What is a Balance Score Card - Essay Example

Summative work Assignment Management Report, which determines the success or failure of an organization. Moreover, it is very essential for taking the appropriate decisions. The main theme of a management accounting report is that to provide logical information about the business and its functioning through out the levels of an organization. Management accounting is a branch of accounting, which is mainly dealing with various managerial aspects mainly handled by the managers within the organization, which is essential for taking appropriate decisions. The concept of management accounting is under the control of Management accountant who is responsible for the preparation of financial statements, and management accounting report for taking appropriate decisions. Generally Accepted Accounting Principles (GAAP) is dealing with various accounting principles and guidelines for undertaking the implementation of accounting practices. But on the other hand, financial accounting is also important for evaluating the profitability of the business entity. Accounting is a system used by the business entity to measure its financial performance. There are several branches of accounting are available, but among them both management and financial accounting is relevant. The main emphasis in management accounting is to establish the relationship between cause and effect of a particular activity. More over, it is multi disciplinary in nature, because it is a combination of several disciplines like financial accounting, cost accounting, statistics, etc. In this case, the net profit of the company is goes on increasing, but at the same time, the cash in hand is decreasing to certain extend. Cash is a critical asset, which plays an important role in business. Cash flow statement is a statement showing the change in cash position from one period to another. Because it is possible to identify the causes of changes in cash balance between the two balance sheet dates. While preparing cash flow statement mainly it is essential to consider both actual cash flows and notional cash flows. Cash Flow Statement For the year ended 2002 Particulars Amount (in m) Cash used in operation. Issue of shares. Cash generated Add: Opening cash balance Cash balance at the end (1) 6 5 4 9 Calculation of Cash from operation Particulars Amount (in m) Net profit Add: provision for taxation. Funds from operation. Add: decrease in debtors. Less: decrease in creditors. Cash used in operation. 4 6 10 8 18 (19) (1) Adjusted Profit and Loss Account Particulars Amount (in m) Particulars Amount (in m) Provision for taxation. Depreciation of FA (balancing figure) Closing balance 6 14 (6) Opening balance Funds from operation. 4 10 14 14 Workings:- Here, there is no disposal of assets takes place in the year 2001 and 2002, therefore the difference between the value of assets in both years are considered as the amount of depreciation, such as- [166_152] = 14m. Propose Dividend Account Particulars Amount (in m) Particulars Amount (in m) Cash (dividend paid) Closing balance 7 9 Opening balance. Balance transferred to Profit and loss account. 7 9 16 16 While preparing the cash flow statement of a business organization, it is possible to understand about the causes of changes in the cash flow position of a business unit. Through which, it is possible to identify that the reduction of cash balance inspite of increase in income or for increase of cash balance in spite of decrease in income. This statement consists of opening cash balance and all sources of cash and all applications of cash and ends with the closing balance of cash. More over, here the changes in current assets and current liabilities are adjusted in the amount of cash from operation. It is necessary for a firm to keep adequate amount of cash in hand for making immediate payments. The major responsibility of the financial manager is to plan cash and maintain adequate cash balance. A cash flow statement is considered as a summarized cash account. In addition to this, the statement helps the management in ascertaining how much cash is needed, from which source it will be raised etc. Capital expenditure is an outlay of cash for a project that is expected to produce cash inflow over a period of time, exceeding one year. Capital expenditure can be very large and have a significant impact on the financial performance of the firm. The cash-flow statement is one of the most critical information tools for the business, showing how much cash will be needed to meet obligations, when it is going to be required, and from where it will come. It shows a schedule of the money coming into the business and expenses that need to be paid. The result is the profit or loss at the end of the month or year. Cash flow projection is just a forward looking function for making estimation about the evaluation of accounts. Major assumption about Cash Flow will help to maintain the sources of fund effectively. In addition to this, both financial and management accounting is closely inter related to each other. The application GAAP is a must in case of financial accounting. Accounting may be regarded as language of business. Several parties like management, share holders, investors, employees, creditors, and the government are interested in the business functions. Financial accounting is concerned with the provision of information to external parties outside the organization. It means recording and summarizing financial transactions and preparing statements relating to the business. In the changed business scenario, various requirements like future planning cost control, timely decisions etc. In today's competitive world of business, due