Box AF 2340, Adenta Accra
info@passquo.com

No products in the cart.

No products in the cart.

Register

Author: Admin Assist
Home Admin Assist Page 21
Level 2 - Corporate Strategy, Ethics & GovernanceOrganizational missions & objectivesPrevious Syllabus

May 2016 Q2 b.

Management by objectives (MBO) is a process of defining objectives within an organisation so that management and employees agree to the objectives and understand what they need to do in the organisation in order to achieve them. The essence of MBO is participative goal setting. In order for MBO to work effectively in an organisation, objectives agreed on must possess certain inherent characteristics.
Required:
Identify and explain THREE of these inherent characteristics and how they facilitate Management by objectives (MBO). (6 marks)

View Solution

For objectives to facilitate the implementation of management by objectives (MBO) it should possess the ‘SMART’ characteristics. SMART is the mnemonics representing the following:
i. Specific: An objective must be a clear statement of what the organisation is trying to achieve, and must be easy to understand. For an objective to enhance MBO, it should avoid any form of ambiguities. For example, managers may set an objective to increase sales, profit or customer satisfaction.
ii. Measurable: This means objectives should include some quantifiable element. This way, performance can be monitored and evaluated against the objectives. Measuring performance against objectives is a key element of control in organisation.
iii. Achievable: For MBO to be effective, targets set should always be realistic. If objectives set by management cannot be achieved, those required to achieve the target will not be motivated by it. It may even discourage them, because they know the target can never be reached anyway, no matter the level of effort they put in. To work well, employee must believe that their efforts can be successful.
iv. Agreed: Sometimes, the ‘A’ is explained as agreed. In this sense, objectives or targets set need to be the consensus reached by the different people who are involved in the process. There is no need to impose targets on employees since it could discourage them from making any attempt to achieve it. The essence of MBO is participative management.
v. Relevant: An objective is relevant if it relates to an organisation’s mission, and will help it fulfill that mission. Thus, objectives must necessarily flow from the organisation’s mission otherwise it will lead to avoidable conflicts in its achievement.
vi. Realistic: Sometimes, the ‘R’ is explained as realistic. In this regard, the explanation will be the same as in achievable/attainable.
vii. Time-related: All objectives or targets should state quite clearly when they should be achieved. Managers and/or employees need to know exactly how long they have so that they can plan accordingly. When objectives are time-specific, it enables management to judge whether or not the objective has been achieved. This characteristic also facilitates management function of control. For example, if an organisation has an objective ‘To increase sales revenue by 5%’ how will managers know the time period over which this sales increase is expected.                                                                                                      (Any 3 points)

View More
Balanced scorecardLevel 2 - Corporate Strategy, Ethics & GovernanceOrganizational missions & objectivesPrevious Syllabus

May 2016 Q2 a.

The Balanced Scorecard approach has been embraced as an effective model for generating information to assist management in formulating and achieving strategic policies. It emphasizes the need to provide management of an organisation with a set of information which addresses all relevant areas of performance in an objective and unbiased fashion.
You are the Management Accountant of McGinate Incorporated, a local printing and publishing house located in the regional capital of Ashanti. Your CEO has asked you to brief him further on the balanced scorecard approach.
Required:
In a memo to the CEO:
i) Describe FOUR perspectives of a balanced scorecard.                                                                                                   (8 marks)

View Solution

                                                                                                      MEMO
To: The Chief Executive Officer
From: Management Accountant
Date:
Subject: Balanced Scorecard
Introduction
This memo is to describe the four perspectives of the balanced scorecard and the major problems inherent in its application to corporate strategic management.
i. Description of the four perspectives of the balanced scorecard

  • Financial perspective – The financial perspective of the balance scorecard answers the question, ‘how do we as an organisation look to shareholders?’ Thus, it addresses the question on how the organisation should create value for its shareholders in order to succeed financially. It covers traditional measures such as growth, profitability and shareholder value, with measures set through talking directly to the shareholders. Financial performance measures indicate whether the company’s strategy, implementation, and execution are contributing to bottom-line improvement.
  • Customer perspective – The customer perspective of the balance scorecard is a means by which management translates its overall mission statement on customer service into specific measures that reflect the factors that really matter to customers. It answers the question of how the organisation should appear to its customers in order to achieve its vision. It helps management to pay attention to customers’ concerns such as cost, time, quality, performance, reliability and service.
  • Internal business process perspective – This perspective addresses internal business processes for which the organisation must excel at in order to meet or exceed customer expectations and achieve financial objectives. Internal measures for the balanced scorecard should stem from the business processes that have the greatest impact on customer satisfaction – factors that affect quality, employee skills, and productivity. It also attempts to identify and measure the organisation’s core competencies and critical technologies needed to ensure continued market leadership.
  • Innovation and learning perspective – This perspective is a means of recognising that the targets for success keep changing due to intense global competition and other environmental factors. Thus, it is an attempt to measure the continual improvement of the organisation with regards to existing products and processes. Thus, measures may include the ability of the company to introduce entirely new products with expanded capabilities as well as innovative processes that delivers better value to customers. It brief, it answers the question of how the organisation can continue to create value and maintain its competitive position through improvement and change.

