Cost-Benefit Analysis - Assignment Example

1-Identify the major categories of capital expenditure and revenue costs in an organisation? Capital Expenditure is part of a company’s Balance Sheet, and Balance Sheet is a proper record of resources owned by a business organization, which is known as the “Assets,” and claims against such resources, which is commonly known as “Liabilities.” Usually when an organization spends money, it expects to reap benefits. If the benefit of an expenditure lasts for more than a year, it is treated as an asset or capital expenditure (Investopedia News & Articles). There are two major categories of capital expenditure. When the assets are held on a short term basis, such as Accounts Receivables, Cash and Cash Equivalents, Notes Receivables, Materials Inventory, and temporary marketable securities, to name a few, they are categorized as “Current Assets.” The second major category of a Capital Expenditure is the “Fixed Assets.” These are assets held on a long-term basis, such as land, buildings and improvements, machinery, furniture and fixture, They are items of value, needed for the normal operations. The next useful Financial Report that is needed by any business organization is the Income Statement, which clearly shows the calculation of the profit or loss. When the revenues, which may be in the form of goods or services sold to customers can be ascertained at any given period, it is usually accompanied by costs and expenses. If the benefits derived from any asset or capital expenditure is exhausted within a year, it becomes an expense or revenue cost. Revenue costs consist of Direct Cost and Indirect Cost. Examples of Direct costs are the Labor and Material costs that are part and parcel of the products for sale. Indirect Costs are incurred in the process of asset consumption or for services rendered, examples of which are depreciation, rent, wages, salaries, heater, light, water and phone. 2- Explain the circumstances in which marginal costing and absorption costing are relevant to decisions? The key issue between absorption costing and marginal costing is how the costs of a business’s input resources are best organised and presented so as to identify individual product/service and total business profit. Specific order costing methods will frequently deploy full absorption costing, one reason for this is that the pricing of each unique piece of work will invariably make reference to the total costs incurred. Continuous costing methods are more likely to deploy marginal costing because of the opportunites in such an environment to use cost-volume-profit analysis (Coulthurst, Nigel “Process Costing,” Students’ Newsletter, Jan. 2000). By using marginal or absorption costing, management may have alternatives in establishing the selling price of its products or services. In reporting purposes, more often, the profit picture under marginal costing method will look brighter compared to absorption costing, thus, if the purpose of the report is to entice more investors, marginal costing will look encouraging, profit-wise, especially when the over-absorption of costs is not enough to show incremental in the gross profit. Marginal costing can be very useful for short-term planning, control and decision making especially in a multi-product business, when it would be very tedious to assign every cost on a per/unit basis. For consistency purposes, management can best be served by only one method, and this can help management generate the price of its product/s at any given period, at the same time they will be guided with regards to cost-control measures. 3- In relation to a major decision to be made in your organisation explain which costs are relevant to the decision? The basic costs that are relevant for a Real Estate Developer is the Cost of the Land and the Cost to develop the land before it can be available to the market as either a Residential Lot, a Commercial Lot or a Memorial Park Lot. These direct costs that are inevitable, are vital in determining the selling price of the commodity in the real estate business. In addition to the Direct Cost mentioned above, the Marketing Expense that one cannot do away with when dealing with brokers, is the Commission Expense. Incorporating an attractive commission package in any Real Estate Lot puts a comparative advantage to the product over that of its competitions. Sales Taxes Expense is another factor that should be considered. In any business entity, the most relevant aspect that should be considered is the competitiveness of the product or service for sale, in terms of quality and affordability. The way to extract the right price as much as the market can bear, is when the Direct Costs, such as labor and materials are easily on hand. It also helps in controlling the costs and providing necessary costing information to management for decision making. The bottom line is, being able to control the direct costs such as labor and materials, then management can adopt control measures in the other general expenses, and the policy of the terms of sales and discounts that may be offered can be readily formulated. 