A financial case study on Open University Malaysia

Category: Accounting

Introduction

In this study, Open University Malaysia has been chosen to investigate and analyze the relative strengths and weaknesses by absorption costing, cost volume profit analysis and others. The process by which total overheads are absorbed into production is known as absorption. The objective of the overhead absorption process is to include in the total cost a product an appropriate share of the company's total overheads. Once all the overheads have been apportioned to the production cost centre it is necessary to charge the overhead into cost units that has pass through the production cost centre. This is known as overhead absorption.

Company Profile

Open University Malaysia was set up with the objective of offering open and distance learning. These colleges established on 10 August 2000 and it was seventh private university in Malaysia. It was incorporated as a private university under Private Higher Educational institutional Act 1996. Open University Malaysia (OUM) is consistent with its philosophy of democratizing education. Philosophy is based on the belief that education should be made available and accessible to all people regardless of age, location and socio-economic background. Open and Distance Learning (ODL) mode is specifically targeted at adults who need to take care of their families and manage their careers while pursuing higher studies.

University employs a blended learning approach which involves use of print modules, face to face interview and online learning platform. The modules are meticulously developed to support self-placed learning. The development process involves subject matter experts who are academics at OUM or other higher education universities. Therefore to supplement the modules various learning tools are produced in house. These incorporate the most current best practices among open and distance leaning university. The vision of OUM is to be the leading provider of Flexible Learning. Mission of OUM is to widen access to quality education and provide lifelong learning opportunity by leveraging of technology, adopting flexible mode of learning and providing a conductive and engaging learning environment at competitive and affordable cost. Universities are keep on growing and improvement their learning information let students have motivation, energetic, self perception and others to upgraded their knowledge.

Today's economy is under recession and affecting overall global economy. Most of the business is facing problems such as insufficient cash flow, unemployment, inflation and others and thus business owners need some solution to solve their financial problems. Financial modeling is a process which a financial representation is constructed by a particular it is also used to compile forecasts and budgets, to assess possible funding requirements and to explore the likely financial consequences of alternative funding, marketing or operational strategies. It is also used for business planning, raising finance, investment or funding appraisals, financial analysis, corporate planning etc.

These models are summarized in particular events which may detrimental for success or failure of a business or company. There are 5 steps which enable financial modeling and finical analysis to develop realistic and credible financial models in a structured manner there are

Project planning is essential for the lead financial analysis to evaluate risk and potential pitfall of developing the model.

Specification is to identify the output parameters of the financial model.

Design and build financial model is to build up and improve organization which define the financial model spreadsheet element.

Testing financial model should perform checksum that the result and calculation formulas in the financial model are consistent.

Documentation to ensure that future users are able to get familiar and use the financial model with effortlessness.

These studies were done by much calculation and recommendations are made based on the computed information which was attached in appendix.

Recommendation

First of all, overhead analysis sheet was to prepare cost statements for allocation and apportionment of overheads which includes service departments. The computation on direct, variable and full cost of products, services and activities using overhead absorption rate to trace indirect cost to cost units. These explained use of cost information in pricing decisions including marginal costs pricing and the calculation of "full cost" based prices to generate a specific return on sales or investments.

Based on the result showed that the higher for this test overhead after re-apportion for production X and Z is elimination method and production Y is ignore intensive. Therefore the highest overhead after re-apportion will be flexible and chargeable to the cost service center. This is to assign of specific overhead that can directly identified to a specific cost service center.

Ignore intensive method is the computation of service cost centre do not break down any balance figure from any service department. It show that the cost center do not need to transfer any cost forward direct compute finish with the percentage which available in the test. This service is call as one way flow.

Elimination method called as two ways flow services. Where the service departments service each other. In this case, company are using this method to test if accumulated cost centre until significant how much their will gain on that period and what will be affected to company performance.

In Repeated Distribution situation Open University Malaysia have two service cost that also support each other and the first application of the calculation will not transfer to all the service costs over to the production cost centre therefore it will required to use repeated distribution to compute cost centre for the period. Therefore, in this case is from service cost library to service cost advertisement. The transfer is added up once and using percentage to calculate from the total and amount transferred to the left. This process is repeated until the amount become insignificant. The computation which are show at appendix for further details.