ii) Explain THREE problems usually associated with the use of this approach for strategic management.                      (6 marks)

View Solution

  • Conflicting measures – The balanced scorecard sometimes presents conflicting measures. A typical example is research funding and cost reduction. While research is a means of ensuring innovation and learning it leads to cost accumulation which may reflect in high prices for customers. Thus, it is often difficult to determine the balance which achieves the best results.
  • Selecting measures – Not only do appropriate measures have to be devised but the number of measures used must be agreed. Care must be taken that the impact of the results is not lost in a sea of information. The innovative
  • Expertise – Measurement is only useful if it initiates appropriate action. Non-financial managers may have difficulty with the usual profit measures. With more measures to consider, this problem will be compounded. Measures need to be developed by someone who understands the business processes concerned.
  • Interpretation – Even a financially-trained manager may have difficulty in putting the figures into an overall perspective.
  • Management commitment – The scorecard can only be effective if senior managers commit to it. If they revert to focusing solely on the financial measures they are used to, then the value of introducing additional measures will be reduced. In this context, do not overlook the cost of BSC. There will be costs involved in data-gathering and in measuring the performance of additional processes.
  • Lack of aggregate performance measure – The balance scorecard doesn’t provide a single aggregate summary performance measure; for example, part of the popularity of ROI or ROCE comes from the fact that they provide a convenient summary of how well a business is performing.
  • No direct link with shareholder value – In comparison to other measures used in value-based management (such as economic value added or EVA) there is no direct link between the scorecard and shareholder value.
  • Culture – Introducing the scorecard may require a shift in corporate culture; for example, in understanding an organisation as a set of processes rather than as departments.
  • Imbalance between short-term and long-term perspective – Implementing the scorecard will require an organisation to move away from looking solely at short-term financing measures, and focus on longer-term strategic measures instead. This usually leads to an imbalance between the long and short-term perspectives by management.
                                                                                                                                                                                                 Signed
                                                                                                                                                                                    (Any 3 points)

View More
Cash flowLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

May 2016 Q1 f.

RICHWARD LIMITED
Background
Mr. Kwesi Bonku is the Managing Director of Richward Ltd, a small haulage contracting company, which he founded 15 years ago. Originally, Mr. Bonku was a heavy goods vehicle driver himself, working for other contractors, but he had the intent of establishing his own business. Having received his pension, he acquired an articulator truck and began to work from home. Over time the business expanded and now Richward Ltd operates a fleet of 15 heavy goods vehicles. Five of the current fleet of trucks was acquired in the last financial year, replacing older units which were becoming too expensive to maintain. The Company now employs 20 full-time and varying number of part-time driver mates. The part-time staff work as and when required.
Mr. Bonku acquired two plots of land six years ago and built a house on it, which he and his family occupy. In addition, he built a garage with facilities for minor servicing and repairs on the same site. Living on site has enabled him to offer a 24-hour service to clients. Consequently, movement of the trucks in and out of the site occurs at all times of day and night. There have been objections raised by the residents in the neighbourhood to disturbance and the local Radio Stations has at various times reflected this criticism.
In addition to the haulage business, the company also obtained license and established a driving school. This had proved to be a successful diversification as there is a regular stream of customers. This training takes place mostly in Richward Ltd’s own garage facilities. It became clear to Mr. Bonku that the land on which the garage facility is built was inadequate for the needs of his growing business.
Acquisition of land
One year ago, Mr. Bonku entered into negotiations to lease some land which would be more than satisfactorily for the company’s operations. The land is situated on an industrial estate five kilometres from the existing facility. In addition, there is room to build a workshop facility which would be adequate for the needs of the fleet. Following agreement of a lease arrangement, which was concluded just before the completion of the last financially year, Richward Ltd occupied the land on which there were no building erected or utilities supplied. Since taking possession of the land, a large security fence has been erected and a small portable cabin placed on site. Water and electricity services have been supplied and negotiations are taking place for the installation of a large diesel tank adequate to service other vehicles besides those of Richward Ltd.
Accounting
Mr. Bonku recruited Mrs. Efua Dadson, a part-time accountant, four years ago. Prior to Mrs. Dadson’s arrival, Richward Ltd applied a policy of paying all invoices immediately on receiving them. As debtors were frequently taking over and above the credit period (30 days) allowed, Richward Ltd suffered a cash flow shortage, which resulted in a large bank overdraft.
Mrs. Dadson introduced some basic financial accounting procedures into the company. In addition to exercising some control on Richward Ltd expenditure, Mrs. Dadson has reduced the debtors’ collection period to about half its former level. Creditors are now paid when the invoices fall due rather than immediately upon their receipt. Such control had been lacking prior to her arrival at the company.
The company faces strong competition for haulage contract work. Typically, haulage contractors operate on a low-margin basis and smaller companies often sub-contract from large-scale hauliers. Richward Ltd carries haulage for a variety of customers as well as undertaking some subcontracting. Much of the haulage work the company carries out is seasonal.
One of its top clients, Grace Ltd, recently appointed a new transport manager. The new Manager of Grace Ltd. has begun to employ other hauliers besides Richward Ltd. Over the last two months, the haulage work Richward Ltd has received from Grace Ltd has reduced by about a third.
In order to address the competition, Richward Ltd recently diversified into the sale of hydraulic oil. Sales have been running at a steady rate of 50 gallons each month for some time, but the company is dissatisfied with this level of sales and from next month June 2016, the company intends to advertise actively. This is expected to increase sales by 10 gallons per month from June to October inclusive after which it will remain steady at 100 gallons per month.
Each gallon costs GH¢1,500 and sells for GH¢2,000. All purchases are on one month’s credit and sales on two month’s credit. The company feels that, to give a good service to customers, it must have sufficient inventory at the end of each month to meet the whole of the following month’s sales.
Additional non-current assets (a delivery van to help cope with the increased sales) will be bought and paid for in July 2016 at a cost of GH¢15,000. Corporate tax of GH¢25,000 is due for payment on 1st August, 2016. The balance of cash at 31st May, 2016 is planned to be GH¢30,000.
Operating costs will rise to cash payments totaling GH¢10,000 each month. The advertising will cost GH¢20,000 in June and GH¢10,000 for each month from July to September inclusive, payable one month in arrears.
The Accountant has not yet had a cash budget prepared for the rest of the year, but she feels that the sales expansion plans are likely to lead to cash flow problems. Suggestions have been made that, if her fears are justified, it might be possible to overcome the problem by increasing the creditor payment period to two months and buying inventory as it is used (i.e. zero inventory at month ends).
Required:

Suggest what other aspects Richward Ltd Limited should consider to solve the expected cash flow problem, should the suggested solution be unachievable.                                                                                                                                (5 marks)

View Solution

Suggested ways of improving the cash situation of Richward Ltd

  • Raising new capital
  • Ploughing back profits
  • Raising new loans
  • Leasing or renting non-current assets instead of buying them
  • Raising prices
  • Selling for cash
  • Asking for a extended period from creditors
  • Cutting down costs

View More
Cash budgetFinance Perspective : Cash BudgetLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

May 2016 Q1 d&e

RICHWARD LIMITED
Background
Mr. Kwesi Bonku is the Managing Director of Richward Ltd, a small haulage contracting company, which he founded 15 years ago. Originally, Mr. Bonku was a heavy goods vehicle driver himself, working for other contractors, but he had the intent of establishing his own business. Having received his pension, he acquired an articulator truck and began to work from home. Over time the business expanded and now Richward Ltd operates a fleet of 15 heavy goods vehicles. Five of the current fleet of trucks was acquired in the last financial year, replacing older units which were becoming too expensive to maintain. The Company now employs 20 full-time and varying number of part-time driver mates. The part-time staff work as and when required.
Mr. Bonku acquired two plots of land six years ago and built a house on it, which he and his family occupy. In addition, he built a garage with facilities for minor servicing and repairs on the same site. Living on site has enabled him to offer a 24-hour service to clients. Consequently, movement of the trucks in and out of the site occurs at all times of day and night. There have been objections raised by the residents in the neighbourhood to disturbance and the local Radio Stations has at various times reflected this criticism.
In addition to the haulage business, the company also obtained license and established a driving school. This had proved to be a successful diversification as there is a regular stream of customers. This training takes place mostly in Richward Ltd’s own garage facilities. It became clear to Mr. Bonku that the land on which the garage facility is built was inadequate for the needs of his growing business.
Acquisition of land
One year ago, Mr. Bonku entered into negotiations to lease some land which would be more than satisfactorily for the company’s operations. The land is situated on an industrial estate five kilometres from the existing facility. In addition, there is room to build a workshop facility which would be adequate for the needs of the fleet. Following agreement of a lease arrangement, which was concluded just before the completion of the last financially year, Richward Ltd occupied the land on which there were no building erected or utilities supplied. Since taking possession of the land, a large security fence has been erected and a small portable cabin placed on site. Water and electricity services have been supplied and negotiations are taking place for the installation of a large diesel tank adequate to service other vehicles besides those of Richward Ltd.
Accounting
Mr. Bonku recruited Mrs. Efua Dadson, a part-time accountant, four years ago. Prior to Mrs. Dadson’s arrival, Richward Ltd applied a policy of paying all invoices immediately on receiving them. As debtors were frequently taking over and above the credit period (30 days) allowed, Richward Ltd suffered a cash flow shortage, which resulted in a large bank overdraft.
Mrs. Dadson introduced some basic financial accounting procedures into the company. In addition to exercising some control on Richward Ltd expenditure, Mrs. Dadson has reduced the debtors’ collection period to about half its former level. Creditors are now paid when the invoices fall due rather than immediately upon their receipt. Such control had been lacking prior to her arrival at the company.
The company faces strong competition for haulage contract work. Typically, haulage contractors operate on a low-margin basis and smaller companies often sub-contract from large-scale hauliers. Richward Ltd carries haulage for a variety of customers as well as undertaking some subcontracting. Much of the haulage work the company carries out is seasonal.
One of its top clients, Grace Ltd, recently appointed a new transport manager. The new Manager of Grace Ltd. has begun to employ other hauliers besides Richward Ltd. Over the last two months, the haulage work Richward Ltd has received from Grace Ltd has reduced by about a third.
In order to address the competition, Richward Ltd recently diversified into the sale of hydraulic oil. Sales have been running at a steady rate of 50 gallons each month for some time, but the company is dissatisfied with this level of sales and from next month June 2016, the company intends to advertise actively. This is expected to increase sales by 10 gallons per month from June to October inclusive after which it will remain steady at 100 gallons per month.
Each gallon costs GH¢1,500 and sells for GH¢2,000. All purchases are on one month’s credit and sales on two month’s credit. The company feels that, to give a good service to customers, it must have sufficient inventory at the end of each month to meet the whole of the following month’s sales.
Additional non-current assets (a delivery van to help cope with the increased sales) will be bought and paid for in July 2016 at a cost of GH¢15,000. Corporate tax of GH¢25,000 is due for payment on 1st August, 2016. The balance of cash at 31st May, 2016 is planned to be GH¢30,000.
Operating costs will rise to cash payments totaling GH¢10,000 each month. The advertising will cost GH¢20,000 in June and GH¢10,000 for each month from July to September inclusive, payable one month in arrears.
The Accountant has not yet had a cash budget prepared for the rest of the year, but she feels that the sales expansion plans are likely to lead to cash flow problems. Suggestions have been made that, if her fears are justified, it might be possible to overcome the problem by increasing the creditor payment period to two months and buying inventory as it is used (i.e. zero inventory at month ends).
Required:

