Evaluating Performance and Appraising Limitations
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Added on 2020-04-07
Evaluating Performance and Appraising Limitations
Added on 2020-04-07
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MANAGEMENT OF FINANCIALRESOURCES AND PERFORMANCE
Table of ContentsPart- 1 Evaluating performance and appraising limitations............................................................3Part 2- Planning and control of an organization’s Resources..........................................................5Part3- Contemporary Management Accounting Methodology.......................................................8Part- 4 Methods of Resource Allocation for Achieving Corporate Strategy.................................11Part 5-Tensions between Financial and Strategic Objectives........................................................14Part 6 Capital Investment Techniques...........................................................................................17Part 7- International Financial Market...........................................................................................19Part 8-.............................................................................................................................................22Appendix 1.....................................................................................................................................27Appendix 2.....................................................................................................................................28Appendix 3.....................................................................................................................................28References......................................................................................................................................29TABLE OF FIGURESFigure 1: Process of ABC................................................................................................................9Figure 2: Model of Activity Based Costing...................................................................................10Figure 3: Microsoft value chain analysis.......................................................................................11Figure 4: qualitative and quantitative issues of strategic performance..........................................20Figure 5: Approaches to managing risk.........................................................................................21Figure 6: Indirect benefits of International Finance......................................................................22Figure 7: various sources of finance..............................................................................................23Figure 8: Risk map for resolving issues........................................................................................25
Part- 1 Evaluating performance and appraising limitations Key Performance Ratios Analysis of performanceFrom above ratios it could be observed that company is operating is appropriate manneras is debt-equity ratio is more than 2 and even an increasing trend can be observed in thedividend paid (Wolf, 2014). The company is financially viable too, and the same can be accessedthrough significant interest coverage ratio. Accounting treatment of various assets
AssetAccounting treatment Depreciation No allocation of depreciation on assets is done on different segments forreporting presentations. A part of depreciation is stated as an overhead;this is because it is impracticable for the company to identify separateamounts of depreciation by each segment that is included in the profit orloss. (AAS 116)Inventory The company reflects its inventory at average cost, subjected to the onewhich is lower (cost or market). The cost includes materials, labour, andmanufacturing overhead which arises at the time of purchase andproduction of inventories. (AAS 102)Capitalization The company capitalizes all software costs until the final product releasedto the end users.The capitalized costs of software development areamortized over the estimated lives (Approaches to Calculating the Cost ofCapital. Boundless Finance, 2017). Once the development reaches thetechnological feasibility, then the costs associated with such software arecapitalized and amortized in terms of future expected benefits. (AAS 4)Valuation The company uses quoted prices for identical assets or liabilities whereverapplicable, in active markets, for determining the fair value of the financialinstruments (Van Dooren, Bouckaert and Halligan, 2015). Model-basedvaluation techniques are used by the company for the valuation of all theinputs. (AAS 3)Treatment of intangible assets- Microsoft tests their intangible assets for recoverability;in the light of changes in circumstances of a shift in strategic direction and profitabilityexpectations. Based on the results of our testing in the last fiscal year, it was determinedthat the company would not be able to recover their carrying value and as a resultingimpairment was charged to the extent of the estimated fair value. Intangible assets areamortized on straight line method (Johnson and Scholes, 2017). The estimated life ofidentifiable intangible assets is expected to be 6.3 years.
Differences in financial reporting- As per the analysis, there have been no differencesin the financial reporting of the company as compared to International AccountingStandard. 1.3 Comparative Performance After comparison of the financial performance of Microsoft to its competitors, it can besaid that the Total Revenue of the company decreased in 2015’s the 3 quarter -12.16 %. Asopposed to this, the revenue for other companies in the industry and the industry as a wholeincreased by 29.94 %, in the same quarter (Shahzad, Rutherford and Sharfman, 2016).AlthoughMicrosoft is a better performer from companies like Dow Jones Industrial, the company has beencontinuously suffering from strong competition from Apple. Inc. Microsoft mainly focuses on the analysis of processes undertaken within the organizationby fundamentally rethinking the way they improve customer service, reduce operational coststhereby becoming world-class competitors (Saeidi and et al. 2015). Each process that eitherresult in finished good or as a base for the next process is evaluated separately. In the ITindustry’s which is multi-process, generic benchmarking is used to comparing information. Part 2- Planning and control of an organization’s ResourcesTreatment of indirect and direct cost- The direct costs are added to the cost of the productwhereas the indirect costs are reflected as an expense in the income statement or P&L account. Different cost treatment of job, process and contractsJob costing:as per this method, identification of costs is made for each work separatelybecause each job entails its own specifications and scope. Contract costing:Contract costing is performed when the company invites tenders forweb development which involve heavy expenditure during an extended period of time(Wang and Sarkis, 2013).Process costing- when a company engages in activities which involve a lot of processeslike that of Microsoft, this kind of costing is used. Microsoft develops its softwarethrough a planned series of steps.
