Question 1
a). Calculation of variances
The material price variance is calculated as the budgeted price less the actual price. The standard per cost is 3.8 dollars per kg (£15200/4000=£3.8) while the actual per unit cost is £14742/3780=£3.9 per kg. This means the material price variance is £0.1 per kg.
Material usage variance is the budgeted quantity of materials and the actual quantity valued at the budgeted per unit price. The budgeted per unit price is £3.8. The difference in the two quantities is 4000-3780=220kgs. This valued at £3.8 gives a material usage variance of £836. The labour rate variance is the difference between the actual labour rate paid and the standard labour rate to workers multiplied by the definite number of hours worked. The budgeted labour rate is £111500/8000hrs = £13.9375 per hour. The actual labour rate is £93600/7200=£13. The labour rate variance is therefore 0.9375*7200 = £6750.
The labour efficiency variance is the variation between the actual number of hours worked and the budgeted hours valued at the standard rate. This gives (8000-7200)*13.9375= £11150 as the labour efficiency variance.
The variable overhead efficiency variance is the variation between the standard variable overhead cost and the actual variable overhead cost absorbed. Variable overhead cost is equal to actual output multiplied by budgeted rate per unit. The variable costs are absorbed on a direct labour basis equal to £13.9375. The variable overhead variance is (7200-6800)*13.9375= £5575.
The fixed overhead expenditure variance is the difference between the actual and budgeted fixed overheads valued at the budgeted rate per unit. The rate per unit is based on the number of balls produced: £10000/1000=£10. This gives the fixed overhead expenditure variance as (£10950-£10000)*£10per ball= £9500.
b). Reasons for material price variances identified
Material price variance may be because of purchasing of inferior quality of materials or because of declining prices of materials in the market. Consequently, the variance may be because of s failure of the purchasing department to secure the most advantageous supply of general increase in the price rise. Material usage variance may because of problems arising from machinery resulting to destruction of large quantities of products.
c). Three Types of Standard That Football Fanatics May Adopt
Some of the standards that football fanatics’ manufactures may adopt include the International Accounting Standards Board, IASB, the Accounting Standards Board (ASB) and requirements of legislation related to accounting.
Question 2
a). Definition of group, parent, associate and subsidiary
A parent is an entity that consists of one or more subsidiaries. In addition, the parent company is not considered as an investment company.
A subsidiary is an entity such as a partnership or a sole proprietorship that is controlled by another entity referred to as the parent company or entity. The subsidiary has more than 25% of its outstanding voting securities owned by the parent company.
An associate refers to an entity that may include a partnership in which the investor has a significant influence and is not a subsidiary or an interest in a joint venture. Parent companies have a small influence or a non controlling interest.
b). Non-Controlling Interest
Non-controlling interest refers to a portion of the net assets in a subsidiary, which is not directly or indirectly linked to the parent company. This kind of ownership stake provides the investor with no influence on how to run the company. The non-controlling interest is accounted for by incorporating it in the balance sheet, as opposed to including it in the liabilities.
c).Why do Businesses Operate in Groups
One reason businesses operate in groups is that it allows better decisions to be made. As a group, the businesses are able to develop accurate decisions based on a variety of expertise from the various businesses. Secondly, working in groups allows companies to reduce risks carried by one business. Thirdly, in cases where the businesses are successful, working in groups helps to improve morale among the employees. Fourthly, businesses in groups are able to respond quickly to competition from other businesses.
d). Rationale for International Financial Reporting Standards
The application of the basic accounting principles varies in the different economic and cultural environment. This has resulted to significant differences in the way accountants report similar transactions. On a global scale, these differences result in additional complications especially when preparing, consolidating, auditing and interpreting financial statements. In foreign transactions, reconciling of the financial statements before consolidation results to increased costs in cases where there mergers to be formed. Consequently, the differences in how account are treated result to less optimal allocation of resources, hence the need for having an International Financial Reporting Standard.
e). Components of the Financial Statements Required by the International Accounting Standards
Components of the financial statement include end of period statement of financial position, statement of cash flows for the period, statement of comprehensive income for the period, a statement of equity changes for the period, the summary of significant accounting policies and other information. Furthermore, the financial statement shall consist of a statement of financial situation as at the start of the earliest period that an entity applies an accounting policy.
Question 3
a). Perspectives of a balanced scorecard
Financial Perspective
The financial perspective includes goals such as profitability for growth, sales growth and cash flow. These indexes provide essential information on the assessment of the operational, business activity. The financial perspective acts as the reference point for the other three perspectives. Financial performance measures include profit ratio, revenue growth, market share, growth, corporate goals, cash flow, net profitability ratio, operating ratios and loss ratios, return on capital employed, return on investment, sales revenue, share price and the return on shareholder funds.
Customer Perspective
Customer perspective focuses on the study of the diverse types of customers, their extent of satisfaction and the process involved in delivering products and service to customers. Business should clearly define their target customers, and markets to ensure future business success. It becomes essential to classify the customers’ needs according to price, product performance, product functionality, service time since customers’ needs vary within the various market. Performance measures include market share, repeat purchases, number of complaints, response time, average time to process orders, new customer acquisitions and the perceived value for money.
Internal Perspective
This perspective focuses on the internal processes in the operation of a company. In addition, the process specific costs are made transparent and allowing conclusions regarding efficiency and effectiveness to be drawn. The internal perspective seeks to determine areas in which the business excels in and identifying critical processes, which satisfy both customers and shareholders. The internal perspective is aimed at streamline the operations in a business, increasing motivation among the employees, improving technology and ensuring quality performance. Performance measures for internal perspective include reduced waste, increased productivity, and improvement in efficiency, improvements in morale, amount of reworking and amount of recycled waste.
