A costing system method means the process adopted to determine costs. There are several ways of ascertain costs. Companies choose among the options depending on fortunes in which accounting is required to be made based on the merchandise being industry and the nature of the industry doing the merchandise.
Depending on the nature of Dynamic Models PLC, the appropriate costing method will be specific order costing where the activity being accomplished consists of undertakings which are specifically identified at each phase.
Specific order costing is applicable where the work consists of separate occupations or batches. The chief sub-division of specific order costing is:
Job costing: this is a traditional method for cost accounting where costs incurred are allocated, apportioned and absorbed by the cost unit. The company production is divided into different occupations but the same nature in order to find the net income made on each occupation for future planning.
Batch costing: this is a different type of specific order bing where a measure of indistinguishable points is manufactured as a batch. It is like occupation bing method but the chief difference is the unit cost represents the ration of the entire cost of the batch to the figure of units in the batch.
1.3 Improvements to the costing and pricing system used by an organisation
In order to better the costing and pricing system used by Dynamic Models PLC, of import information is needed.
Datas need to be relevant, seasonably and accurate. The chief features of information needed are explained below:
Relevance: directors merely need relevant information for determination devising ;
Seasonableness: utile information for determination devising demands to be available when needed.
Accuracy: cost should be identified accurately for each merchandise, each activity, and each client. In order to aim the brand suitably and do determinations about the volume mix and pricing.
2. Use calculating techniques to obtain information for determination devising
2.1 Apply calculating techniques to do cost and gross determination in an organisation
Accountant use many techniques for prediction intents. First, they use correlation coefficient method to mensurate the grade of relationship between two variables.
There is a perfect correlativity when R= +1.0 or R=-1.0 and all the point of the diagram do non lie on a consecutive line. There are some instances where all the point of the diagram do non lie on a consecutive line and R would non be 1.0/
Therefore, a perfect correlativity can still be where all the points lie on the line but non a consecutive line.
Calendar month
End product
Cost
Ten
Yttrium
1
2
9
2
3
11
3
1
7
4
4
13
5
3
11
6
5
15
Ten
Yttrium
X2
Y2
Xy
2
9
4
81
18
3
11
9
121
33
1
7
1
49
7
4
13
16
169
52
3
11
9
121
33
5
15
25
225
75
18
66
64
766
218
R = 1 it is strong correlativity.
Second, arrested development line method is used to happen the values of the invariable a and B in the equation y= a+ bx. This method is besides called the least squared method. The line we obtain is the one which minimizes the amount of squares of the perpendicular divergence of the points from the line.
a = Y mean – b*x mean = 66/6 – 5* ( 18/6 ) = 5
Among the other different method of prediction, there are:
Quality prediction methods which is based on judgements about future gross aggregation. However this technique is non truly dependable because of the deficiency of strict premises.
Judgmental prediction is a technique where people make appraisal of hereafters conditions. Based on old conditions ( economical, historical and other relevant factors ) . This technique can supply good estimations particularly when it is done by experient predictors.
Quantitative method is based on numerical informations relevant to the beginning gross. This method is besides practical and makes considerable premise about prediction. The manner this method provides the degree of uncertainness makes it one of the common prediction methods used by companies.
The following techniques is Times series attack which is the technique that private sector frequently uses because of the features of informations used by these companies.
2.2 Assess the beginnings of financess available to an organisation for a particular undertaking
There are several beginnings of financess available in organisation for a specific undertaking:
Issue extra equity: there are frequently used on the 2nd grade market by a quoted Dynamic Model PLC publishing portions or an unquoted Dynamic Model PLC to obtain a citation.
When the company needs to spread out and turn, the organisation could trust on difference in order to supply necessary resources ( loaners ) . The sum of money demands to payback with involvements and capital refunds at a peculiar period of clip as fixed by the contract.
Shares represent the sum of financess supplied for good to the company for their acquisition. These are provided by an investor and are non-returnable unless in an event of settlement. Investor expects wagess from the company profitableness and do hold ownership of the staying financess of the concern.
Bank adoptions, retained net incomes and limited portions are used by little concerns and Private Sector Company. ( The Association of Business Executives, 2011 )
3. Participate in the budgetary procedure of an organisation
3.1 Choice appropriate budgetary marks for an organisation
In order to measure financially the assorted marks of Dynamic Models PLC ‘s direction, the company needs to put up an appropriate budget.
