EUE43E Business Management Simulation Manual Prague 2010

Module: EUE43ETrade & Commerce

BosscatBusiness Management

Simulation Manual

Module Leader:Robert Williams

Bosscat Business Management Simulation 1 | P a g e

CONTENTS

Page

Chapter 1: BOSSCAT PLAYERS NOTES 6

INTRODUCTION 6‘THE CHALLENGE’ 6PERIODS OF PLAY 7THE PRODUCTS 7BASIC MATERIAL 7PREMIUM MATERIAL 8OPERATORS 8A GUIDE TO RESOURCE NEEDS FOR EACH PRODUCT: GEMA 8A GUIDE TO RESOURCE NEEDS FOR EACH PRODUCT: LUCY 9SUPERVISION 9OVERTIME 9ALLOCATION OF OPERATORS 9OTHER PRODUCTION COSTS 9ADMINISTRATION COSTS 10ADVERTISING COSTS 10ADVERTISING EFFICIENCY FACTOR 10RESEARCH 10CONSULTANT'S REPORT 10WAREHOUSING COSTS 10INTEREST CHARGES 11START-UP CAPITAL 11TUTOR SET PARAMETERS 11INITIAL MARKET RESEARCH 11SALES 11PERIOD 1 DECISION FORM 12PERIOD 2+ e - DECISION FORM 12HINTS 12

Chapter 2: FINANCIAL ACCOUNTS 13

INTRODUCTION 13THE PROFIT AND LOSS ACCOUNT 14THE BALANCE SHEET 16

ASSETS 16LIABILITIES (I.O.U's) 17

THE SOURCE AND APPLICATION OF FUNDS STATEMENT 18SUMMARY 19DEFINING COSTS 20DIRECT COSTS AND OVERHEADS 21VARIABLE AND FIXED COSTS 22CONTRIBUTION and PRODUCT MIX 23


CONTENTS

Page

Chapter 3: THE BOSSCAT ACCOUNTS 25

INTRODUCTION 25

A. THE MANUFACTURING ACCOUNT25

1. OPENING MATERIAL STOCK 252. MATERIAL RECEIVED 253. STOCK AVAILABLE 264. CLOSING MATERIAL STOCK 275. MATERIAL USED 276. LABOUR COSTS 277. DIRECT COSTS 288. SUPERVISION 289. MATERIAL ORDER COST 2810. MATERIAL STORAGE COST 2811. DEPRECIATION 2812. OTHER PRODUCTION OVERHEADS 3013. TOTAL PRODUCTION OVERHEADS 3014. COST OF PRODUCTION 3015. UNIT COST OF PRODUCTION 3016. OPENING FINISHED GOODS STOCK 3117. PERIOD'S PRODUCTION 3118. CLOSING FINISHED GOODS STOCK 3119. COST OF GOODS SOLD 3120. GROSS PROFIT 3121. PERIOD SALES 32SUMMARY 32

B. THE PROFIT AND LOSS ACCOUNT 32

INTRODUCTION 3222. GENERAL ADMINISTRATION 3223. ADVERTISING COSTS 3224. MARKET RESEARCH 3325. WAREHOUSING COSTS 3326. OPERATING PROFIT 3327. FINANCE CHARGES 3328. NET PROFIT 3329. PROFIT BROUGHT FORWARD (B/F) 3330. PROFIT CARRIED FORWARD (C/F) 34


CONTENTS

Page

C. BALANCE SHEET 34

31. SHARE CAPITAL 3432. RESERVES 3433. SHAREHOLDERS’ FUNDS 3434. BANK LOAN (&GEARING) 3435. TOTAL CAPITAL EMPLOYED 3536. FIXED ASSETS 3537. LAND & BUILDINGS 3538. MACHINERY 3639. CUMULATIVE DEPRECIATION 3640. CURRENT ASSETS 3641. RAW MATERIALS 3642. FINISHED GOODS 3643. DEBTORS 3644. CASH 3645. CURRENT LIABILITIES 3646. BANK OVERDRAFT 3747. CREDITORS 3748. NET CURRENT ASSETS 3749. TOTAL ASSETS 37

D. THE CASH FLOW STATEMENT 37

APPENDICES 39

APPENDIX 1 – Decision Sheet Period 1 40

APPENDIX 2 – e-Decision Sheets Periods 2+ 42

APPENDIX 3 – Example Results Period 3 44 - 47


Notes


CHAPTER 1

BOSSCAT PLAYERS NOTES

INTRODUCTIONYou are the management team (and shareholders) who are going to set up a small limited liability company manufacturing a range of plastic toys for the nursery school market. Although you plan to advertise directly to the consumer, products are going to be distributed nationwide through a number of independent wholesalers and retailers. You will be in direct competition for the same market with a number of other companies. Your tutor will provide details of the number of competing companies during the simulation briefing session.

There are in fact only two possible products; GEMA and LUCY. These products are manufactured from the same material and are formed by fairly expensive (£120,000) machinery, called 'injection moulding machines'. The products from the machines are then hand finished and packed for distribution by operators working on two separate production flow lines; one line for each product.

You do not have to produce both products, but you will always have the machinery available to produce both if you wish to change your mind and proceed from one product to two product manufacture (or vice versa) at any stage in the game.

‘THE CHALLENGE’You must initially decide your company objectives in terms of profitability, liquidity (cash holding), or market share required over a specified time period. These written down objectives now become your guide to establishing a strategy in terms of price and advertising. All teams have the same materials and workforce skills, so it is not possible within BOSSCAT to differentiate on product quality.

Having decided your strategy and the number of products you think you might sell, you must plan the number of operators to be employed, the amount of 'raw' plastic material to purchase, the amount of any loan required from the bank, the product prices, and the advertising to be placed in order to achieve your objectives. In short, your team has to manage the company! Your success is measured by the market valuation of your £1.00 shares. Their value depends primarily on your profitability, but is also affected by your market share and the financial strength of your business.

You will be helped by the supply of information, some of which is free and some of which has to be paid for. In general, the free information is that which is normally generated internally, such as the financial statements and easily available information about competitors’ prices. The expensive information is that which is normally generated by people outside the firm, such as market research, and a consultant's report.

PERIODS OF PLAYBOSSCAT is played in periods. Each period represents 8 working weeks (2 months), and since the company works a 48 week year, allowing for annual shutdowns, there are 6 periods in a simulated year. Before each period you (and your competitors) must make decisions on:

a. How many operators to recruit (8 weeks -1 period - in advance of employment).

b. How to allocate available operators between product lines.c. Whether to increase, or payback, any loans.d. How much material to order.e. The product selling prices and advertising required.


f. What Market Research and information you require.

All these decisions are entered onto the paper DECISION FORM (see Appendix) for Decision Periods 1 and 2 (D1 & D2) and onto an e-DECISION FORM thereafter. All decisions are then entered into the computer program at THE START OF THE PERIOD. The computer prints out all the Financial Statements and any extra requested information which relate to the situation reported at THE END OF THE PERIOD. Typical Financial Statements (see Benetton Period 3 Results (R3)) are also to be found in the Appendix at the end of this Manual. All resources planned for a period, such as operators, materials, and money – if the simulation allows – will be made available at the START of the period.

THE PRODUCTSEach unit of GEMA and LUCY requires the following resources:

Product Material (kg) Operator Time (min)GEMA 0.250 8.0LUCY 0.333 12.0

Since each operator theoretically works a 40 hour week, which equals 19,200 minutes of work per 8 week period, the theoretical output of one operator is 2,400 GEMAs or 1,600 LUCYs per period. Each 1 kg of material is sufficient to make 4 GEMAs or 3 LUCYs.

Material requirements are fixed for each product and, once delivered, there is no difference between the different sources of material. However, the number of operators required for production depends on the operator efficiency. This efficiency is initially set to 85%, and means that the operator is available for work for 34 hours per week rather than the 40 hours for which the operator is paid. 85% is the maximum operator efficiency that can be achieved in practice. The operator efficiency will fall if the number of operators increases or decreases from one period to the next. This reflects the assumption that new operators take time to reach full potential, the so called 'learning curve effect', or that, in periods of redundancy, the remaining workforce tends to be slightly demoralised! As the number of operators stabilise so the efficiency gradually returns to 85%.

Although this operator efficiency may be shown on the printed results, this represents the MAXIMUM. The actual efficiency may be less because there are material shortages and operators are effectively under-employed.

BASIC MATERIALThe basic material is plastic granules suitable for the injection moulding machine. This basic material needs to be ordered 1 period in advance (8 weeks lead time), and is paid for in the period following receipt (8 weeks credit given). Basic materials are deemed to be ordered at the start of a decision period and are delivered at the start of the next decision period (ie material ordered in D1 (Period 1) are delivered at the start of D2 (Period 2). Normally, material costs £300 per tonne (1 tonne = 1,000 kg), but it is possible to source cheaper supplies but of a lower delivery reliability. The cheaper the cost the lower is the reliability of delivery.

At a minimum cost of £150 per tonne, the average risk is that only 50% of the ordered material will be either delivered (ie it varies randomly between 0% delivered and 100%, but in the long run will average 50%). At prices between £150 and £300 per tonne, the delivery reliability rises in proportion until at £300 per tonne all material will be delivered. At an intermediate price of £225 per tonne the long run average delivery will be 75% with the delivery reliability ranging from 50% to 100%.


If only 75% is delivered the balancing 25% will be added to any subsequent order for delivery in the following period (but this new total order will then still be subject to the same random total delivery reliability). The formula to use to calculate the risk of NON-DELIVERY is:

Average risk of Non Delivery where Price is in the range £300 to £150 = (100 - Price/3)%

This 'average' statement means that actual proportions delivered could vary quite widely. For example, if you did decide to buy at £150 per tonne to save on material costs, you might find that none of the material is delivered! On the other hand, it might be possible that all of it was delivered! The 'average' value is 50%.

N.B. You have to decide on the PRICE you source your material for at the START of the game (D1 for Period 1). You will NOT be allowed to change this decision later and will have to manage with whatever you decided in D1.

PREMIUM MATERIALIt is also possible to purchase material for immediate delivery at a fixed premium cost of £360 per tonne, but there are no credit facilities available. This supplier would only be used if you felt that you might have insufficient raw material available at the beginning of a period... perhaps because you do not know how much of the basic material ordered in a previous period will be delivered?

OPERATORSThere is no restriction on the number of operators who can be recruited in the FIRST PERIOD (D1) and allocated jobs in the SECOND PERIOD (D2) of play. However, in subsequent periods from Period 2 onwards, you may not increase or decrease the total workforce by more than 50% or by 5, whichever is the larger value.

