# Financial Forecast of Tricol plc. (Version 1)

*The following report is from a ReportStation’s HND student. We want to highlight the importance of understanding and expressing yourself in the best possible way.*

**The management in Tricol plc**

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**Contents**

**Introduction****Part A**

2.1 The adjustment of the budget

2.2 The calculation of the variance and the variance rate

2.3 The analysis of the possible reasons for the variances

2.4 The recommendation for the management action

**Part B**

3.1 The assumption of two investment appraisal techniques

3.2 The recommendation for the investment

3.3 The consideration of any other factors in the management

**Conclusions****Appendices**

** **5.1 Appendix 1 — The adjustment of the budget

5.2 Appendix 2 — The calculation of the variance and the variance rate

** ** 5.3 Appendix 3 — The calculation of the payback method

5.4 Appendix 4 –The calculation of net present value method

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**Introduction**

The report is used to solve problems happened in Tricol plc. It mainly contains two parts. In Part A, I will identify and discuss variances in materials, labor and overhead. In Part B, I will evaluate the financial viability of the investment proposal. After that, I will support recommendations for the management in this company.

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**Part A**

2.1 The adjustment of the budget

It is showed in the appendix 1.

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2.2 The calculation of the variance

It is showed in the appendix 2.

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2.3 The analysis of the possible reasons for the variance

In this part, I will analyze the possible reasons of variances in terms of the flexed budget figures, the calculation of variances and variances rate and the additional information in the task. The company policy allows a rate of 3% for any variance analysis. But after my calculation, I find that any variance rate is higher than 3%. So I will identify all of the variance in three aspects such as in materials, labor and overhead.

In material section, the company has recently upgraded the production machinery used for this product. This will decrease the scrap and waste. Thus, the usage of direct materials declines. This is a favorable impact to Tricol plc. Besides, the company is also using higher-grade materials. So the price of raw materials increases. This causes an adverse impact for the company.

In labor section, the one is that the company has switched suppliers. Due to this, employees may need time to adapt the new supplier. This can descend the work efficiency. The other one is that the use of upgraded machine may lead to lower work rate. Workers have to learn how to use the new machine, and this will waste time. In addition to this, the determination of a higher-than-expected wage settlement also improves the labor rate. These factors bring a negative influence for the company and increase the labor cost.

In overhead section, the main variance in this aspect is insurance costs and administration overheads. In fact, in June the actual production occurs in the difficult trading conditions. This will lead to the increasing insurance costs and administration overheads. Another reason may come from the higher-than-expected wage settlement for production operatives; the administration fee also rises with it. Therefore, this company has an adverse overhead variance.

2.4 The recommendation for the management action

After pervious analysis for reasons, in this part I will support some recommendations. Firstly, the material price is very high. This aggravates the material costs. So the company may attempt to source material on cheaper price.

Secondly, the expenses on labor are also big. I suggest that the company strictly regulate the payroll and reduce the labor rate.

Thirdly, in order to promote the labor efficiency, the company can train staff to use the upgraded machinery. Otherwise, the company may set up an award system to encourage employees who are high work efficient.

**Part B**

3.1 The assumption of two investment appraisal techniques

After recognizing the variance, in this section, I will evaluate the investment proposal by two particular methods. These are the payback method and net prevent value method. I will show the calculations in table form (see the appendices part). Then, I am going to clearly state the assumptions done before analysis. The first is that, in this task, I do not need to consider the influence of taxation and inflation. The second is that the period of the investment is five years. The short time helps the company to quickly recover the cost. The next one is that the market element is stabilized. For example, the market rate does not vary. Lastly, the company works with certain market rate of return on investment of 10% for these type investments. This would help me avoid some unnecessary calculations.

3.2 The recommendation for the investment

In this part, I will compare two investment approaches. Then, I will decide whether this investment should go ahead. For the payback period method, it is simple to operate. Then, it also has the shorter payback period, the less risky. However this approach ignores time value of money. Additionally, there is no allowance made for interest on the initial capital investment. For the net present value method, the approach used is discounted cash flow under 10% discount rate in order to reflect the time value of money. This method concentrates on cash flow and outflow rather than on evaluating the profit. Besides, using this method set up on an objective foundation to estimate this investment. To sum up, I consider that the net present value method can objectively reflex the actual return. From the calculation, the Tricol plc can gain -￡6,400 of the net present value after 5 years. So I advise the company to give up this investment. The company has to choose a better plan to replace this one.

3.3 The consideration of any other factors in the management

There are many other internal or external elements that the management should consider when I review the recommendation. The internal factor is in the following. First, new machinery may have an impact on the workers’ acceptance and cause difficulties in terms of not right machine exploitation and increased scrap of materials. Second, the motor vehicles will depreciate after 5 years; and the fixed assets like land or loading unit will appreciate. The external factor is the variance and influence of the market rate. Except for this, another consideration is changes in political, economic and social elements. Here is to mention – national policy such accounting regulations, legislative regulations or tax frame.