Budget is a fiscal tool which includes a prediction net income and loss history, balance sheet, hard currency flow statement analyzed per month of the accounting period in order to ease control.
Budget purposes at calculating a long term aims of Dynamic Models PLC direction. It besides aims at comparing existent public presentation to the budget by utilizing discrepancy analysis. An inauspicious discrepancy is a negative result for the company and, reciprocally, favourable discrepancy is positive.
Accountants are supposed to reexamine their fabrication scheme and bing method when the company is non executing good in order to take disciplinary action and prosecute the company objectives in a long tally which is profitableness.
Most of the clip, budget are used for a period of 12 months merely little companies set up their budget for a period of 6months.
3.2 Create a maestro budget for an organisation
In order to make a maestro budget for Dynamic Model PLC, comptrollers and all the people involved in the accounting procedure demand to travel through two different subdivisions: the operation budget and the fiscal budget.
Current economic conditions helps accountant to get the better of troubles met during the budgeting procedure program, In fact, relevant information demand to be considered to put up accurate marks.
During the operation budget, the income statement, gross revenues budget, operating disbursals and cost of goods sold are analyzed. In such instance, Dynamic Model PLC has no got gross revenues gross yet and the operation budget will be made based on budgeted disbursals and back uping agendas.
During the fiscal budget, the impact of the budget is analyzed based on the hard currency of the organisation ( hard currency budget, capital budget, budgeted balance sheet ) .
Budgeting is a fiscal tool which helps directors to utilize qualitative and quantitative information in order to pass on their fiscal scheme and outlooks to the top direction and others people involved in the budgeting procedure.
Opportunities and capablenesss can be analyzed by people involved in the budgeting procedure when communicating is clear.
This fiscal tool is a key for supplying relevant information about corporate fiscal schemes, chances and possible challenges to be avoided.
Budgeting procedure is aim at:
Planning: in order to better public presentation. Dynamic Models PLC need o set up a program. It helps directors to calculate the organisation outlooks based on chances and challenges of the current economic clime and the effectivity of schemes implemented. A program could be modified during the class of the company operations in order to react rapidly to any unexpected environmental menaces.
Coordination: Dynamic Models PLC needs to work as a squad in order to accomplish the best possible consequences. That will enable the company to work efficaciously and expeditiously in a perfect harmoniousness. The budget will be an agreed planned which is supposed to run into the company objectives. Performances need to be monitored in order to guarantee that the relevant work is implemented successfully.
Control: As it said above, public presentations need to be monitored and controlled in order to guarantee that the relevant work is implemented successfully. When the budget period ends, there is a demand to compare existent outgos and existent income to the budgeted 1s and understand if the company has being making good or in what ways the company has been unsuccessful.
Discrepancies analysis will assist directors to be able to supervise public presentations. In instances outlooks are non met, disciplinary actions need to be taken.
Motivation: all the people involved in the accounting procedure need to work towards accomplishing the company objectives. That will reenforce motive and people will work barely in order to accomplish company ‘s aims.
Improved communications: Dynamic Models of PLC need to set up a good communicating scheme with all the people involved in the budgeting procedure. Responsibility, authorization demands to be given to allow people in order to put the needed directives to employees, their occupation specifications and responsibilities and do certain they all understand what the company expects them to make.
In that manner, people will work together to accomplish organisational and experience more committed.
Fiscal determinations are truly of import. That is the ground why senior direction demands to understand and put accomplishable aims.
3.3 Compare existent outgo and income to the maestro budget for an organisation
Budget is a fiscal tool that directors use in order to calculate quantitative look of programs. The maestro budget is set for an overall period harmonizing to the organisations aims.
As the maestro budget includes two chief parts: operation budget for the company planned gross revenues and operating disbursals and ; fiscal budget for all the different fiscal actions like hard currency direction, loans…
An appropriate budget purposes at planning and control. The budget is planned before the fiscal period and existent public presentations are compared to the expected 1s in order to be monitored and take disciplinary actions if necessary.
