Name Roll No Learning Centre Subject

: : : : FINANCIAL AND MANAGEMENT ACCOUNTING

Assignment No

TWO

Date of Submission at the learning centre:

1.

The Balanced Score Card is a framework for integrating measures derived

from strategy. Take an Indian company which has adopted balance score card successfully and explain how it had derived benefits out of this framework. Ans. TATA motors have adopted balance score card framework successfully and yields benefits from that.

Case Study : TATA Motors CVBU(Commercial Vehicle Business Unit)

TATA Motors Commercial Vehicle Business Unit enhances balanced scorecard framework.

Tata Motors is the largest and most prominent market leader in the manufacture of commercial business vehicles in India. In the year 2000, its Commercial Vehicles Business Unit (CVBU) suffered its first loss in its more than fifty years history. This loss was massive. It was in the tune of Rs. 108.62 Million. This prompted Tata Motors to take a profound look into itself; to find reason in this debacle.

Subsequently, the executive director of CBVU, Mr. Ravi Kant, called for stringent cost cutting across unit operations, supported by more effective formulation and execution of strategy. To augment this process, the management of Tata Motors resolved to adopt the Balanced Scorecard and Performance Framework as the key tool in the endeavour to rebuild the Organisational Performance Chart. The challenge here was to undertake deployment of the Balanced Scorecard across all the functional units and departments of the CBVU.

Soon, however, with the process underway, the real problem revealed itself. It turned out that the manual nature of the review procedures of such a huge structure was well neigh impossible, being, at best, extremely difficult to implement and incredibly time consuming. A watertight solution was needed; quickly. After further examination of the situation, a decision was taken to implement a Balanced Scorecard Automation Tool that would centralise, integrate and collate the data, providing rapid review and analytical functionality and presenting a rapid and comprehensive one view picture of organisational performance. 2

Commencing this process, the CVBU management reviewed many solution providers and evaluated each of them upon the basis of a variety of diverse factors. At the end of this exhaustive process, a solution was decided in the form of COVENARK Strategist, a prominent Balanced Score Card Automation Tool developed by mPOWER Information Systems to integrate with the existing ERP and legacy systems with the help of data integration suite.

The results were immediate and spectacular. Within two years of this, CVBU had turned over to register a profit of Rs. 107 Million from the loss of Rs. 108.62 Million, accounting for a whopping 60% of TATA Motors inventory turnover. The success path of Balanced Score Card did not stop here. In the beginning CVBU has started the Balanced Scorecard with only Corporate Level Scorecard; at this time they have expanded it to six Hierarchical Levels with three hundred and thirty one Scorecards, additionally looking forward to proliferate it to the lowest level of organisational structure. In this way, balanced scorecard framework played a vital role in the success story of TATA Motors CVBU.

2. What is DuPont analysis? Explain all the ratios involved in this analysis. Your answer should be supported with the chart

Ans. A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). It is also known as "DuPont identity". DuPont analysis tells us that ROE is affected by three things: - Operating efficiency, which is measured by profit margin - Asset use efficiency, which is measured by total asset turnover - Financial leverage, which is measured by the equity multiplier 3

ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

Investopedia explains DuPont Analysis It is believed that measuring assets at gross book value removes the incentive to avoid investing in new assets. New asset avoidance can occur as financial accounting depreciation methods artificially produce lower ROEs in the initial years that an asset is placed into service. If ROE is unsatisfactory, the DuPont analysis helps locate the part of the business that is underperforming. The DuPont System expresses the Return on Assets as: ROA = OPM * ATR The Operating Profit Margin Ratio is a measure of operating efficiency and the Asset Turnover Ratio is a measure of asset use efficiency. The DuPont System expresses the Return on Equity as: ROE = (ROA - Interest Expense/Average Assets) * EM The Equity Multiplier is a form of leverage ratio and measures financial efficiency. Figure shows the DuPont Analysis for a farm operation

Table 1. DuPont Analysis for Two Farms Farmer A Farmer B 0.30 0.12 0.20 0.060 0.05 2.00 0.36 0.043 0.03 1.50