For example, if you currently employ 30 operators, you can employ within 15 to 45 next period (+/- 50%). However, if you employ 8 operators, the number next period can be within the range 3 to 13 (+/-5). Operators are recruited ONE PERIOD (8 weeks) IN ADVANCE of employment. Wages do not start until employment begins. Operators are paid £160 for a 40 hour week.

A GUIDE TO RESOURCE NEEDS FOR EACH PRODUCT

PRODUCTION REQUIREMENTS FOR GEMA

Units produced per period

Material (kilos)

No. operators required at different efficiencies

70% 80% 90%

1,000 250 1 1 12,000 500 2 2 14,000 1,000 3 3 25,000 1,250 3 3 3

10,000 2,500 6 6 520,000 5,000 12 11 1040,000 10,000 24 21 1950,000 12,500 30 27 2470,000 17,500 42 37 33

100,000 25,000 60 53 47


PRODUCTION REQUIREMENTS FOR LUCY

SUPERVISIONSupervisors are required at the rate of one supervisor for every 10 operators, or part thereof, and are paid £240 per week. Base on the number of operators the computer automatically calculates how many supervisors are required and so you do not have to recruit these.

OVERTIMEOperators can work up to a maximum of an extra 10 hours of overtime each week at £6 per hour (time plus 50%). Overtime is planned at the beginning of the period for all 8 weeks, and once 'promised' cannot be taken back if, for some reason, work is not possible eg. because material is out of stock. This is to be regarded as a penalty for bad planning. Supervisors are not paid overtime and so their wages are not increased for overtime supervision.

ALLOCATION OF OPERATORSAt the start of each period, you must allocate the total number of operators who will be available to you that period (based on previous recruitment/dismissal) to the manufacture of one or both products. This allocation remains fixed for the period, but can be changed without any restriction for subsequent periods. Be careful! Allocating too many operators to a product may mean that either expensive finished goods stocks build-up or that labour may be idle if insufficient raw material is available.

OTHER PRODUCTION COSTSIn addition to operator, material, and supervision costs there are also the following costs of production per period of 8 weeks:

Machine Depreciation £4,000Basic material order costs £1,000/order placedMaterial storage costs 2% of average value‘Other’ production costs £10,000 plus £1/op.hr

The 'other production costs' have been calculated by the simulation to comprise a fixed part and a variable part dependent on the work output in the period. The fixed part could include, for example, a 'contract cleaning' bill, whereas the variable part could include the costs of running equipment which varies with output. The costs are evaluated by the computer


Unitsproduced per

period

Material (kilos)

No. operators required atdifferent efficiencies

70% 80% 90%

1,000 333 1 1 12,000 666 2 2 24,000 1,333 4 4 35,000 1,666 5 4 4

10,000 3,333 9 8 720,000 6,666 18 16 1440,000 13,333 36 32 2850,000 16,666 45 40 3570,000 23,333 63 55 49

100,000 33,333 90 79 70

program by adding up all the productive hours spent on making the dolls each period and charging £1 per hour.

e.g. 6,000 Gemas produced in a period at a standard of 8 minutes per unit equals 800 hours production and so £800 is added to 'other production costs'.The 'average stock value' is calculated by halving the sum of the period start stock value (ie the opening value + the material delivered at the start of the period) and the period end stock value.

ADMINISTRATION COSTSThe simulation calculates administration costs which amount to £10,000 per period plus an extra £1,000 for every supervisor employed during the period. This cost represents staff salaries, rent, local taxes, telephone, heating etc.

ADVERTISING COSTSAdverts cost £500 each, and are used to promote each product. 70% of the current period's advertising is used to promote sales in the current period; the balance of 30% is used to promote next period's sales. This simulates a 'customer loyalty effect'.

ADVERTISING EFFICIENCY FACTORThe effectiveness of the advertising in promoting sales is governed by the Advertising Efficiency Factor (AEF) which is generated by the simulation automatically. If you change the prices of your products, the AEF decreases. For example, an AEF of 80% means that only 80% of the adverts are effective. That is,10 adverts would only have the 'pull', or sales stimulating effect, of 8 adverts. Stable product prices result in an AEV returning to 100%. The bigger the change in prices the greater the fall in the AEF. This factor simulates the 'uneasiness' of potential customers who see price changes and who need more 'reassurance' (promotional activity) to compensate. Therefore, MORE advertising would be needed to allow for the drop in the AEF.

RESEARCHResearch information can be purchased each period. This request can be made on the Decision Form and the results are supplied with the Financial Report. The availability and costs of research are as follows:

All competitors’ advertising £1,000All competitors’ market shares £2,000Total market forecasts for next 4 periods

All competitors’ profits to date£3,000£2,000

Research costs are added automatically to company costs each period. The market shares may not add up to100% if total supply is less than total potential demand.

CONSULTANT'S REPORTA Management Consultant's Report can be purchased each period (from period 3 onwards) for £2,000. This report contains a financial analysis of company performance and suggestions for improvements. The cost is automatically added to the Administration costs.

WAREHOUSING COSTSFinished goods held in stock incur storage costs at the rate of 3% of the Closing Finished Goods Stock value per period. These costs reflect insurance costs, the cost of replacing assumed defective and pilfered stock, and all other costs associated with stock holding which vary dependent on the amount of stock held.


INTEREST CHARGESInterest is charged on Bank Loans at 2.5% per period and on any used Bank Overdraft facility at 2% per period.

There is no limit on the level of loan, but the overdraft is limited to a maximum of £50,000. Any excess is automatically added to the higher interest Bank Loan Account and a special fee (fine?) is charged to the Interest Costs of £5,000. The excess is borrowing rounded upwards to the next £10,000 (Bank Loan borrowing can only be undertaken in £10,000 increments). This fine may be regarded as being artificially high but this is to ensure that 'cash control' is taken seriously as it is a very important part of business management. Players are therefore encouraged to plan extra loans in advance.

Part of any loan can be paid back in any period, but repayments must be in units of £10,000 and there MUST be sufficient Cash available in the current account at the end of the previous period (see Balance Sheet ‘Cash’ figure) to cover the repayment. You are NOT allowed to repay Bank Loans from your Overdraft.

START-UP CAPITALYou start with £400,000 equity capital supplied by your team members (owners) in exchanged for shares at £1.00 each. Most of the cash is spent on purchasing land and buildings for your factory £180,000 and your injection moulding machinery for £120,000. The balance is available as 'working capital' for running the business ie for the purchase of materials, operating overheads, and wages. The machinery depreciates (loses value) at a constant rate of £4,000 per period.

TUTOR SET PARAMETERS

Your tutor will select parameters for:

1. The Market Multiplier2. The Price/Demand Elasticity3. The Advertising Sensitivity4. The Product Base Prices

INITIAL MARKET RESEARCHYou will be given the total anticipated size of the market at the beginning of the exercise for both toys. This market size depends essentially on how many companies there are and, once play commences, what their aggregate pricing and advertising decisions are. You will have to decide how much of that market to go for, bearing in mind that your competitors have the same problems. If the planned production of all teams exceeds 100% of the available market then there will be excess production capacity. Conversely, if the total production is less than 100% of the total market demand then total profits will be reduced through an aggregate inability to meet demand.

SALESYour team’s sales will depend on the price levels chosen, the number of adverts placed, and the basic demand curve written into the simulation, all other factors being equal. However, you must have sufficient Finished Goods Stock available to satisfy the demand you have created. If you have not, and any competitors have stock and a product price not more than 50% higher than yours, the excess demand you have created will go to them.

If the product price you have selected is more than 3 times the Product Base Price, you will not receive any sales. The Product Base Price (PBP) is a reference price used by the


program and is fixed for the game. The PBP is a typical price for each product but you are not told what it is.

PERIOD 1 DECISION FORMThe first period is slightly different from the following periods (Periods 2+) in that there is no production and hence no sales. The decisions which have to be made relate to:

1. How many operators to recruit now to start work in period 2?

2. The price to be paid for basic material throughout the game and how much material to order for anticipated delivery at the start of period 2?

3. You DO NOT allocate operators to production since they have not been recruited yet. Nor do you order any Premium Material for this period as this is delivered immediately and there is no production yet!

PERIOD 2 + e - DECISION FORMFrom Period 2 onwards you will utilise an electronic decision form (e - Decision Form) which you can e-mail to the game controller. Please note that it is your responsibility to ensure that this is completed correctly, unambiguously and on time. Failure to do this may result in poor decisions or past decisions being entered to the detriment of the performance of your company.

HINTSTry to find out as much about the environmental parameters as you can, especially; Market Size, Demand Elasticity, Advertising Sensitivity, Market Trends, and, if you have competitors, what their decision making process is like? The more information you have, the better will be your own decisions. You should also endeavour to develop some decision support/budgeting spreadsheets to facilitate rapid decision making and the evaluation of ‘scenarios’. Your tutor may specify that the time available for decision making will diminish as the simulation progresses.


CHAPTER 2

FINANCIAL ACCOUNTS

INTRODUCTIONLet us pretend that you have a significant amount of your own money to invest. No doubt you would seek some professional advice from a Bank Manager or an Accountant, both of whom should be well qualified to give you the best information to suit your present and future needs. How you spread your money around is your business. Perhaps you are very conservative and put all your money in a low interest paying, but rock solid, investment with no risk of losing your investment. On the other hand perhaps you are a bit of a gambler, and invest in a business with very high potential returns providing that the business does not collapse before you can withdraw your funds! On the average, perhaps you will invest in a number of different activities to spread the risk and to receive a satisfactory total return each year on your total investment. If your total investment is high, you will need to consult a Financial Adviser on a regular basis to review and perhaps modify your investments based on likely expectations from the different activities.

Let us go a step further and assume that you will be investing in PEANUT (UK) Ltd., a toy manufacturing and marketing business. In return for your investment, the company has given you a large number of shares of the business. Since PEANUT (UK) Ltd. is a private company, its shares are not traded on the Stock Exchange. They can only be sold and bought within a defined group of people. Sometimes such a group is a family, but in our case we will not assume this. The shares are valued primarily by reference to the profits made by the company each period. You are not going to receive your share of the profits of the company for some time since all profits will be put back into the company. PEANUT (UK) Ltd. is a young company and this plan of withholding 'dividends' has been agreed. So, you have a significant stake in the business and your eventual return is dependent on the growth of profits. What measures do you think you would now take to ensure that return justifies the risks you are taking? Do you agree with the following questions?

