SPA #3
SPA #3We have got to make some decisionsCourse Name: Using Accounting for Decision MakingCourse Code: ACCT11059Lecturer: Martin TurnerStudent Name: David DickinsonStudent ID: Q47056674Due Date: Monday, 18th May, 11:00AMSTUDENT'S DECLARATION:I declare that the content of this assignment is my own work except where acknowledged. Information derived from the published or unpublished work of others has been acknowledged in the text and a works cited bibliography is given. This work has not been presented in a previous course.Signed David DickinsonDate 17/05/15Chapter 8 was an interesting chapter surrounding the decisions that need to be made by managers within a business. A manager is only able to make informed decisions based on past events. So, how can a manager get information to make the decision? How important a role does accounting play in assisting the manager? The chapter makes a statement that a manager will often have to commit to using large parts of capital, partly by predicting the future. How can such a decision affect the business for the years to come, and how does a manager clearly identify what information to use when making the decision?The author of the chapter asks the question – what costs are relevant? Relevant costs are those that relate to the future, not those of the past. I found this concept very easy to understand, especially after exploring some of the associated costs within a business. The author talks in depth about sunk costs within a business. These are costs are past costs that cannot be changed and should be ignored for any decision making. An example provided for this was advertising. This is something that I could relate to as in my previous role of Branch Manager with Worksense Workwear & Safety, I was faced with multiple instances of advertising put in place by the former manager. Although a cost that I still needed to pay for on a monthly basis, it was not something that had relevance to other business decisions made in this role as it did not directly affect the profitability of them.Other costs discussed during the chapter were differential costs (the difference in costs and benefits between alternate options) and replacement costs (do you need to replace the resource again?). I found the discussion surrounding replacement costs an important idea to consider as most things have a limited life. As such, it would be important to consider whether the resource being purchased would need to be replaced again in the short term, or whether it would last a number of years before needing replacement. This is especially important when considering to utilise a large portion of available capital in a business. Would you need to re-use this capital again, and if so, when are you going to need to access this capital? A further question would be – is there going to be enough capital available at this later date to make another purchase?There was a large portion of this chapter that looked at contribution. Will the resource make a difference to the business? The author also discussed whether the investment would create a positive or negative contribution. It was also noted that it is better for business to avoid having products with negative contribution margins. As these products reduce the cash flow within the business, it is wise for a manager to clearly identify these products to reduce the instances of this occurring. At the end of the day, a business’s main objective is to be profitable. The author also mentions that contribution margins only appease the investors. A business should also make sure that it contributes to customers, suppliers and employees etc. In order to contribute to all the other persons, a manager should consider all aspects before making a final decision.Another interesting discussion was about constraints. In business, there may be constraints surrounding products such as maximum demand for a product, and the limits on how much of a particular resource can be obtained. In regards to maximum demand for a product, the manager should make the informed decision on how much the firm should seek to sell to its customers. This I think would take a bit of informed guesswork on the manager’s behalf. However, a good manager would have access to information in regards to potential sales based on existing sales with competitors etc, and also market feedback from existing customers. The second half of this discussion – limits on particular resources was very involved and required some thought on my behalf. In particular, how could this be applied to my current role and my chosen business – HGL? I refer back to the example provided with Robinhood. Simply by considering the contribution margins given by each product, the waste disposal unit was not a reasonable product to manufacture due to the fact that it was negative. This left 4 products, and out of these the most viable options provided were Canopyhood - $300 profit per unit, and Supertub - $150 profit per unit. However, if Robinhood had to consider a potential shortage of steel, then this changed the thought process dramatically. Robinhood would need to look at the best way of getting a return on the limited steel able to be purchased for the period. As such, after looking at the best returns, it was found that the Easyiron would provide a return of $200/kg of steel, and the Canopyhood would provide a return of $150/kg of steel. As such, a wise manager would invest in these products to maximise returns to the organisation. However, I found that the author did not consider other such factors as customer satisfaction in this topic. For instance, if Robinhood were to only invest in the two items providing a good return on steel, then the existing (and potential) customers would not be able to purchase the other items from Robinhood. As I have found in business, sometimes if you are not able to provide them with certain items or provide a complete solution, they will often shop elsewhere. The risk of this is that the customer may try other brands, and if they like these, they may completely convert to these brands on a permanent basis. This would have negative effects on future sales and cash flow for the business. As such, it is a very fine line for the manager to consider the best way of