Difference is between Income and profit is due to nature of the organization. Income term is used for nonprofit organization. Profit is used for profit-oriented organization.
- Key Stake holders are as follows:
Shareholders
- Profit of the Company
- Dividend income from the company
Employees
- Career growth
- Salary increase
- Bonus and retirement benefits
Customers
- Quality of products
- Discounts on products
- Product innovation
Government
- Taxation
- Compliance of laws
- Employment of people
Creditors
- Timely payment
- Solvency of the company
- Long term contracts with Company
PART B
- Marginal costing and decision-making
It is possible to use marginal costing to make decision. For instance, they use it to analyze limiting factor as well as linear programming.
There is a need to utilize marginal costing in making decision where it is possible to assume the same future fixed costs without regards to whatever is decided, and that each variable cost stands for future cash flows to be incurred due to whatever is decided.
Sometimes, some assumptions regarding fixed and variable costs are invalid. In times of invalidity, it is necessary to use relevant costs in evaluating the economic or financial impacts of a decision.
For decision making classification of the cost according to nature is not relevant (production or non-manufacturing costs) instead their classification as per their behaviour (response to change in volume i.e. variable and fixed etc). Every cost / revenue and income stream which changesas a result of decision-making process (whether they production. Non-manufacturing or variable or fixed)
- Break even points in units and margin of Safety in units
- Limiting factor decision making
When it comes to budgeting, the usual assumption is that it is possible for a firm to produce maximum products (or services) in meeting current sales demand. Companies establish their production volume as well as sales based on sales demand.
Factors That Affect Cost-Volume-Profit Analysis
Factors that affect cost include:
- Volume of production,
- Product mix,
- Internal efficiency,
- Method of productions, and
- Size of plant etc.
PART C
- “Capital Investment Decision is probably the most important decision for an organization”
The features that follow are known with numerous investment projects:
- It involves purchasing an asset whose expected life is a number of years, as well as paying a huge sum of money when the project starts. For returns on the investment, there is net income from additional profits while the project lasts.
- There could be a disposal value (residual value) for the asset when it is no longer useful.
- It may be necessary to invest in working capital for a capital project. Cash investment may be included in working capital.
An alternative is purchasing another business or establishing another business venture for a capital investment project. In these projects are a first capital outlay and perhaps certain working capital investment. It is possible to expect financial returns from the investment in a long time, possibly indefinitely.
Prior to undertaking projects, there is need to assess and evaluate. Generally, the reasons to undertake projects are:
- An appropriate financial return is anticipated, and
- acceptable investment risk.
Investment appraisal has to do with evaluating investment projects for capital expenditure. It is carried out because the capital expenditure is valuable and there is need to undertake it.
Project B should be accepted due high NPV as compared to A.
(iii) Disadvantages with the ARR method.
- It lacks link with the goal of maximizing wealth. This means its project selection is not on the basis of their capacity to heighten firm owners’ wealth.
- It can be calculated in different ways so may cause confusion in interpretation.
- It is on the basis of accounting profits, as against cash flows. Nevertheless, investment means putting in money towards obtaining cash returns. Hence, cash flows should inform investment decisions instead of accounting profits.
- Manipulation is not difficult and there will be difference for every accounting policy and estimate because it is on the basis of profits (more subjective).
- The ARR approach does not consider the time value of money.
- It is a percentage return which relates the average profit to the investment size. Despite the possibility of the absolute return to be remarkable, it does not provide it.
- There is a need to make a decision regarding the minimum target ARR in the process of utilizing it for investment appraisal. Establishing a minimum target for ARR lacks rational economic basis. Whenever there is a minimum target accounting return, it could be a subjective target which lacks economic or investment relevance.
The disadvantages of the payback method.
- It lacks link with the goal of maximizing wealth. This means its project selection is not on the basis of their capacity to heighten firm owners’ wealth.
- It is quite subjective to set a minimum payback period.
- Target payback period could bring about the selection of a project that is less attractive project with regards to NPV as its payback period supersedes target payback period.
- It does not consider all cash flows after the payback period, and therefore does not consider the projects’ total cash returns. This is payback method’s big demerit.
