Alpha Group
Consolidated financial statement of financial position for the year ended 31st December, 2015.
Items £ (000) £ (000)
Long-assets 2014 2015
Investment property, fair value 2500 2500
Property, plant, $ equipment 4324 4818
Total long-term assets 6824 7318
Current assets
Cash 200 140
Cash equivalent 30 20
Trade receivables 1900 1200
Inventory 1000 1950
Dividends 100 190
Non-controlling interest share 120 150
Inventory, fair value cost to complete and sell 180 150
Total current assets 3530 3800
Total assets 10354 11118
Equity and liabilities
Share capital 1500 1250
Retained earnings 1910 1000
Profits for the year 1000 1250
Dividends payables 100 190
Total equity attributable to owners 4510 3690
Less non-controlling interest (730) (630)
Total equity 3780 3060
Liabilities
Current liabilities $ other liabilities
Trade payables 250 1890
Warranty provision 401 391
Environmental restoration provision 280 260
Provision for doubtful receivables 200 115
Accumulated depreciation on property 1450 1060
Total current liabilities 2581 3716
Long-term liabilities
Long-term debt 2300 2800
Interest accrued on long-term debt 230 280
Total long-term liabilities 2530 3080
Total equity and liabilities 8891 9856
Purpose and operation of remuneration committee in ensuring good corporate governance
The remuneration committee contributes to the development and administration of transparent and fair procedures for policy setting. Additionally, the committee assists the board of management in designing the strategies for human resource management by setting the remuneration procedures for both the official in charge of management and other employees. It keeps the oversight to ensure that remuneration packages are based on merits, competencies, performance, and qualifications. This promotes effective corporate governance that maintains the balance of stakeholders’ interests. The committee also scrutinizes the business strategies set by the companies to align the remuneration arrangements of the companies with their strategies. It sets the remunerations and other necessary compensations for all employees (Abeysekera, 2012).
How performance evaluation can result in changes in performance and two possible negative consequences of performance evaluation
Performance evaluation involves the acknowledgment of the performance of non-probationary employees through a constructive process. The evaluation of employees’ performance is often intended to guide them in their duties. The practice of evaluating the performance of employees can affect their performance in various ways. It ensures that every employee is motivated to achieve their individual targets, which contribute to the overall success of organizations. Additionally, performance evaluation increases the motivation of employees towards executing their duties and promotes their development. As a result, the productivity of personnel increases, leading to the improved organizations’ performance. However, performance evaluation has various harms on the organizations.
One of the negative consequences for carrying out employees’ performance evaluation is that it leads to internal ranking as well as other ratings based on merits. These ratings and ranking often result in internal competition among employees and the management officials. Individuals within the organization believe that performance evaluation is a major basis for promotions and other forms of employees’ elevation within the organization. As such, they engage in unnecessary competitions which hinder effective management. The performance evaluation may also undermine employees’ motivation. It may lead to the development of the feeling of superiority and contempt among employees. Consequently, individuals who were initially doing well feel demotivated, resulting in deterioration in the performance of the organization.
Value chain analysis and how it can help an organization to gain competitive advantage
Business organizations undertake various activities with an objective of increasing their profitability. However, the increased competition tends to hinder the efficient realization of the organizations’ goals. High competition reduces the profits and this prompt the management to adopt some strategies to restore and maintain the profit levels of their organizations. One of the tools used by the management to enhance the competitiveness of their organizations is the value chain analysis. Essentially, this analysis involves the application of managerial skills to analyze the internal activities of the firms. The main objective of carrying out the value chain analysis is to help the management in the identification of the most valuable activities that can enable the organization to carry out product or cost differentiation (Hergert and Morris, 1989).
The identification of the valuable activities of the organization through value chain analysis enables the management to do cost differentiation, which entails setting competitive costs. These costs are set by considering the prices offered by competitors. As such, firms are able to set relatively low prices that enable them to gain competitive advantage. Additionally, through value chain analysis, firms are in a position to lower the cost of internal activities (Hergert and Morris, 1989). As a result, an organization offers products and services at lowers prices thereby gaining a competitive advantage.
Most business organizations use value chain analytical tools to classify their activities on the basis of their returns. The amount of resources utilized in a particular activity determines the cost of that activity. Through value chain analysis, the business managements are able to restructure their internal activities by reducing the resources allocated to less profitable activities or even doing away with them and concentrating on activities that are more profitable. This allows the managers to allocate resources efficiently thereby reducing the costs involved in undertaking various projects. Such high efficiency in resources allocation lowers the cost, resulting in improved competitive advantage of the organizations.