1. Operating profit margin ratio 2. Asset turnover 3. ROA (1*2)

4. Interest expense to avg. farm assets 5. Equity multiplier

6. ROE (3-4) * 5 0.02 0.02 Farmer A and Farmer B each have a 2 % ROE. The components of the ratios indicate that the sources of the weakness of the farms are different. Farmer A has a stronger profit margin ratio but lower asset turnover compared to Farmer B. Furthermore, Farmer A has a higher leverage ratio than Farmer B. The weak ratios for each farm may be decomposed into components to determine the potential sources of the weakness. To improve asset turnover Farmer A needs to increase production efficiency or price levels or reduce current or noncurrent assets. To improve profit margins, Farmer B needs to increase production efficiency or price levels more than costs or reduce costs more than revenue. 5

The DuPont analysis is an excellent method to determine the strengths and weaknesses of a farm. A low or declining ROE is a signal that there may be a weakness. However, using the analysis you can better determine the source of weakness. Asset management, expense control, production efficiency or marketing could be potential sources of weakness within the farm. Expressing the individual components rather than interpreting ROE itself may identify these weaknesses more readily.

Q3. Prepare Funds Flow statement from the following balance sheets and additional information

Liabilities Eq Share capital 13% debentures

1998

1999

Assets Good will Plant Machinery Land building Investments Debtors Stock Bills receivable Bank Preliminary expenses

1998 20,000 & 3,50,000 & 6,50,000 40,000 50,000 80,000 70,000 40,000 10,000 13,10,000

1999 15,000 4,50,000 6,59,000 1,48,000 30,000 90,000 50,000 30,000 8,000 14,80,000

7,50,000 9,00,00 0 2,50,000 2,00,00 0 50,000 50,000 60,000 20,000 60,000

Profit and loss 40,000 a/c General reserve Creditors Bills payable Provision for tax 40,000 50,000 30,000 50,000

Prov for dep on 1,00,000 1,40,00 land and building 0 Total 13,10,00 14,80,0 0 00

total

Additional information

1. Provision for depreciation on P&M was RS40,000 o 31st March 1998 and Rs.45,000 on 31st March 1999 2. Machinery costing Rs.36000 (acc dep Rs12,000) was sold for Rs.20,000 6

3. Investment costing Rs.30000 were sold at a profit of 20% on cost 4. Tax of Rs.30000 were paid Ans: 1998 Current assets Stock Debtor Bank B/R Current liability Creditor B/P 50000 30000 60000 20000 10000 20000 NET increase in working capital 40000 60000 60000 60000 10000 80000 50000 40000 70000 90000 30000 30000 50000 10000 20000 10000 20000 1999 Increase decrease

Fund flow statement for the year 31-12-1999 Particular Funds operation Sale of p machinery R.S from 73000 20000 and Particular Purchase machinery Investment Payment for tax R.S of 100000

30000 3000

Decrease in working 40000 capital 133000

133000

Plant and machinery To balance b/d To bank 350000 100000 By bank a/c By loss on sale 20000 16000 7

By depreciation By balance c/d 4. The standard cost of a certain chemical mixture is: 35% Material A at Rs.25 per kg 65% Material B at Rs.36 per kg A standard loss of 5% is expected in production During a period there is used: 125kg of Material A at Rs.27 per kg and 275kg of Material B at Rs.34 per kg The actual output was 365 kg Calculate a. Material cost variance b. Material price variance c. Material mix variance d. Material yield variance

45000 369000

Hint: Use net standard output (deduct the loss) Ans. Standard quantity for actual output : 365/5% = duty chemical mixture (a) Material Cost variance = (Standard qty/Standard price) (actual qty/cost price) Material A = (154 x 25) (125 X 27) = 475 (F) Material B = 230 x 36) (275 x 34) = - 1070 (A) Total = - 1070 + 475 = 595 (A) (b) Material price variance (std price actual price) X actual price Material A = (25-27) x 125 = Material B = (36-34) x 275 = Total = 300 (F) (c) Material mix variance 250 (A) 550 (F)

Material Actual mixed Standard mixture 125 35 % 275 65 % Total = 400

Actual Qty 140 260

Material mix variance = (actual qty at std unit actual qty) x std price

Material A = (140 125) x 25 Material B = (260 275) x 36 Total = - 165 (A)

= =

375 (F) - 540 (A)

(d)

Material yield variance = (Std qty actual qty at std unit) x standard price Material A = (154 140) x 25 Material B = (230 260) x 36 Total = - 730 (A) = 350 (F) = - 1080 (A)