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财政预算 hnd财政预算 hnd DE3J 35: Preparing Financial Forecast Introduction The report is going to show the flexed budget for the Tricol plc and the investment evaluation and produce a report to the management of the company. PART A Flexible budget for Tricol plc For Ju...

财政预算 hnd
财政预算 hnd DE3J 35: Preparing Financial Forecast Introduction The report is going to show the flexed budget for the Tricol plc and the investment evaluation and produce a report to the management of the company. PART A Flexible budget for Tricol plc For June Per Unit Expected Flexed Actual Variance Budget Budget 1600 units 2,000 units 1600 units F/A ? ? ? ? ? Raw Material cost 40 80,000 64,000 61,600 2,400 F Direct Material used 4 80,000 6,400 5,600 800 F Direct Labor cost 18 36,000 28,800 35,200 6,400 A Direct Labor used 2 4,000 3,200 3,520 320 A Variable Production 2 4,000 3,200 3,200 0 Overheads Insurance 2,200 2,200 2,400 200 A costs Depreciation 1,500 1,500 1,500 0 Fixe d Rent and 2,500 2,500 2,500 0 Cost Rates Administratio2,000 2,000 2,200 200 A n overheads Total Cost of 128,200 104,200 108,600 4,400 A production 1 DE3J 35: Preparing Financial Forecast The calculation of the variances: Materials 1. Direct material total variance: (Standard units of actual production x standard price)- (actual quantity x actual price) (1,600units×4kg×?10/kg)- ?61,600 =2,400(F) 2. Direct material usage variance: Standard price× (standard units of actual production -actual quantity) (?10/kg)× (1600units×4kg-5,600kg) =8,000(F) 3. Direct material price variance: Actual quantity× (standard price-actual price) 5600kgs× (?10/kg-?11/kg) =5,600(A) Labor 1. Direct labor total variance: (Standard hours of actual production ×standard rate)- (actual hour× actual rate) (2hours×?9/hours×160?0units)- (3520hours×?10/hours) 2 DE3J 35: Preparing Financial Forecast =6,400(A) 2. Direct Labor rate variance Actual hour× (standard rate- actual rate) 3,520hours× (?9/hours-?10/hours) =?3,520(A) 3. Direct labor efficiency variance Standard rate× (standard hours of actual production-actual hours) (1600units×2hours×?9/kg)- 3,520hours =2,880(A) Overhead 1( Overhead absorption rates: Variable+ fixed budgeted overheads Total budgeted activity = ?3,200+?2,200+?1,500+?2,500+?2,000 1,600units = ?7.125/unit 2. Total overhead variance: Total standard overhead for actual production- total actual overheads = (7.125/unit ×1600units)-(?3,200+?2,200+?1,500+?2,500+?2,000) =?400(A) 3 DE3J 35: Preparing Financial Forecast Report for management Introduction: The report is to illustrate the use of standards in managing costs, the author focused on a production of Tricol plc. From the fixed budget, all the variances are over 3%, and the total cost of production had an adverse variance, it has increases by 4.2%. So we can suppose that the increase of direct labor cost, insurance and administration cost are all the reasons that leaded the increase of total cost of production. And there are the details of the analysis of these variances. MATERALS The material variance: , Direct material total variance (Standard units of production ×standard price)- (actual qualitative× actual price) (1,600units×4kg×?10/kg)-,61,600 =2,400(F) , Direct material usage variance Standard price× (standard units of actual production -actual quantity) (?10/kg)× (1600units×4kg-5,600kg) =8,000(F) 4 DE3J 35: Preparing Financial Forecast , Direct material price variance Actual quantity× (standard price-actual price) 5600kgs× (?10/kg-?11/kg) =5,600(A) As calculated above, it can be seen that the cost of raw material is less than that budgeted, thus it is a favorable variance. Here are some of the possible reasons like Sales activity was not on target. Material Usage Variance: The Material Usage Variance is favorable. One possible reason for it is the company is now using higher-grade materials. Besides the company has recently concluded a higher-than-expected wage settlement for production operatives, so we can see that the company is using higher grade workforce. Otherwise, the company has recently upgraded the production machinery used for this product, so the material usage variance is favorable. Material Price Variance: The Material Price Variance is unfavorable, because the actual purchase price exceeded the standard price. Notice that the price variance is based on the quantity of material purchased, not the quantity actually used in production. One reason is that because the higher quality used by the