1. Where is my initial investment? Is it safe?

2. Is my investment earning an appropriate amount of interest? Will this be maintained?

3. How well are different parts of the company performing? Can I relate managerial performance to departmental profits or cost control?

4. Has the company got sufficient cash to pay current expenses? Will I be asked to put up more cash in order to protect my initial investment?

The answers to these questions are not easy; you need to have a very detailed knowledge of all the aspects of the business including the competition, the quality of management, the economic environment, and the current industrial relations just to name a few important parameters. However, the financial accounts of a business can give you a reasonable amount of information.

The BALANCE SHEET shows you the value of your investment.

The PROFIT and LOSS Account shows how well your investment earned profit.

The SOURCE and APPLICATION of FUNDS Statement shows how cash was generated and used.


You will also be able to see how different parts of the business contributed to the profit, since the accounts are arranged to show different areas of responsibility.

If these accounts are presented on a regular basis, then a pattern can sometimes be seen which can give some guidance to future financial statements. If the future looks good, this will encourage further investment. If the future looks bleak then the faint hearted will try to withdraw their investment, whereas the courageous will do something to reverse the forecast!

The basic tests for the validity of any information system also hold for Accounting Systems. These tests are:

1. Is the information true?

2. Is the information sufficiently accurate?

3. Is the information fair?

There is no doubt that Accountancy information has to be true. Professional standards of conduct would forbid false information to be generated or false conclusions to be reached because of the exclusion of data.

Accuracy depends on needs and speed. If Accounting information is to be used for forecasting, then the accuracy requirements would be considerably less than the requirements for what happened to a 'charity donation' as an example.

Fairness is a little more difficult. For example, should you allow future 'lease payments' (money due to you for equipment owned but hired out by you) to be included in the accounts to calculate present profit when there is a chance that they may never be paid? It may be fair to some businesses and unfair to other businesses. Unfair because the money has not been received yet, or fair because the deal has been made just like any other 'debtor' or person who owes us money? The legal test of 'reasonableness' is a benchmark, but is not universal.

Although business is a very complicated activity, you can go a long way to understanding it if you can understand the accounts.

THE PROFIT AND LOSS ACCOUNTThe Profit and Loss Account compares the Sales made in a period with the costs incurred by the business in obtaining these sales. The difference between Sales and Costs being the Profit.

There is little doubt over the value of the Sales in a period. We simply collect all the Invoices (demands for payments) and Sales slips issued within certain dates and add them up. Although the goods may not have left the factory or the goods have not yet been paid for, the fact that an Invoice has been issued is usually sufficient to record a sale.

The costs associated with sales in a period are a little more difficult to determine. The costs we need are the costs which have 'expired'. In this sense, 'expired' means that the resource has been consumed either fully or partially in the period. Wages have been consumed (not recoverable), materials have been consumed, some of the value of the machinery has been lost, rent has been paid, etc.

We have to be careful that we do not confuse the costs for a period with money spent on resources which have not been fully consumed. For example, say we purchased £5000 of


materials in a defined period, and used £1000 of these materials in goods manufactured and sold. The material costs for the period are the expired costs, the £1000. The balance of £4000 is held in stock and carried forward as an asset to the next period.

ExampleIn the period January 1st 1990 to March 31st 1990, the total value of Invoices issued for goods sold on credit was £50,000. Only £25,000 of these Invoices had been paid by March 31st.

On January 1st, £15,000 was spent on materials, and at the end of March £5000 was left in stores. All products made during the period have been sold. Wages of £10,000 were paid during the period. Machinery used in the manufacturing process was valued at £100,000 on January 1st and £95,000 on March 31st. Six months rent of £2000 in advance was paid on the factory site on January 1st. No Invoice had been received from the power company during the period but it was estimated that the factory had used £2000 worth of power. During the period, £100,000 had been spent on land for planned factory expansion. There was no expected loss in value of this asset over the period. Administration and marketing costs during the period amounted to £10,000. No other costs were incurred.

What is the Profit or Loss during the period?

SOLUTION£

Sales 50,000

lessMaterials 10,000Wages 10,000Depreciation 5,000Rent 1,000Power 2,000Admin. Etc 10,000 38,000

Profit 12,000

Sales are the total invoices; it does not matter whether the invoices have been settled or not.

Materials are those actually 'consumed', and calculated by subtracting materials remaining from materials available. Wages are those incurred for the period whether totally paid or not.

Depreciation is the estimated loss in value of an asset over the time period. It is most important that this expense is not a 'cash flow' i.e no money changed hands in the period purely because the asset fell in value from £100,000 to £95,000. Half of the rent paid is not for this period but for the next. The 'unexpired' balance is carried forward as a prepayment.

Even though there was no bill received for power costs, they have been incurred and an estimate must be included. This treatment of an expense which has been incurred but not invoiced is called an 'accrual adjustment'.

Administration and marketing costs are those for the period.

Money has been spent on 'land' but this is an investment. Since there is no loss in value there is no expense for the period.


THE BALANCE SHEETThe Balance Sheet lists all the assets of the business and balances this against all the I.O.U.'s.

ASSETSAssets are valued on the basis that the business would be prepared to purchase them at this valuation. This is not necessary the 'street value' since not many people may be prepared to buy 'special' left handed brass hinged fixing brackets which are valued by the business at £50 each, because that is the cost of making them! Assets are valued on the basis that the business is a 'going concern' and not likely to be closed down in the near future.

Assets which have a life expectancy of more than 1 year are called FIXED ASSETS. Assets which are likely to be consumed in the year are called CURRENT ASSETS. Assets are listed in order of decreasing life expectancy. Fixed Assets, apart from land, lose value over a time period. This loss in value, or DEPRECIATION, has to be estimated if the asset is not sold.

One of the 'puzzling' assets to be found in the Assets side of the Balance Sheet are DEBTORS. A Debtor is a person who owes the company money, and not immediately recognised as an asset! Perhaps the Debtor has just purchased some goods from the company and is taking advantage of the '30 days to pay' credit offered by the business. However, a Debtor can be sold to a third party, quite legally, and therefore is an Asset. Perhaps you feel that some Debtors will never pay up? In this case part of the debt is an 'expired cost' and would be added to the Profit and Loss Account. The remainder would be an Asset.

EXERCISE

Re-arrange the following assets in order of decreasing life expectancy:

Stock 20,000Land 90,000Cash 5,000Debtors 15,000Machinery 65,000Buildings 45,000

SOLUTION

FIXED ASSETSLand 90,000Buildings 45,000Machinery 65,000 200,000

CURRENT ASSETSStock 20,000Debtors 15,000Cash 5,000 40,000

TOTAL ASSETS 240,000


LIABILITIES (I.O.U's)The traditional 'other side' of the Balance Sheet lists all the liabilities of the business. Since the business started with nothing, all the cash it uses to acquire assets must belong to someone else. These liabilities are usually listed in order of decreasing time for repayment, with the Owner's investment heading the list since there is little or no obligation on the business to repay the owner!

The funds which rightly belong to the owner but which are retained in the business for a variety of reasons are called RESERVES. The main reason for retention is for 'building up' the business to maximise future profits. The sum of the Owner's initial investment in the company and the Reserves are called the OWNERS EQUITY.

People who are owed money by us are called Creditors of which there are two types. There are those creditors who should be paid in the short term, certainly within the current trading period of 1 year. The other category is creditors who are not paid until longer than the current 1 year period. The first category could well be a supplier of materials. The latter creditor is usually a Bank which has supplied a long term loan with an agreed repayment date and rate of interest.

Banks also supply short term loans, called OVERDRAFTS. These loans are variable up to an agreed maximum and interest is charged on a daily basis. Such loans are often used for very long periods, but can be 'called in' by the bank on 24hour notice.

A typical list of Liabilities is shown in the following example. The Total Liabilities equals the same value as the Total Assets in the previous example. The two sides 'balance'.

Owner’s Investment 100,000Reserves 45,000

OWNERS EQUITY 145,000

Bank Loan 75,000

CAPITAL EMPLOYED 220,000

CURRENT LIABILITIESBank Overdraft 5,000Creditors 15,000

20,000

TOTAL LIABILITIES 240,000

If you can imagine the TOTAL ASSETS and the TOTAL LIABILITIES set out side by side, you have the traditional method for displaying company accounts. This method still persists in some textbooks and in accounts used for internal purposes, as is the case for the BOSSCAT Accounts. However, in the UK, The Company Finance Act of 1985 specifies exactly how a Balance Sheet, and a Profit and Loss Account should be set out if they are to be submitted for public examination.


The standard format for a company to publish its Balance Sheet for the public according to the UK Act of 1985 is as follows:

FIXED ASSETS 200,000

CURRENT ASSETS 40,000Less CURRENT LIABILITIES 20,000

(includes Creditors to be paid within 1 year)NET CURRENT ASSETS 20,000

TOTAL ASSETS 220,000

Less CREDITORS due for repayment after 1 year or more 75,000

NET ASSETS 145,000

FINANCED BY:

OWNERS EQUITYOwners Investment 100,000Profit and Loss A/C 45,000

OWNERS EQUITY 145,000

In the modern format, the RESERVES are limited to funds put aside for a specific purpose, such as a TAX RESERVE. Those profits set aside for growth or to support future dividends are shown in the Profit and Loss Account.

THE SOURCE AND APPLICATION OF FUNDS STATEMENTThe Source and Application of Funds Statement is purely a record of how cash was received and spent by the company during the period. It is VERY IMPORTANT to remember that the only CASH a business has is that shown in the Cash Account in the Section 'Current Assets'. All other entries in the Balance Sheet under 'Assets' are valuations; the only exception being investments made by the business to absorb cash in the short term. Rather like we put cash in a Savings Account rather than let it 'sit around'. To all intents, such short term investments are CASH. If there is no cash, then there will be an entry in the 'Overdraft', which is simply the 'Credit side' of the Cash Account. All entries in the Liabilities side of the Balance Sheet are I.O.U.'s of one type or another.

It is essential to keep a check on the Cash Flow in a business, since it is often referred to as the 'life blood'. We may have a very profitable business but we may go 'bust' if we run out of cash. Basically, employees require cash on a very regular basis, suppliers need cash and some are important enough to with hold materials or services unless we pay up. In the longer term, investors need cash for dividends. But most important of all is the Revenue Service which requires taxes to be paid by specified dates!