Considering the information provided for Macrae Manufacturing Ltd that utilizes the standard system of costing, various variances such direct labor and material variances can be obtained. The labor variances can be obtained as labor rate or efficiency variance. Since the labor variances are the differences between the standard and actual resources incurred in the production, the labor variances will be calculated as follows
a) Labor rate variance = (actual rate× actual hours)- (standard rate × actual hours) =
(2.7× 27000)- (3×27000) = 8100
Labor efficiency variance= standard rate (actual hours – standard hours) =
3(27000-30000) =9000
b) Labor variance occurs due various factors. Business organizations usually have their standard ways of costing the labor. Therefore, if the rate paid to the labor is higher or lower than the standard one, labor variances are likely to occur. Another factor that could lead to labor variances is the use of materials that are of inferior quality or technical or mechanical problems with machines used. Additionally, labor variances could arise due to payments or bonuses paid to overtime workers which were not expected. Labor variances occur when there is deviation of labor rare or efficiency with the standard rates or efficiency. These variances are measured by the differences in costs due to variations in either labor efficiency or costs.
c) material variances entails the differences in either material usage or the price of the materials used in the production of a given volume of products and the standard materials expected by the organization. From the given data, the material variances could be computed as follows
Material price variance = (the actual price × the actual quantity) – (standard price × actual quantity =
(3 × 7) – (4 ×7) = 7 favorable variance
Material usage variance = standard price (actual quantity- standard quantity) =
4(7-5) = 8 unfavorable variance
d) Material variances occur as a result of various factors. The procurement department may purchase materials of higher or lower quality than the standard quality required by the organization. This will lead to higher or lower material prices than what the organization is prepared for. The purchase of material in large quantities often involves some quantity discounts. The impacts of these discounts on prices contribute to material variances. Additionally, the variations in the yield of material lead to material variances.
e) How Macrae Manufacturing would calculate the standard cost for one unit of the product
Items £
Direct labor used 3@ 1.4 per hour 4.2
Direct material 7@ 3 per kilo 21
Standard production cost 25.2
Main stages of a benchmarking exercise
Benchmarking entails the strategy that business organizations use to compare themselves with their competitors as a way of improving their competitive positions. This exercise involves five main stages that include determining what the organization intend to benchmark, the formation of a team, identifying the partners, collection and analysis of data, and implementation and monitoring of results (Freiling & Huth, 2005).
Purpose of using non-financial performance measures
Non-financial performance measures entail the quantitative measure of the performance of an organization or an individual which are not expressed in money terms. The major purpose of these measures is to enable the management to predict the future performance of the organization by considering the progress of non-financial aspects such as employees or customer satisfaction.
Meaning of cash equivalent
Cash equivalent refers to an investment that is highly liquid, particularly with a short maturity of fewer than three months. Essentially, cash equivalent entails short-term investments that can be converted into cash after a short period depending on the needs of an individual or an organization. Examples of a cash equivalent include marketable securities and commercial papers.
Two methods and layout for reporting cash flows
Cash flows can be reported using either direct or indirect methods. The direct layout reports the cash flows that are associated with various items which affect the cash flows. Some of these items are dividends and interest received, income tax, and cash paid by the customers. On the other hand, the indirect method entails reporting the cash flows using the net profit or loss and other items such as expenses that affect the income (Statement of Cash Flows, 2016).
Meaning of capital investment appraisal and three assumptions made in its application
Capital investment appraisal also known as capital budgeting, entail the process in which an organization determines whether its capitalization structure has the capacity to fund long-term investments and whether such investments are worth using the firm’s capital. One of the assumptions made during the application of capital budgeting is that decisions are not based on accounting profits but the cash flows. Another assumption is that opportunity costs are incorporated in the cash flows (Afonso & Cunha, 2009). Additionally, the application of the capital appraisal assumes that the there are no financing costs since they are taken care of by the weighted-average costs of the capital that are used in the discounting of cash flows.
Meaning of time value of money
TVM ( time value of money entails the perception that the value of a given amount of money in the current time is higher than the future value of the same amount because money has the capacity grow in value. For example, if an individual has $ 500 today and that money is invested somewhere, in future the same amount will have greater value because of the interest earned.
Use of two discounted cash flow techniques and the decision rule used to accept or reject a project
DCF (discounted cash flow) involves the estimation of the viability of an investment project using various techniques. The discounting techniques are used to bring the future cash flows to the present so that the potential for a project to yield the desired returns can be evaluated. BCR (benefit cost ratio) and NPV (net present value) are the most commonly used discounting techniques. The decision rule involves accepting the project if BCR or NPV is greater than one, otherwise, reject.
References
Abeysekera, I. (2012). Role of remuneration committee in narrative human capital disclosure. Accounting & Finance, 52(s1), 1-23.
Afonso, P., & Cunha, J. (2009). Determinants of the use of capital investment appraisal methods: evidence from the field. In The 2009 European Applied Business Research Conference (EABR), 1-15
Freiling, J., & Huth, S. (2005). Limitations and challenges of benchmarking–a competencebased perspective”. In Competence Perspectives on Managing Interfirm Interactions, 8, 3-25
Hergert, M., and D. Morris. (1989). Accounting data for value chain analysis. Strategic Management Journal, 10, 175-188.
Statement of Cash Flows IAS 7 (2016) —. Retrieved August 26, 2016 from http://www.iasplus.com/en/standards/ias/ias7
