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Coursework assignment: Business analysis - Nguyen Dang Duy Phuc

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Coursework assignment Business analysis has present the content: the implementation of direct material cost in July, performance of the production manager for the month of July, form of material cost analyzing report, analyze the profitability and liquidity of the company in 2021 by benchmarking the textile industry index,...

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Nội dung Text: Coursework assignment: Business analysis - Nguyen Dang Duy Phuc

  1. National Economics University School of Accounting and Auditing COURSEWORK ASSIGNMENT BUSINESS ANALYSIS Name: Nguyen Dang Duy Phuc Class: Accounting CFAB K61 ID: 11196416 Lecturer: LE NGOC THANG April, 2022
  2. Part A 1) The implementation of direct material cost in July Actual Materi Actual Materi Produc materi al produc al cost Actual tion al cost usage tion per m2 materi Actual material usage per unit (m2) levels per m2 per levels (millio al (units) (millio unit (units) n VND) usage n VND) (m2) (m2) Adjusted Adjuste Pla Adjuste Plan Plan plan d plan n d plan Q0 Q’0 Q1 C0 C'0 C1 U0 U'0 Q1 x U1 U1 Bed 120,00 248,00 sheets 120,000 120,000 2 2 2.07 0 0.11 0 (B) 0.138 0.135 5 Pillowcas 190,00 180,000 180,000 0.5 0.55 95,000 0.53 es (P) 0 a) Calculate material cost in basis period and analytical period: Direct material cost in basis period: MC0 = QB0 x UB0 x C0 + QP0 x UP0 x C0 = (120,000 x 2 x 0.115) + (190,000 x 0.5 x 0.115) = 38,525 (million VND) Direct material cost in analytical period: MC1 = QB1 x UB1 x C1 + QP1 x UP1 x C1 = (248,000 + 95,000) x 0.135 = 46,305 (million VND) b) Simple comparison: ΔMC = MC1 - MC0 = 46,305 - 38,525 = 7,780 (million VND) %ΔM = ΔMC/MC0 x 100 C = (7,780/38,525) x 100 = 20.19% It can be seen that the cost of direct materials increased by 7,780 million VND and the growth rate was 20.19% compared to the plan. Increasing costs is not good and we will analyze in more detail the impact of each element on the direct material cost by using continuous replacement method: c) Continuous replacement: - The influence of production levels: ΔQ = (QB1 x UB0 x C0 + QP1 x UP0 x C0) - (QB0 x UB0 x C0 + QP0 x UP0 x C0)
  3. = (120,000 x 2 x 0.115 + 180,000 x 0.5 x 0.115) - (120,000 x 2 x 0.115 + 190,000 x 0.5 x 0.115) = -575 (million VND) %Δ = (ΔQ/MC0) x 100 = (-575/38,525) x 100 = -1.50% Q Impact: The decrease of production levels makes material costs decrease by 575 million VND. It is equivalent to a decline of 1.50%. Cause: Obviously, not producing will not incur raw material costs. However, reducing costs in this way is not a good idea because not producing also means no future profits. In this case, the reduced production level is due to the urgent change request from the customer. Solution: Depending on the company's circumstances and limiting factors, the managers may have the following solutions: Hire more workers to complete orders on time Outsourced Optimizing production processes Most of the above methods increase costs. Thus, the managers must clearly define their goals as optimizing profits, minimizing raw material costs, or maintaining contracts with customers (prioritizing to fulfill customer needs) to offer appropriate solutions. - The influence of material usage per unit: ΔU = (QB1 x UB1 x C0 + QP1 x UP1 x C0) - (QB1 x UB0 x C0 + QP1 x UP0 x C0) = (248,000 x 0.115 + 95,000 x 0.115) - (120,000 x 2 x 0.115 + 180,000 x 0.5 x 0.115) = 1,495 (million VND) %Δ = (ΔU/MC0) x 100 = (1,495/38,525) x 100 = 3.88% U Impact: The increase of material usage per pillowcase makes material costs increase by 1,495 million VND. It is equivalent to a rise of 3.88%. Cause: Unexpected request for an immediate design change to the pillowcases, which required 10% more cotton than previously. The increase in material usage can also come from the production process such as defective material, excessive waste, and errors in allocating material to jobs. Solution: More effective use made of material, outsourcing, or subcontracting. - The influence of material cost per m2:
  4. ΔC = (QB1 x UB1 x C1 + QP1 x UP1 x C1) - (QB1 x UB1 x C0 + QP1 x UP1 x C0) = (248,000 x 0.135 + 95,000 x 0.135) - (248,000 x 0.115 + 95,000 x 0.115) = 6,860 (million VND) %Δ = (ΔC/MC0) x 100 = (6,860/38,525) x 100 = 17.81% C Impact: The increase of material cost per m2 makes material cost increase by 6,860 million VND, which is equivalent to 17.81%. Cause: For objective reasons, the rise in material cost per m2 is due to the world commodity prices for cotton increasing by 20% in July. This is a factor that the manager cannot control. When it comes to subjective causes, it might be because of careless purchasing, the material standard price was set too low, or do not take advantage of discount terms. Solution: More care taken in purchasing, make use of discount terms or make fixed-price contracts with suppliers. - The total influence of all direct materials cost: ΔM = ΔQ + ΔU + ΔC C = -575 + 1,495 + 6,860 = 7,780 (million VND) The strongest influence comes from material cost per m2 by 6,860 million VND. In the future, businesses need to analyze the signs of raw material price increase more closely to come up with an appropriate response plan and optimize production to reduce material consumption. In addition, businesses also need to build a suitable process to promptly deal with unexpected requests from customers, in order to reduce the production delays (this is what makes businesses unable to complete the production volume plan). 2) Performance of the production manager for the month of July The production manager at Everon is responsible for all buying and any production issues which occur, although he is not responsible for the setting of standard costs. Therefore: The production manager is responsible for the difference between the actual figures and the adjusted planned figures (different in operating): ΔMC production manager = (QB1 x UB1 x C1 + QP1 x UP1 x C1) - (Q’B0 x U’B0 x C’0 + Q’P0 x U’P0 x C’0) = (248,000 x 0.135 + 95,000 x 0.135) - (120,000 x 2 x 0.138 + 180,000 x 0.55 x 0.138) = -477 (million VND)
  5. The senior manager is responsible for the difference between the adjusted planned figures and the planned figures (different in planning): ΔMC senior manager = (Q’B0 x U’B0 x C’0 + Q’P0 x U’P0 x C’0) - (QB0 x UB0 x C0 + QP0 x UP0 x C0) = (120,000 x 2 x 0.138 + 180,000 x 0.55 x 0.138) - (120,000 x 2 x 0.115 + 190,000 x 0.5 x 0.115) = 8,257 (million VND) - The influence of production levels: The shortfall in the production of 10,000 pillowcases was caused by the customer’s request. The production manager cannot control this element in this situation, hence the responsibility for all 575 million VND change in total material cost belongs to the senior manager. - The influence of material usage per unit: ΔU senior manager (Q’B0 x U’B0 x C0 + Q’P0 x U’P0 x C0) - (Q’B0 x UB0 x C0 + Q’P0 x UP0 x C0) = = (120,000 x 2 x 0.115 + 180,000 x 0.55 x 0.115) – (120,000 x 2 x 0.115 + 180,000 x 0.5 x 0.115) = 1,053 (million VND) ΔU production manager (QB1 x UB1 x C’0 + QP1 x UP1 x C’0) - (QB1 x U’B0 x C’0 + QP1 x U’P0 x C’0) = = (248,000 x 0.138 + 95,000 x 0.138) – (120,000 x 2 x 0.138 + 180,000 x 0.55 x 0.138) = 552 (million VND) The result shows that in relation to material usage, the production manager only accounted for the increase of 552 million VND in material cost. The production manager has reduced the material usage per pillowcase, from 0.55 m2 in the adjusted plan to approximately 0.53 m 2 in the actual. This is a good change but it cannot offset the weakness of the production manager in controlling material usage per bed sheet, the figure rose approximately by 0.07 m 2. - The influence of material cost per m2: ΔC senior manager (Q’B0 x U’B0 x C’0 + Q’P0 x U’P0 x C’0) - (Q’B0 x U’B0 x C0 + Q’P0 x U’P0 x C0) = (120,000 x 2 x 0.138 + 180,000 x 0.55 x 0. 138) – (120,000 x 2 x 0.115 + 180,000 x 0.55 x = 0.115) = 7,797 (million VND)