You may ask how a profitable business can run short of cash? Have a go at the following exercise:On January 1st, the business had £12,000 in the bank. During January the business purchased £20,000 of products for resale. 50% was purchased for cash, the other 50%


would be on credit and paid at the end of February. Wages in the month amounted to £10,000, which were paid. On January 1st 6 months rent was paid of £6,000. Office costs of administration and marketing during January amounted to £5000. All these costs were paid. There were no other costs. At the end of January products in stock were valued at £12,000.

During January sales of £30,000 were made. Of these 50% was on credit and unlikely to be received before the end of February. The other 50% were cash sales.

The profit calculations are as follows:

£Sales 30,000

Start stock 20,000End stock 12,000

Stock used 8,000Wages 10,000Rent 1,000Admin. Etc 5,000

Total Costs 24,000

Profit for January 6,000

QUESTION: What is the Bank Statement balance at the end of January?

SOLUTIONCash Into Business

Sales 15,000

Cash Out of BusinessSupplies 10,000Wages 15,000Rent 6,000Admin etc. 5,000

Total out 36,000

Net outflow of cash 21,000Start Cash in Bank 2,000

Overdraft at end Jan. 19,000

You may say that this is purely a short term problem; by mid year the cash position will be acceptable. This may be so, but on the other hand you had better sort out the problem with the Bank Manager before the event rather than after it. The big problem occurs when the business is expanding since cash demands will always precede cash receipts. Adequate funds have to be planned in advance to avoid possible bankruptcy.

SUMMARYWe have shown that there are 3 major Financial Statements which have to be understood in Business:


1. The PROFIT AND LOSS ACCOUNT

2. The BALANCE SHEET

3. The SOURCE AND APPLICATION OF FUNDS statement

These Accounts are supplied to you as part of the BOSSCAT Business Game. In the Game the accounting period is 8 weeks, not 1 year. Although the Profit and Loss Account and the Balance Sheet are as described, the Source and Application of Funds is called a CASH FLOW Statement, and covers detailed cash movements.

DEFINING COSTSThe Overall Profit and Loss account for a manufacturing organisation is usually in two sections, the Manufacturing Account and the Profit and Loss Account. The reason for this separation is to enable businesses to ascertain how much it costs to produce the product themselves as opposed to buying the product(s) from an external source, if this was possible.

In accountancy jargon this potential subcontracting is called 'reducing the added value'. It means that all organisations should constantly review their costs to find out whether in fact they can obtain the service from an external source or make it themselves. You can probably recall a number of organisations who now subcontract parts of the business rather than do it themselves.

There is bound to be a synergy effect in all businesses, by which we mean that some operations, such as paying wages, can be centralised and a separate wage paying department for the manufacturing division is not required. If we subcontracted manufacturing we would have to pay the subcontractors wage paying department. Our own departmentalised costs do not usually have a proportion of the centralised costs since they are fairly well fixed and independent of the number of people paid, within reason.

There is not often much doubt concerning the SALES value of an item. The price received is fairly well known. However, how much the item COST to produce and sell is quite a different matter!

Many people approach 'accounts' for the first time thinking that ascertaining costs is as straight forward as 2+24. They then quite surprised to find that professional accountants can make 2+25 or even 2+23! The basic reason behind this paradox is the concept of FAIRNESS. One accountant may decide, because of historical conventions that 20% of the factory rent should be added to Product X. Whereas another accountant may, because of a very detailed study of the floor space taken up by the product (and floor space is surely proportional to rent charged?) consider that 35% of the rent should be allocated to Product X. This could make a big difference to the costs of Product X.

If the SALES PRICE of Product X is set by the 'market place', i.e. by free competition, and since

PROFIT = SELLING PRICE - COST


The second accountant is going to work out a lower profit for Product X than the first accountant. On the other hand, the second accountant will allocate lower rent to other products which would be less costly!

If the SALES PRICE of Product X is calculated by adding a percentage to the COSTS, then it may be that the second accountant has priced the product outside the market acceptance limit. But on the other hand, products having a lower cost may be sold at too low a price!

It is obviously very important to calculate costs as fairly as possible and to review the mix of products being sold. There are two basic methods for calculating production costs both of which have ways of trying to be as fair as possible.

1. The Absorption Costing MethodSeparate all costs into Direct Costs and Indirect Costs.

2. The Variable Costing MethodSeparate all costs into Variable Costs and Fixed Costs.

DIRECT COSTS AND OVERHEADSAbsorption Costing is the 'classical' method and the one most likely to be found in manufacturing organisations. It assumes that if a cost completely disappears when the 'subject' disappears the cost is called a DIRECT COST.

For example, if a Department in a business was dissolved, all the costs which completely disappeared would be DIRECT COSTS of that Department. Again, if a PRODUCT was abandoned, all those costs which completely disappeared would be the DIRECT COSTS of that product. We can apply the same test to a Factory, a Service, or any other definable 'subject'.

Because the 'subject' of a Direct Cost is usually a Product, this is the implied meaning if no other 'subject' is defined.

Typical examples of Direct Costs are:

a. Direct Materials

b. Direct Labour

c. A Licence to produce the product (if any)

However, some obvious Direct Costs are not defined as such because the time needed to classify them would be out of all proportion to the benefit. Examples are small fasteners such as screws, and paint.

In a manufacturing business each product would have a PARTS LIST which tabled the different components in the product. All these components would be priced and become the DIRECT COSTS of the product, unless they were regarded as too small to consider separately.

All costs which are not Direct Costs are INDIRECT COSTS, although a more common name is OVERHEADS. In some countries, such as the USA, the word used is 'Burden'. The small screws etc which are too low in value to be called Direct Costs would be called OVERHEADS, but basically all Overheads are those costs which need to be shared among all the products or services on some fair basis. For example, the Production Control Department in a Factory is engaged in scheduling and planning the production of all


products. The cost of the staff doing this work needs to be shared, or apportioned over all the products.

ExampleA business calculated at the end of a period that the Total Production Overheads amounted to £500,000. During this period, the Total Capacity of the Manufacturing Division was 200,000 man hours, this being the actual time spent by operators in making the products.

One of the products, Product G, used up 50,000 man hours to manufacture 10,000 units during the period. Total Direct Material costs for Product G amounted to £75,000, and the Direct Labour Cost was £5 per hour.

Calculate the Manufacturing Cost of G. assuming an Absorption Costing Method based on Operator Capacity.

Prodn. Overhead Appointment = £500,000/200,000hrs= £2.50/Direct Lab. hr

Direct Labour = 5 hrs / unit of GProdn. Overhead Allocation = £2.50 x 5 = £12.50

Product Cost/UnitDirect Labour Cost = £25.00Direct Matl. Cost = £ 7.50Prodn. Overhead = £12.50

Manufacturing Cost of G = £45.00

Any excess production made but not sold would be placed in stock at this valuation, termed the UNIT COST.

In this example, we would have obtained a different value for the Manufacturing Cost if another basis for apportionment had been used. For example, if the apportionment had been based on the Total Direct Labour and Total Direct Material Costs during the period (this basis is called the PRIME COST and is the one used in the BOSSCAT Game).

VARIABLE AND FIXED COSTSThe alternative method of costing called VARIABLE COSTING, or sometimes MARGINAL COSTING has been developed to show more clearly the relationship between volumes of output and changes in profits. This is very important in the financial planning, or budgeting activities of a business so that optimum plans can be developed without the need for major assumptions on how 'overheads' as defined in the previous paragraphs are allocated to different products. In VARIABLE COSTING there is no allocation of any costs to a product except those which vary in proportion to the level of product supply.

In VARIABLE COSTING, all costs are separated into VARIABLE COSTS and FIXED COSTS. This is not, in reality, a simple matter for the following reasons:

a. Variable costs change with significant 'leaps' at certain output levels. For example, the Materials used in the manufacturing process are certainly 'variable costs', but at certain purchasing volumes, buying discounts might be available.


b. Many costs are part FIXED and part VARIABLE, such as power costs, where a fixed or standing charge is made plus a charge for every power unit consumed.

c. Fixed costs do not stay fixed over a range of production levels nor over a time period. For example, factory rent may have to be increased to accommodate an extra warehouse, and the landlord may increase rents in the short term.

d. The dilemma in deciding whether Operator Costs, such as Direct Labour costs are FIXED or VARIABLE. In one type of business, shedding labour as sales drop may happen quickly, whereas in another type of business labour may be regarded as fairly permanent until a very large drop in sales materialised.

ExampleIf we had used a Variable Costing Method in the previous example and assumed that Operator costs were Variable, the costs for manufacturing Product G is given by;

Variable Labour cost/unit = £25.00Variable Material cost/unit = £ 7.50Variable cost of Production = £32.50

Any excess production made but not sold would be placed in stock at this valuation.

CONTRIBUTION and PRODUCT MIXThe exercise in trying to separate costs into fixed and variable is usually worthwhile in order to get a 'feeling' for profit/sales sensitivity and for a clearer understanding of planning the best mix of products to produce and sell.

One of the most useful 'spin offs' from Variable Costing is the concept of CONTRIBUTION, which is defined by:

CONTRIBUTION = SELLING PRICE - VARIABLE COST

The Variable Costs are the 'out of pocket' costs of making one item of product, costs which could be 'avoided' if the item was not made. Therefore the difference between the Selling Price and the Variable Cost for each item produced and sold (NO Contribution is made if the item is NOT sold!), is a Contribution towards paying the Fixed Costs of the Business. When the Fixed Costs have been met, which happens at the BREAK EVEN POINT, all extra Contributions in the defined time period are PROFITS for the owners.

ExampleA Business makes only one product which it sells for £25. The Variable Costs of Manufacture are £13. The Business has £144,000 of Fixed Costs per 8 week period. What is the Break Even Sales volume? What is the Profit at a Sales Volume of 15,000 units per period?

1. Break Even Volume = Fixed Costs / Contribution per Unit

Contribution per Unit sold = Selling Price - Variable Cost

= £25 - £13 = £12

Break Even Volume = £144,000 / £12

= 12,000 units


2. At Sales greater than 12,000 Units, all Contribution is Profit

Therefore, Profit = (15,000 – 12,000) x £12

= £36,000

Or, alternatively:

Profit = Total Contribution - Fixed Costs

= (15,000 x £12) - £144,000

= £180,000 - £144,000 = £36,000


CHAPTER 3

THE BOSSCAT ACCOUNTS

INTRODUCTIONEach financial entry in the BOSSCAT Accounts is now examined in depth. Each entry is given a reference number and this number is the same as the paragraph number in this Chapter. Each paragraph not only defines and comments on the entries as given by the BOSSCAT exercise but also comments on the FINANCIAL PRINCIPLES behind the entry. The order is:

A. The Manufacturing Account

B. The Profit and Loss Account

C. The Balance Sheet

D. The Cash Flow Statement

A. THE MANUFACTURING ACCOUNT

1. OPENING MATERIAL STOCKThis shows the quantity and value of raw material in stock at the beginning of each period, and is equal to the closing material stock for the previous period. At the start of the simulation the value is zero.