 Simultaneous Equation. According table as above this method is no mathematical limit to the number of step allocations that can be made. In the alternative, calculus could be used to achieve numerous simultaneous allocations. These situations provide intellectually stimulating challenges but company may not be worth the cost of implementation. As a result, companies are usually content to rely on direct or very simplified step allocations of service department costs.

Basically, this study is to test how external reporting rules are replaced internal specification can be accumulated and presented. Therefore, internal specifications are sufficiently logical that enable good economic making decision. It means all of the manufacturing costs are absorbed by the unit produced. It also known as full costing which are included direct material, direct labor, both variable and fixed manufacturing overhead. Normally, variable cost is often useful for management's decision making because variable cost is different with fixed cost. During the period of time, fixed cost rate are fixed just circumstance fixed cost rate just will be change for examples employees salary, rental increasing and other fixed cost expenses. But variable cost is different it was based on operating expenses for example overtime of staff.

According to the result which are compute and excel sheet is show that the comparison between absorption method and marginal methods. After computation result show that profit on absorption method (RM81,142,328) are higher than marginal cost (RM59,584,167) equal RM21,558,161, 26% higher. Therefore, OUM can use absorption costing approach to make decision during the period of time when they are facing pricing or other problems. In this stage, it can appear what company can ignore demand and arrive at a price that will safely yield profit whatever profit companies are targeted.

In excel sheet working are noted that absorption costing are relies on a forecast of sales and unit production cost can be computed without such a forecast just use previous data to estimated the figure. Therefore, the computation which show at the appendix are reliable company will have profit. Mangers are believe that absorption costing approach pricing is safe and desire. These approaches are safe for company as long as company budgeted at least as many element as manager are forecasted.

Breakeven point will provide a thought process which can insight how profit change as sales increase or decrease. Forecasting an accurate amount of sales or profits is nearly impossible due to a company's many products with varying degrees of profitability and services with customer's demands, interaction between price, promotion and number of unit sold. The break-even technique can be adapted to determine the sales needed to attain a specified amount of profits.

Result shows that breakeven point in unit is 2165.17 per student fees and breakeven point in currency is RM 46,763,954. Break-even point in units for OUM is the number of students it needs to pay their fees in order to cover companies fixed and variables expenses during the years.

Chart of Profit and loss are show that there are higher gain in certain period and the margin of safety in % is 66.90%, RM112,732,602. Therefore, top management can consider pricing can involve a complicated decision making process on the part of consumers and how to increase their profits on pricing strategy an psychology of pricing before making decision on the product and services. The chart shows the profit by the amount of unit contribution margin can cover back fixed cost as well as increase profits.

Break even analysis are explain the relationship between cost, production volume and returns. It can be extended to show how changes in fixed cost variable cost relationship and how will be affected profit level. So that, CPV (Cost profit Volume) analysis are useful when used with partial budgeting or capital budgeting techniques and company can applied this method to launch their analysis. It indicates the lowest amount business activity necessary to prevent losses.

Finally, there is some strength and weakness from financial modeling which can affect company performance. Basically, Major companies such as Open University will provide master budget to predict their financial performance for future. Therefore, there are some benefits which OUM should consider is:

If sales exceed the forecast top management should seriously consider implementing financial modeling as an integral part of the business planning process.

As a large public companies engage in financial budgeting and modeling. It is the only ways to maintain control over businesses with hundreds of employees or department and millions of sales. The company will spends so much money to maintain their strategic financial plans therefore it must start-ups a finance growth to maintain it.

Financial modeling is the only way deal with multiple events that may affect company performance. Sales forecast, product cost, operating expenses, availability of financing (equity and debt and other will competitive pressure consider in decision making process.

Financial modeling help document and measure the possible outcomes of various course of action. It really helps top management to make better decision.

A top management has to consider many facts and problem which will affect company performance in future. The strength and weakness of financial modeling can show company how to improve their strength to get better profit and how to reduce their weakness. Therefore, understanding break-even analysis, absorption approach is important therefore top management can make better decision which based on the fixed and variable cost and able to reduce their cost to increase their profit. This approach can predict company during economic downturn.