d) Prepare a cash budget for Richward Ltd Limited for the six months ending 30th November 2016, showing the planned cash position at the end of each month; on the basis of the original planned credit and inventory holding periods.                (6 marks)

View Solution

e) Redraft your cash budget to reflect the suggested alterations to these planned periods.                                                (5 marks)

View Solution

View More
Finance perspective : OthersLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

May 2016 Q1 c.

RICHWARD LIMITED
Background
Mr. Kwesi Bonku is the Managing Director of Richward Ltd, a small haulage contracting company, which he founded 15 years ago. Originally, Mr. Bonku was a heavy goods vehicle driver himself, working for other contractors, but he had the intent of establishing his own business. Having received his pension, he acquired an articulator truck and began to work from home. Over time the business expanded and now Richward Ltd operates a fleet of 15 heavy goods vehicles. Five of the current fleet of trucks was acquired in the last financial year, replacing older units which were becoming too expensive to maintain. The Company now employs 20 full-time and varying number of part-time driver mates. The part-time staff work as and when required.
Mr. Bonku acquired two plots of land six years ago and built a house on it, which he and his family occupy. In addition, he built a garage with facilities for minor servicing and repairs on the same site. Living on site has enabled him to offer a 24-hour service to clients. Consequently, movement of the trucks in and out of the site occurs at all times of day and night. There have been objections raised by the residents in the neighbourhood to disturbance and the local Radio Stations has at various times reflected this criticism.
In addition to the haulage business, the company also obtained license and established a driving school. This had proved to be a successful diversification as there is a regular stream of customers. This training takes place mostly in Richward Ltd’s own garage facilities. It became clear to Mr. Bonku that the land on which the garage facility is built was inadequate for the needs of his growing business.
Acquisition of land
One year ago, Mr. Bonku entered into negotiations to lease some land which would be more than satisfactorily for the company’s operations. The land is situated on an industrial estate five kilometres from the existing facility. In addition, there is room to build a workshop facility which would be adequate for the needs of the fleet. Following agreement of a lease arrangement, which was concluded just before the completion of the last financially year, Richward Ltd occupied the land on which there were no building erected or utilities supplied. Since taking possession of the land, a large security fence has been erected and a small portable cabin placed on site. Water and electricity services have been supplied and negotiations are taking place for the installation of a large diesel tank adequate to service other vehicles besides those of Richward Ltd.
Accounting
Mr. Bonku recruited Mrs. Efua Dadson, a part-time accountant, four years ago. Prior to Mrs. Dadson’s arrival, Richward Ltd applied a policy of paying all invoices immediately on receiving them. As debtors were frequently taking over and above the credit period (30 days) allowed, Richward Ltd suffered a cash flow shortage, which resulted in a large bank overdraft.
Mrs. Dadson introduced some basic financial accounting procedures into the company. In addition to exercising some control on Richward Ltd expenditure, Mrs. Dadson has reduced the debtors’ collection period to about half its former level. Creditors are now paid when the invoices fall due rather than immediately upon their receipt. Such control had been lacking prior to her arrival at the company.
The company faces strong competition for haulage contract work. Typically, haulage contractors operate on a low-margin basis and smaller companies often sub-contract from large-scale hauliers. Richward Ltd carries haulage for a variety of customers as well as undertaking some subcontracting. Much of the haulage work the company carries out is seasonal.
One of its top clients, Grace Ltd, recently appointed a new transport manager. The new Manager of Grace Ltd. has begun to employ other hauliers besides Richward Ltd. Over the last two months, the haulage work Richward Ltd has received from Grace Ltd has reduced by about a third.
In order to address the competition, Richward Ltd recently diversified into the sale of hydraulic oil. Sales have been running at a steady rate of 50 gallons each month for some time, but the company is dissatisfied with this level of sales and from next month June 2016, the company intends to advertise actively. This is expected to increase sales by 10 gallons per month from June to October inclusive after which it will remain steady at 100 gallons per month.
Each gallon costs GH¢1,500 and sells for GH¢2,000. All purchases are on one month’s credit and sales on two month’s credit. The company feels that, to give a good service to customers, it must have sufficient inventory at the end of each month to meet the whole of the following month’s sales.
Additional non-current assets (a delivery van to help cope with the increased sales) will be bought and paid for in July 2016 at a cost of GH¢15,000. Corporate tax of GH¢25,000 is due for payment on 1st August, 2016. The balance of cash at 31st May, 2016 is planned to be GH¢30,000.
Operating costs will rise to cash payments totaling GH¢10,000 each month. The advertising will cost GH¢20,000 in June and GH¢10,000 for each month from July to September inclusive, payable one month in arrears.
The Accountant has not yet had a cash budget prepared for the rest of the year, but she feels that the sales expansion plans are likely to lead to cash flow problems. Suggestions have been made that, if her fears are justified, it might be possible to overcome the problem by increasing the creditor payment period to two months and buying inventory as it is used (i.e. zero inventory at month ends).
Required:

Advise Mr. Bonku on the strategic management accounting information which should be provided to assist future decision making and cost control.                                                                                                                                            (8 marks)

View Solution

Advice to Mr. Bonku
Competitor Information

  • Information about competitors can be very useful as it provides a benchmark against which Richward Ltd’s performance can be compared.
  • Budgeting will provide information to forecast patterns and trends. This will be very useful when making decisions and setting objectives and targets e.g. market growth rates.
    Financial information
  • Investment appraisal
    Information can be provided to evaluate each capital investment project undertaken by Richward Ltd. This will be very useful when developing the new site.
  • Variance analysis
    This is a very important management accounting control tool. The expected costs and revenues will be forecast and actual costs and revenues compared with them. Variances can then be identified and investigated to find their cause. This will establish some of Richward Ltd’s strengths and weaknesses.
  • Customer account profitability
    Costs incurred by Richward Ltd can be related to each customer and the profit generated by each customer calculated. This will be very important information used by Richward Ltd’s managers to make decisions relating to each customer e.g. Grace Ltd.
  • Quoting prices
    Most of Richward Ltd’s customers will be other organisations. They will expect a price to be agreed before awarding a contract to a supplier. Management accounting can supply the information for quoting competitive and realistic prices when negotiating with customers.

View More
Level 2 - Corporate Strategy, Ethics & GovernancePrevious SyllabusSWOT Analysis

May 2016 Q1 b.