2. MATERIAL RECEIVEDAll the deliveries made in a period, and the price paid is entered into the Material Stock Account. Discounts are sometimes available for a number of reasons, such as:

a. You are a special customer (e.g. an Education Organisation).

b. The amount of material ordered allows you to obtain a quantity discount.

c. You pay cash for deliveries very promptly thus qualifying for a 'prompt settlement' discount.

d. You purchase a large number of different products from the same company and qualify for an 'annual purchase discount' or similar.

It is always worth enquiring if a discount is available from a supplier.

The quantity you order for each delivery needs to be carefully considered. In an ideal world it would be nice to just have in stock say, the exact amount you require as frequently as each hour. Since stock costs money, and since this money is usually borrowed, it is quite expensive to have stock 'sitting around' waiting to be used. Most consultants would agree that it costs around 25% of the average stock value each year to store materials. So if your average stock holding is £100,000, it costs you in interest charges and other storage costs such as insurance, £25,000 per year ON TOP OF the cost of buying the stock in the first place!

JUST IN TIME Stock Management is the process of trying to reduce stock levels to the minimum efficient level. This technique concentrates on supplier planning and customer


planning skills to improve the nearly continuous flow of materials. In BOSSCAT, it is not possible to order materials more frequently than each period of 8 weeks. There is also a charge of £1000 (see paragraph 9) made for every order placed to represent order processing and order reception costs.

The whole subject of 'How much to order?' and 'When to order?' is termed Scientific Stock Control. It is about 'Forecasting' requirements, estimating the 'Cost of Ordering' and calculating the 'Cost of Holding Stock'. In its most simple format a reasonable estimate of the most appropriate order size, termed the ECONOMIC ORDER QUANTITY (EOQ) occurs when the Ordering Cost equals the Holding Cost for the same period, say 1 year.

In BOSSCAT the holding cost is approximately 4% of the average value in stock per 8 week period (this includes 'game' charges plus average bank interest charges). Although a detailed study of Stock Control is outside the remit of these notes, players should give some thought to the frequency of stock replacement.

3. STOCK AVAILABLEThis is simply the sum of 1 and 2. In many real situations, the purchase price of materials does not remain constant, thus leading to some difficulties regarding the value of issued stock.

PROBLEMSuppose stock comprised 1000kg purchased last period at £150 per tonne and 2000kg at £360 per tonne purchased this period. Although the material was purchased at different prices, it looks identical. Suppose you used 1500kg, what is the value of the stock remaining in stores? Did you use the expensive stock, or some of the expensive and some of the cheap stock?

SOLUTIONS

METHOD 1. THE AVERAGE COST

Add all the materials quantities and all the prices and find the grand total of material and value.

Quantity Price/tonne Value1000kg £150 £1502000kg £360 £720

Totals 3000kg £870

Therefore Average price = £870/3 = £290/tonne

All stock remaining in stores is valued at this price until the next delivery.

METHOD 2. FIRST IN FIRST OUT (FIFO)

Assume that OLD STOCK is used first, followed by NEW STOCK. This is fair to the 'customer' in times of increasing prices. Therefore the stock remaining in stores after issuing 1500kg is at the latest price of £360 per tonne.


METHOD 3. LAST IN FIRST OUT (LIFO)

Assume that the NEW STOCK is issued first, followed by OLD STOCK. This means that customers are being charged at the latest costs. In times of increasing prices, the higher prices charged would be needed to cover the cost of new stock replenishments. There, in our problem, the value of remaining stock is at the old price of £150 per tonne.

4. CLOSING MATERIAL STOCKSubtracting the total material used (paragraph 5) from the stock available yields the closing stock which will be carried forward as the opening stock for the next period.

5. MATERIAL USEDAlthough in BOSSCAT the amount of raw material used is calculated from a knowledge of the units produced and the material conversion efficiency, in the real world this value is obtained by taking a STOCK COUNT at the end of a period and subtracting this value from the recorded stock available. However, there always should be a reconciliation between the amount used by reference to what has been produced and the amount missing from stock. Any significant adverse differences between these figures would indicate excessive scrap generation, spoilage, pilferage, or just bad record keeping. Alternatively, a favourable difference showing that less material than expected was used, indicates poor, or pessimistic standards.

The materials used are only those required to manufacture the products. The materials are directly related to the products, since if no products were to be made, no materials would be required. Such materials are called DIRECT MATERIALS. Any other materials purchased such as lubricants for the machines are termed INDIRECT MATERIALS since they cannot be directly related to any one product, and are included in the Other Production Overheads (paragraph 12).

The value shown in the 'QTY' column shows the amount of material used in production. The 'Total' columns are extended to show the Direct Materials used for the production of both products in terms of Quantity and Price.

6. LABOUR COSTSLabour costs are the wages paid to the Direct Labour force for the 8 week period plus any overtime which is paid at 1.5 times the basic rate. In BOSSCAT any overtime which has been promised on the Decision Form has to be paid whether or not it was worked. For example, a shortage of materials, termed a 'stock out', might have occurred. In this case you must regard the overtime payments as a kind of penalty for bad planning!. The actual production volume of the workforce is shown in the QTY column. Providing there was no 'stock out' the amount produced is calculated by dividing the actual capacity by the 'standard time ' given in the Player's Notes.

Actual Max. Capacity = No. operators x hrs worked/period x op. efficiency

Note: the Actual capacity could be less than maximum because of material 'stock out'.

In the real world, capacity calculations are always difficult considering the wide range of different operator skills, the nature of the jobs, and the ability of management to plan in a variable environment. This is especially so if we consider businesses which give a service, such as selling insurance. What is the capacity of an employee?

The great danger to rely solely on historical data, such as the capacity last year. We may well be compounding a 'felony' if last year's management was particularly inept. All WORK


must be studied to ensure no only that the best methods are being used, but that an appropriate 'capacity' figure can be determined.

7. DIRECT COSTSThe total of the Direct costs is also called the PRIME COST. In our case this only comprises one type of labour and one type of material. In normal circumstances the Prime costs for each product comprise all those costs which can be DIRECTLY allocated to a product WITHOUT any arbitrary apportionment and allocation among other products. For example, it has been know for a whole Design Department in a Manufacturing organisation to be TOTALLY involved in testing and troubleshooting ONE product for some considerable time. All work on other products ceased. In this case the Design Department costs should be a Direct Cost of the product.

8. SUPERVISIONIn BOSSCAT, supervision is related to the total direct labour force; there being one supervisor for every 10 operators or part thereof. The cost of control is an indirect cost since it is shared by both products and not totally allocatable to one cost unit. Supervisors are paid 150% on Operator rates, but they do not receive payment for overtime worked.

9. MATERIAL ORDER COSTEvery time an order is made to replenish stocks, extra costs are incurred. In some situations these costs are quite minimal and include the basic costs of paperwork and postage. In other situations the costs are very high especially if the order is placed internally on the production department. In this case, all the costs of setting up and making a new batch must be included. A significant component is the learning cost incurred as the production unit builds up to its normal production rate. Production Managers prefer nice long production runs to avoid this cost. All the avoidable costs of reception of an outside order, paperwork costs, and any costs of transportation which are fixed rather than vary with quantity despatched. eg. the hire of a container, must also be included.

In BOSSCAT, the mean cost is £1000 for every order placed, and it is assumed that this cost is fully incurred in the period of placement rather than reception.

10. MATERIAL STORAGE COSTIn paragraph 2 we discussed how material storage costs and material ordering costs effected decisions on how much to purchase. In BOSSCAT the game rules state a charge of 2% of the average material stock value as being the storage cost, and this is the value calculated here. However, interest charges on borrowed money amount to approximately 2% per 8 week period, and therefore the total storage cost which includes this interest charge amounts to approximately 4% per period.

11. DEPRECIATIONDepreciation is the loss in value of an asset over each period. Depreciation only applies to FIXED ASSETS, which have not totally 'expired' or have been totally 'consumed' in the defined period (usually 1 year). Since the true loss can only be calculated exactly if the assets were to be sold, DEPRECIATION has to be estimated. This is a better method anyway since in a 'going concern' the value to the user would probably be quite different from the value realised in a sale. Therefore DEPRECIATION is a PROVISION; defined as an estimate. However, we must make sure, periodically that the 'written down' value of any asset after subtracting DEPRECIATION is realistic.

The two most common methods for depreciating assets:

a. The Straight Line Methodb. The Reducing Balance Method


Both methods can best be explained by means of examples.

Example

THE STRAIGHT LINE METHOD

An asset was purchased for £100,000 and has a life expectancy of 8 years, at the end of which it is hoped to receive £8,000 for scrap.

The Straight Line Method assumes an equal depreciation in the asset each year, therefore the depreciation is calculated:

Depreciation over Life = £100,000 - £8,000= £92,000

Depreciation per year = £92,000/8= £11,500 per year

Example

THE REDUCING BALANCE METHOD

An asset was purchased for £100,000. The life expectancy is not known nor is any scrap value. However, experience suggests that a depreciation factor of 20% of the current value per year is appropriate.

Depreciation in Year 1 = £100,000 x 20%= £20,000

Value at start of Year 2 = £80,000

Depreciation in Year 2 = £80,000 x 20% = £16,000


Depreciation in Year 3 = £64,000 x 20% = £12,800


etc.....

The Reducing Balance Method is popular not only because it does to some extent reflect the fact that depreciation is higher in the early life of an asset (eg. a Private Motor Car) but because it balances the sum of loss in value and maintenance costs.

Assume that we are comparing two identical departments and evaluating, however unfairly, the departmental manager's performance on the basis of cost control. The only difference between the departments is that one has new machines and the other had older machines. Very likely, the Department with older machines will have higher maintenance costs than the other. But if the Department with the new machines had a higher depreciation cost, as it would with the REDUCING BALANCE METHOD, the total of Depreciation and Maintenance might be reasonably similar.

