Revision thread MAC Unit 33 diploma anyone?

reddwarf

We've done this before it is helpful if you get several people contributing.

One person posts a question and whoever gets the answer right (stimulates discussion!) asks the next question..

pirate

Ok sounds good
how about what is the formula for Return on Capital Employed and what would you say when interpreting the results

P

reddwarf

Operating Profit over fixed assets + net current assets + (long term loans - not all of the time it seems!)i.e. capital employed

ROCE is Operating Profit multiplied by asset turnover over, so improving either should improve ROCE. It is known as the primary ratio. It demonstrates how efficiently the company is using it's capital to earn returns for re-investment and it's shareholders.

Investment in new capital equipment will reduce this ratio by increasing the capital employed, this should be borne in mind in analysis.

that's all I've got for now....!

SandyHood

Capital employed is either:

Fixed assets plus net current assets

or
Shareholders funds plus long term loans

Don't muddle them up, they both give the same value.

(Well they will both give the same value in the MAC paper ~ as there is no minority interest)

Sometimes MAC questions ask for RONA

In these the net assets are (as expected fixed assets + net current assets - long term loans) or Shareholders' funds only

SandyHood

Spot on interpretation reddwarf

~ Businesses that reward managers for high ROCE percentages will often unwittingly encourage them to make sub-optimal decisions in terms of investments which add to the profit, but might lower the % return.

reddwarf

Thanks Sandy!

reddwarf

Okay Pirate (or anyone else including Sandy!) how about 'what are the advantages and disadvantages of a participatory budget process?'

pirate

Well you had me there. Had to rack brains as book is in loft. Think its where those who work in a partilcar budget participate in creating it
The advantatage would be that those invovled in creating it have motivation to make sure it works, the people who work in it have specialist knoweledge so the input is quite valauble, it could create better performance and encourage positive attitudes and a feeling of being part of something. on the negative side it may be that people dont get involved as they havent got the skills or the time to do it.

Is that about right?

anyone doing PEV and PCR would benefit from a threat like this I would say.

reddwarf

Hi Pirate, there is quite a long list but it seems participatory budgeting success largely depends on the individuals involved and can be time consuming so sometimes budgets do have to be imposed by senior management (top down(. This is so that companies can react to a rapidly changing environment. The motivational aspect has never been conclusive from research carried out. This is what I remember from Osborne!

Wow your book is in the loft! Are you sitting MAC in June?

Would you post the next question?

pirate

Lol my book is in the loft coz I sat my MAC in December and I passed it I found this question and answer thing useful then so thought I'd add something in to get it going.
Should we start a new one say MAC, PCR, PVR and Financial Performance and Budgeting. That way all people studying the management perfomance and planning will be targeted.

Q: A company uses the ideal standard to set budgets. What are the problems with using this standard

leonag

The ideal standard is difficult to achieve, so a constant "not hitting their targets" can demotivate staff.

Also an ideal standard will probably result in adverse variances, and this constantly happening will mean variances don't get investigated. A standard should be set that is acheivable, so the ideal standard isn't very realistic.

leonag

Question

How does an increase in materials, where material usage doubles as production/sales doubles, affect gross profit margins.

I won't be answering any Budgeting questions as I'm only doing Fin Performance, exam tomorrow! Budgeting is next and is my last one, fingers crossed.

reddwarf

Pirate very kind of you to get us running! Feel free to alter heading... more the merrier!

tentative answer!...

Margins should remain the same provided costs and sales prices remain the same - I think???

leonag

Sounds good to me. Your question.

reddwarf

Phew!

What are the possible reasons for an adverse Materials Price Variance?

leonag

An adverse material price variance is caused by paying more for material than was planned, this could have been caused by a general increase in price, changing of supplier or even the quality of the product itself, it may also be because less of the material was purchased so the company received less bulk discounts.

This is the bit I've just revised, so hopefully that's right!

Question. What is meant by Life Cycle Costing?

reddwarf

Looks spot on to me.

Life cycle costing takes a long term view of the product, and costs it though all of it's phases; r and d, launch, growth, maturity, ? and decline. It is often hard to match all of the costs to the product (in particular r & d).