to the rapid growth in the size of business units and the consequent increase in the problem of internal control, management accounting is playing a massive role. Accounting is a work dealing with the application of theoretical knowledge in the practical field, which requires wide knowledge and skill. Mostly, the management accountant should deal with the relevant technical issues for taking sufficient decisions. For taking appropriate decisions it is necessary to consider the fund flow analysis and cash flow analysis, cash budget, capital budgeting, ratio analysis etc. are relevant. Management accounting aims to develop certain trends in the organization with a view to bring more advanced results. Moreover, it is necessary for an accountant to stress more on the uses of financial measurements and other statements to make effective decisions. It is necessary to evaluate the major organizational changes to improve the workings of an entity. As a result of this, it is possible to improve the technical feasibility and financial viability of an entity as a whole. The ultimate aim of management accounting is to emphasis on future, because the decision making process of managers rely on forecasting and prediction. Rather than this, cash flow statement is an important tool for short term analysis. Like the other financial statements, the statement of cash flows can be analyzed to reveal significant relationships. In case of cash flow statement, it is necessary to consider two concepts like cash generating efficiency, and free cash flow. Cash generating efficiency means the ability of a company to generate cash from its current or continuing operations. But on the other hand, free cash flow refers to the amount of cash that remains after deducting funds, which are required by a company to continue its operations. If free cash flow is positive, then the company has met all its planned commitments and cash has available to reduce its debt or expand. But at the same time, a negative free cash flow means that the company will have to sell its investments, borrow money, or issue its stock for meeting its requirements in an effective manner. The scope of management accounting is very wide in nature. But financial accounting is the general accounting which relates to the recording of business transactions in the books of accounts and preparing a trial balance. The basic objective of management accounting is to classify and analyze the accounting data. It helps to interpret the financial information and there by assure the accountability. As compared to financial accounting, management accounting is internal in nature. Major elements in the success of a business entity are its accounting control and managerial efficiency. But the effective implementation of the accounting procedures in the business requires a well defined planning, adequate control, increased efficiency etc. While evaluating the business functioning of the company (Intellexis) is taken in to consideration, they made profit in 2001, but there was a less cash balance as compared to the year 2000. Similarly, in 2002 the company suffered loss; but the cash got increased than that of its previous year. It reflects that even though cash balance is a crucial factor for contributing towards the profits of the company, then also some times the variation of cash balance may or may not leads to either profits or loss. By analyzing the capital expenditure it was 19m in 2002 and 129m in 2001. Due to the huge amount of capital expenditure in 2001, the cash balance for the year was lowered to 4m. But in 2002, the expenditure was quiet small, so ultimately the cash balance enhanced to 9m. In this situation it is necessary to consider the two basic aspects of financial management, procurement of funds and effective utilization of funds. Procurement of funds- Funds can be obtained from various sources; therefore it becomes a complex problem for business concerns. While procuring funds, certain factors like risk, cost, and control are essential to consider. The cost of funds should be at the minimum level, and then only it is possible to maintain a proper balance among risk and control. Procurement of funds includes: Determination of sources of finance. Determine the finance mix. Raising of funds. Division of profits. Effective utilization of funds- After procuring it is necessary to utilize it in an effective manner. All funds are procured at a certain cost and after entailing a certain amount of risk. If these funds are not utilized in a proper manner, so that they generate an income higher than the cost of procuring them, then there is no point in carrying out the business further. It is necessary to undertake the investment of funds in an effective manner, so that the company can produce at its optimum level without endangering its financial solvency. Cash Management Control Aspects The finance manager must control the levels of cash balance at various points in the business entity. A general view about the maintenance of cash balance is that to keep cash balance in excess of the actual requirements. For the survival of the business units, it is significant to maintain the liquidity at all parts of the organization. At the same time, it is also keen to ensure that there are no funds blocked in idle cash. The cash management system is based on the organizational structure. In case of centralized organization, the central office should control the requirements of cash inflows and out flows. But the situation is reverse in case of decentralized entity. More over, Cash budget reflects the cash requirements of an organization during the budgeted period. Cash budget is an analytical tool that assists the finance manager