One very important aspect of DEPRECIATION is that it does NOT involve a CASH FLOW. The Cash Flow occurred when the asset was purchased. For example, we might state that


running a private car costs about 30 pence per mile. Of this, about 20 pence is loss in value, or depreciation, and the other costs are for fuel, oil, taxes, insurance etc. If we travelled 10,000 miles in a year, the costs would total £3000, but our 'out of pocket costs' or cash flow, would only be £1000. £2000 would be the depreciation cost.

In BOSSCAT, the depreciation is calculated each period on the company assets as a fixed amount of £4000. This implies a Straight Line Depreciation method. Each period the total amount depreciated over the life of the business is shown in the Cumulative Depreciation entry in the Balance Sheet (paragraph 39). This depreciation is solely on Production Machinery and is entered into the Manufacturing Account. Depreciation on any Administration asset, such as a computer system, or on a Marketing asset such as Representatives cars would be included in the related costs (paragraph 22).

12. OTHER PRODUCTION OVERHEADSThere are many costs involved in the production process ranging from heating costs to snow clearing! All of these costs are overheads since they cannot be allocated to a single cost unit. Some are fixed, such as rates and staff salaries, some are completely variable with production activity such as internal transport costs, whereas others are part fixed and part variable, such as telephone charges which include a 'standing charge' plus costs for units consumed.

In BOSSCAT these costs are £10,000 per period plus £1 per production hour to allow for the variable component. The program calculates the total number of standard hours of production over the 8 week period, multiplies by £1 and adds this to the Fixed Cost of £10,000. For example 12,000 GEMA produced per period means 12,000 times 8 minutes of 'standard' output, or 1600 hrs of standard output.

13. TOTAL PRODUCTION OVERHEADSThese costs are the sum of the overheads in entries 8 to 12. All overhead costs must be recovered by the sales, and under the costing system used in BOSSCAT the production overheads are apportioned to each product in the same ratio as each product's Prime Costs are to the Total Prime Costs. For example, if the Prime costs of Product A was 20% of the Total Prime Cost, 20% of the Total Production Overheads would be allocated to Product A.

There are many different ways of apportioning overheads to cost units. The criterion is to choose a method which is FAIR. In other absorption costing systems (the name given to this costing method) overheads are apportioned on the basis of Direct Labour hours, Direct Labour Cost, or even Direct Material Costs. The exercises at the end of these notes requires you to use an alternative absorption basis.

14. COST OF PRODUCTIONThis cost is the sum of the product Prime costs and the allocated overheads. Although there can be little doubt that the Total Production cost is correct, the individual product costs depend very much on the apportionment method used. It is quite possible for different Cost Accountants to present different product costs because in their opinion, a different method of overhead apportionment appears to be FAIRER.

15. UNIT COST OF PRODUCTIONThe unit cost is the Cost of Production (row 14) divided by the number of finished units produced indicated by the 'QTY' value in row 6 or row 17. This is a fairly common procedure, but one open to criticism since the unit cost can vary quite significantly with the absorption method used. For example, a product which has a high material content and a low labour content will show a very low unit cost if the overhead allocation method is based solely on the relative labour hours used. Conversely, a product with a high labour content and low


material content gets a lion's share of the overhead. Unit costing only works well if the products are similar in labour and material content.

16. OPENING FINISHED GOODS STOCKThe opening finished goods stock is equal to the closing stock of the previous period. It is zero at the start of the simulation.

17. PERIOD'S PRODUCTIONThis entry just repeats paragraph 14.

18. CLOSING FINISHED GOODS STOCKIn real systems the Closing Stock is determined by a 'stock count' and the cost of goods sold is equated to the cost of 'missing' stock, that is, the difference between what stock was available for sale and the stock remaining.In BOSSCAT the closing stock is obtained by subtracting the number of units sold from the stock available. The value of the stock is then calculated by multiplying by the unit production costs (paragraph 15). As with raw material stocks, it is important to reconcile the depletion in stocks with the expected usage due to sales. Significant differences must be explained. Pilferage is not always the answer, it may be that items are given away as samples to encourage further business.

19. COST OF GOODS SOLDThe Cost of Goods Sold during the period is calculated as follows:

Example

Stock at start £25,000Production during Period £35,000

Stock available for sale £60,000Less Stock at end £15,000

Cost of Stock sold(Cost of sales) £45,000

20. GROSS PROFITThe Gross Profit for each product is the Sales value less the Cost of Sales, and is the contribution made by the production conversion process towards final company profits. As we shall see later, the Administration, Marketing, Finance Costs still have to be deducted.

In many organisations, the gross profit can be estimated as a percentage of sales value. Most costs can be expressed as a percentage of sales value and these can be monitored as the exercise continues. In real business however, it is important to compare such percentages or 'ratios' against standard values obtained from external agencies such as the Centre for Interfirm Comparison.

If the GROSS PROFIT is not felt to be adequate in real systems, serious consideration must be given to subcontracting out the production process, or part of it. That is, it might be cheaper to ‘buy in' rather than make it. All the costs considered so far would be avoided if we purchased all products externally for resale.


21. PERIOD SALESPeriod Sales are calculated by the computer program and is dependent on many factors such as price and advertising stimului, etc. Sometimes sales will be won by a company not as a result of its own efforts but due to market over-stimulation by a competitor with insufficient goods for sale.

In BOSSCAT, unsatisfied sales by one company are offered to the other providing that the other product is not priced excessively.

SUMMARYThe Manufacturing Account is presented here as a record of what has happened. If you are really trying to WIN then this account should be planned in advance; not perhaps to the same detail, but nevertheless to the same order of magnitude. Only by PLANNING and then COMPARING the plan with what happens will you improve your CONTROL over the game. The plan should naturally be a realistic statement of intent, and one which also satisfies your longer term strategies.

You must therefore be able to forecast sales by plotting trends, using market research, and keeping a careful eye on the competition. You must have sufficient finished goods stock available to meet the expected demand, and this must be at a price which will give you a planned gross profit after deducting manufacturing costs. This naturally means that you will also have enough labour and materials available to produce finished goods. Frankly, you need to plan at least 2 periods ahead if you are to muster enough resources in time.

Keep control of the costs and gross profit by calculating the ratio of these factors as a percentage of sales or manufacturing volume. Plot the ratios so that you can see the trends and instigate corrective action as appropriate.

B. THE PROFIT AND LOSS ACCOUNT

INTRODUCTIONThe Profit and Loss Account deducts the remaining non-production overheads from the Gross Profit to determine the NET PROFIT. The basic philosophy behind control is one of 'personal responsibility'. The Production Costs could be the responsibility of the Production Director, and the costs for Administration, Marketing, Finance etc for the respective Directors or Senior Managers. Some organisations have a Sales Director in addition to a Marketing Director in order to separate the responsibilities for Sales Revenue and Marketing Costs. The theory behind Organisation structure is that organisations develop from strategic or longer term plans, and consequently the accounts should assist the resultant responsibility centres. Since finance charges are seldom the responsibility of the operations management, these costs are included after the calculation of the Operating Profit. The result is the Net Profit.

22. GENERAL ADMINISTRATIONThis can sometimes be a general 'catch-all' definition for all costs not defined elsewhere. However, in BOSSCAT it is intended to cover all administration and marketing staff salaries, office rates, rent, heating, paperwork, travel expenses etc. In fact all running costs outside the production environment. In the BOSSCAT exercise, the administration cost is part fixed and part variable in proportion to the number of supervisors to be employed for the following period. This suggests that there are increases in 'office' charges in anticipation of an increase in managerial staff.

23. ADVERTISING COSTSAlthough in real situations, the advertising and promotional costs would be included in the total Marketing costs, they are significant in this exercise and worthy of a separate entry to


encourage control. In many organisations, advertising costs are relatively high and yet seem to be more of a spontaneous gesture rather than a planned activity. It is very important that in BOSSCAT you try to determine as quickly as possible how important advertising is in stimulating demand. As in real life, the same basic rules apply in that too little advertising is not effective, and too much advertising is inefficient.

24. MARKET RESEARCHIt is quite surprising that Market Research is seldom undertaken by small to medium sized organisation. However, it is most important that the value of extra 'outside' information is correctly estimated and that essential information is obtained appropriately. For example, forecasting market demands must not be based solely on an extrapolation of historical information which may have been limited by production or industrial relations constraints. It is important to establish how the marketing environment may change. No organisation, even IBM, can operate without a very shrewd awareness of how competitors will react to new strategies, or indeed what their own response will be to competitors' possible new plans. In BOSSCAT, market research in the form of expected market size, actual market share, and advertising levels are available.

25. WAREHOUSING COSTSIt would not be normal to find this cost in this position in a typical P/L Account, since it is usually hidden in the Production Costs within a variety of production overheads. This can lead to a loss of control. Typical components of this cost are spoilage costs, transportation costs, insurance costs, paperwork costs, pilferage costs, heating costs, etc. The total cost relates to the cost of holding Finished Goods which is the responsibility of the Marketing Manager rather than the Production Manager. The cost is negligible if the Finished Goods stock levels remain under control, but can rise quite significantly as a result of poor sales demand while production levels are not requested to be at a lower level.

26. OPERATING PROFITThis is Gross Profit less Sales Expenses and Administration cost. This profit would be the responsibility of the Director in charge of Operations.

27. FINANCE CHARGESFinance Costs relate to the Bank overdraft interest costs and the Bank Loan interest charges. The game does not allow for the investment of surplus funds. Therefore it is important to reduce the Bank loan if cash is available in order to reduce interest charges. Interest charges are greater for longer term bank loans than short term overdrafts. This is because the lenders money is at risk for a longer period, and higher risks mean higher interest rates. In BOSSCAT, a charge of £5,000 is made if there is an automatic transfer from overdraft to loan because you have exceeded your Overdraft limit. This is a cost which represents your Bank's disapproval and simulates penalty interest rates plus a possible extra fee.

28. NET PROFITThis is Operating Profit less Finance Charges. Normally, the Inland Revenue would levy Corporation Tax on Net Profits. However, the definition of Tax Allowable costs differs from the organisations costs, and usually several adjustments have to be made to the accounts. The Net Profit is added to the Profit and Loss Account balance.

29. PROFIT BROUGHT FORWARD (B/F)The Profit and Loss Account is constantly collecting each period's profits (or losses) and this printed value shows the balance at the start of the period.


30. PROFIT CARRIED FORWARD (C/F)This is the Profit B/F plus the Net Profit for this period. Since there are no distributions outside the company such as taxes and dividends, the balance shows the accumulated profits since the start of the game. The net profits belong to the owners of the business.