company so the cost on the material is higher 5 DE3J 35: Preparing Financial Forecast than budgeted. Second, because the company has recently switched suppliers so we should find that the company may lose the discounts. Last, maybe the specification of this material has changed. So the cost of the material increases. Maybe due to the poor performance by the buying department staff, so the company paid more on the materials. On the other hand, maybe due to changes in market condition between setting standard and actual event, so the actual cost on materials changes. LABOUR: , Direct labor total variance (Standard hours of actual production ×standard rate)- (actual hour× actual rate) (2hours×?9/hours×160?0units)- (3520hours×?10/hours) =6,400(A) , Direct Labor rate variance Actual hour× (standard rate- actual rate) 3,520hours× (?9/hours-?10/hours) =?3,520(A) , Direct labor efficiency variance (Standard rate)× (standard hours of actual production-actual hours) (1600units×2hours×?9/kg)- 3,520hours =2,880(A) 6 DE3J 35: Preparing Financial Forecast Labor Efficiency Variance: The Company used 320 more labor hours than those planned for the actual level of production. This variance is unfavorable because the actual rate exceeded the standard rate during June. Possible reasons are: Lower labor efficiency because the labor is not familiar with the upgraded production k of experience in their work; The machinery; Using lower graded labors cause lac company has recently concluded a higher- than– expected wage settlement but maybe it did not boost the efficiency of the workforces in fact, etc. Labor Rate Variance: The labor rate variance is unfavorable too, because the actual direct-labor hours used in June were more than the standard hours allowed. One reason is that the company uses a higher grade of workers than that was planned. So the actual labor rate per hour is increasing. Other reason may be that it is shortage of skilled labor in this company and there are unplanned overtime which should not have taken place. Maybe there are some changes in labor market condition. Because of these reasons the Labor Rate Variance is adverse finally. Overhead Variance: From the Flexed Budget for June we can find that there are adverse variances in 7 DE3J 35: Preparing Financial Forecast insurance costs and administration overhead. The insurance cost has increased from (?2,200 to ?2,400), which may be caused by the new machinery, because the protection of the new machine requires higher insurance premium. The administration overhead has increased from (?2,000 to ?22,000), possible reasons are: The company brought more office stationery; Depreciation of equipments in office; Office rent and rates have increased; More office salaries, etc. Significance: Material Total=2,400/64,000×100%=3.75% Usage=8,000/64,000×100%=12.5% Price=5,600/64,000×100%=8.75% Labor Total=6,400/28,800×100%=22.2% Labor rate =3,520/28,800×100%=12.2% Efficiency =2,880/28,800×100%=10% Overhead 400/11,400×100%=3.5% All the rates of significance for Variance analysis of this company of this year are 8 DE3J 35: Preparing Financial Forecast over3%, so the company must take action to investigate them for finding the main problems causing it. Recommendation , Company should take action to investigate the Variance with a rate of more than 3% to find the main problems causing them , Investigate paying higher than expected wage while the labor efficiency variance is negative , Source an alternative supplier offering the current grade at a lower price , Identify if it would be possible to use a lower grade of material at a cheaper price, without compromising the quality of our product too severely , Establish if it would be beneficial to negotiate a bulk order with the prospect of obtaining the material at a cheaper unit cost , Employ staff with high quality to improve the labor efficiency, therefore it can decrease the labor hour. , Train the workforce on their working skills to improve the labor efficiency, reduce the labor hour and result in increased scrap. , Using some positive ways to increase the morale of our staff Conclusion 9 DE3J 35: Preparing Financial Forecast The overall actual variance is adverse. One reason is that the company has recently upgraded the production machinery used for this product. Besides, the company has recently switched suppliers and is now using higher-grade materials. Otherwise, the company has recently concluded a higher-than-expected wage settlement for production