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Hello,
Unfortunately I am still struggling to understand what the capital employed actually is… 🙁
In some sources it is referred to as a comapny’s assets. At the same time we deduct financial assets when calculaing Capital employed. What is more there is stand alone ration that measures efficiency with which company uses its assets and which uses total assets (which makes sense) – Return on assets.
In other sources capital employed reffered to as comapnies funds.
Sometimes it is reffered to as Net Assets but net assets is Equity only and the Capital employed formula includes interest bearing liabilities as well.
I need to understand this in general but also because it will them help me to make sense of ROCE, Asset turnover and other ratios that use capital employed.
So, what it acctually is? Could you please help me to understand?
I would trully appreciate your help with this!
Thank you.
Hi Cath,
Thanks for such a good explanation! I would now like to ask a few questions about cost of capital.
1) Some sources state that cost of capital consists of cost of debt and cost of equity which are in short are money received by a company from someone (bank, shareholder, other creditor etc.). For example, Kaplan materials I use and the Opentuition F2 lectures about WACC talk only about cost of debt and cost of equity. But other sources state that cost of capital includes opportunity costs as well. And in one of the P2 lectures on NPV opportunity costs are briefly mentioned. Could you please clarify whether Opportunity costs are actually a part of Cost of capital? Could you please help with this?
2) I thought that cost of capital represents cost of the whole capital the company has at the moment. I.e. it covers not just the new capital not yet received by the company but also the one it has for a while (e.g. loans it got a while ago, shares it issued a while ago). But after I went through WACC materials I am not sure that my understanding is correct, and cost of capital actually covers new capital that was not yet received. Could you please clarify this?
Thank you in advance.
Hello,
I decided to clarify the second question from my previous post (please see above):
Question: Why should we use actual units produces/hours worked for actual production etc in calculation of materials, labour and variable OHs variances regardless whether we have closing inventory or not? Should not we use units sold related figures?
Clarification: One of the purposes of the variance analysis is to understand why actual profit differs from the budgeted one. Therefore, as we talk about “profit” we need to use figures from the P&L including Cost of sales. CoS cover costs (materials, labour etc) of the units sold and not necessarily produced. In case sales equal production CoS of units sold are equal to costs of production. But in case a company sold less than produced there will be closing inventory and therefore CoS on the P&L won’t represent costs of production. So, my question is why should we calculate variances based on units produced and not sold? For example, Materials usage variance = Materials that should be used for actual production – materials actually used for actual production. As you can see production figure is used in the formula.
I would really appreciate if you could assist with the above.