  6. ΔC production manager (QB1 x UB1 x C1 + QP1 x UP1 x C1) - (QB1 x UB1 x C’0 + QP1 x UP1 x C’0) = = (248,000 x 0.135 + 95,000 x 0.135) – (248,000 x 0.138 + 95,000 x 0.138) = -1,029 (million VND) Although the cost of materials per m 2 increased by 20%, the production manager did a great job in reducing the cost of input materials when in actual production. The expected materials cost per m 2 is 0.138 million VND, but he can manage to purchase at 0.135 million VND per m 2. That has contributed to reducing direct material cost by 1,029 million VND. 3) Form of material cost analyzing report MATERIAL COST ANALYZING REPORT (in million VND) SENIOR MANAGER Adjuste Variance Plan d plan Quantit Usag Usa Direct material cost Cost Total Quantity Cost y e ge Bed 120,000 2 0.115 27600 120,000 2 0.138 33,120 sheets Pillowca 190,000 0.5 0.115 10,925 180,000 0.55 0.138 13,662 ses Influenc e factors The influence of -575 producti on levels The influence of material usage per unit 1,035 The influence of material cost per m2 7,797 Total 38,525 46,782 8,257 expense PRODUCTION MANAGER Adjuste Actual d plan Direct Quantit Usage Cost Total Quantit Usage Cost Total
  7. material y y cost 0.13 33,12 0.13 33,48 Bed sheets 120,000 2 248,000 8 0 5 0 0.13 13,66 0.13 12,82 Pillowcases 180,000 0.55 95,000 8 2 5 5 Influenc e factors The influence of 0 producti on levels The influence of material usage per unit 552 The influence of material cost per m2 -1,029 46,78 46,30 Total expense -477 2 5 Total variance 7,780 It can be seen that the increase in direct material cost is largely due to senior management. It is possible that when setting a budget, senior management did not anticipate the risk of rising material prices or prevent increased raw material usage. That has caused the price of raw materials to increase by 8,257 million VND. On the other hand, the production manager's performance is quite good as he helped reduce the cost of materials by 477 million VND. Part B Everon has information extracted from financial statements for the last three years as table below. Analyze the profitability and liquidity of the company in 2021 by benchmarking the textile industry index. (in million VND) Change in Change in 2020-2021 31/12/2019 31/12/2020 31/12/2021 2019-2020 Absolute Percentage Absolute Percentage Net sales revenue 3,644,200 3,469,717 3,535,416 -174,483 -4.79% 65,699 1.89% Gross profit 578,718 620,183 513,502 41,465 7.16% -106,681 -17.20% PBIT (Profit before interest & 268,692 340,169 175,692 71,477 26.60% -164,477 -48.35%
  8. Change in Change in 2020-2021 31/12/2019 31/12/2020 31/12/2021 2019-2020 Absolute Percentage Absolute Percentage tax) PAIT (Profit after interest & tax) 216,847 276,228 143,659 59,381 27.38% -132,569 -47.99% Current assets 1,624,461 1,783,901 2,351,260 159,440 9.81% 567,359 31.80% Total assets 2,922,805 2,976,423 3,606,391 53,618 1.83% 629,968 21.17% Liabilities 1,497,538 1,337,688 1,897,856 -159,850 -10.67% 560,168 41.88% Current liabilities 1,331,356 1,256,933 1,757,418 -74,423 -5.59% 500,485 39.82% Equity 1,425,267 1,638,735 1,708,535 213,468 14.98% 69,800 4.26% 31/12/2019 31/12/2020 31/12/2021 Ind. LIQUIDITY RATIOS Liquidity ratio = Assets/Liabilities 1.95 2.23 1.90 1.84 Current ratio = (Current assets)/(Current liabilities) 1.22 1.42 1.34 2.37 Long-term debt ratio = (Non Current assets)/ 7.81 14.77 8.94 (Long-term debts) PROFITABILITY RATIOS ROA = (PAIT/Average total assets) x 100 9.36% 4.36% 8.13% ROE = (PAIT/Average equity) x 100 18.03% 8.58% 15.85% ROI = (PBIT/Average total assets) x 100 11.53% 5.34% (Industry averages are taken from the stock website SSI) LIQUIDITY RATIOS Liquidity ratios are used to determine a debtor's ability to pay off current debt obligations without raising external capital. Liquidity ratios measure a company's ability to pay debt obligations and its margin of safety through the calculation of metrics including the liquidity ratio (assets/liabilities), current ratio, and long-term debt