Organizational Budget, January – December 2011
Plan
Fact
Discrepancy
Expense
Entire
Entire
Entire
I. SALARIES
1. Staff wages
18,000
18,500
-0,500
2. Advisers
6,000
6,000
0,000
II. ADMINISTRATION
1. Rent
7,000
7,000
0,000
2. maintenance/equipment
500,000
510,000
-10,000
3. Furniture
5,000
5,200
-0,200
4. Fuel
1,500
2,000
-0,500
5. Telephone measure
1,500
2,000
-0,500
6. Internet
1,000
1,200
-0,200
III. Plan COSTS
1. Research and development
10,000
9,000
1000
2. Imperativeness and promotion
2,000
2,000
0,000
3. Training staff in house
2,000
2,000
0,000
4. Economic Justice Training for Rural Communities
14,000
13,500
0,500
5. Printing and publication of stuffs
10,000
11,000
-1,000
6. Community awareness workshops and treatments
10,000
10,000
0,000
7. Legislative protagonism
2,000
2,000
0,000
8. Media training/workshop
10,000
10,500
-0,500
TOTAL – Favorable discrepancy
600,000
611.900
-11.9
Business direction purposes at planning, forming, staffing, directing and commanding. An effectual budgeting procedure helps to understand fiscal issues based on the company objectives. Once the program is executed, there is a clear apprehension of the budget. Then, there is a demand to supervise and command performanc4es to take disciplinary actions if required.
Based on the budget above, the company scheme is non good implemented as the entire discrepancy is inauspicious ( -11, 9 ) . This means that the company operations are non profitable and there is a demand to take disciplinary actions.
3.4 Evaluate budgetary monitoring processes in an organisation
Budgeting monitoring is aimed at comparing existent public presentations of an organisation against budgeted 1s. The differences between existent and budgeted public presentations are called discrepancies. When the company realizes net income, discrepancies are favourable. However, an inauspicious discrepancy reduces net income and actions need to be taken instantly.
This procedure helps directors to reexamine discrepancies. By making so, they can easy place in what countries of the concern the company is non executing good.
Harmonizing to the figures above, the company is non executing good. The cost of existent public presentations is higher that the budgeted. The company spends more than expected for media preparation, printing, telephone measure, cyberspace, fuel, furniture, and care and staff wages.
Therefore, there is a demand to corrective action in order to implement effectual budgeting monitoring demands to take topographic point for better consequences.
4. Recommend cost decrease and direction procedures for an organisation
4.1 Recommend procedures that could pull off cost decrease in an organisation
Based on the budget above, the company is non making good. Therefore, directors need to be focused on countries of the concern that are non successful.
In order to make so, fiscal technique such as cost control and cost decrease are the most appropriate techniques will assist directors to take disciplinary action and drive the cost down every bit expected.
The company needs to command their operating disbursals and avoid important addition of cost like the cost of care and equipment which has increased significantly.
Cost control is a proactive action to avoid surprises for future consequences. However cost decrease is a reactive action and seems to be the most appropriate one to set about in order to drive the cost down and respond to important inauspicious discrepancies.
Directors need to command the cost and promote higher profitableness to supply better return to the company stockholders.
Cost control and cost decrease will assist the concern to:
Operate more efficaciously ;
Drive the cost of stuffs at the lowest possible degree while keeping quality and good client service ;
Helps to computerise procedures to acquire the labour cost at the lowest possible degree and avoid waste
4.2 Evaluate the potency for the usage of activity-based costing
Activity based bing method has risen and go the technique that companies used the most compared to the traditional 1s. ABC theory identifies all the relevant activities which take topographic point in an organisation and costs are incurred based on each activity cost driver identified.
These are the chief phase in activity based costing:
Identify all the activities that cause overheads to be incurred ;
Cost are allocated per activity ;
Identify all the relevant cost driver which may impact to each activity cost ;
Determine the volume of each cost driver ;
Calculate the cost driver rate ;
Determine the volume of each cost driver required by each merchandise ;
Calculate operating expenses attributable to each merchandise.
Traditional methods tend to be overestimated because cost are frequently allocated based on the figure of machine hours for activity with high volume in nature. And, this cause comptroller to under-estimate cost of certain activities because traditional procedures do non frequently take into history extra cost which occurred with short tally production cost.
