[accountguy]

So thanks for making that clear 🙂

There is another situation where we need to modify the material to use for the contract.

It is a kaplan kit question that says:
The contract requires 10 kgs of material X. There are 250 kgs of this material in inventory which was purchased in error over two years ago. If material X is modified at a cost of $2 per kg. It could then be used as a substitute for material Y which is in regular use and currently cost $6 per kg.

It is an opportunity cost question. correct?

Could you please also explain what is really happening in this question and how can we answer. I am really confused with this.

[accountguy]

Thanks for the response. SIR 🙂

But I asked you a question regarding point (3) which says that relevant cost is an opportunity cost when the material kilos are limited to satisfy both the existing project as well as the contract requirement.

(1) I need to know how to calculate opportunity cost whether there is any fixed rule to calculate the opportunity cost or not?

(2) Opportunity cost is sometimes referred to as net benefit foregone (i.e. benefit lose from alternative use or other use) in the Kaplan and BPP study texts but I do not know what does that mean.

(3) Net Benefit is the contribution / profit from the existing project which we lose and any cost will be deducted from the profit to get the net benefit (correct?)

Could you please explain the points above and how to calculate them?

[accountguy]

Thank you very much 🙂

It was really helpful. But lastly please state the following too.

Whenever there is a change in inventory then we will always be given opening inventory in the question so that we can calculate closing inventory otherwise the change in inventory has no other use in our budgeting calculations!

For eg if we have change in inventory of 700 but there is no opening inventory at all then change in inventory should not be included and it would be silly for examiner to not give opening inventory when there change in inventory. (true?)

[accountguy]

BUT in chapter 13 example 1 of the basic variance we had budgeted production of 8,700 units and budgeted sales 8,000 units and the difference is the closing inventory of 700 (i.e. not change in inventory as u said before – so I am confused here) multiplied with the total production cost of $68. (and this is what you have done in the lecture)

As we can see that fixed cost is included in the total production cost therefore the company is using absorptional costing (I hope I am correct here?)

[accountguy]

Yes, I watched your video. Thanks for the previous answer though I needed to ask you one more query. Although it is also a lengthy one (sorry for that :)).

In Mix variance the material kgs would be same in total whether we have use more of one material and less of the other material would cause a variance because we are producing same total number of kgs.

[Material mix simply account for input of Kgs in the production process]

However, in Yield variance the material kgs would not be same in total because the actual kgs produced might be more or less than standard/bugeted kgs which might be a result of more output in case we have more actual kgs produced and loss/wastage in case we have less actual kgs produced.

[Material yield simply account for output of Kgs in the production process]

Sales mix variance measures the effect on profit of changing the mix of actual sales from the standard mix. It refers to whether we have sold more units in actual than units budgeted and vice versa.

If sales mix variance is favourable then we sell more units in actual as compared to the budgeted units sold;
If sales mix variance is adverse then we sell less units in actual as compared to the budgeted units sold;

[Sales mix simply account for actual input of Kgs in the production process]

Sales quantity variance measures the effect on profit/contribution of selling a different total quantity from the budgeted total quantity. It refers to whether we have so more units in actual than units budgeted and vice versa.

If sales quantity variance is favourable then we sell more units in actual as compared to the budgeted units sold
If sales quantity variance is adverse then we sell less units in actual as compared to the budgeted units sold

[Sales quantity simply account for actual output of Kgs in the production process]

[accountguy]

Sorry, I forgot to mention that.

In Absorptional costing closing inventory is calculated as:
Closing inventory = (Production units – Units sold) x Total Production costs

[Total Production costs includes all variable and fixed costs]

In Marginal costing closing inventory is calculated as:
Closing inventory = (Production units – Units sold) x Total Production costs

[Total Production costs includes all variable but not fixed costs at all]

I hope it is correct now? 🙂

[accountguy]

Could you please explain them?

I have a problem understanding and identifying which costs relate to prevention costs, detection cost, internal failure costs and external failure costs?

[accountguy]

Thank you

[accountguy]

If we raise new finance by debt or equity; it will have an effect on its share price.

We used investor’s ratios to calculate the market value of shares after the issuance of debt or equity. If ratios indicate that there is an increase in the MV of shares then it is financially acceptable to shareholders because it results in increasing the shareholders wealth.

I understand that more debt causes equity holders to ask for a higher rate of return but why the more equity issue (ie rights issue) will result in affecting the market value of shares?

Spine Co has raised equity finance by issuing rights shares in the market & as we know from the TERP calculation that it always results in a lower new market share price so isn’t this result in a lower share price and would not be acceptable to shareholders?

[accountguy]

1) Interest can be quoted as annual interest rate but I don’t get it whether they are calculated as we calculate simple interest or they can be compounded interest where we have to use compound interest calculation because from your lecture I have learned about two interests (simple interest and compound interest)?