operatives. PARTB The company has been advised that the market rate of return on investment project is correctly 10%. It is also keen to recoup the cost of the investment within five years. So the next two investment appraisal might be useful. Payback The total investment ,100,000+,600,000+,900,000=,1,000,000 Yearly Net Cash Flow Cumulative Cash Flow ? ? Profit in year 0 (1,000,000) (1,000,000) Profit in year 1 160,000 (840,000) Profit in year 2 160,000 (680,000) Profit in year 3 320,000 (360,000) Profit in year 4 320,000 (40,000) Profit in year 5 NIL 40,000 Profit in year 5 280,000 280,000 10 DE3J 35: Preparing Financial Forecast Net Cash Benefit 280,000 Payback: 5 years 40,000 / 320,000* years 5 = 4years and 1.5months 360,000 but only ?40,000 is required to In year 5 the cash flow for the full year are , recoup the initial investment. Therefore, 1.5 months is enough to gap the required plus in the fifth year. Thus, it totally costs 4 years and 1.5 months to cover the whole capital invested. Net Present Value Calculation of Net Present Value at 10%. Annual cash Present value Present Value flow ? factors at 10% ? ? Year 0 (1,000,000) 1.000 (1,000,000) 1 160,000 0.909 145,440 2 160,000 0.826 132,160 3 320,000 0.751 240,320 4 320,000 0.683 218,560 5 320,000 0.621 198,720 935,200 Net Present (64,800) Value It can be seen that the actual rate of return must be less than 10%. The deficit means that the annual cash flows are not enough to allow more interest to be deducted and still repay the original investment. This investment is, therefore, not worthwhile as it 11 DE3J 35: Preparing Financial Forecast is less than fulfils the requirement of a 10% return. Assumptions: , Uncertainty does not exist , here is no impact of taxation and inflation on the figures , Unlimited funds can be raised at a competitive rate , The “Market rate of return” will maintain the same during the period , The total cost of project will be payable in the beginning year , The expected revenue from the investment, that is the expected Net Cash Flow after deduction of all relevant costs is certain, and will be occurred , Discount rate will not be changed Note: , All the investment is made for one time merely at the beginning of the project. , Ignore the impact of inflation and taxation. , Hypnosis the rate of return is invariable. Recommendation The net present value is a better way to assist the company to evaluate the investment than other methods. 12 DE3J 35: Preparing Financial Forecast , The NVP has considered the time value of money and the use of cash flow. , NVP can help to provide the basic objective for evaluating and selecting investment project. , It takes accounts of both magnitude and time of expected cash flow in each period of a project’s life. , The whole life of the projected has considered, it become unnecessary and misleading to consider accounting profits which are time bound. , It focuses on cash inflows and outflows rather than on accounting profits. , NVP takes into account required rate of return of company. , The payback technique is considered to be simple and easy to understand. , NVP ignores the time value of money and ignore the fact that benefits from different projects may accrue at an uneven rate and other factors. The actual rate of return must less than 10%. Due to much interest has been deducted to allow all the capital to be repaid. The true rate of return on the project and is known as the Discounted Cash Flow Yield. In other words, the DFC yield is the solution rate of interest that leads to a Net Present Value of Zero. The other elements: We should consider other elements including non- financial elements. , The investment can develop the local economic. , It can resolve the problem of high rate of unemployment. 13 DE3J 35: Preparing Financial Forecast , It will result in the high risk to the company if the project is dangerous. , Whether the investment will pollute the environment of make it better. , Whether the project will develop the financial resources of the company. Thus, although the NPV has not reached satisfied level, we should also take account of the project. Conclusion After the variance analysis, the company might be known what aspect they should improve in order to increase production to save the cost. Use the right investment appraisal techniques can help the company make sure that if the investment is benefit. Considering the other elements seems to be also important. 14
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