ratio. The liquidity ratio (assets/liabilities) shows the relationship between total assets and total liabilities of a business, it guarantees whether total assets are sufficient to pay off debts. Then the current ratio reflects the ability to pay off the current liabilities of a business by current assets. Finally, the long-term debt ratio shows whether the non-current assets are enough to pay off long-term debts. The liquidity ratio of Everon increased significantly to 2.23 (2020) from 1.95 (2019) before falling back to 1.90 in 2021. All figure was higher than 1, this indicates that the company has maintained enough assets to pay off all debts over the years. The ratio in 2020 is the highest, it is because Everon decrease its liabilities by 159,850 million VND (from 1,497,538 million VND in 2019 to 1,337,688 million VND in 2020. The figure in 2021 (1.90) was higher than industry averages (1.84), this made Everon become more attractive to the lenders than other companies in the same business line. The current ratio in 2020 was 1.42, which was higher than the previous year (1.22). In 2021, the current ratio decreased compared to 2020, which was 1.34, showing that Everon’s ability to meet quick payment needs was poorer than the previous year. The reason for the decrease of Everon's current ratio might be the increase of current assets (increased 31.80% compared to 2020) cannot
  9. offset the rise of current liabilities, which arose by 39.82% compared to 2020. The figure in 2021 was also less than industry averages, this indicates that Everon will not be as attractive to short-term lenders as other players in the industry. The long-term debt ratio of Everon was highest in 2020 (14.77), and then this figure declined to 8.94 in 2021, but still higher than the 2019 mark of 7.81. The fact that this number remains high shows that in the future, the company can meet its long-term debt obligations well. PROFITABILITY RATIOS Profitability ratios are a class of financial metrics that are used to assess a business's ability to generate earnings relative to its revenue, operating costs, balance sheet assets, or shareholders' equity over time. Generally, the better the financial health of the company, the higher this ratio. If these ratios are above the industry average, they will be attractive to investors. ROA shows how much the shareholder can receive after interest and tax from 1 VND of assets, while ROE shows how much the shareholder can receive after interest and tax from 1 VND of equity, and ROI indicates how much profit before interest and tax of a project can get from the investment. Return on total assets ROA in 2021 was 4.36%. This ROA indicator of Everon decreased sharply from 9.36% in 2020 and was almost half of the industry average (8.13%), which shows the ineffectiveness of the organization, asset management, production; and business activities of the company were getting worse and less efficient than the industry average. The results show that on average in 2021, for every 100 VND of assets used in the production and business process, only 4.36 VND profit after interest & tax is generated. The same movement occurs with ROE. In 2021, Everon's ROE of 8.58% was less than the industry average of 15.85%. It shows that on average, for every 100 VND of capital invested by business owners in production and business activities, a profit after interest & tax of 8.58 VND is generated. In 2021, both assets and equity of Everon increased compared to 2020 by 21.17% and 4.26% respectively, but this did not cause PAIT to increase, but on the contrary, PAIT decreased by 47.99%. It is this that has caused both ROA and ROE indexes to drop sharply in 2021 compared to 2020. It proves that Everon is having problems in effectively utilizing assets and equity for profit. That also explains why Everon's ROI is nearly halved in 2021 (from 11.53% decreased to 5.34%). This will make Everon less attractive to investors.
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