RICHWARD LIMITED
Background
Mr. Kwesi Bonku is the Managing Director of Richward Ltd, a small haulage contracting company, which he founded 15 years ago. Originally, Mr. Bonku was a heavy goods vehicle driver himself, working for other contractors, but he had the intent of establishing his own business. Having received his pension, he acquired an articulator truck and began to work from home. Over time the business expanded and now Richward Ltd operates a fleet of 15 heavy goods vehicles. Five of the current fleet of trucks was acquired in the last financial year, replacing older units which were becoming too expensive to maintain. The Company now employs 20 full-time and varying number of part-time driver mates. The part-time staff work as and when required.
Mr. Bonku acquired two plots of land six years ago and built a house on it, which he and his family occupy. In addition, he built a garage with facilities for minor servicing and repairs on the same site. Living on site has enabled him to offer a 24-hour service to clients. Consequently, movement of the trucks in and out of the site occurs at all times of day and night. There have been objections raised by the residents in the neighbourhood to disturbance and the local Radio Stations has at various times reflected this criticism.
In addition to the haulage business, the company also obtained license and established a driving school. This had proved to be a successful diversification as there is a regular stream of customers. This training takes place mostly in Richward Ltd’s own garage facilities. It became clear to Mr. Bonku that the land on which the garage facility is built was inadequate for the needs of his growing business.
Acquisition of land
One year ago, Mr. Bonku entered into negotiations to lease some land which would be more than satisfactorily for the company’s operations. The land is situated on an industrial estate five kilometres from the existing facility. In addition, there is room to build a workshop facility which would be adequate for the needs of the fleet. Following agreement of a lease arrangement, which was concluded just before the completion of the last financially year, Richward Ltd occupied the land on which there were no building erected or utilities supplied. Since taking possession of the land, a large security fence has been erected and a small portable cabin placed on site. Water and electricity services have been supplied and negotiations are taking place for the installation of a large diesel tank adequate to service other vehicles besides those of Richward Ltd.
Accounting
Mr. Bonku recruited Mrs. Efua Dadson, a part-time accountant, four years ago. Prior to Mrs. Dadson’s arrival, Richward Ltd applied a policy of paying all invoices immediately on receiving them. As debtors were frequently taking over and above the credit period (30 days) allowed, Richward Ltd suffered a cash flow shortage, which resulted in a large bank overdraft.
Mrs. Dadson introduced some basic financial accounting procedures into the company. In addition to exercising some control on Richward Ltd expenditure, Mrs. Dadson has reduced the debtors’ collection period to about half its former level. Creditors are now paid when the invoices fall due rather than immediately upon their receipt. Such control had been lacking prior to her arrival at the company.
The company faces strong competition for haulage contract work. Typically, haulage contractors operate on a low-margin basis and smaller companies often sub-contract from large-scale hauliers. Richward Ltd carries haulage for a variety of customers as well as undertaking some subcontracting. Much of the haulage work the company carries out is seasonal.
One of its top clients, Grace Ltd, recently appointed a new transport manager. The new Manager of Grace Ltd. has begun to employ other hauliers besides Richward Ltd. Over the last two months, the haulage work Richward Ltd has received from Grace Ltd has reduced by about a third.
In order to address the competition, Richward Ltd recently diversified into the sale of hydraulic oil. Sales have been running at a steady rate of 50 gallons each month for some time, but the company is dissatisfied with this level of sales and from next month June 2016, the company intends to advertise actively. This is expected to increase sales by 10 gallons per month from June to October inclusive after which it will remain steady at 100 gallons per month.
Each gallon costs GH¢1,500 and sells for GH¢2,000. All purchases are on one month’s credit and sales on two month’s credit. The company feels that, to give a good service to customers, it must have sufficient inventory at the end of each month to meet the whole of the following month’s sales.
Additional non-current assets (a delivery van to help cope with the increased sales) will be bought and paid for in July 2016 at a cost of GH¢15,000. Corporate tax of GH¢25,000 is due for payment on 1st August, 2016. The balance of cash at 31st May, 2016 is planned to be GH¢30,000.
Operating costs will rise to cash payments totaling GH¢10,000 each month. The advertising will cost GH¢20,000 in June and GH¢10,000 for each month from July to September inclusive, payable one month in arrears.
The Accountant has not yet had a cash budget prepared for the rest of the year, but she feels that the sales expansion plans are likely to lead to cash flow problems. Suggestions have been made that, if her fears are justified, it might be possible to overcome the problem by increasing the creditor payment period to two months and buying inventory as it is used (i.e. zero inventory at month ends).
Required:

Present a SWOT Analysis for Richward Ltd.                                                                                                                 (8 marks)

View Solution

SWOT Analysis for Richward Ltd.
Strength

  • Richward Ltdis an established business with an experienced management team
  • Bonku lives on site enabling Richward Ltdto offer a 24-hour service to customers
  • The company acquired a lease on a new site that has quite a lot of potential
  • The company has diversified into truck driver training which reduced dependence on read haulage for income.
  • Replacement of old trucks and other equipment. This increases the efficiency of operations.
    Weaknesses
  • Richward Ltd’s existing site is too small, so it will have to locate the new site that requires more capital and will disrupt business operations.
  • Richward Ltd currently does not have an effective management accounting system, which means Richward Ltd’s managers make decision without having sufficient information
  • The company is too dependent on Grace Ltd, which account for majority of its business
    Opportunities
  • The enlarged premises will enable the company to attract new business and offer new services e.g. overnight trailer parking and a vehicle repair service.
  • Richward Ltd should be able to establish stronger links with existing customers, which should help to retain their business.
  • Location of land/business premises.
    Threat
  • The most serious threat facing Richward Ltd is the loss of Grace Ltd’s custom. In the last two months one third of this business has already been lost.
  • There are a large number of competitors working on low profit margins and this forces price down. There appears to be little prospect of Richward Ltd being able to increase its prices.
  • Local residents are opposing operations from the current site and the company is receiving bad publicity in the local press.

View More
Level 2 - Corporate Strategy, Ethics & GovernancePorter’s five forcesPrevious Syllabus

May 2016 Q1 a.

