levels are increased. It follows that firms with higher variance in operating income will have lower optimal debt ratios the variance in operating income also plays a role in the constrained analysis , because higher variance firms are much more likely to register significant drops in operating income. Consequently the decision to increase debt should be made much more cautiously for these firms. Comparing to industry average Firms sometimes choose their financing mixes by looking at the average debt ratio of other firms in the industry in which they operate, the operating at a debt ratio slightly higher than those of other firms in the industry in both market and book value terms, where as a market debt ratio slightly higher than the average firm but a book debt ratio which is slightly lower. That firms is comparison are that firms within the same industry are comparable and that, on average , these firms are operating at or close to their optimal .firms within the same industry can have different product mixes , different amounts of operating risk, different tax rates and different project returns . Comparable firm A firm similar to the firm being analyzed in terms of underlying risk, growth and cash flows patterns. The conventional definition of comparable firm is one that is in the same business as the one being analyzed and of similar size. There is a data set online that summarizes market value and book value debt ratios by industry, in addition to other relevant characteristics. Conclusion: It is a advisable for the new company to calculate industry cost of capital rather than cost of capital estimated for a single firm. Industry cost of capital show true as well as overall nature of business in the industry. While firms cost of capital is the mirror of only single firm. As we have seen many variation in the every firm in the same industry. So, it is better to calculate industry cost of capital rather than firms cost of capital. Many times it happens many firms do not show their true and fair view of cost of capital. It may Access or sometimes less. We have always probability that single firm may manipulate the number. Hidden cost may not see in their calculation. So that is why the industry cost of capital is better for decision making.
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