maximising profits, whilst also contributing to the customers in terms of product and benefit.This would also need to be a consideration for my chosen company, HGL. After reading the annual reports for this company, I feel that they too have had to make a number of decisions in recent years surrounding this topic. In particular, they have had to make decisions about products providing negative contribution to the company and have since removed them from sale. An example of this would be the exit of creative design projects by SPOS Group to refocus on the core business of providing shelving solutions to customers. By doing this, sales declined in 2014 by some $7m, however the gross margin lifted by 3% for the period. This clearly showed that the decision was indeed the correct one.During this chapter, it discussed the time value of money. I had a few questions which immediately came to mind after reading this section. The first question I had was whether it was better to invest back in the business for a potential return, or simply just hang onto the cash. This is yet another question that a manager should consider as part of looking into the future for the business. Another question would be whether you would get a better return on the cash by banking it in long term deposits over any potential investment back into the business. The last question that came to mind whilst reading this section was how do you evaluate the value of money.This brought me to the next step which discussed the accounting rate of return. The formula stated in this chapter was (average net profit / initial investment) x 100. I found this concept much easier to understand with the example provided which used the airline purchasing new planes. To clearly evaluate which was the better option, the author looked at the net profits that the new planes would provide against their initial investment. By using this method, it was found that the Airbus 380 would provide a better return over that of the Boeing 787. However, again this only discusses that of the profit side of things and did not discuss any other factors such as potential customer satisfaction (or dissatisfaction) by utilising the different planes.Payback period was a topic that I was familiar with in my previous role at Worksense Workwear & Safety. It is stated that the payback period is defined as initial investment / cash flow. The example provided was $2m per year / $500k per year, which gave a period of 4 years to obtain a payback period. I was reminded of my own personal experience where I was trying to obtain capital from the Worksense head office for an embroidery machine. My branch (similar to other branches within the group) provided additional services such as embroidery to clothing for customers. In many cases, this was important to retain contract customers. My particular branch was one of only 2 branches within the group that did not have an onsite embroidery service and had to subcontract this work to another embroiderer. However, the chosen embroiderer also conducted work for 2 of my competitors which meant that I was reliant on when they could fit me in to their schedule. My spend with the embroiderer was $250k per year just on logos. At an average of $5 per logo, this meant that they were doing about 50,000 logos for us per year. To remain competitive in this market however, I had to try and reduce my costs so that we could make more margin and also reduce sell prices if needed. As such, I was forced to undertake a business plan for the purchase of an internal embroidery machine. I had already calculated that 50,000 logos were being done per year. I had then calculated that this would cost me approximately $2 each in thread and smaller incidentals, meaning that my cost to perform the same amount of logos was $100k. A new cost of wages for someone to run the machine was approximately $39k and I had an additional cost of $1k for electricity for the machine. This gave me a rough cost of $140k to perform the same amount of work, thus giving me an increased return of $110k per year. Given that a new embroidery machine would only cost the business approximately $110k, my payback period was 1 year. After going through the model with the GM at the time, he had decided that the best move going forward was to actually purchase a new machine. Although the business was undergoing a significant cost reduction scheme, it was decided that the payback period of 1 year represented only a little risk in the scheme of things.This chapter also discussed internal rate of return (IRR) and net present value (NPV). IRR was claimed to be easy to understand, however has limited use due to some business investments requiring additional outflows of cash. NPV was also limited due to the fact that it was difficult to determine the correct discount rate to use, requiring a lot of guesswork. Additionally, the author stated that both options are used and accepted in business, however both difficult to apply in practice. After reading this section, I wondered why managers would want to spend time utilising both of these methods if they are limited and potentially may not provide the right information to the manager. A manager would require clear and concise information so that they can make profitable decisions for the business.I had discussed a number of times earlier in this assessment, qualitative factors. These are factors that cannot be expressed in numbers to assist in decision making. This includes factors such as customer satisfaction and improved potential for new customers/sales. Whilst these cannot be defined clearly such as quantitative factors listed throughout this assessment, they are still an important area to address when making a decision.In conclusion, there are a number of factors that managers must take into consideration when looking at spending a business’s capital. As many of the decisions are made for the long term, it is important to make sure that the decision has been thought out and that all chances of reducing the company’s finances are minimised. At the end of the day, the most important thing for any business is to ensure that they continue to make money now, and into the future. ................
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