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Meaning of Financing Costs and Calculation

Question 1

1.1 Depreciation adjustment

The present scenario is giving a description of the marketing manager of a manufacturer of golf equipment, as for increasing growth and production proposal was planned but there was the absence of some adjustments which are mandatory for accomplishing goals and objectives. In the below-mentioned illustration 100000 has been taken as an assumption as an initial investment which has discounting payback of 30% DCF return. In the specific case, it has invested in its infrastructure, basic utilities, coach, and its accessories which had generated an approximate cost of $100000. It had created a policy in which its investment had been depreciated for 3 years by 25% on basis of the reducing balance method as its payback period is been analyzed as 30% along with discounting cash flow return.

Discounted cash flow

30.00%

Initial investment (Assumption)

100000

Depreciation

25.00%

It has been assumed that 100000 is an initial investment for this specific golf company. In this specific reducing balance method, it had charged depreciation on fixed rate as it is also considered as method of fixed installment. Its depreciation will be calculated on asset's book value which is obtained by reducing depreciation from its cost. Usually book value decreases on aspect of charging depreciation (Walras, 2013). The rate percent of depreciation is applicable on decreasing asset's balance as it is also termed as diminishing or reducing balance method. The depreciation has been calculated in this specific method has been elaborated below:

Year

Cost of asset

100000

Depreciation

1

Less: 25% of 100000

-25000

Book value

75000

2

Less: 25% of 75000

-18750

Book value

56250

3

Less: 25% of 56250

-14062.5

Book value

42187.5

In the reducing method, the amount of depreciation is not always same, it gradually decreases. While buying its accessories, it had also purchased various assets with long life such as plant and machinery, clubs, furniture etc. are depreciated in this specific scenario. In this method, real cost of its applicability of asset is amount of depreciation along with repair expenses as it provides outcome in very efficient manner due to less repair expenses and on contrary side, more depreciation. If assets gets repair charges in older aspect then it will gradually increase and depreciation will decrease. The aggregate effect of this specific cost ob both will be constant on income statement of every year. The limitation of this method can be stated that huge time will be taken for writing off a specific asset as it might become nil if high rate of interest is not applied.

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The formula for calculating rate of depreciation plays very important role in this method:

r = 1 – (S/C)^1*/n

r = Depreciation rate

n = Useful life of asset

S = Residual value

C = Asset's original cost

1.2 Overhead recovery and allotment

Overhead is replicated as cost which is unavoidable in both production and service oriented business. The direct cost such as wages of employee and materials which can be applicable on delivery of production and service as well. For recovering most of indirect expense is to incorporate all cost of overhead in terms of factory products and services strategy of pricing. The below table is giving brief description about allocation of its overheads along with its overheads recovery rate in context of direct production cost.

Assumption

Budgeted cost

Amount

Factory rent

75000

Depreciation

42187

Indirect materials

85000

Direct labour

125000

Electricity expense

50000

Indirect labour

55000

All the above expenses are taken in assumption in context of golf company, in which depreciation amount has been extracted from question 1 on basis of reducing method. The below table is depicting segregating portion of assembly and finishing overheads of factory in context of all factory overheads. The value of machine has been taken from assumption number 1 in 1stquestion. The number of employees are 85 in which 354 are contributing in assembly and rest in finishing. There is also representation of budgeted indirect labour and material which is allocated in very appropriate manner. The below mentioned chart is depicting proportion in each head.

Assumption

Assembly

Finishing

Total

Area

15000

20000

35000

Hours consumed

20000

30000

50000

Machine value

60000

40000

100000

Employees

35

50

85

Hours of direct labour

22000

28000

50000

Budgeted indirect material

40000

45000

85000

Budgeted indirect labour

22000

33000

55000

In the same series, there is now representation of overhead analysis sheet which has been properly analysed by given working note. The major contribution has been gained nu indirect material which is of 85000 as an overhead (Overhead recovery,2018.). The most important concept which had been analysed that direct labour is not considered as an overhead so cost has not been allocated in given table.