There the usage of activity based bing method is a better technique in order to calculate the concern activities and outlooks. The importance of ABC is:
Cost associated with activities are identified accurately ;
Manager can utilize cost drivers as a cost step and cost public presentation ;
Budget can easy be made utilizing the cost of each relevant cost driver ;
It helps director to place unprofitable merchandise and reexamine the fabrication
Procedure and make up one’s mind whether to fabricate the merchandise or supply it.
5. Use fiscal assessment techniques to do strategic investing determinations
5.1 Apply fiscal assessment methods to analyse viing investing undertaking in the public and private sector
In order to do viing investing undertaking, the company needs to utilize investing assessment technique which will assist them to look at the possible capital of investing by a house and step its possible value to the house.
There are 3 methods of investing assessment which evaluate the possible return on investing:
Payback method ;
Annual or mean rate of return ;
Net present value method.
Payback method is simple and clear. It helps directors to find what undertaking among the chosen 1s return the initial cost of investing quicker. For case, the organisation has chosen 2 different undertakings, A and B. By utilizing the payback method, we can place what is the undertaking with a quicker return on investing capital: if undertaking A takes 4years for the company to acquire their investing capital and undertaking B takes 3 old ages, the undertaking that will be chosen will be the undertaking B as the company recover from the capital investing quicker.
Annual or mean rate of return is besides simple and clear. However, managerial determinations are made based on one-year or mean rate of every undertaking compared to the old. Therefore the undertaking with a highest rate of return will be the one the company has to take.
Then, the last method of assessment technique is Net Present Value. This method seems to be more complex than the old 1s. Managerial determinations are made based on the net hard currency flow adjusted for the effects of altering value of money over clip. The quicker concern have to wait to acquire the money generated from investing, the higher the value is and the most appropriate it is to take that undertaking,
Undertaking A
Undertaking B
Discount rate
Investing
52 000
100 000
8 %
Year 1
25 000
10 000
0,926
Year 2
20 000
36 000
0,857
Year 3
14 000
40 000
0,794
Year 4
4 000
42 000
0,735
ARR
30 %
32 %
PBP
2,50
3,35
NPV ( 8 % )
2 346
2 742
5.2 Make a justified strategic investing determination utilizing relevant fiscal information
Here comes the most of import challenge of directors in the determination devising procedure. In fact, strategic investing determination involves placing the most profitable merchandise among the different capital investing undertakings. Information provided by the investing method used will give a better apprehension to directors on undertaking profitableness.
Senior direction demands to hold a closer expression to relevant information in order to do strategic investing determination and find if it is either right or incorrect to put on the undertaking.
Undertaking A
Undertaking B
Discount rate
Discount rate
Investing
52 000
100 000
8 %
20 %
Year 1
25 000
10 000
0,926
0,833
Year 2
20 000
36 000
0,857
0,694
Year 3
14 000
40 000
0,794
0,579
Year 4
4 000
42 000
0,735
0,482
ARR
30 %
32 %
PBP
2,50
3,35
NPV ( 8 % )
2 346
2 742
NPV ( 20 % )
– 7 261
– 23 282
Based on 8 % price reduction rate, director should make up one’s mind to travel for undertaking A as the NPV and ARR are more of import.
5.3 Report on the rightness of a strategic investing determination utilizing information from a post-audit assessment
Post audit assessment is a fiscal tool aimed at analysing the existent cost and benefit of the undertaking after been implemented. Then comparing with initial outlooks is made in order to place anything that might hold gone incorrect during the execution of the undertaking.
In instance outlooks are non what the company has planned disciplinary action demand to be taken.
Based on the tabular array above, the payback period of undertaking A is ( 2,5years ) is more suited than the payback period of undertaking B ( 3.35years ) .
However, the one-year or mean return of return of the undertaking B ( 32 % ) is more suited than undertaking A ( 30 % ) .
Both methods are non truly accurate because they do non see the factor of clip value of money.
The net present value is the most accurate and most used fiscal assessment method as it does see the factor of clip value for money.
Therefore, if the price reduction rate remains the same ( 8 % ) , both undertakings are suited for the company but the undertaking B is more profitable. However, if the price reduction rate goes up to 20 % both undertaking are non suited for the company objectives because of their negative impact.
6. Interpret fiscal statements for planning and determination devising
6.1 Analyze fiscal statements to measure the fiscal viability of an organisation
For the company to pay its duties one clip as required, Dynamic Model PLC needs to be liquid. Therefore the usage of fiscal ration will assist manages to run into their current liabilities.