**Conclusions**

This report helps Tricol plc resolve two aspects’ troubles. In the first, it recognizes causes for the variance between budget and actual activity. It also provides suggestions for the management implement. Then, it assesses whether the investment proposal is reasonable by two investment techniques. In a word, I hope that this report is effective for the company.

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**Appendices**

** **5.1 Appendix 1 — The adjustment of the budget

After analyzing above information, I make a table about the budget and actual expense as below.

Tricol plc Flexed Budget | ||||

| Budget | Flexed Budget | Actual | Variance F/A |

For June | 2,000 units | 1,600 units | 1,600 units | |

￡ | ￡ | ￡ | ￡ | |

Direct Material | 80,000 | 64,000 | 61,600 | 2,400F |

Direct Labor | 36,000 | 28,800 | 35,200 | 6,400A |

Variable Production Overheads | 4,000 | 3,200 | 3,200 | 0 |

Depreciation | 1,500 | 1,500 | 1,500 | 0 |

Rent and Rates | 2,500 | 2,500 | 2,500 | 0 |

Administration Overheads | 2,000 | 2,000 | 2,200 | 200A |

Insurance Costs | 2,200 | 2,200 | 2,400 | 200A |

Total Cost of Production | 128,200 | 104,200 | 108,600 | 4,400A |

5.2 Appendix 2 — The calculation of the variance and the variance rate

Here, I will calculate variances in materials, labor and overhead.

**Material variances**:

- Direct material total variance

(Standard units of actual production × standard price) – (actual quantity × actual price)

〔(4kg × 1,600) × ￡10〕–￡61,600

= ￡64,000 –￡61,600

= ￡2,400 (F)

The rate of direct material total variance

= ￡2,400 /￡6,400 ×100%

= 3.75%

- Direct material usage variance

Standard price × (standard units of actual production – actual quantity)

￡10 × (4kg × 1,600 – 5,600kg)

=￡10 × 800kg

=￡8,000 (F)

The rate of direct material usage variance

= ￡8,000 /￡6,400 ×100%

= 12.5%

- Direct material price variance

Actual quantity × (standard price – actual price)

5,600kg × (￡10 –￡61,600/5,600kg)

=5,600kg × (￡10 –￡11)

=5,600kg ×￡1

=￡5,600 (A)

The rate of direct material price variance

= ￡5,600 / ￡6,400 ×100%

= 8.75%

**Labor variances:**

- Direct labor total variance

(Standard hours of actual production × standard rate ph) – (actual hours × actual rate ph)

〔(2h × 1600) ×￡9〕– (3,520h×￡10)

=(3,200h×￡9 ) –￡35,200

=￡28,800 –￡35,200

=￡6,400 (A)

The rate of direct labor total variance

= ￡6,400 / ￡28,800 ×100%

= 22.2%

- Direct labor efficiency variance

Standard rate ph × (standard hours of actual production – actual hours)

￡9 × (2h × 1600 – 3,520h)

=￡9 × 320h

=￡2,880 (A)

The rate of direct labor efficiency variance

= ￡2,880 / ￡28, 800 ×100%

= 10%

- Direct labor rate variance

Actual hours × (standard rate ph – actual rate ph)

3,520h × (￡9 –￡10)

=3,520h ×￡1

= ￡3,520 (A)

The rate of direct labor efficiency variance

= ￡3,520 / ￡28,800 ×100%

=12.2%

**Overhead variances:**

Total overhead variance

Total standard overhead for actual production – total actual overheads

= (Standard insurance costs – actual insurance costs) + (standard administration overheads – actual administration overheads)

=(￡2,200– ￡2,400) + (￡2,000– ￡2,200)

=￡200 +￡200

=￡400 (A)

Overhead absorption rate

= total budgeted overhead / total budgeted activity level

= ￡400 / ￡4,200 ×100% = 9.52%

5.3 Appendix 3 — The calculation of the payback method

**Payback period method**

Year | Yearly net cash flow ￡ | Cumulative cash flow ￡ |

0 | (1,000,000) | (1,000,000) |

1 | 160,000 | (840,000) |

2 | 160,000 | (680,000) |

3 | 320,000 | (360,000) |

4 | 320,000 | (40,000) |

5 1^{st} 1/8 of ￡32,000 | 40,000 | Nil |

5 2^{nd} 7/8 of ￡32,000 | 280,000 | 280,000 |

Net cash benefit | 280,000 | 280,000 |

5.4 Appendix 4 –The calculation of net present value method** **

**Net present value at 10%**

Year | Annual cash flow | Present value factors at 10% | Present | Value |

| ￡ | ￡ | ￡ | ￡ |

0 | (1,000,000) | 1.000 | (1,000,000) | |

1 | 160,000 | 0.909 | 145,440 | |

2 | 160,000 | 0.826 | 132,160 | |

3 | 320,000 | 0.751 | 240,320 | |

4 | 320,000 | 0.683 | 218,560 | |

5 | 320,000 | 0.621 | 198,720 | 953,200 |

Net present | (64,800) |

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