Overhead analysis sheet

Overhead

Basis of allotment

Assembly

Finishing

Total

Indirect material

W. N 1

40000

45000

85000

Factory rent

W. N 2

32142.85

42857.14

75000

Direct labour

W. N 3

Electricity expense

W. N 4

20000

30000

50000

Depreciation

W. N 5

25312.2

16874.8

42187

Indirect labour

W. N 6

22000

33000

55000

Working note

1

Directly allocated to specific department

2

Rent

75000

Total occupied area

35000

Assembly

32142.85

Finishing

42857.14

3

It is not considered as an overhead so it will be not allocated

4

Total electricity cost

50000

Total hours consumed

50000

Assembly

20000

Finishing

30000

5

Depreciation

Total depreciation

42187

Total value of machine

100000

Assembly

25312.2

Finishing

16874.8

6

Directly allocated to specific department

Recovery of factory overheads

Assembly

Finishing

Total

Total overheads cost

139455

167731

307186

Employees

57422.64

98665.29

156087.94

Sub total

196877.64

266396.29

In the above table factory overheads are recovered on basis of cost which has been allocated above. In the above scenario assembly recovery rate has been identified as 60% then its sub total will be directly multiplied then organization will be able to get addition in 118126 which has been incurred in context of overhead and it will operate in very normal capacity. And in same series, finishing overheads recovery rate is 40% then it will get 106558 as recovery amount.

1.3 Identifying market research budget

In the context of launching any organization which is small or big then there is requirement of identifying budget for market research which has been considered. In the same series there are various factors for considering and setting a budget in very appropriate manner in which it will be having ability for meeting its requirement but not with over spending. In this scenario $8000 has to be charged for project of marketing research which should be able to conducted for assessing market size for specific new range. It should be applicable by following these 4 steps:

  • Overall budget should be considered: It is considered as initial step for identifying market research budget and allocating it properly. If this has been set properly then appropriate allocation of percentage of specific budget to that market research. For identifying amount of percentage next three steps are mandatory as an overall budget.
  • Available research for taking financial decisions: As it is said that, one amount of budget is not fit for every department. There is presence of massive amount which is helpful in syndicating research among all types of topics. The most important step is to set budget on realistic mode as inventory research is already published but commission should be considered for creating custom research.
  • If there is presence of customised budget then preparation of budget should be accordingly: If all answers are not present in syndicate reports then it will be providing significance to considering budget. As there is requirement of commission for custom research then budget should be adjusted accordingly. There is always presence of projects in customised manner and its process will be termed as very time consuming. If expenditure are greater in market research i.e. more than $8000 then it will be incurring its benefits in very substantial aspect. The customised reports are designed in such manner as they provide very specific and particular answers to questions and it will be helping in receiving detailed and extensive as per requirement.
  • Understanding on basis of cost which is expected and information which has been obtained: The biggest investment is considered as a market as it considers all pros and cons of entering in industry, it competitors and so on. It should be determined in both aspect time and money as well. If there is requirement to dive into blindly then there is need for educating themselves on basis of realistic expectations on which report range has been justified, its knowledge will be leafing toward perfect market research report and for that there is need of budget.

1.4 Meaning of Financing costs and its calculation

Financing cost is also known as cost of finance which is related to interest, cost and other charges that are required to be fulfilled by the company. The involvement is generally in the form of borrowing of money with the aim to purchase or build a particular asset. There are various other costs that are required to be settled down by the individual or an entity, which can be inclusive of taking finances to mortgage a house, financing a car loan through bank or initiate finances for student loan as well. Cost may comprise of interest on loan, bank overdraft charges, etc. There are other expenses as well, that are present and associated to security of funds or business management, such as, financing fees and interest payments charged by intermediary financial institutions. The individual or enterprise involved in it, are required to fulfil these requirements (Canto, Joines and Laffer, 2014).

The overall cost of financing a mortgage is quite different from financing a small loan for any type of asset, having lower value. With most of the loans, one has to pay back the principle with that of interest and amount borrowed. The payment of interest is generally made monthly or yearly. A down payment or initial payment is required to be made. Further, as one individual or the corporation reaches to the end of repayment period, it is then switched to paying most of the principal in that period. There is other cost of financing a mortgage in paid, such as, closing fees, interest charges as well as escrow charges.

