Report on Online Return on Capital Employement

TWO
QUESTIONS

INTRODUCTION
Question 1
(a) Cost per unit of each product by conventional method
A B
Material 22 35
Labour 35 30
Direct cost 57 65
Production overhead
(6/hour) 9 6
Total production cost per
unit 66 71
(b) Cost per unit of each product by using ABC principle
% Total Overhead Level of activity
Cost per unit of
activity
Set ups 25 82125 955 86
Machining 35 114975 54750 2.1
Material movement 25 82125 424 193.69
Inspection 15 49275 920 53.56
100 328500
(c) Comment on the causes
Products A B
Overheads per unit (Conventional
system) 9 6
Overheads per unit (ABC principle) 29.72 25.77
 A change to activity based costing results in the overhead costs of A increasing while the
overhead cost of B decreasing.
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 The adoption of ABC provides a fairer unit cost that better reflects the effort required in
the manufacturer of different products.
 Product B has fewer set ups, material movements and inspections while product A have
more than B.
Working notes -
Total overheads
Production units
Machine hours
per unit
Total machine
hour OAR
Total
overhead
A 3250 3 9750 6 58500
B 9000 5 45000 6 270000
54750 328500
Total overhead by product per unit
Overhead A B
Activity Cost Activity Cost Total
Set ups 225 19350 730 62780 82130
Machining 9750 20475 45000 94500 114975
Material movement 224 43387 200 38738 82125
Inspection 250 13390 670 35885 49275
Total overhead 96602 231903 328505
No. of units 3250 9000
Overhead cost per unit 29.72 25.77
Total cost per unit
A B
Direct costs 57 65
Overhead costs 29.72 25.77
Total production cost per unit 86.72 90.77
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Question 2
(a) Columnar statement
Original
Budget
Actual
Budget
Standard
Budget
Varian
ces Flexible Budget
Standard Cost
per unit
Units
20000
Units
18800
Units:188
00
Units:
20000
Units:
22000
Units:
25000
Direct Material 24 480000 442650 451200 8550
48000
0
52800
0
60000
0
Direct Material 12 240000 223000 225600 2600
24000
0
26400
0
30000
0
Variable
production
Overhead 3 60000 57500 56400 -1100 60000 66000 75000
Fixed
production
overheads 102000 18000 17000 -1000 17000 17000 17000
Total Cost 882000 741150 750200 9050
79700
0
87500
0
99200
0
(b)pected
(c) Explain the cause of labour and material variance
 Labour variance: - It is an costing analysis which influence the labour expanses which is
included in the business calculation (Return on capital employment, 2019.). It also
include the factors who affect the cost per unit can create labour rate variance. Such as
overtime amount paid, premium shift, external influences and extra charges of staff
wages.
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 Material variance: - It includes those factors who affect the price of cost such as price of
raw material increase unexpectedly, budgeted price.
Question 3
Market based transfer prices -
It mention a price in an intermediate market between independent buyers and sellers.
When there is consist of external market of competition for the transferred product, market prices
and also for transfer prices that time transferred goods are recorded at market prices(Rupprecht,
Peter and Navab, 2015).
Advantages – The advantage of this method that it is used as objective and in perfect
competition market it will take suitable decisions.
Disadvantages – Market prices are fluctuated substantially and in competitive market
intermediate products are not traded easily. So there is hard to find perfect market for establish
market price.
Negotiated transfer price -
It is important decision of any organisation that takes between selling and buying
decision. This negotiation will be between the cost based price and the market price. There is
buying division manager and selling division manager are bargain in the manner of independent
company manager.
Advantages – It provides greatest autonomy in each division to headquarter and provide
least interferences. In this method have freedom to get favour and it provides motivation to
manager for business like attitude in each division.
Disadvantages – The disadvantages of this method is there results are based on relative
bargaining strengths and abilities of the divisional managers. So it was not suitable every time
and disapprove in each section. It is consuming much more time and there is transfer prices are
expensive.
Question 4
Return on capital employed –
It is a profitability ratio which measure of performance of company to generate profits to
compare results or net operating profit with capital employed. Return on capital employed shows
investors profits in dollars and each dollar of capital employed generates(Gartstein, Bridgett and
Low, 2012).
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Return on capital employed = Net operating profit / Employed capital
Advantages – There are various advantages of return on capital employed, they are following as
-
 It's mainly focused on cost and profit Comparative measure of performance and used to compare performance
Disadvantages -
 It based on historic measure
 Many times it is only focused on short term achievements
 It is measured against the NBV of the asset of the business.
Residual income -
It is the amount of net income which is part of divisional performance management form
investment centres. Residual income have been used in measurement performance of company's
management and internal corporate performance.
Residual income = Monthly net income – Monthly debts
Advantages -
 It is shows as opportunity cost of different account and attachment of asset in the
division. It helps to earn different return from different assets.
Disadvantages -
 It is only based on accounting measure of capital employed and profit in subject to
influence.
 It does not provide comparison between investments and their divisions.
Economic value added -
It is an internal management performance measure which are based on residual income
technique. In this technique compare performance of total cost of capital and operating profit and
from remaining income adjust amount of tax. It is also known as economic profit and with the
help of measurement management take appropriate decision regarding to performance
improvement.
EVA = Net operating profit after tax – (Capital invested * WACC)
Advantages -
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 EVA is a tool which provide help to manager for decision taking to increase their
shareholders wealth. It helps to investors for investing purpose and EVA also used in calculate value of
goodwill.
Disadvantages -
 EVA can not perfectly measure all capital asset according to managers and utilize all
retained earnings.
 It can not value of return on expenses related to research and development.
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