RICHWARD LIMITED
Background
Mr. Kwesi Bonku is the Managing Director of Richward Ltd, a small haulage contracting company, which he founded 15 years ago. Originally, Mr. Bonku was a heavy goods vehicle driver himself, working for other contractors, but he had the intent of establishing his own business. Having received his pension, he acquired an articulator truck and began to work from home. Over time the business expanded and now Richward Ltd operates a fleet of 15 heavy goods vehicles. Five of the current fleet of trucks was acquired in the last financial year, replacing older units which were becoming too expensive to maintain. The Company now employs 20 full-time and varying number of part-time driver mates. The part-time staff work as and when required.
Mr. Bonku acquired two plots of land six years ago and built a house on it, which he and his family occupy. In addition, he built a garage with facilities for minor servicing and repairs on the same site. Living on site has enabled him to offer a 24-hour service to clients. Consequently, movement of the trucks in and out of the site occurs at all times of day and night. There have been objections raised by the residents in the neighbourhood to disturbance and the local Radio Stations has at various times reflected this criticism.
In addition to the haulage business, the company also obtained license and established a driving school. This had proved to be a successful diversification as there is a regular stream of customers. This training takes place mostly in Richward Ltd’s own garage facilities. It became clear to Mr. Bonku that the land on which the garage facility is built was inadequate for the needs of his growing business.
Acquisition of land
One year ago, Mr. Bonku entered into negotiations to lease some land which would be more than satisfactorily for the company’s operations. The land is situated on an industrial estate five kilometres from the existing facility. In addition, there is room to build a workshop facility which would be adequate for the needs of the fleet. Following agreement of a lease arrangement, which was concluded just before the completion of the last financially year, Richward Ltd occupied the land on which there were no building erected or utilities supplied. Since taking possession of the land, a large security fence has been erected and a small portable cabin placed on site. Water and electricity services have been supplied and negotiations are taking place for the installation of a large diesel tank adequate to service other vehicles besides those of Richward Ltd.
Accounting
Mr. Bonku recruited Mrs. Efua Dadson, a part-time accountant, four years ago. Prior to Mrs. Dadson’s arrival, Richward Ltd applied a policy of paying all invoices immediately on receiving them. As debtors were frequently taking over and above the credit period (30 days) allowed, Richward Ltd suffered a cash flow shortage, which resulted in a large bank overdraft.
Mrs. Dadson introduced some basic financial accounting procedures into the company. In addition to exercising some control on Richward Ltd expenditure, Mrs. Dadson has reduced the debtors’ collection period to about half its former level. Creditors are now paid when the invoices fall due rather than immediately upon their receipt. Such control had been lacking prior to her arrival at the company.
The company faces strong competition for haulage contract work. Typically, haulage contractors operate on a low-margin basis and smaller companies often sub-contract from large-scale hauliers. Richward Ltd carries haulage for a variety of customers as well as undertaking some subcontracting. Much of the haulage work the company carries out is seasonal.
One of its top clients, Grace Ltd, recently appointed a new transport manager. The new Manager of Grace Ltd. has begun to employ other hauliers besides Richward Ltd. Over the last two months, the haulage work Richward Ltd has received from Grace Ltd has reduced by about a third.
In order to address the competition, Richward Ltd recently diversified into the sale of hydraulic oil. Sales have been running at a steady rate of 50 gallons each month for some time, but the company is dissatisfied with this level of sales and from next month June 2016, the company intends to advertise actively. This is expected to increase sales by 10 gallons per month from June to October inclusive after which it will remain steady at 100 gallons per month.
Each gallon costs GH¢1,500 and sells for GH¢2,000. All purchases are on one month’s credit and sales on two month’s credit. The company feels that, to give a good service to customers, it must have sufficient inventory at the end of each month to meet the whole of the following month’s sales.
Additional non-current assets (a delivery van to help cope with the increased sales) will be bought and paid for in July 2016 at a cost of GH¢15,000. Corporate tax of GH¢25,000 is due for payment on 1st August, 2016. The balance of cash at 31st May, 2016 is planned to be GH¢30,000.
Operating costs will rise to cash payments totaling GH¢10,000 each month. The advertising will cost GH¢20,000 in June and GH¢10,000 for each month from July to September inclusive, payable one month in arrears.
The Accountant has not yet had a cash budget prepared for the rest of the year, but she feels that the sales expansion plans are likely to lead to cash flow problems. Suggestions have been made that, if her fears are justified, it might be possible to overcome the problem by increasing the creditor payment period to two months and buying inventory as it is used (i.e. zero inventory at month ends).
Required:
Assess the nature of competitive forces of Richward Ltd.                                                                                            (8 marks)

View Solution

1. Rivalry amongst existing competitors
Richward Ltd faces strong competition for haulage contract work and it appears that there are several firms operating in the market. Profit margins are low, which indicates that work is undertaken at low prices. A major customer, Grace Ltd, uses other haulers, which suggests that competition for business is fierce. Richward Ltd is facing strong competition from existing competitors. The strong nature of competition is also exacerbated by low switching costs of customers.
2. Threat of a new market entrant
The main constraints on setting up a road haulage business will be obtaining a license and having sufficient capital to purchase or lease a tractor unit and trailer. Finance for such an operation will be readily available. The only other significant entry barrier might be low profit margins. It appears that, overall, the road haulage industry has few major entry barriers so this will always be a threat to established business such as Richward Ltd.
Note: Any of the points under barriers to entry that is well explained may considered – capital requirements, low switching costs of customers, degree of differentiation, economies of scale, knowledge requirements, etc.
3. The power of customers
The customer of Richward Ltd will be primary organisations that employ skilled people who know the road haulage industry and how to negotiate contracts. As there are many competing businesses in the trade, this puts the customers in a strong bargaining position. This is shown by the fact that Richward Ltd’s major customer Grace is using other hauliers and is, no doubt, assessing its supplier’s prices and performance. The power of customers in the market is strong; this poses a serious threat to Richward Ltd.
Note: Other points which may be considered are switching costs, concentration risks (demand), number of competing firms, negotiating skills, profit margin of customers.
4. Power of suppliers
The main suppliers to Richward Ltdwill provide vehicles, other plan and equipment, formal services and labour. It is unlikely that any supplier is in a strong monopolistic situation, except possible providers of capital. Richward Ltdis in an established position and while it remains profitable will probably be able to obtain reasonable amounts of capital. The power of suppliers does not appear to be very strong.
5. The threat of a substitute product
The main substitute for road haulage services is freight carried by the railway industry. The current dire state of this industry means that rail freight cannot be considered a serious threat to Richward Ltd.
Note: Other points which may be considered are switching costs, concentration risks (demand), number of competing firms, negotiating skills, profit margin of customers.
Overall, Richward Ltd’s competitive position is not strong as it faces a number of competitive threats.