Learning and Innovation Perspective
This perspective looks at the potential of improvement and increasing value of a business. In addition, it seeks to search the areas into which the business can make improvements and what activities it should be involved in ensuring improvement and creation of value in the future. The major element of this perspective is the use of information systems, which provides information on the other three perspectives and they affect future decisions of the organization. Some of the performance measures include the extent of employee empowerment, value of new product in sales, amount of training, the percentage sales in new products, number of new products and the number of strategic skill learned.
b). How is the balanced scorecard used in performance evaluation?
The balanced scorecard provides a comprehensive evaluation of employee and organization performance. The balanced scorecard gives a complete view of the employees and the organizational performance, which helps in the alignment of the of the employees action plan with the organization’s goals.
c). Balanced in the balanced Scorecard
The term balanced indicates the balancing of the company’s financial and nonfinancial indicators. Likewise, the balanced scorecard should provide a balanced view of the company in terms of customer relationships, growth, internal business processes and education. Consequently, long-term goals and short-term goals need to be balanced. Furthermore, the term balanced relates to the use of indicators to decide about 90% of the business without repeating any indicator. Moreover, the indicators themselves need to be balanced.
d). How is Benchmarking used in Performance Evaluation and the Steps in the benchmarking Process?
In the performance evaluation of a business, certain standards need to be recognized to be used as a criteria for evaluation. For instance for employee evaluation, the ability of an employee to achieve the set standards provides the basis of conducting performance evaluation. These benchmarks can be set in areas such as quality, productivity and service effectiveness.
The first step in the benchmarking process includes determination of the functional areas that will benefit the most from the benchmarking process based on the importance and cost. The second step will include the identification of key factors and variables that are going to be used to measure the functional areas identified in step one. That is the collection of information to be used. The third step will involve the analysis of the collected information. This will include the data presentation inform of graphs as a way if identifying performance gaps in the different processes within the organizations. The fourth step involves the implementation of actions that will deal with the performance gaps. This step involves the formation an action plan. The fifth step involves the monitoring of the various processes to endure maximum benefits are achieved. It includes the assimilation of information, evaluation of the progress made and repetition of the impact of the modifications.
Question 4
a). Key principles in the UK Corporate Governance Code
Leadership
One of the elements under leadership includes the role of the board. Each company will be headed by a board that will responsible for the long-term success of the company. Another element will be the division of responsibilities between the running board and the executive responsibility for the running of the organization's business. The third element is the chairman who will be responsible for the leadership of the board and make certain that it is effective. The fourth element is the non-executive directors who will assist in the development of strategy proposals and provide constructive criticism.
Effectiveness
The first element under this principle will be the composition of the board. The members of the board will be required to have the suitable experience level and skill, knowledge of the company and independence that will allow them to discharge their duties effectively. The second element consists of the appointment of the board. This process is required to be formal, transparent and rigorous in the appointment of new directors to the board. In addition, the directors shall be required to be committed in the discharge of duties to the company. Consequently, the directors shall be required to refresh their knowledge and skills regularly. Additionally, the board will require to be supplied with information that will assist in discharging of their duties. Other key elements of effectiveness include evaluation of the performance of the board and re-election regularly to be based on the performance on the board.
Accountability
One of the main elements of accountability is financial and business reporting. The board will be required to provide a balanced assessment of the company’s financial position and future prospects. The second element under accountability is risk management and internal control. Under this, the board shall be responsible for determining the nature and extent of the significant risks in the process of achieving its strategic objectives. Furthermore, the board shall be responsible for managing internal control systems. The third element under accountability is the audit committee and auditors. The board shall be responsible for maintaining appropriate relationships with the company’s auditors.
Remuneration
One of the elements under this principle includes the level and components of remuneration. The levels of remuneration should be sufficient to attract, retain and motivate directors in the company. For the executive directors, their remuneration should be structured in a way through which the rewards can be linked to corporate and individual performance. The other element entails the use of a formal and transparent procedure in developing policies on the remuneration packages of individual directors.
Relations with Shareholders
The key elements include dialogue with stakeholders and constructive use of the AGM. The board needs to ensure that there is satisfactory dialogue with stakeholders. Additionally, the board should use AGM as a means of communicating with investors.
b). Role of an Audit Committee
The roles of the auditing committee include monitoring the integrity of the company’s financial statements and announcements. In addition, the audit committee reviews internal financial controls and risk management systems. Furthermore, the audit committee is responsible for monitoring and reviewing the internal audit function.
Question 5
a). Payback Period
For machine A
For machine B
b). Accounting Rate of Return
For machine A
For machine B
c). Net Present Value
For machine A, NPV is calculated as shown below
Year
Net Cash flows in(£)
Present Value Factor
Present Value(£)
NPV
-2988
For machine B NPV is calculated as shown below
Year
Net Cash flows in(£)
Present Value Factor
Present Value (£)
NPV
-12490
The management should not invest in any of the machines since the return on the investment will be less than will be less than the minimum rate of return for both machines. This is based on the NPV since it is based on the time value of money, which the other two techniques do not consider. According to the payback period, the excellent option of investment for the management would have been machine A since it requires a shorter period to recover the amount of the initial investment. Based on the accounting rate of return the best option of investment for the management would still be machine A as it has a higher ratio of average annual income compared to the average cost of investment.