Secondly, if I do get this right then you’re saying that Bonds & Debentures are not borrowings from the bank but they are issued by big companies!?

2) Is it true that if the interest is charged daily, monthly, quarterly or semi-annually they are compounded as such and we can calculate the interest from this compound interest formula

P (1 + r)^n

[accountguy]

Yes Sir, I have seen your lecture on Simple interest, Compound Interest but I could not anything on Effective interest that what it is. Could you please then explain that to me?

Secondly, I guess from seeing the lecture that there are only two ways of stating the interest rate which are simple interest and compound interest. Am I right here?

[accountguy]

Hello Sir, I have seen your lecture on this topic again n again AND,

I wanted to ask that when we calculate project-specific cost of capital to calculate Asset Beta we need to take the data of Ungeared Company [Ungeared means company which has no debt BUT in example 2 of Chapter 21 we can clearly see that Company Y has 0.2 debt to equity which you take as 20 in your lecture which is fine BUT it clearly does not make sense to USE this company’s data because this company is geared]

[Doubt #1]
Why do we UNGEAR proxy company EQUITY BETA? To remove the debt part from the equity beta of proxy company?

[Doubt #2]
Secondly, when we calculate Equity Beta we’ve to incorporate data of only the Regeared Company such as X Company BUT I don’t get the logic behind using Ungeared Company Asset Beta to Regeared Company Equity Beta.

Why do we REGEAR Asset BETA? To add the debt part of our company into the formula?

[accountguy]

Can you please explain me the question that I asked about ?

[accountguy]

Thanks 🙂

I want to ask you a stupid question maybe but it is better to ask than regret it.

In the Lease & Buy chapter in your lectures, you called the NPV as PV in your lectures even though you have already deducted the cost of lease or buy that happened in the year 0. The same thing is done in the ASOP Co [Dec 2009] answer where it has calculated PV less cost of lease or buy = PV (not NPV). Isn’t that strange!

Please clear the confusion.

[accountguy]

In Overcapitalization, it is when the company has too much WORKING CAPITAL & where receiveable, inventory, cash will increase & so does its current assets n Non-current assets but payables, overdraft will decrease & so does current liabilities indicating increase in working capital cycle whereas it reduces NET WORKING CAPITAL.

Current ratio n Quick ratio both will increase while Interest & gearing of the company will reduce since the company has high WORKING CAPITAL to pay its liabilities.

In Overcapitalization, sales turnover will decrease with the profit margin

Is there any main financial ratio that can indicate whether the company is overcapitalization or overtrading?

Please let me know. Is that all alright?

[accountguy]

Overtrading causes turnover, receivable, inventory & payable days to increase while reducing the current ratio & working capital ratio.

What do you mean by ‘ratio of the working capital to the non-current assets’ in your last response? Is that the working capital ratio (Current Assets / Current liabilities)?

But overcapitalization may be indicated by the ratio of working capital which can be calculated as 1.27 in 20X3 & 1.15 in 20X4 in Gorwa Co question which indicates that working capital has decreased therefore it cannot be overcapitalization. Is that correct?

While in overcapitalization the turnover, payable days, overdraft are decreased but receivable, inventory, current ratio & working capital ratio are increased, Is that correct?

Thanks for your answer, it was helpful 🙂

[accountguy]

Sir, can you please state all the ratios that are going to be used for the analysis between overcapitalization n overtrading with the relevant increase & decrease in the respective ratios that either indicates overcapitalization n overtrading.

It is difficult for me to grasp the idea of whether the relevant ratios such as inventory days n receivable days n payable days n Current assets n Current liabilities with the other ratios will increase or decrease? Can you please be specific on how to think about the ratios in term of overcapitalization or overtrading

I have seen your lecture more than once but I couldn’t understand the relevance.

[accountguy]

1) You said that ‘any expenses that are not under the control, we simply ignore them’ but, if they are under the control of the division then, you’ll agree with me that we’ve to deduct depreciation n head office cost to reach the OPERATING PROFIT bcoz operating expenses [where depreciation n head office are taken to] are minus from gross profit to get operating profit.

There are MCQs in Kaplan which states that controllable profit is profit after depreciation?

2) What I asked you in the second question whether controllable profit is considered profit before tax or profit before interest & tax in RI calculation and the same deduction about depreciation n head office cost is applied there too [as profit after depreciation] if they are in control of division?

Correct me if i am wrong at some point.

Thanks for your help SIR 🙂

[accountguy]

Thanks for the answer!
but,
Sir could you please confirm what you are saying is that control account only consist of totals while the ledgers are individual accounts made for each receivable, payables, & cash for customers/suppliers?

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