View More
Corporate governanceLevel 2 - Corporate Strategy, Ethics & GovernanceOECD frameworkPrevious Syllabus

Nov 2015 Q6 b.

Ghana has adopted the principles published by the organization for Economic Co-operation and Development (OECD) which deal mainly with performance problems that result from the separation of ownership and management of a company. Explain FIVE (5) principles of corporate governance.                                                                                                                   [15marks]

View Solution

Most corporate governance codes are based on a set of principles founded upon ideas of what corporate governance is meant to achieve. This is based on a number of reports.
1) To ensure adherence to and satisfaction of the strategic objectives of the organisation, thus aiding effective management.
2) To minimize risk, especially financial, legal and reputational risks, by ensuring appropriate systems of financial control are in place, systems for monitoring risk, financial control and compliance with the law.
3) To promote integrity, that is straightforward dealing and completeness.
4) To fulfill responsibilities to all stakeholders and to minimize potential conflicts of interest between the owners, managers and wider stakeholder community.
5) To establish clear accountability at senior levels within an organisation. However, one danger may be that boards become too closely involved with day-to-day issues and do not delegate responsibility to management.
6) To maintain the independence of those who scrutinize the behaviour of the organisation and its senior executive managers. Independence is particularly important for non-executive directors, and internal and external auditors.
7) To provide accurate and timely reporting of trustworthy/independent financial and operational data to both the management and owners/members of the organisation to give them a true and balanced picture of what is happening in the organisation.
8) To encourage more proactive involvement of owners/members in the effective management of the organization through recognizing their responsibilities of oversight and input to decision making processes via voting or other mechanisms.
Note: Some students may approach this question from the perspective of the OECD principles of corporate governance as follows:
1) The right to shareholders: Shareholders should have the right to participate and vote in general meetings of the company, elect and remove members of the board and obtain relevant and material information on a timely basis. Capital markets for corporate control should function in an efficient and timely manner.
2) The equitable treatment of shareholders: All shareholders of the same class of shares should be treated equally, including minority shareholders and overseas shareholders impediments to cross- border shareholding should be eliminated.
3) The role of stakeholders: Rights of stakeholders should be protected. All stakeholders should have access to relevant information on regular and timely basis. Performance-enhancing mechanisms for employee participation should be permitted to develop. Stakeholders, including employees, should be able to freely communicate their concerns about illegal or unethical relationships to the board.
4) Disclosure and transparency: Timely and accurate disclosure must be made of all material matter regarding the company, including the financial situation, foreseeable risk factors, issues regarding employees and other stakeholders and governance structure and policies. The company approach to disclosure should promote the provision of analysis or advice that is relevant to decisions by investors.
5) The responsibilities of the board: The board is responsible for the strategic guidance of the company and for the effective monitoring of management. Board members should act on a fully informed basis, in good faith, with due diligence and care and in the best interest of the company and its shareholders. They should treat all shareholders fairly. The board should be able to exercise independent judgement; this includes assigning independent non-executive directors to appropriate tasks.

View More
Accountants & EthicsLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

Nov 2015 Q6 a.

The personal qualities as well as the professional qualities of an accountant can influence his/her role in the strategic management process. Outline three personal qualities and two professional qualities expected of an accountant.    [5marks]

View Solution

View More
CSRLevel 2 - Corporate Strategy, Ethics & GovernancePrevious Syllabus

Nov 2015 Q5 c.

What is meant by sustainability? Using relevant examples, explain the concept of the triple bottom line.                        [8marks]

View Solution

Sustainability involves developing strategies so that the company only uses resources at a rate that allows them to be replenished such that the needs of the current generation can be met without compromising the needs of future generations. At the same time, emissions of waste are confined to levels that do not exceed the capacity of the environment to absorb them.
The triple bottom line (TBL) is sometimes summarized as People, Planet, and Profit. It consist of:

  • Social justice: fair and beneficial business practices towards labour and the community and the region in which a corporate conducts its business. A TBL company conceives a reciprocal social structure in which the wellbeing of corporate, labour and other stakeholder interests are interdependent.
  • Environment quality: a TBL company endeavours to benefit the natural order as much as possible, or at the least do no harm and curtail environmental impact. In this way, the company tries to reduce its ecological footprint by, among other things, carefully managing its consumption of energy and non-renewable resources, and by reducing manufacturing waste, as well as rendering waste less toxic before disposing of it in a safe and legal manner.
  • Economic prosperity: the economic benefit enjoyed by the host society. It is the lasting economic impact the organization has on its economic environment. Importantly, however, this is not as narrow as the internal profit made by a company or organization.

View More