Current ratio = Current assets/ Current liabilities
Quick ratio = Current assets less stock/ Current liabilities
Trade Receivable turnover = Trade receivables/ Gross saless gross
Stock/ Inventory turnover = Inventory/ Cost of gross revenues
Net income Margin = Net income/ Gross saless
Asset turnover ratio = Gross saless revenue/ Entire assets
Tax return on Capital Employed = Operating Profit/ Gross saless gross
Gearing = Preference Share Capital + Long-term liabilities/ Total assets – Current liabilities
2010
2011
Current ratio
650/350 = 1,9
490/300 = 1,6
Quick ratio
( 650-330 ) /350 = 0,9
( 490-230 ) /300 = 0,9
Trade Receivable turnover
220*365/3500 = 22
170*365/2990 = 20
Stock/ Inventory turnover
330*365/2135 = 56
230*365/1823 = 46
Net income Margin
114*100 % /3500 = 3,26 %
76*100 % /2990 = 2,64 %
Asset turnover ratio
3500/2300 = 1,5
2990/ 2065 = 1,4
Tax return on Capital Employed
258*100 % /3500 = 7,37 %
193*100 % /2990 = 6,45 %
Gearing
( 150+625 ) / ( 2300-350 ) = 39 %
( 150+540 ) / ( 2065-300 ) = 39 %
6.2 Apply fiscal ratios to better the quality of fiscal information
Careful reading is required when construing ratio analysis. They give a full apprehension on the company profitableness, liquidness, efficiency and construction of geartrain, beginnings and utilizations of hard currency and their net consequence.
However, ratio analysis has some restrictions:
Changes in fiscal consequences are explained but they do non demo the ground why ;
Deterioration shown non ever indicate the hapless direction issues
Good determination can non be made on excessively much significance to single ratio.
2010
2011
Discrepancy
%
Current ratio
1,9
1,6
-0,3
-16
Quick ratio
0,9
0,9
0
0
Trade Receivable turnover
22
20
-2
-9
Stock/ Inventory turnover
56
46
-10
-18
Net income Margin
3,26 %
2,64 %
-0,62 %
-19
Asset turnover ratio
1,5
1,4
-0,1
-7
Tax return on Capital Employed
7,37 %
6,45 %
-0,92 %
-12
Gearing
39 %
39 %
0
0
Harmonizing to the tabular array above, we can see that current ratio lessening by 16 % . However speedy ratio shows that liquidness is available to pay their short term liabilities. Trade receivable turnover and stock/inventory decreased by 2 and 10 yearss severally. Profit Margin lessening by 19 % in 2011 and plus turnover is less than 0.1 times. Return on capital employed lessening by 12 % but pitching remain changeless.
2011
Average
Discrepancy
%
Current ratio
1,6
2,2
0,6
38
Quick ratio
0,9
1,1
0,2
22
Trade Receivable turnover
20
10
-10
-100
Stock/ Inventory turnover
46
7
-39
-85
Net income Margin
2,64 %
25,00 %
22,36 %
847
Asset turnover ratio
1,4
2
0,6
43
Tax return on Capital Employed
6,45 %
50,00 %
43,55 %
675
Gearing
39 %
20 %
-0,19
-49
Figures in 2011 comparison to industry mean ration shown that mean current ration and speedy ration are better value and increase by 38 % and 43, 55 % severally. Gearing was decreased by $ ( % and plus turnover 0.6times more than 2011.
6.3 Recommendations on the strategic portfolio of an organisation
In order to turn to new capablenesss and new potency markets, directors use a scheme portfolio. It is a fiscal tool which enables organisation to look at the market chance in the long tally.
A strategic portfolio needs to be developed in a manner where schemes undertaken are aimed at prosecuting Dynamic Model PLC ‘s mission and aims.
It aims at puting places, placing marks and monitoring public presentations. It besides takes into history all the possible alterations that may happen to take disciplinary action.
Therefore, Dynamic Models PLC can merely better their current state of affairs and fiscal statement by:
Increasing entire current assets such as stock list ;
Increasing income for better net income border and return on capital employed ;
Increasing gross revenues for better net income border and trade receivable turnover.
