Ch16 Accounting

8/8/2019 Ch16 Accounting

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Chapter 16 -

Accounting, Economicsand Financial

Management Basics

Management for Engineers,Technologists and

Scientists


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Study Objectives - Ch. 16

explain product demand and supply

explain the function of the variousfinancial statements

differentiate between different

types of costs apply the CVP method in decision

making


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Chapter 16

Engineers are involved in the following

financial management tasks (p. 336):

y Evaluating projects

y Planning and controlling budgets

y Cost estimatingy Analysing of economic risks


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Chapter 16 - Models

y Bookkeeping Model - classifying, recording,and reporting financial transactions

y Cost-Volume-Profit Model: Decisionmaking regarding selling price, sales volume& product mix.

y

Budget and performance analysis model -Ch. 17

y Net Present Value Model: Capitalinvestment decisions.


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Chapter 16 - Economics

Economics is the science which studies

human behaviour as a relationshipbetween ends and scarce means whichhave alternative uses.

(Lord Robbins)


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7/18

Chapter 16

Example: Why the cost of an asset

may be a poor indicator of its value

A mine shaft system may cost R2 billion

to develop but it may have no or verylittle economic value if it is notproviding access to an ore body thatcan be mined at a profit.


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Chapter 16

Factors to consider when evaluating an

asset for investment purposes (p.338): amount of expected return or income

timing of income

risk associated with return Invest in a project when (p. 338):

y NP V > 0

y IRR > hurdle rate


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Chapter 16

Economic efficiency = worth / cost;

must be greater than 100% Resources used by organisations:

land (natural resources)

labour (operate machines)

capital (e.g. machinery & equipment)

enterprise (entrepreneurs)

knowledge (primary resource?)


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Chapter 16

Law of diminishing returns (p. 339)

Returns to scale (p. 340) Opportunity cost (p. 341)

When evaluating a number of projects

y Which projects will create wealth?

y Which projects should the companychoose if the necessary capital is notavailable to invest in all those with apositive net present value?


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Quantity demanded of

product X (p. 341) Qd,x = Qd,x(Px, Y , P1, ,, Pn, T, A)

where: Px is the price of product x

Y is the level of household income

P1, ..., Pn refers to prices of other related

products e.g. substitutes and complements T refers to the tastes of consumers

A refers to advertising


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Quantity of product X that

businesses will supply Qs,x = Qs,x(Px, P1, ,, Pn, F1, , Fm, T, Z)

where: Qs,x refers to the quantity supplied

Px refers to the price of product X

P1 - Pn = prices of other products F1 - Fm = factors of production costs

T refers to the state of technology

Z - other factors


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Chapter 16

Difference between:y

Balance sheety Income statement

y Cash flow statement

The effect of the following

transactions on cash flow (p. 346): An increase in stock

An increase in debtors

An increase in creditors


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Balance sheet

C u r r e n t a s s e t s

y I n v e n t o r i e sy D e b t o r sy P r e p a id a c c o u n t sy D

e p o s i t sy C a s hy S h o r t - t e r m

i n v e s t m e n t s

C u r r e n t l ia b i l it ie s

y S h o r t - te r m l o a n sy T r a d e c r e d i to r sy T a x p r o v i s io n sy B a n k o v e r d r a f tsy D i v i d e n d s t o b e

p a i d

y I n t e re s t d u e

F i x e d a s s e t s

y La n d

y B u i l d i n g sy P l a n t sy V e c h i c l e sI n t a n g i b l e a s s e t s

y P a t e n t s

E m p l o y m e n t o f c a p i t a l

C a p i t a l e m p l o y e d

L o n g t e r m l i a b i l i t i e s

y M o r t g a g e o n l a n dy B o n d o n b u i ld i n gO w n e r s e q u i t y

y S h a r e c a p i t a ly R e s e r v e s


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Nature of cost

Fi . 1 . r s t ti v ri l sts (p. )

l

ri l sts


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Nature of cost

Fig . 16 .8 Representat ion of f ixed costs (p. 347 )

Rand

Volume

Fixed costs


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CVP Example

B l u e S k y A i r w a y s p r o v i d e s a d a i l y s e r v i c e b e t w e e n

J o h a n n e s b u r g a n d D u r b a n . T h e a i r c r a f t h a s a c a p a c i t y o f

2 2 0 p a s s e n g e r s a n d e a c h t r i p c o s t s t h e c o m p a n y R 7 0

0 0 0 , r e g a r d le s s o f t h e n u m b e r o f p a s s e n g e r s . A d d it io n a l

c o s t s a r e R 6 0 p e r p a s s e n g e r (b a g g a g e , c a b in s e r v ic e s a n d

b o o k in g c o s t s ) .

a ) I f B l u e S k y A ir w a y s c h a r g e R 4 5 0 p e r p a s s e n g e r ,h o w m a n y p a s s e n g e r s d o t h e y n e e d t o b r e a k e v e n

w it h e a c h f l ig h t ?

b )

R e s e a r c h s h o w e d t h a t p l a n e s a r e a c t u a l l y c a r r y i n ga n a v e r a g e o f 8 0 % o f i t s c a p a c i t y o f p a s s e n g e r s .

W h a t p r o f it (o r lo s s ) is r e a l i s e d a t 8 0 % c a p a c i t y a n d

R 4 5 0 p e r t ic k e t ?

c ) W h a t p r ic e s h o u ld B lu e S k y A ir w a y s c h a r g e if t h e yw a n t t o r e a l is e a p r o f i t o f R 1 0 0 0 0 0 o n e a c h t r ip (a t

8 0 % c a p a c it y )?

Ch16 Accounting

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