Absorption costing-This costing type has its origin from managerial accounting whichexpenses all costs associated with developing a particular product; this type of costing isthe time required by external reporting GAAP (generally accepted accounting principles).Absorption costing is done for costs which are directly relatable to the development ofthe product (Tantalo and Priem, 2016). Distinction between fixed and variable costA company's cost which is linked to the amount of goods or services it produces is calledvariable cost. The variable cost of the company increases and decreases with the volume ofproduction undertaken. On the other hand, the costs which do not vary with the level of outputare known as a fixed cost. This part of cost remains constant at each level of production. Cost volume profit analysisShort-term decision analysis The analysis is applied to ascertain themanner in which change in cost and volumeaffects operating as well as net income ofcompany (Harrison and Wicks, 2013). Foraccomplishing the analysis, variouscomponents such as sale price per unit areassumed constant.This technique is used by the company as anew way for evaluating costs which assist inmanagerial decision making. Instead ofevaluating components of cost this analysis,re-arranges the costs into variable costs, fixedcosts, and mixed costs (Rivera, Muñoz andMoneva, 2017). In this technique, the companyallocates salary to fixed costs and bonus tovariable costs. Relevant cost and its application to decision-making The objective cost of a business decision is determined by relevant costs. An objectivemeasure cost of a decision is a number of cash outflows that result from its implementation.Thus, it assists in decision making through revealing the amount of cash outflow resulting from acost. Some of the relevant costs are future cash flows, avoidable cost, opportunity cost andincremental cost. Role and Limitations of Traditional Budgets
A detailed statement of financial results that are predictable for a given period of time inthe future is known as the process of Budgeting. Traditional functional budgets can be effectiveonly when the organization is divided into many units which together contribute toorganizational goal (Mir and Pinnington, 2014). If the entity runs on the basis of annual goals, itmay need a functional budget for a short period just to keep the company on the right track. Problems and motivational impact of functional annual budgets -The problemassociated with functional budgets is that it created unnecessary pressure in the mind ofthe staff and promoted unhealthy competition (Guerreiro, 2015). However, ifcommunicated in a positive way can provide a guide to managers and their employees inachieving the organizational objectives. Alternatives to functional budgets Budget Description Activity-based budgets This type of budgeting is the one in which theactivities of the organization which incurcosts are recorded, and their relationshipswith each other are defined and analyzed.Continuous Budgets It is the process of continually adding monthsto a multi-period budget with each passingmonth by revising the assumptions of thebudget for every incremental period of thebudget (Endrikat, Guenther and Hoppe,2014).Beyond Budgeting Roundtable This technique emphasizes a holisticfocus onthe objectives to be achieved and theirrelation with the processes undertaken toaccomplish them. Microsoft encourages full-scale recreation of processes instead of sub-processes being optimized.
Part3- Contemporary Management Accounting MethodologyRole of Activity-Based Management ‘Relevance lost’ -The traditional system of accounting overhead is done throughallocating it to the product in the proportion of direct labour or machine hours which maynot reflect the actual consumption of resources. There is a relevant loss of usefulresources as the traditional management accounting fail to provide accurate product cost(Grant, 2016). The traditional system of accounting has failed to keep pace with newtechnologies by focusing on short-term profits instead of short-term financial measure ofnon-performance. Traditional accounting focuses on volume-related drivers, like labourhours, while the modern costing method uses transaction-based drivers, like a number oforders received. Appraisal of activity-based costing (ABC)-This technique is considered as the modern alternative to the traditional system of accountingthat is absorption costing; this allows the managers to understand the product and netprofitability in a much better way. This also provides the management with improvedinformation for making value-based and leading to more effective managerial decisions. ABCtechnique focuses on cost drivers- the activities increase costs. Thus this technique gives accurateresults in terms of cost and profitability. Figure 1: Process of ABCActivity-based costing fills the information needed for re-engineering and benchmarking byproviding cost of each activity separately. This costing method also provides operatinginformation about the true cost of services, products, processes, distribution channels, activities,
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