Luotang Power Presentation and Questions

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2011

FCV = [(RMB320,283,000/346,000MWh)-(RMB362,062,000/347,000MWh)]X 0.346tonne X 3,427,351MWh

= (RMB925.38-RMB1, 043.41) X 1,185,863.45MWh

= (RMB139, 967,463) (U)

From above, we are know that fuel cost variance in Luotang Power is unfavorable in year 2011 compared to year 2010.

2. Assuming that the heat content of the coal was at the mid-point of the no-adjustment range in 2006, how much of the deterioration could be explained by Mr. Tan’s suspicion that they were being shipped lower – quality coal? You may assume that the adjustment mechanism relating to the moisture content of coal adequately protects the project company when high water content coal is delivered and the effects are generally linear.

Furthermore, Luotang engaged in a contract, coal supply contract with Pingdingshan, it requires supplying low sulphur bituminous coal that met certain quality specifications based on coal extraction, mines at the Henan Province. Regardless of the relative stable price of coal, the quality was in fact declining. The company received coal, combination of low heat content and higher water content, resulting in more coal consumed per net electricity generation. The coal quality had gotten worse nearly 3% from the expected quality, a mere adjustment formula. On the other hand Luotang needed to pay a fixed price per ton of delivered coal, adjusted to account for inflation, rectification in transportation cost. Such consequences shows that an injustice been in order with agreement between Luotang and Pingdingshan.

3. What changes, if any, would you recommend be made in the management accounting performance system to improve the reporting and evaluation of Luotang Power Project?

From the financial statement above that presented the differences between standard and actual costs, it is shown unfavorable for the three items which is in operating costs. In year 2011, the actual costs incurred is higher than standard cost. There are coal costs, fixed operating and maintenance and also depreciation expense.

In coal costs, the actual costs increased by RMB5, 021,000 than standard costs, leads to unfavorable although the revenue increases more than the previous year and but results low in profit. Next is, fixed operating and maintenance is unfavorable at RMB5, 890,000 from the standard costs and also depreciation expense is unfavorable at RMB44, 459,000. This is due to the coal quality that Luotang Power bought is deteriorated about 3% from the expected quality. They are spending a huge cost on buying the coal which is over RMB300million of coal each year but electricity generated is decrease due to low coal quality.

Besides that, the demand for electricity had fallen over the previous 12 months as the main power purchaser, HPPC had started to produce its own electricity. Moreover, Luotang Power is facing difficulties in selling the excess energy.

Recommendations

Mr. Tan had an expected promotion that he hoped to get but in order to get the prize he must present the proper report to the Board, hence, the presentation may be the chance he’s been looking for.

A suggestion that would help Luotang to generate better and much efficient electricity based on the amount of the coal would be to make purchase of coal besides or other than Pingdingshan, coal supplier. Luotang, before engaging into a new contract with the suppliers, should assure the quality of the coal and that the supplier will meet the certain quality specifications as per described or acquired. Hence, better generated electricity based on amount of coal provided to be used.

In order to reduce the misunderstanding or the renegotiation between the Hubei Provincial Power Company (HPPC) and Luotang, Luotang might consider establishing a new contract with (HPPC) in order to amend the term and condition that have been signed before. According to the new contract Luotang can state relating to what should be the fix quantity of energy purchased by (HPPC) per year and the price that they should pay. Hence, there may be no more renegotiations related price or reduction in purchase of electricity.

As we know that 2,000 MW expansions at Luotang would increase the company’s electricity output and market share, there may be a need to attract many investors with the knowhow and the operating skills, such as coal directors who are operating the mines nearer to HPPC thus to invest in this company. Chances of expansion and introduction to a new power plant at a newer location could be more legit if investments take place.

Lastly, it is advisable that Mr. Tan should seek advice from Michael Abrahams, a well experienced and educated fellow who had worked with the American engineering giant Bechtel Corporation upon how to handle plant based on capacity. He might have extensive experience and a high level of understanding in engineering therefore, he might assist him to perform well during the presentation. Furthermore, Abrahams could also assist Luotang to have a good contract price with HPPC as well as make the financial results as better as possible.

Bibliography

Adams, A., O'Donnell, A., & Stone, D. (2014). Prezi. Retrieved March 11, 2014, from Prezi.com: http://prezi.com/zecdh4sdc_bz/luotang/

hapizifather69. (2013, March). Luotang Power. Retrieved March 11, 2014, from studymode.com: http://www.studymode.com/essays/Luotang-Power-1550064.html?topic

Norham, N. A. (2013, Oct 11). Slide Case Luotang Final. Retrieved March 11, 2014, from Scribd.com: http://www.scribd.com/doc/175240202/Slide-Case-Luotang-Final

qinyi, y. (2013, March 18). Prezi. Retrieved March 11, 2014, from Prezi.com: http://prezi.com/rv875-nfkv1b/untitled-prezi/

Robert L. Simons, C. J. (2013, Jan 29). Luotang Power: Variances Explained. Retrieved March 11, 2014, from Harvard Business Review.org: http://hbr.org/product/Luotang-Power--Variances-/an/913533-PDF-ENG

Simons, R., & Chapman, C. (2013, Jan). Faculty & Research Case, Luotang Power: Variances Explained. Retrieved March 2014, from hbs.edu: http://www.hbs.edu/faculty/Pages/item.aspx?num=44116