4- Explain how long term financial evaluation techniques, including cost/benefit analysis, would be relevant to the organisation? When the expected gross profits can be generated by way of assumptions, management can easily predict if it can cover for the other General, Administrative and Overhead expenses. The number of employees that a company can sustain will be easily determined. Annual Projections for the next five years, showing the projected Balance Sheet, Income Statement, Cash Flow Analysis and replacing the estimated figures regularly with the actual operation outputs, can be very helpful as a guide for management decision making. This way, it can foresee the outcome and can make the necessary adjustments in either the direct costs or the overhead expenses. It is best for management to maintain a graphical illustration of the operation on a monthly and yearly basis, to get a clearer picture of the trends in the economy, internally and externally. Patterns can be picked up from the graphs which will show when are the lean months and the peak months for any industry. It is essential that external comparisons of the financial analysis shall be undertaken in order to ascertain company’s strengths and weaknesses. It is important for management to ensure that the money invested in is generating an adequate return and that the company is able to pay its debts and remain solvent at the same time. When there is impact of product or service cost control initiatives, it will not be surprising to see a drastic decline in costs and expenses. 5- Discuss the factors that would be relevant to two revenue expenditure decisions in the organisation? It is the perennial dream of every businessman or stockholder to be able to realize a steady positive economic growth. If one’s business must grow, it has to potentially work towards expansion or increase of inventory. When an organization has to decide that it will expand, or probably increase its inventories for sale, almost always it entails substantial disbursement for revenue expenditure. Management should be aware of several factors, such as: Market Share: Management should ensure that they can still partake for more cuts in the market. Sustainability: It must be considered that the moment there is an increase in inventory or expansion in buildings or store branches to increase revenues, it is almost always difficult to buckle down when things will not turn out for the better, because it will only mean more losses. Cost of Money: If upon expansion, the company will have to resort to more borrowings, a study of the effect of the Interest Expense that will be additionally incurred will have to be made. Another revenue expenditure that usually places a company in a dilemma to ponder upon, is the Advertising Expense. The cost that may be incurred for this expense is globally exorbitant. The factors to be considered here is primarily the form and source of advertising, whether to make use of print ads, media ads or internet websites, and other promotional campaigns. The thing to focus on is how wide is the range of potential customers can it penetrate and be able to convert them to actual customers versus the cost of advertising. 6- Identify how financial information should be presented to support spending recommendations? It is the job of accountants to present to management several key analysis by way of ratios or specify at every Financial Report the major outcome of the company’s operations, in order that management can ascertain whether to invest more, spend more or employ cost-cutting measures. Accountants should show that when more spending will be needed, its effect on the profit picture must be clear. In every operation, management must have decided its goal and objective, as far as profit is concerned, and by looking at the financial information that will be presented to them, then they will know if they are on the right track or not, or if their profit is mediocre or outstanding. The accountant should be able to compute the Return on Assets, which is equal to Net Income divided by the Average Total Assets, and the Return on Equity, which may be derived at by dividing Net Income with the Average Stockholders’ Equity. Definitely, the higher the figure that will be extracted, the happier the owners will be, and perhaps will inspire them to spend more or approve certain spending recommendations (Financial Statement, Ayala Land Corp.). Such recommendation will be reinforced by further presenting the Current Ratio, which is equal to Current Assets divided by Current Liabilities. If this ratio shows a number of more than one for every one (1.80:1), then indeed, such an analysis can make any stockholder smile. Another useful data that can support any recommendation for more spending, is the Debt to Equity Ratio, which means that when a company’s Interest Bearing Debt is less than fifty percent of its Stockholders’ Equity, management can have no reason to be fearful of more spending. Works Cited: Investopedia ULC News & Articles, 2010. Coulthurst, Nigel. “Process Costing.” Students’ Newsletter, Suite 101.com, January 2000. Clausen, James. “Manufacturing Accounting-Absorption Costing.” Suite 101 Media Inc, Vancouver, 20 December 2009. Tatum, Malcolm, “Cost Accounting,” Wisegeek, 8 March 2010. Financial Statement, Ayala Land Corporation, Manila, Philippines, September 2009. Read More