Working curriculum of the course

7. Productivity doesn't change.

8. There are no structural shifts. Let's stop on this assumption. Still we considered production of one product. Respectively, there was no problem of distribution of costs for various products, definitions of their prices, determination of production efficiency of each of products. On questions of distribution of expenses and price definitions in a case when the company makes some products, we will in detail stop in the following paragraph, and now it is necessary for us to understand, how the production structure influences company profit.

Let the Sword company makes two types of products A and B, costs of which production, the prices and the marginal income are reduced in the mentioned below table:

Indicators And In

Variable expenses on unit, $8 10

Price, $11 14

The marginal income on unit, $3 4

Constant expenses of Sword firm make $30000. Let's define points of break-even of Sword firm for the following two structures of release:

For each chosen structure we consider a structural set as one product, therefore, for structure of I:

Variable expenses on 2 products A and 1 product B, 2$ *8 + 1*10 = $26

Price of 2 products A and 1 product B, $2 *11 + 1*14 = $36

The marginal income on 2 products A and 1 product B, $36-26 = $10

Then the critical volume of production on a formula (3) is equal:

х0 = 30000$/10$ = 3000 pieces of structural sets,

 

or 3000*2 = 6000 products A

and 3000*1 = 3000 products B.

For structure of II:

Variable expenses on 3 products A and 4 products B, 3$ *8 + 4*10 = $64

Price of 3 products A and 4 products B, $3 *11 + 4*14 = $89

The marginal income on 3 products A and 4 products B, $89-64 = $25

Critical volume of production:

х0 = 30000$/25$ = 1200 pieces of structural sets,

or 1200*3 = 3600 products A

and 1200*4 = 4800 products B.

It is clear, that the CVP analysis under condition of changeable structure of release demands attraction of additional criteria for an assessment of efficiency of this or that structure of release. The exact analysis of a point of break-even is possible only at a certain structure of production.

9. Expenses are influenced relevantly only by volume of production. Very important assumption for the CVP analysis. We abstract from influence of environment and we rank as constant expenses everything not depending on release volume costs of production.

10. The volume of production is equal to sales volume, or changes of initial and final stocks as a result are insignificant. The real world doesn't satisfy with everything to the assumptions listed above. However we can approximate CVP analysis methods to the real world by means of the reception known as sensitive analysis. The sensitive analysis uses reception «that will be, if» which assumes the answer to a question as the result if originally designed assumptions aren't reached will change or the situation with admissions changes. The tool of the analysis of sensitivity is the safety margin, that is that size of revenue which is behind a break-even point. Its sum shows, to what limit the revenue that there was no loss can fall.

After the main assumptions on changes in initial assumptions are made, it is necessary to calculate the changes of the marginal income caused by these assumptions and a safety margin. Management accounting continuously analyzes behavior of expenses and periodically defines a break-even point. As a matter of fact, the sensitive analysis defines elasticity of a margin of safety in relation to CVP analysis admissions.

There is the only obscure question: from where to take estimates of the prices and costs of future periods. Already functioning company takes these values from own statistics of expenses and behavior of the prices taking into account future changes in economy. It is necessary to consider in particular seasonal fluctuation in prices, actions of competitors, emergence of the goods substitutes (especially in the hi-tech markets). Again created firms can't lean on a personal experience owing to that absence, therefore, for them calculation for analogy to firms already operating in this branch is possible only. Thus, it is possible to lean on every possible reference information, including received from specialized consulting firms. The most difficult is creation of firm which will affect sector of the market not existing yet. In that case it is necessary to be guided by careful accounting of expenses and market researches of the market. It is expedient to apply in this case pricing on a method «expenses plus», that is the price turns out addition to size of expenses of the fixed margin. At such pricing the size of the marginal income at once is known and, therefore, the break-even point easily is defined.

In the previous paragraph we considered methods of definition of a point of break-even. We believed that costs for production of one unit of production and the price of realization of production are external sizes in relation to our calculation. In other words, by the time of calculation of a point of break-even these indicators to us are known and they aren't subject to change. Now we will concentrate attention on definition these key parameters for our analysis. Therefore this paragraph consists of two parts in which determination of prime cost of the goods and definition of the price of the goods is analyzed, respectively. Such profound analysis will allow us to study process of planning of break-even in the following paragraph.