In case of smaller purchases, such as, vehicles, a set amount of payment is required to be made each month and only a small amount of interest is required to be paid, which is generally called as simple interest loan (Dosi, Pereira and Virgillito, 2018). The interest that is paid on vehicle is based on Annual Percentage Rate (APR). It is the set month amount which is required to be paid each month. So, as to perform this function, annual payment is divided on monthly basis where interest and principle amount is paid by the individual who have indulged in taking loan. There is certain car loan which can be paid off faster, without any type of penalties. However, there are certain others who believe that the amount must be paid in set number of years. Further, borrower sometimes also get the option of extending the term loan, as per the suitability, but ultimate decision lies in the hands of loan payer. One can also opt for lower monthly payment with overall longer term which increases overall amount of interest to be paid in the end.

Every company requires capital to conduct the business. It is generally contributed either by the shareholders or promoters of the company in the form of equity or preference share capital. Under ideal condition, prudent decisions are made by the management where a mix of equity and debt is initiated. It is not required to be returned to the one who invested in the particular period. Rather, one can opt for giving away the invested amount in the form of interest, as and when entity tends to generate profits (Fernández-Villaverde, Guerrón-Quintana and Rubio-Ramírez, 2014).

There is belief that, finance cost is only applicable to debt capital. However, it is important for the accountants to opt for accounting norms and analyse that through what methods they issue cost of finance for the company. It helps them in ensuring that finance cost is appropriately captured as per the stated accounting norms. Issue of number of share can be enhanced as per increased requirements of Annual investment when the company may be planning for expansion. It helps in ensuring that all the important functions of the company have been fulfilled and investment made in it. It will help the company to move towards growth and stability for longer period so that aim and objectives of the entity can be fulfilled (Guerzoni and Raiteri, 2015).

There are various types of costs that are included in finance cost. These are, amortization of discounts or other premium that are directly or indirectly related to borrowings. Further, amortization with respect to ancillary cost can also be incurred in relation with connection with borrowings or arrangements. Finance charges with respect to finance leases are also included in the charges related to cost of borrowing. Difference in exchange rate of currency is related to other charges as well as it can be the exchange rates involved in in converting from one exchange rate to the other (Murfin, 2012). There can be two types of accounting treatment that can related to finance cost, which is included under, IAS 23, Borrowing Cost. These are mentioned as under:

The preferable treatment can be recognizing fiancé cost as an expense in the period in which it has bee incurred. When this treatment is actually recognized and used, then in that case, it must be stated as an expense in the financial statements regardless of the fact that show I has been applied.

There is alternative treatment available which is related to finance cost where the organization or individual can opt for capitalising it if it is the part of production, construction or acquisition related to quantifying of asset. In all the cases, it is not allowed to capitalise the cost. Rather, it will only be included in the case, where, it will result in to generation of future economic benefits for the company. The reliability of the same is required to be measured before capitalizing it.

Question 2

Supply and demand analysis and explanation to consumer and producer surplus

Supply-and-demand

Supply is a fundamental economic concept that helps in describing total amount of specific goods and services that is made available to the consumer. It can be related to amount available that is available at specific price or it can also be available across a range of prices, if it gets the chance to be displayed on a graph. The concept is closely related to demand available in the market for specific goods and services at specific prices. The overall supply provided by the supplier will rise if there is any increase in demand aspects of the company. It helps in enhancing overall profitability aspects of the business (Pieper, Mkandawire and Van der Hoeven, 2016).

Supply and demand are the two common trends of overall modern economy. Although each and every goods and service can have their own patterns of demand and supply which is based on personal preference, prices and utility. As and when there is any increase in supply aspects, the prices tend to fall, there is equal increase in demand as well, which helps in reaching to supply equals demand aspect. It helps in enhancing consumer utility and overall profitability of the producer can also be maximized.

