Name :

Roll No :

Learning Centre :

Subject : FINANCIAL AND MANAGEMENT

ACCOUNTING

Assignment No : TWO

Date of Submission

at the learning centre:

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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.

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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

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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

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Table 1. DuPont Analysis for Two Farms

Farmer A Farmer B

1. Operating profit margin ratio 0.30 0.12

2. Asset turnover 0.20 0.36

3. ROA (1*2) 0.060 0.043

4. Interest expense to avg. farm assets 0.05 0.03

5. Equity multiplier 2.00 1.50

6. ROE (3-4) * 5 0.02 0.02Farmer 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.

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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 1998 1999 Assets 1998 1999

Eq Share capital 7,50,000 9,00,000

Good will 20,000 15,000

13% debentures 2,50,000 2,00,000

Plant & Machinery

3,50,000 4,50,000

Profit and loss a/c

40,000 50,000 Land & building

6,50,000 6,59,000

General reserve 40,000 50,000 Investments 40,000 1,48,000

Creditors 50,000 60,000 Debtors 50,000 30,000

Bills payable 30,000 20,000 Stock 80,000 90,000

Provision for tax 50,000 60,000 Bills receivable

70,000 50,000

Prov for dep on land and building

1,00,000 1,40,000

Bank 40,000 30,000

Total Preliminary expenses

10,000 8,000

13,10,000

14,80,000

total 13,10,000 14,80,000

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

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3. Investment costing Rs.30000 were sold at a profit of 20% on cost

4. Tax of Rs.30000 were paid

Ans:

1998 1999 Increase decrease

Current assets

Stock

Debtor

Bank

B/R

Current liability

Creditor

B/P

NET increase in working capital

80000

50000

40000

70000

50000

30000

90000

30000

30000

50000

60000

20000

10000

10000

20000

40000

60000

20000

10000

20000

10000

60000

60000

Fund flow statement for the year 31-12-1999

Particular R.S Particular R.S

Funds from operation

Sale of p and machinery

Decrease in working capital

73000

20000

40000

133000

Purchase of machinery

Investment

Payment for tax

100000

30000

3000

133000

Plant and machinery

To balance b/d

To bank

350000

100000

By bank a/c

By loss on sale

20000

16000

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By depreciation

By balance c/d

45000

369000

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

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 = 250 (A)

Material B = (36-34) x 275 = 550 (F)

Total = 300 (F)

(c) Material mix variance

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Material Actual mixed Standard mixture

Actual Qty

125 35 % 140275 65 % 260

Total = 400

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

Material A = (140 – 125) x 25 = 375 (F)

Material B = (260 – 275) x 36 = - 540 (A)

Total = - 165 (A)

(d) Material yield variance

= (Std qty – actual qty at std unit) x standard price

Material A = (154 – 140) x 25 = 350 (F)

Material B = (230 – 260) x 36 = - 1080 (A)

Total = - 730 (A)

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