Determination of prime cost of let-out production

We pass to consideration of methods of determination of product cost. Two methods of accounting of prime cost will be studied: pozakazny and poprotsessny. It is necessary to explain at once distinctions in these two approaches to determination of prime cost.

Pozakazny accounting of prime cost is applied in that case when production is focused on release enough expensive unique products. A typical example of branch in which application of pozakazny accounting is expedient, construction is. The typical firm of this branch during some moment of time can have in work some various objects. And, building materials are bought wholesale for all objects. Thus, there is a problem of reference of expenses for separate objects.

Poprotsessny accounting assumes mass production of the same products at which it is supposed that costs for production of one product are equal to average expenses on this process of production. Distribution of expenses between separate processes in something similar to pozakazny accounting, though has constant character. However, distribution of expenses between stages of process represents the procedure which is sharply different from pozakazny accounting. The main problem consists in definition of how expenses belong on result of a production activity on various production phases.

The system which we will describe for needs of pozakazny accounting, is based on association of accounts of expenses and financial accounts in one book of accounts. Such system is called as the centralized accounting of expenses. Its main advantage consists in absence of the double accounting of the same factors of economic activity.

The system of records is based on use of so-called control accounts.

The control account is a total account in which records are made on total amounts of operations of the period.

For example, the rest on the control account of a salary should be equal to total amount of the salary added on sheets. Let's assume that 500 employees of firm in a quarter the salary at a rate of $100000 is added. Then the total balance will be equal $100000 and will be equal to total amount of 1500 entries in sheets on salary charge. The summary volume of sheets is called as the auxiliary book. Let's pass now to reflection consideration in the accounting of separate economic operations:

I. Accounting of purchases of raw materials.

Acquisition of materials for production for the sum of $34000 will be reflected in records on control accounts as follows:

Debit of the control account of the warehouse book of $34000

Credit of the control account of creditors of $34000

Let's note that each purchase, besides, that is reflected on accounts of the control account, carried out as well on individual accounts in the warehouse book, and also on the corresponding personal account of the creditor. Thus, account books on the corresponding accounts are specification of control accounts, and control accounts - convenient synthesis of information containing in records on individual accounts.

II. Accounting of holiday of materials.

At the accounting of holiday of materials two various situations - holiday of the main materials and holiday of additional materials are usually considered. Holiday of the main materials is carried out from a warehouse according to consignment notes in which order number on which performance materials are released is surely specified.

In conductings on control accounts holiday from a warehouse of the main materials for the sum of $12000:

Debit of the control account of a work in progress of $12000

Credit of the control account of the warehouse book of $12000

Let's notice that reference of the received main materials into these or those accounts on the control account of a work in progress and is that mechanism which guarantees the correct reference of costs for prime cost of this or that order.

At delivery of additional materials in the demand the account of an overhead charge is specified:

Debit of the control account

all-firm overhead charge of $6000

Credit of the control account of the warehouse book of $6000

On the account of an all-firm overhead charge it is kept account on individual accounts of separate orders.

III. Accounting of labor costs.

The accounting of labor costs is kept in two stages:

1. Accounting of a salary of each employee, calculation of assignments for income tax and state insurance;

2. Distribution of expenses to labor by orders, into accounts of an overhead charge and the production account.

At these operations the control account of a salary is in some way suspense account for transferring of expenses for labor from enterprise cash desk into individual accounts of the shown accounting.

In the account these operations are reflected as follows. After calculation of a salary of workers, calculation of deduction from them, the following conductings become:

Debit of the control account of a salary of $10000

The credit of the account of a salary to payment of $80000

The credit of the account of deduction from a salary of $20000

Actually instead of joint account of deduction from a salary separate accounts are applied to the separate accounting of all types of tax and insurance fees from a salary. At delivery by cash of a salary and payment of taxes the following accounts are made:

The debit of the account of deduction from a salary of $20000

The debit of the account of a salary to payment of $80000

Credit of the account of cash desk of $100000

It is necessary to notice that in the western accounting of operation on cash desk of the enterprise and for the bank account don't differ on a method of their reflection in the account.