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The concept of demand and supply is quite complex in nature, where, practical applications and contributing factors attached to it are taken into consideration. Supply can then be referred to as, anything which is in demand at competitive marketplace. If there is any increase in prices of goods, then it will also help in enhancing supply aspect from the side of producers as well. It is also significant to understand that there is high dependence of demand factor, when it comes to supply for particular product and services. Also, market expectations tend to define the area in which demand and supply factor is required to be made by the organization for its better output (Curme and et.al., 2014).

The concept of demand and supply is related to macroeconomics, where, supply and equation formula has been developed by the researcher so as to come up with appropriate relationship between demand and supply. There are various factors that can have impact on it. These are, inflation rate, interest rates and other market influences. A supply and demand curve is responsible for addressing the relationship better price of goods and quantity supplied or demanded. The information can be gathered with the help of movement along the supply and demand curve and shift in demand or supply curve.

The law of demand and supply is considered to be one of the fundamental concepts of economics as it is said to be backbone of economy. Demand is referred to how much / many quantity of products and services are desired or required by the individual. Quantity demanded is the number of product that people are willing to buy at certain specified prices. The relationship established between price and quantity demanded helps in defining demand relationship between he two. Changes in any of the two factors initiate alteration in overall demand aspects as well. Supply is the representation of how much amount the market can actually offer (Hall and Lieberman, 2012). Supply relationship can be defined as quantity supplies and price of the products offered for sale.

Law of demand helps in stating the relationship between quantity demanded and Prices. As and when there is increase in prices, there is adequate decrease in quantity demanded by the customers. On the other hand, a decrease in prices leads to bring elevation in quantity demanded. It is quite natural and human nature, that, people will avoid buying those products that will force them to forgo consumption of products that may value more.

Law of supply is also present, which helps in demonstrating supply aspects of quantities which can affect certain prices at which the product is actually sold. It can be stated that with an increase in overall prices, there will be increase in number of quantities supplied in the market. Hence, any increase in supply will thereby increase in prices of quantity demanded. Producers tend to supply more when prices are higher with the hope of earning increased revenues (Ljungqvist and Sargent, 2012).

Unlike demand relationship, supply relationship is related to time. Whether any type of changes in prices will bring temporary and permanent changes in demand and supply aspect of product and services or not.

When demand and supply aspects are equal, then in that case, the economy is said to be at equilibrium state. At this point, it is important to have effective allocating of goods and services so that exactly same amount can be supplied by the producer, which is actually demanded by the customers. It helps in reaching to the state of equilibrium (Newbold, Carlson and Thorne, 2012). Equilibrium price and quantity is the one, where, supplier is selling the products and consumers are able to get those goods and services.

The above diagram states that equilibrium is an intersection point of demand and supply. At this point, it is stated by the researcher that, allocation is made in the most uniformed manner where customers and producer both are able to generate adequate profits out of it. However, fluctuation in the two is dependence on current economic conditions of the country. It helps in understanding that at this point, suppliers are selling their goods, that are produced by them and consumers are able to get them as per their demand.

Consumer surplus is another economic measure that is related to generate benefits for the consumers. It helps in assessing the calculation of what the customers are willing to pay and what they are actually able to spend for particular goods and services. Consumer surplus is the state which tends to occur when consumer is willing to pay more for a particular product in comparison to that of current market price (Walras, 2013). The concept of consumer surplus is generally dependent on economic theory of marginal utility which helps in analysing additional satisfaction, that must have been gained by the customers from one good to the other. However, the same may vary from person to person and on their own personal preferences as well. As per the law of diminishing marginal utility, the more of particular good and service is available with the customer, that less it will be willing to pay for it. It is due to diminishing marginal utilities he receives.

