Financial Forecast of Tricol plc. (Version 3)
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Report on Financial forecasting for Tricol plc
1 Introduction
The report aims at giving details which are presented by a table related to flexed budget about the variances of direct materials total, usage, price, direct total, efficiency, rate and total overheads. In the end, recommendations and conclusions are given to make the ultimate completion.
Part A
2 Body
2.1 Flexed Budget
The table of Flexed Budget are given in the Appendices
2.2 Variances Analysis
2.2.1 Material Variances
The direct material usage variance is 8000 Favourable indicating that the flexed budget is £8,000 more than the actual use of direct material. It is obvious that the results are generated due to using higher-grade materials and upgrading production machinery for the product.
The direct material price variance is 5600 Adverse which shows that the flexed is £5,600 less than the flexed budget price. The results come up with the conclusion of switching their suppliers as well as using higher-grade materials purchase the higher-grade materials. These two adjustments directly lead to the price increase from £10/kg to £11/kg.
The direct material total variance is calculated by direct material usage and direct material price and the number is £2,400 Favourable which means the direct material total of flexed budget is £2,400 more than that of actual use.
2.2.2 Labour Variances
The direct labour rate variance is £3,520 Adverse which suggests that the flexed budget is £3,520 less than the actual labour rate. Tricol plc has recently concluded a higher-than-expected wage settlement for production operatives which, to some extent, have caused the increase of labour cost, from £9/h to £10/h. And the qualifications of employees such as poor productions efficiency also have to be taken into account.
The direct labour efficiency variance is £2,880 Adverse showing the fact that the flexed budget efficiency is £2,880 less than actual labour efficiency. The causes of this phenomenon may be various such as the ageing of facilities and the negative attitudes of employees towards manufacturing which are reflected significantly on labour efficiency.
The direct labour total variance is calculated by direct labour rate and direct labour efficiency and the number is £6,400 Adverse which means the direct labour total cost of flexed budget is £6,400 less than that of actual use.
2.2.3 Overhead Variances
The total overhead variance is £400 Adverse which means the total overhead of flexed budget is £400 less than actual total overhead. The cost on administration and insurance has a direct impact on the total amount of overheads for in Tricol plc the two of them are the two main components. The administration fees can be adjusted by decreasing the wages of the management level while controlling the cost insurance can depend on additional charge on staff and facilities.
3 Conclusions
Through calculation of the data above, all the actual variances are higher than 3.51%, some even reaching 22.22%. Although Tricol plc is allowed to apply a rate of significance of 3% for variances, the final results give a worrying prospect. These changes occurred in actual manufacturing process not only is relevant with the failure of achieving the initial production but also indicates the variation in material and lavour will lead to the final increase in actual variance.
4 Recommendations
For the purpose of improving the current situations and making a difference in future strategic planning, some suggestions are given.
- Attempt to source material at a cheaper price with the reason that the current supplier with higher cost has not done much good to the business and the supplier with low cost is the right one to replace the place.
- The qualifications of the staff have urgently to be improved because previous efficiency has not satisfied the actual need.
- Get the staff to be more motivated through extra bonuses and set up a series of humanized standards to make sure all the employees have got involved in the manufacturing.
5 Appendices
Flexed Budget For June 2008
Tricol plc Flexed Budget For June 2008 | ||||
Original budget | Flexed budget | Actual results | Variance (F/A) | |
Amount of products | 2,000 | 1,600 | 1,600 | |
£ | £ | £ | ||
Direct materials | 80,000 | 64,000 | 61,600 | 2,400(F) |
Direct Labor | 36,000 | 28,800 | 35,200 | 6,400(A) |
Variable overheads | 4,000 | 3,200 | 3,200 | 0 |
Insurance | 2,200 | 2,200 | 2,400 | 200(A) |
Depreciation | 1,500 | 1,500 | 1,500 | 0 |
Rent and Rates | 2,500 | 2,500 | 2,500 | 0 |
Administration | 2,000 | 2,000 | 2,200 | 200(A) |
Total | 128,200 | 104,200 | 108,600 | 4,400(A) |
Direct material usage variance
Standard price×(standard units of actual production –actual quantity)
10×(4×1600-5600) =£8,000(F)
Direct material price variance
Actual quantity×(standard price-actual price)
5600×(10-11) =£5,600(A)
Direct material total variance
(Standard units of actual production ×standard price)-(actual quantity× actual price)
10×4×1600- 61600=£2,400(F)
Direct labor rate variance
Actual hours×(standard rate ph-actual rate ph)
3520×(9-10) =£3,520(A)
Direct labor efficiency variance
Standard rate ph×(standard hours of actual production- actual hours)
9×(1,600×2-3,520) =£2880(A)
Direct labor total variance
(Standard hours of actual production×standard rate ph)-(actual hours×actual rate ph)
2×1600×9-35,200=£6400(A)
Total overhead variances
Total standard overhead for actual production-total actual overheads
(1600×2-3,200)-(8,200-8,600) =£400(A)
Part B
Report on
Investment of
Tricol plc
Content
1 Introduction – 2 –
2 Body – 2 –
2.1 The Payback Period – 2 –
2.2 Discounted Cash Flow (NPV) – 3 –
3 Conclusion – 4 –
4 Recommendations – 4 –
5 Appendices – 5 –
1 Introduction
The purpose of this report is to evaluate the financial viability of the investment proposal of Tricol plc as well as giving suggestions on future prospects. It mainly concentrates on three sections, the Payback Period and Discounted Cash Flow (NPV).
2 Body
2.1 The Payback Period
The payback period is the method of investment and project appraisal that measures the number of years that is expected to take to recover the cost of the original investment.
The chart showing the payback period for the new investment is given in the appendices.
The payback period is 4 years 1 month and 15 days which is among the expected 5-year recoup time.
Assumptions applied to this approach:
- Year 0 means now.
- Year 1 means at the end of 12 months from now.
- Year 2 at the end of 2 years from now, and so on.
- Figures in brackets(), designate an outflow.
2.2 Discounted Cash Flow (NPV)
Net Present Value are calculated in the table given in the appendices.
The surplus indicates that the annual cash flows in five years are not big enough to allow more interest to be deducted and fails to fulfill a 10% return. The investment is, therefore, reflected to be not worthwhile with reason of no return to cover initial cost.
Assumptions applied to this methodology:
- Uncertainty does not exist.
- There is no inflation.
- The appropriate discount rate to use is known, to avoid unnecessary calculations.
- Unlimited funds can be raised at a competitive rate.
3 Conclusion
The payback period gives evidence of the availability of operating the investment, for the payback period is 4.125 years less than 5 years. However, the Discounted Cash Flow related to NPV presents a negative prospect because a 10% return has not be fulfilled.
Any serious investment appraisal must consider the time value of money. So Tricol plc is most expected to take the results of NPV analysis under consideration which has counted in the time value of money while in the method of payback period time value of money has been originally ignored.
4 Recommendations
Tricol plc should not go ahead with investment on the project any more. The reason is obvious that when taking time value of money into account a 10% return is not possibly to be achieved and no return is existed to cover the original cost.
The following are factors (non-financial factors included) for the management review the recommendations:
- Additional local authority charges on the extra facilities
- Additional labour to man new equipment
- Government grants
- Inflation rates
5 Appendices
Payback period for the new investment
Year | Annual 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 | 320,000 | 280,000 |
Net cash benefit | 280,000 | 280,000 |
Net Present Value:
The calculation of net present value at 10%
Year | Annual Cash Flow | present value factor 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 | 935,200 |
Net Present Value | (64,800) |