The added salary is necessary for carrying as costs of control accounts, reflecting thereby transfer of expenses for labor on costs of production of this or that order. It is carried out by the following records:

Debit of the control account of a work in progress of $70000

Debit of the control account of an all-firm overhead charge of $30000

Credit of the control account of a salary of $100000

Similar to a situation with the records reflecting movement of materials, at the accounting of expenses on a salary at the same time with records on control accounts records on accounts of individual orders are conducted. Thus, the general scheme of reference of expenses on a salary on prime cost of various orders has the following appearance:

IV. The accounting of the executed orders and realized production. In process of implementation of orders and receipt of finished articles on a warehouse the accounts reflecting increase in the rest in a warehouse of finished goods and reduction of a work in progress should be carried out.

Questions for self-examination

1. Economic essence of planning

2. Planning principles

3. Analytical method of calculation of a point of break-even

4. Graphic method of calculation of a point of break-even

Literature

1. Ershov V. F. Business design: Application guide / Century F.Ershov. - SPb.: St. Petersburg, 2005. - 288 pages.

2. Small business program. Management in small business. Business plan. - M: "DECK" IKK, 1993. - 59 pages.

3. Small business program. Management in small business: How to make financial decisions. - M: "DECK" IKK, 1993. - 70 pages.

4. Small business program. Management in small business: Budget drawing up. - M: "DECK" IKK, 1993. - 79 pages.

5. Ushakov I.I. Business plan / I.I.Ushakov. - SPb.: St. Petersburg, 2008. - 224 pages - (Practice of management)

6. Financial analysis and planning [Electronic resource]: A training course. - Electron. applied прогр. (520 Mb). - M: Kordis & Media, 2005. - 1 эл. wholesale. disk (CD ROM): зв. -

 

 

Subject 4 Assessment of efficiency of investments

The lecture purpose – to study methods of an assessment of efficiency of investments

Lecture questions:

1. Time factor

2. Indicators of an assessment of investments

3. Methods of an assessment of efficiency of investments

Content of lecture

Technique of an assessment of efficiency of production investments (capital investments). Efficiency of production investments (capital investments) characterizes economic, social or other results and economic expediency of their implementation. As a basis of an assessment of expediency of capital expenditure comparison of advantage of this or that project under condition of limitation of the capital as resource and providing the greatest profit on realization of best of several options (projects) of investments serves.

The standard official technique of an assessment of efficiency (expediency) of capital investments contains first of all general provisions. Most essential of them is the following.

First, calculations of economic efficiency of capital investments are applied in process: development of various design and planned (look-ahead) documents; optimization of distribution of real investments in forms of reproduction of fixed assets; estimates of efficiency of use of own financial means.

Secondly, at calculations define the overall economic efficiency as the relation of effect (result) to the amount of capital expenditures, caused this effect. Expenses and results are estimated taking into account time factor. At the enterprises as economic effect of capital investments the profit gain (the self-supporting income) serves.

Thirdly, for the purpose of all-round justification and the analysis of economic efficiency of capital investments, identifications of reserves of its increase use system of indicators — generalizing and individual. Generalizing indicators treat the period of payback of capital expenditure (number of years or months during which initial investments) and a capital intensity, i.e. specific capital investments counting on unit of a gain of capacity or output are compensated. The individual indicators which are subject to the general complex analysis — it is labor productivity; фондоотдача; material capacity (power consumption), prime cost, quality and technological level of production; duration of an investment cycle; size of social effect in comparison with social standards; the indicators characterizing improvement of a condition of surrounding environment.

Fourthly, at determination of efficiency of capital investments influence on total effect of so-called investment factors, that is the actions which implementation doesn't demand capital investments should be excluded. It means that it is necessary to exclude effect from the cumulative effect (profit) received by the enterprise from more complete use entered before capacities, increase in factor of working in shifts of work of the equipment, introduction of progressive forms of the organization of production, work and management, increase of vocational training and skill of the personnel, etc.