The firms have ability to reduce consumer surplus, if they have the availability of market power. It helps in rising the products above a particular competitive equilibrium. In case, if the firm is monopoly, then, a firm can maximize its profits by reducing overall consumer surplus. Another method of bringing reduction in consumer surplus is that, organization can indulge in price discrimination activities. Approaching reduction in the prices for different groups of customers, such as in the case of price discrimination can help in performing this functional aspect. It helps in eliminating consumer surplus by engaging in first degree price discrimination techniques. It states that charging highest prices that the customer is willing to pay can help in better development of overall profitability aspects of the business. Gaining market man power can also help in advertising regarding brand loyalty which helps in making the demand more inelastic. It shows that any change in prices will not bring any type of change in quantity demanded aspects of the business (Pieper, Mkandawire and Van der Hoeven, 2016). Choose the best assignment helper with chat support. Contact Now!

There are various significances that are related to consumer surplus. In the competitive market, firms are required to relatively lower down the prices which helps the consumer to gain customer surplus. However, if the market is such that, it is not competitive in nature, then, in that case, consumer surplus tends to be less and there is greater amount of inequality prevailing in the environment. If the consumer surplus is less, then in that case, it can increase production surplus with greater inequality. However, a fact has been stated by the researcher that, consumer surplus enables the customers to make purchases through wider choices of available goods and services.

The doctrine of consumer surplus is able to occupy important role in overall concepts of economics. When an individual buys a particular commodity, then in that case, he / she is able to gain some utility in consuming it. At the same time, he / she may also lose certain utility in the form of prices that one needs to pay for it. In the initial stages, utility gain is usually higher in comparison to that of what is actually lost. The gap is known to be consumer surplus. As soon as there is adequate decrease in it, it gives rise to increase in producer’s surplus for the organization. It reflects that, in this scenario, producers are able to gain high profitability aspects in comparison to that of consumers. The gap between the two helps in deciding that whether there will be presence of consumer surplus or producer’s surplus (Hall and Lieberman, 2012). The total value paid for it actually remains the same.

Producer’s surplus is another important concept that is related to economics. It helps in deciding that how much of a good the producer is willing to supply and the amount which actually received by him in trade. The benefit raised out of it helps in receiving from selling particular goods in the market. It is generally generated with the help of market prices that may be present in excess of the lowest price at which the producer is willing to sell a particular goods and services.

Producer’s surplus combined to consumer surplus helps in generation of overall economic surplus. It helps in generating overall benefits to producers as well as consumers who may be interacting in free market as opposed to the scenario of price quota. While deciding prices, the producer can opt for capturing overall economic surplus. It helps in stating that, producer’s surplus is equal to consumer surplus.

Producer’s do not opt for selling products if they are not able to realise at least marginal cost of produced products. From the standpoint of economics, marginal cost is inclusive of opportunity cost. In this aspect, it is related to the essence of cost of not doing something and chosen to produce a separate item to be offered to the customers. When there is a presence of producer’s surplus, it does not mean that there is absence of consumer surplus. The main idea behind overall free market is that setting the prices in such a manner that both producers as well as consumers can be benefitted out of it. It plays a substantial role in overall development of economy. A change can be brought in profits and producer’s surplus due to constant change in market prices.

The falling cost of production on prices and overall quantities offered for sale for the customers can have greater impact. Falling prices in production will help in bringing reduction in the prices that it is planning to offer to the customers. It will help in enhancing overall sales of stereo systems and the demand of the customers will then be satisfied at reduced prices. A decrease in prices always helps in enhancing consumer surplus. Further, fallen production cost also lead to bring positive increase in producer’s surplus in the end. Hence, it can be stated that, it is the ideal situation in which both producers and consumers tends to deal in. They are able to produce both producer’s as well as consumer’s surplus in the end. The opportunity cost that lies in this case is also higher in comparison to other aspects that are available with the producer’s as well as consumers. The existence of both helps in ensuring that the company as consumers are able to produce maximum amount of benefits out of it, in such a manner that, cost as well as profitability can be effectively determined in the end (Dosi, Pereira and Virgillito, 2018).

In case of the stated case of stereo systems, falling production prices leads to bring positive change for both consumers as well as producers. It helps in brining overall positive impact on economic aspects in wider context. Hence, it can be stated that the fallen prices of production of stereo systems is quite positive in nature and can help the overall economy to grow and expand in the most positive manner.

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