C. BALANCE SHEET

31. SHARE CAPITALThe Share Capital represents the face value of the Shares issued in exchange for money invested in the company. Typically, shares have a face value of £1 or 25p in the UK. Normally the trading value of shares on a Stock Exchange, which reflects market supply and demand conditions does not affect the organisation's financial structure in any way. But, low market demand for shares due to doubts over future profits would normally lead to low prices, unless 'take over' speculation was high. This could cause a business some difficulties if more money was requested from existing shareholders or a new share issue was contemplated.

In BOSSCAT, the share price is calculated using a formula based on profitability, cash availability, and market share. This is a reasonable method but does NOT coincide with real life.

32. RESERVESTo the untrained person, the Reserves are possibly the most confusing aspect of accounts. There is a false impression of a large treasure chest stuffed full with bank notes! Reserves are in fact, IOU'S recorded in the company accounts showing the amount of shareholders real or paper profits which have been retained in the business.

Some profits are held back from distribution in order to cover a specified possible demand for money, such as a revised Tax Bill (TAX RESERVE), or it could be a GENERAL RESERVE to cover general business expansion plans. The Profit and Loss Account is a RESERVE to maintain future Dividends (payments to shareholders) when Profits are low or negative, but this account is usually shown separately. Reserves generated by profits earned but not distributed are called REVENUE RESERVES.

CAPITAL RESERVES are not generated from genuine profits but from 'paper' profits such as the revaluation of land owned by the business. This so called 'profit' due to inflation must be recorded in order to inform the shareholders of company worth, but it cannot be distributed as cash dividends.

In BOSSCAT, the Reserves are solely the Profit and Loss Account Balance for the end of the period. Since no Dividend and no taxes are paid during the game, the Reserves are the cumulative profits to date.

33. SHAREHOLDERS’ FUNDSThis is the sum of 31 and 32, and represents the funds invested by the shareholders which are at risk if the company fails. Naturally, shareholders exchange this risk for expected returns which are higher, in the longer term, than investing in a more secure organisation such as a Building Society. This would be the longer term approach. In the shorter term, shareholders are expecting growth in the exchange value of their shares, if they are allowed to freely trade them, based on the present value of higher returns in the future, or possible take-over activities.

34. BANK LOAN (& GEARING)


In the BOSSCAT game, the only source of extra loans above normal overdraft limits is a Bank Loan which charges a higher interest rate than the overdraft rate. Only in times of very high and expected short lived inflation would one expect a long term loan to have a lower interest charge that a short term loan such as an overdraft.

In real life, loans are available from a large number of different sources. One source is a Debenture which is a loan shared by a large number of lenders who can sell all or part of their IOU to another person, sometimes at a higher value than the original sum. This happens when loans are raised at a fixed interest rate, and thus if interest charges fall, the debenture return is at a premium, which can be sold for a profit. The reverse happens if interest rates rise. For example, if a loan of £10 is paying a fixed interest of 10% when currently interest rates are 20%, the loan certificate could only be traded for approximately £5 instead of it's face value of £10.

GEARINGAs a general rule one would not expect lenders to provide money if the company is already borrowing an amount equal to half the value of the shareholders or equity stake. This restriction is termed MAXIMUM GEARING, where GEARING is the ratio of the money borrowed to the money put in by the owners.

GEARING = LOAN CAPITAL/EQUITY CAPITAL

eg. If the Owner’s ‘investment’ = £1000 and the maximum gearing = 50%

then:Maximum loan available is £1000 x 50%

= £500

Although in many situations, lending is about having confidence in the borrower's desire to repay whatever the outcome, there is little doubt that security (collateral) would have to be deposited with the lender in order to safeguard the loan. The lender would have the legal right to sell this security if necessary.

There is still an attitude in some quarters that it is wrong to borrow money. Certainly, minimum borrowings mean maximum flexibility in examining opportunities compared with organisations saddled with very high and fixed term repayments which tend to make them conservative. However, if you are able to borrow at x% and make x+5% on the investment, there is no reason to feel guilty.

35. TOTAL CAPITAL EMPLOYEDThis shows the worth of the company since the value is the balancing value against the other side of the sheet. It is simply shareholders investment plus secured loan.

36. FIXED ASSETSThe assets owned by a company fall into 2 categories; Fixed Assets which have a life expectancy of more than 1 year, and Current Assets which have a life, within the firm, of less than 1 year. Current Liabilities which show short term or less than 1 year obligations for payment are offset against Current assets to give Net Current assets. Fixed Assets are normally listed in order of life expectancy.

37. LAND & BUILDINGS


The value of land and buildings in BOSSCAT is the recorded purchase price paid, that is, the historic cost. In order to make owners aware of the current value of assets, revaluations should take place periodically, and a new value would be inserted. The differences in value would be credited to the CAPITAL RESERVES as mentioned above. Industrial buildings are depreciated in many company accounts at a relatively low value such as 2.5% per annum. Buildings such as office blocks would probably not be depreciated. There is no building depreciation in BOSSCAT.

38. MACHINERYMost plant and machinery has a limited life, and would be depreciated every period in the fairest method allowed. The value in the accounts shows the historical cost of the equipment before depreciation is subtracted. In BOSSCAT, Plant and Machinery is depreciated by £4000 per period of 8 weeks. (See paragraph 11.)

39. CUMULATIVE DEPRECIATIONThis shows the total depreciation taken to the profit and loss account since the start of the exercise. The net value of plant and machinery is 38 less 39, and this value should represent a reasonably accurate valuation of the plant etc. In times of significant inflation this net value could be very much lower than the true value leading complex revaluation and backlog depreciation calculations.

40. CURRENT ASSETSThis is a list of assets which will remain with the company for less than the 'current' reporting period, usually assumed to be 1 year.

41. RAW MATERIALSThis repeats the value of the raw material closing stock (paragraph 4)

42. FINISHED GOODSThis repeats the value of the finished goods closing stock (paragraph 18)

43. DEBTORSSince all sales are on credit in BOSSCAT, the debtors figure equals the sales value of the current period. All these debtors will pay during the following period. In real life, debtors have a habit of not settling their bills regularly, and the credit control office has to issue 'aged' debtors lists showing how much is owing over 1 month, 3 months, 6 months etc. Obviously, a debt means that you lose the interest on investing the cash, or alternatively have to borrow cash to replace stocks etc, and therefore high levels of debtors are expensive. It seems strange to some people that debtors are an asset! However a debt can be sold to a third party quite legally, and therefore debts have value.

Some organisations exist only to collect debts for other organisations which are possibly better at making toys rather than collecting money. Obviously there will be a difference between the amount of money they collect and the value of the debt sold.

44. CASHThis is the only place in the accounts where one can find £5 notes, if there are any available. Every other account represents an IOU or a paper valuation. Cash does not just represents coinage, it covers all funds which can be realised at 100% value at very short notice. There is usually only one cash account. If the value is negative, it is shown as an overdraft in the current liabilities. The cash figure is calculated by examination of the various Cash Flows as shown in the CASH FLOW STATEMENT below.

45. CURRENT LIABILITIESThese short term obligations for settlement are usually listed in order of time to pay.


46. BANK OVERDRAFTThe overdraft is the negative value of cash at the bank. Overdrafts are treated as current liabilities rather than loans since they can be called in by bank managers at very short notice. Bank Managers are usually limited to a total overdraft facility which they can offer to customers, and therefore significant overdrafts are only available after detailed negotiations. If the overdraft limit is broken, the Bank Manager tends to get a little upset, and frequent violations can lead to severe credit restrictions. In BOSSCAT, an overdraft limit of £50,000 has been agreed, and any transgression means a replacement by a higher cost long term loan and a penalty cost of £5000. Cash control is extremely important both in BOSSCAT and in real life.

47. CREDITORSIn the same way that most manufacturing organisations sell goods on credit, they also buy materials on credit. The Creditors Account is a statement of these debts to be paid. In BOSSCAT this only relates to the materials purchased on 8 weeks credit. Normally, it could relate to many different types of debts to be paid such as wages or indeed for goods and services which have not yet been invoiced. These latter costs are called Accruals.

48. NET CURRENT ASSETSThese are the Current Assets less the Current Liabilities and are often called NET WORKING CAPITAL. There is an important ratio showing Current Assets/Current Liabilities which is a measure of liquidity, or 'solvency'. This ratio should have a value of about 2. That is, the business could find the cash, over a period, to pay its short term obligation twice over.

Current Ratio = Current Assets/Current Liabilities

49. TOTAL ASSETSTotal Assets equal Total Capital Employed and show the book value of an organisation. The true value of any firm is however equal to the present value of all the future benefits arising from the operations of the firm. If this value is higher than the book value, and a difference is realised by the sale of the firm, then GOODWILL is generated at the time of sale, and would probably appear as an asset in the buyers Balance Sheet.

D. THE CASH FLOW STATEMENT

The CASH FLOW STATEMENT is a short term version of the Source and Application of Funds Statement to be found in published accounts.

The principle of construction is extremely straight forward. It purely lists all the sources of cash during the period and offsets this total against all the demands for cash in the same period. The assumed timing of cash flows is the last day of the period. This is not what would happen in reality, and it is quite possible for any overdraft to be significantly higher during the period than that indicated by the Statement. This would happen if all cash 'out flows' were early in the period and all cash 'inflows' were late.

In BOSSCAT, cash is received from a Bank Loans and Sales, although sales lag one period due to credit offered to customers. Cash demands are for operational and financial expenses, but not including depreciation expenses, plus any loan repayment. The balance of the cash account appears in the Balance Sheet in paragraph 44.

Players are advised to construct expected cash flow statements at least one period in advance in order to control the overdraft facility.