In practice of managing of the enterprises the various decisions connected with investment of production of social infrastructure are made. In this regard it is accepted to distinguish the general absolute and comparative (an expediency assessment) efficiency of capital investments.

Absolute efficiency of capital expenditure shows a combined value their returns (productivity) at this or that enterprise. Its calculation is necessary for an assessment of expected or actual effect from real investments for a certain period of time.

Comparative efficiency of capital investments is defined only when there are some investment projects (versions of the solution of an economic task). It characterizes advantages (economic, social and others) any one project of capital expenditure in comparison with another or others. Calculations of comparative efficiency carry out for the purpose of definition of best of possible projects (options) of investment of production.

Absolute and comparative efficiency of real investments are interconnected. Definition of the most expedient project (option) of capital investments is based on comparison of indicators of their absolute efficiency, and the analysis of the last is carried out by comparison of the standard, planned or actually reached indicators, their dynamics for a certain period.

Apply two interconnected indicators by which determine absolute efficiency of investments: the first (straight line) — factor of economic efficiency (profitability) of capital expenditure; the second (return in relation to the first) — the period (term) of payback of capital investments. Factors of economic efficiency (profitability) estimate on ratios:

for separate projects or forms of reproduction of fixed assets of the operating enterprises

;

for the enterprises (separate shops and production objects) which are constructed (are under construction)

The gain of profit is defined as a difference in profit size for the last year the previous and settlement periods (at the agricultural enterprises — as a mid-annual gain of profit), and capital investments are considered totally in the comparable prices without any deductions.

Settlement values of factors it is necessary to compare to standard factor , the Ministry of Economics established centrally and the budgetary planning of RK for a certain period (its duration usually equals to the so-called horizon of forecasting or indicative planning). The project (option) of capital investments is considered expedient (effective) provided that .

The choice is put in a basis determination of comparative efficiency of real investments economically the most expedient project of capital investments, which is carried out (can be carried out) by calculation of indicators of the so-called given expenses on a formula

> min

Where — the current expenses (prime cost) on і - му to the project;

— capital investments on і - му to the project.

The project (option) of capital investments with the smallest given expenses also will be the best from the economic point of view. However it should be noted that only those projects which meet the requirements of social and technical and economic standards, environmental protection and safety measures are subject to consideration.

This method of determination of comparative efficiency of capital investments is based on the assumption that they (investments) are carried out одноразово in full. Actually the compared projects often differ one from another distribution of investments on terms of their implementation or duration of creation of production objects. In this regard economic efficiency of capital investments define taking into account time factor, that is carry out calculation of influence of production of capital expenditure occurring at different times on their efficiency. For this purpose investments of later years lead to one settlement year (as a rule, it it is the first year of investment) their multiplication to special factor of a which is determined by a formula

Where — standard of reduction of the expenses occurring at different times, equal 0,08;

— the reduction period (t — й year).

The factors of discounting calculated on a formula have the following values for the corresponding years: the first year — 1,0; the second — 0,926; the third — 0,857; the fourth — 0,793; the fifth — 0,734; the sixth —  0,680; the seventh — 0,630; the eighth — 0,583; the ninth — 0,540; the tenth — 0,5.

It is possible to show influence of a raznovremennost of capital investments on their efficiency on such example (data conditional). Two projects of a construction of production object are developed. The volume of capital expenditure according to the first project makes 260 million тг., on another — 250 million тг. At term of a construction of object of 5 years capital expenditure on years of investment is distributed unequally (tab. 3.2).

Table 3.2 Calculation of capital investments, one million тг.

year	capital attachment to projects		К	Capital expenditures are listed in the first year of investment projects
	first	second		first	second
1-й	80	30	1,000	80,00	30,00
2 -й	80	40	0,926	74,08	37,04
3-й	60	70	0,857	51,42	60,00
4-й	30	60	0,793	23,79	47,58
5-й	10	50	0,734	7,34	36,70
Total	260	250	—	236,63	211,32