- It ignores cash flows’ timing during the payback period.
Advantages of the IRR method
- The main advantage of the IRR method of investment appraisal (compared to the NPV method) is often given as easier comprehension of an investment return when stated as a percentage return on investment instead of money value NPV.
- Another advantage of the IRR method is that cost of capital estimation is not required.
PART D
- Purposes of budgeting
There are a number of purposes for budgets.
- Towards converting long-term plans (strategic plans) into further comprehensive shorter-term (yearly) plans.
- Towards ensuring a link between planning and the organizations’ long-term goals and strategies.
- Towards the coordination of the actions of every part of the organization, in achieving similar goals. This is called ‘goal congruence’. Among the merits of budgeting is the covering of every activity; hence, proper coordination of all activities to work on similar goal is necessary.
- Towards communicating the plans of the firm to managers as well as other employees who will execute the plans.
- Towards motivating managers and employees through the setting of targets for achievement, and perhaps incentive in form of bonuses or other rewards for meeting the targets. It is also towards the provision of guidelines to authorize expenditure. There may be no permission for expenditure unless it was part of the budget or part of the department’s budgeted expenditure limits.
- Towards the identification of areas of responsibility to implement the plans. A manager should be in charge of each aspect of the budget to achieve the budget targets for performance.
- Towards the provision of a benchmark to measure actual performance.
- Towards controlling costs through a comparison of budgets with actual results as well as the investigation of any differences (or variances). This is called budgetary control.
- Cash Budget
Cash position is affected due to purchase of new machine payment. The impact of negative cash flows are eliminated by receiving the loan receipt.
- Incremental budgeting
Incremental budgeting could be a budgeting process supporting the idea that the best means of developing a replacement budget is to make certain marginal changes to the current budget. This means that when it comes to incremental budgeting, there is adoption of current budget as the basis of adding or subtracting incremental assumptions from the bottom amounts towards working out new budget amounts. Incremental budgeting is usually taken as highly conservative out of all budgeting approaches.
Advantages of Incremental Budgeting
Firms usually consider incremental budgeting for various reasons, which include:
1. Simplicity
It is the easiest budgeting method as complex calculations are not required because it utilizes the present period towards projecting the future budget. Likewise, there is need for a few assumptions. Due to its simplicity, time savings in the process of budgeting is ensured.
2. Consistency and operational stability
It depends on the figures from the past budgets, thereby ensuring consistency and stability over time.
3. Funding stability
It can likewise ensure the stability of funding over time, due to easiness of projecting expenses. Firms requiring funding for a number of years can find this beneficial.
4. Reduces internal rivalry
In general, it ensures the allocation of incremental changes to the budget from a year to subsequent. Therefore, there is no compelling of a firm’s departments to compete with one another towards obtaining a bigger part of the budget.
Disadvantages
There is frequent criticism of incremental budgeting for several underlying demerits. The following are its major potential demerits:
1. Promotes unnecessary spending
It could bring about needless spending. The usual reason is that a corporation’s departments tend to spend all allocated cash during a budget a year towards obtaining greater cash in the coming budgeting period. It helps with the acceleration of budget parts by a certain amount every year. Nevertheless, it is possible for certain departments not to require more money every year but will have an increase due to the normal way the budgeting process works. This could bring about wasteful budgeting process as well as less than optimal efficiency.
2. Discourages innovation
It could discourage assembling innovative ideas and growth. The opportunity to finance fresh ideas or activities could be little due to basing fresh budgets on figures from past budgets. Therefore, the budgeting process does not encourage implementing fresh ideas and it enhances a conservative business environment.
3. Failure to consider changes and external factors
The main assumption in incremental budgets is that the operations of a firm will always be stable. Hence, they do not respond to possible changes that could be due to unpredicted situations or certain unforeseen factors.
4. Absence of incentive for a detailed review
Due to incremental budgets being stable, it does not offer any incentives towards the firm’s management review of its budgets with a perspective of achieving savings in expenditures. Budgets become exposed to risk of wastage, insufficient assumptions, as well as mistakes due to the absence of a review process.
by
janamwlivecom (student)