Business ManagementSimulation

APPENDICES



APPENDIX 1

Decision Sheet Period 1


12345678910111213141516171819202122232425262728293031323334

A B CDATE BOSSCAT DECISION SHEET PERIOD 1 ONLY DECISION PERIOD NUMBER

PLEASE COMPLETE BLANK SPACES 1GAME REFERENCE TEAM NAME TEAM REFERENCE LETTER & NUMBER

OPERATORS AVAILABLE THIS PERIOD

TOTAL TO BE EMPLOYED NEXT PERIOD (ie Period 2) Number:

ALLOCATION OF OPERATORS GEMA OVERTIME: (hrs/op/wk - max 10)FOR THIS PERIOD LUCY OVERTIME: (hrs/op/wk - max 10)

TOTAL (must = cell C5 which = C6 from last period)

MATERIAL PURCHASE BASIC RAW MATERIAL (to be delivered next period ie Period 2) Kg (1 Tonne =1,000 Kg)BASIC RAW MATERIAL PRICE (£150 to £300/t set for duration of game)£ (£/Tonne)PREMIUM RAW MATERIAL (to be delivered for this period) Kg (at £360 / 1,000 Kg)

FINANCIAL DECISIONS EXTRA LOAN REQUIRED THIS PERIOD £ (at 2.5%/period - multiples of £10,000)LOAN REPAYMENT THIS PERIOD (only if cash available now) (multiples of £10,000)

MARKETING DECISIONS SELLING PRICE/DOLL (£.p) ADVERTS (@ £500 each)GEMA (enter £0 if product not for sale) Number:LUCY (enter £0 if product not for sale) Number:

RESEARCH REQUIRED ALL COMPETITORS' ADVERTISING @ £1000 YES or NO (Embolden as appropriate)ALL COMPETITORS' MARKET SHARES @ £2000 YES or NO (Embolden as appropriate)MARKET FORECASTS FOR NEXT 4 PERIODS @ £3000 YES or NO (Embolden as appropriate)ALL COMPETITORS' PROFITS TO DATE @ £2000 YES or NO (Embolden as appropriate)CONSULTANT'S REPORT (Period 3+ only) @ £2000 YES or NO (Embolden as appropriate)



APPENDIX 2

e-Decision Sheet Periods 2+


12345678910111213141516171819202122232425262728

A B C D

GAME REFERENCE NO. DECISION PERIOD NUMBER

Euro5DATE TEAM REFERENCE CODE.2008

Please take care to complete ALL unshaded cells correctly. TOTAL NUMBER:OPERATORS AVAILABLE THIS PERIOD (must = cell D7 from last period) Cell D6

NUMBER: OVERTIME:(hrs/op/wk-max.10)ALLOCATION OF OPERATORS GEMAFOR THIS PERIOD LUCY

(must = cell D6 this sheet which = D7 from last period's sheet) TOTALKILOGRAMMES:

MATERIAL PURCHASE BASIC RAW MATERIAL (to be delivered next period ie cell D7 + 1 Period) (1 Tonne =1,000 Kg) Kg. Kg.PREMIUM RAW MATERIAL (to be delivered for this period ie cell D7) (at £360 / 1,000 Kg) Kg. Kg.

£:FINANCIAL DECISIONS EXTRA LOAN REQUIRED THIS PERIOD (at 2.5%/period) (multiples of £10,000) £

LOAN REPAYMENT THIS PERIOD (only if cash available now) (multiples of £10,000) £SELLING PRICE/DOLL: (£.p) ADVERTS: (@ £500 each)

MARKETING DECISIONS GEMA Number of adverts:MARKETING DECISIONS LUCY Number of adverts:

RESEARCH REQUIRED ALL COMPETITORS' ADVERTISING @ £1000 (Embolden request) YES NO ALL COMPETITORS' MARKET SHARES @ £2000 (Embolden request) YES NO MARKET FORECASTS FOR NEXT 4 PERIODS @ £3000 (Embolden request) YES NO ALL COMPETITORS' PROFITS TO DATE @ £2000 (Embolden request) YES NO CONSULTANT'S REPORT (Period 3+ only) @ £2000 (Embolden request) YES NO

TOTALTO BE EMPLOYED NEXT PERIOD (ie cell D6 +/- ANY CHANGE; max change ± 50%) Cell D7

PLEASE COMPLETE ALL BLANK SPACESTEAM NAME

BOSSCAT e- DECISION SHEET (Periods 2+)



APPENDIX 3

Example Results Period 3


COMPANY 2 Benetton BOSSCAT PERIOD 3 GAME REFERENCE: wcf96 DATE 05-06-2009*********************************************************************************************************************** MANUFACTURING ACCOUNT*********************************************************************************************************************** * TOTAL GEMA LUCYREF. * QTY £ QTY £ QTY £****************************************************************************************** 1 OPENING MATERIAL STOCK * 850 264 2 MATERIAL RECEIVED * 54000 16920 3 STOCK AVAILABLE * 54850 17184 4 CLOSING MATERIAL STOCK * 2788 874****************************************************************************************** 5 MATERIAL USED * 52062 16310 9562 2995 42500 13314 'Qty' shows material (kgs) used 6 LABOUR COSTS * 158400 38250 26400 127500 132000 'Qty' shows items produced * -------------------------------------------------- 7 PRIME COSTS * 174710 29395 145314 * --------------------------------------------------

8 SUPERVISION * 17280 9 MATERIAL ORDER COST * 100010 MATERIAL STORAGE COST * 18111 DEPRECIATION * 400012 OTHER PRODUCTION COSTS * 40600 * --------------------------------------------------13 TOTAL PRODUCTION OVERHEADS * 63061 10610 52451 O/Head apportioned as Prime Costs * --------------------------------------------------14 COST OF PRODUCTION * 237771 40005 19776515 UNIT COST OF PRODUCTION * 1.04 1.55******************************************************************************************16 OPENING FINISHED GOODS STOCK * 20750 0 0 13755 2075017 ADD PERIOD'S F.G. PRODUCTION * 237770 38250 40005 127500 197765

FINISHED GOODS AVAILABLE * 258520 38250 40005 141255 21851518LESS CLOSING FINISHED GOODS STOCK * 64968 0 0 41998 64968 * --------------------------------------------------19 COST OF GOODS SOLD * 193552 40005 15354720 GROSS PROFIT * 63184 21195 41989 * --------------------------------------------------21 PERIOD SALES * 256736 38250 61200 99257 195536

***********************************************************************************************************************

CASH FLOW STATEMENT £

CASH IN Carried Forward Last period cash account : 0 From last period's debtors (sales) : 234274 New loan received : 50000 ------------------------------------------------- (A) TOTAL CASH TO ACCOUNT : 284274 CASH OUT Carried Forward Last period overdraft : 44418 Paid to last period's creditors : 10500 Loan repayment : 0 Labour costs : 158400 Production overhead less depreciation : 59061 Premium material costs : 4320 Sales and administration expenses : 41449 Finance charges : 9388 ------------------------------------------------- (B) TOTAL CASH FROM ACCOUNT : 327536

CASH BALANCE (see Balance Sheet, possible small rounding errors) = (A)-(B) = 43262 OVERDRAWN


COMPANY 2 Benetton BOSSCAT PERIOD 3 GAME REFERENCE: wcf96 DATE 05-06-2009***********************************************************************************************************************REF. PROFIT/LOSS ACCOUNT REF. BALANCE SHEET ***********************************************************************************************************************21 TOTAL SALES £ 25773620 GROSS PROFIT £ 63184 SOURCES OF CAPITAL --------------------- SALES EXPENSES & ADMIN 31 SHARE CAPITAL £ 400000 ---------------------- 32 RESERVES £ 1871722 GENERAL ADMINISTRATION£ 19000 (Profit/Loss account) --------23 ADVERTS & PROMOTIONS £ 17500 33 SHAREHOLDERS FUNDS £ 41871724 MARKET RESEARCH £ 3000 34 BANK LOAN(Debt cap.) £ 14000025 WAREHOUSING COSTS £ 1949 ----------------------- ------ 35 TOTAL CAPITAL EMPLOYED £ 558717 4144926 OPERATING PROFIT £ 21735 APPLICATION OF CAPITAL27 FINANCE CHARGES £ 9388 ---------------------- ------ 36 FIXED ASSETS28 NET PROFIT £ 12347 37 LAND/BUILDINGS @ COST £ 18000029 PROFIT BROUGHT FORWARD£ 6370 38 MACHINERY @ COST £ 120000 ------ 39 LESS CUMULATIVE DEPN £ 800030 PROFIT CARRIED FORWARD£ 18717 -----------------------******************************************************* TOTAL FIXED ASSETS £ 292000 PERIOD DATA !******************************************************* 40 CURRENT ASSETSPREMIUM MATERIAL(KGS) 12000 (AT £360/TONNE) ! 41 RAW MATERIALS £ 874PRICE OF MATERIAL:- £ 300 PER TONNE ! 42 FINISHED GOODS £ 64968MATERIAL ON ORDER:- 52000 UNITS ! 43 DEBTORS(receivables) £ 256736ADVERT EFFICIENCY :- 100% ! 44 CASH £ 0COST OF ADVERTISING:- £ 500 PER ADVERT ! --------OPERATORS WAGE RATE:- £ 160 PER WEEK ! £ 322578OPS. THIS PERIOD GEMA 15 ! 45 LESS CURRENT LIABILITIES LUCY 75 ! 46 BANK OVERDRAFT £ 43261SUPERVISORS THIS PERIOD 9 ! 47 CREDITORS(payables) £ 12600OPERATORS NEXT PERIOD 90 ! --------SUPERVISORS NEXT PERIOD 9 ! £ 55861OPERATOR EFFICIENCY 85% ! 48 NET CURRENT ASSETS £ 266717OVERTIME THIS PERIOD (HRS/OP/WEEK) ! ----------------------- GEMA 10 ! 49 TOTAL ASSETS £ 558717 LUCY 10 !***********************************************************************************************************************CONTROLLERS NOTES FOR BOSSCAT PLAYERS***********************************************************************************************************************


COMPANY 2 Benetton BOSSCAT PERIOD 3 GAME REFERENCE: wcf96 DATE 05-06-2009***********************************************************************************************************************SUMMARY ACCOUNTS*********************************************************************************************************************** UNITS SOLD THIS PERIOD (ref.21) GEMA 38250 LUCY 99257 UNITS PRODUCED (ref.17) GEMA 38250 LUCY 127500 UNITS REMAINING UNSOLD (ref.18) GEMA 0 LUCY 41998

£ SALES THIS PERIOD (ref.21) 256736 NET PROFIT FOR PERIOD (ref.28) 12347 CUMULATIVE PROFITS (RESERVES) (ref.30) 18717 OVERDRAFT AT BANK (ref.46) 43261*********************************************************************************************************************** MARKET INFORMATION AND CONTRACTED RESEARCH PASSWORD ***********************************************************************************************************************PRODUCT PRICES CO 1 CO 2 CO 3 CO 4 CO 5 CO 6 GEMA 1.8 1.6 1.59 1.58 1.5 1.29 LUCY 2.8 1.97 2.08 1.99 1.89 1.64

ADVERTS GEMA 12 10 5 8 10 20 LUCY 20 25 2 8 2 40

MARKET GEMA 9 9 9 9 19 23SHARE % LUCY 7 27 10 6 14 32************************************************************************************************************************


EUE43E Business Management Simulation Manual Prague 2010

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