Hmm bit hazy on this one!

leonag

If that's you being hazy can you sit my exam for me please? I'm abit of a numbers person, I actually like the variances and then switch off when it comes to things like that, it's just dull, dull, dull!

Anyway your question.

reddwarf

The numbers are harder for me... but then I find the report writing tricky too!

Which kind of buget is best for control purposes?

leonag

Nope, you've got me on that one! Hope someone else responds or we won't get another question.

reddwarf

Well we are stuck! How about I answer it and you post the next question?

It's a flexed budget because it compares like wth like, ie. actual costs are compared to what costs should have been (standard) for the actual activity.

SandyHood

How about this one as you have mentioned Life Cycle Costs?

Life Cycle Costing helps identify when to and when not to invest in a new project. What advantage does it have compared to starting a project and seeing what happens?

Clue: I'm looking for an answer which recognises the cost characteristics of that projects tend to have nowadays.

reddwarf

Hmm I'm thinking of environmental issues.. I thought I read that getting the design right at the beginning of a project can reduce costs of disposal at the end of a product's life which may be enforced by legislation.

Advantage is you can see if the project will be profitable or not and consequently apply value engineering to target costs or not proceed at all..

SandyHood

You've got it in your second paragraph.

you can see if the project will be profitable or not and consequently apply value engineering to target costs or not proceed at all.

Look at the cost committment.

The design stage, designs-in some costs which you will have to pay, so getting the design right is very important.
Once production starts, you need to hit sales targets etc but you don't get much opportunity to take out designed-in costs.

So at the life cycle costing analysis you are looking at the whole life of a project including the design stage and can challenge the engineering department to review their designs and think again about the costs that will be committed as soon as the project starts to go ahead.


A bit more light-hearted for Friday:

Would a production department on the ground floor be more or less likely to have stepped costs than the office for the marketing department on the first floor?

reddwarf

Interesting Sandy, thank you.

Your joke? Well enough said I think!

Oh, and it's your turn to ask a question....

SandyHood

I had hoped the stepped cost one would be my question.

1. What might be some non-financial factors to consider when sub-contracting production to a lower wage economy overseas?
   
2. And what factor would be the critical one when basing such a sub-contracting decision on financial factors alone?

reddwarf

Loss of skilled labour in country of production, quality, labour disputes, terrorism, natural disasters, political unrest, all could result in loss of future sales.

Lost on the second part.

There would probably be unforeseen costs and high insurance costs and transport costs...

help!

SandyHood

Good
- volume of production is typically the financial decision point

Typically

1. In house production costs a fixed overhead plus a relatively low variable cost per unit.
2. Sub-contract production would have no fixed cost but a higher variable cost per unit.

Your turn for a question.

reddwarf

Thanks Sandy, that's interesting and not something I have covered.

Going back to RONA, I meant to ask, is this a conventional ratio, our tutor said she'd never heard of it when I asked her to confirm it's operating profit/net assets?

What is the likely limiting factor in a non-profit making organisation and how would their performance be measured?

SandyHood

Not for profit organisations have alternative KPIs.

I suggest that they have "effectiveness" measures. For example, a hospice would be successful if the relatives of a terminally ill patient found the care and comfort provided met the patient's needs.

For many years I was concerned about charities. In some cases a lot of the money raised was spent on administration so in some cases less than 60% of donations were used to pay for the good cause. I have been concerned about "efficiency".
However, when I had more insight into the specifics of charities, particularly one or two in Africa I wasn't so hard and fast about efficiency. The costs of getting the food to the starving African children can be high, and in many charities the accounts are basic. So sometimes these costs are presented as administration costs, but they are not paying paper shufflers they are costs of doing the job that is needed. Now I tend to want more detail.

Some charities still consume more money on the head office costs/administration than the people making donations would be happy with.
Others are more efficient, but the work they do requires more costs.
Sorry not a very helpful right or wrong answer.

reddwarf

Yep this are has been controversial area and I know the RSPCA were in the headlines a while back. Your insight is interesting.

My text book says funds would limit the charity's activities, as there would probably be unlimited demand for their services.

Would you define 'effectiveness' for them to be meeting their objectives?