in determining the short term cash requirements of the organization. More over, the cash budget shows the periodical cash position. The efficient collection and payment of cash is essential for controlling the requisites of a business unit. For the effective running of a business unit, the optimum cash balance is significant. The term float is used to refer those periods that affect cash, which moves through different stages of the collection process. In addition to this, the cash ratio that measures the absolute liquidity position of the business. Quick Tyre and Exhaust Centre Question (i) Explain whether the manager was justified in being satisfied with the increased gross profit. From the data provided the Material Costs relating to their Tyres and Exhausts division could be summarized as follows: Materials Costs (Tyres): 10,080 Material Costs (Exhausts) 5,040 Total 15,120 However it is seen that the above-mentioned figure is at an increased level of 40% over costs. In order to arrive at the correct budgeted estimates it is necessary to reduce this figure to bring it to current levels. Therefore, the correct budgetary estimates would be: Materials Costs (Tyres) (100 X 10080/140) = 7200 Material Costs (Exhausts) (100 X 5040/140) =3600 Total 10,800 It is also necessary to arrive at the right budgetary figures for the labour. There are 2 fitters for tyres and equal number for exhausts The specified rates for material costs for tyres and exhausts have been provided as 48 and 72 respectively. Therefore it is now possible to proceed to find out the hours involved for making of tyres and exhausts. In the case of tyres it would be 7200/48 = 150 units and in the case of exhausts = 3600/ 72 = 50 units. Further in one hour 3 units of tyres and 1 unit of exhausts are produced Therefore it could be said that the budgeted units for tyres are 150 units and for exhausts 50 units. A budget estimate of level of activity for tyres at 150 and exhausts at 50 are being depicted below: Particulars Tyres Exhausts Total Materials 7,200 (48 X 140) 3,600 (72 X 50) 10,800 Labour 1,400 (35 X2X20) 1,400 (35 X2X20) 2,800 Total Margin 40% 13,600 4,320 Sales figure 17,920 Next we come to the application of the budgetary estimates on the actual performance made by Quick Tyre and Exhaust Centre. It could be seen that the actual performance of the company has been 222 units of tyres and 68 units of exhaust items. It is seen that 222 units of tyres would require 222/ 3 = 74 hours or in other words 37 hours per person in tyre division. There is an excess of 2 hours in the case of tyre division but when we come to exhaust division, we find that 68 items would take 68 hours, and yet the budget allocation has been 35 X2 = 70 hours. Therefore the excess work in tyre division could be carried out by the workers of exhaust division and therefore, no aspect of overtime would arise. Coming to the tyre materials, it is seen that 7200 is for 150 units. In the case of 222 units, the rate would be 222X48/150 = 71.04 and in the case of exhaust it would be 68X72/50= 97.92. Therefore, it could be said that the actual performance on the basis of the budget could be assessed as follows: Particulars Tyres Exhausts Total Materials 10,656 (48 X 222 ) 4,896 (72X 68) 15,552 Labour 1,400 (35 X 2X 20) 1,400 (35 X 2X 20) 2,800 Total 12,056 6,296 18,352 Profit 7,448 Sales 17,500 8,300 25,800 The amount of profits as claimed by the Company is 7729, when the actual profits as per the above statement is 7,448 that is, the excess of budgeted profits over actual profits would be 281. The areas where the overcharge has occurred could be attributed as follows: Undervaluation of material costs of Tyre Product: (10,656 - 10,315) = 341 Overvaluation of labour: overtime wrongly accounted = ( 60) 281. Therefore the effective profit would not be7729 - 7280, i.e. 449, but 7729 - 7448, ie 281. It could therefore be said that the budgetary surplus profits, in terms of the budgeted profits over the actual profits earned has been overstated by 168, that is the difference between 449 and 281. In this context it needs to be said about the overhead variance analysis. In the present case there is an aspect of material cost variance and also labour cost variance. The material cost variance has occurred due to the underbooking of material overheads, which was wrongly taken as 10,315 instead of the actual10,656. This has led to excess profit valuation of 341. Material overhead variance may arise due to wrong costing treatment of materials, omitting or undervaluing of materials, not accounting for purchases or valuing it at lower rates or value allotments. In the practice of cost accounting the aspect of correctly and accurately booking material costs cannot be overemphasized because it constitutes, by far, the most important constituent of costs, especially in manufacturing organisations If the material booking is incorrect, it could lead to enhancement of profits, as seen in the present context. The aspect of material costing could be correctly assessed and accurately recorded if organised monitoring of costs and variance analysis is done on a regular and constant basis, and the variances if any are immediately identified and suitably corrected. In this way, the cost records are well maintained and correctly managed, which could lead to the overall efficiency of the costing system in vogue. Material costs need to be particularly monitored since it is in area where the scope of occurrences of malpractices are higher. Next it is deemed necessary to take into consideration the aspect of Labour cost overheads. It is seen that labour would consist of direct labour, indirect labour, normal idle time and abnormal idle time, wage regulations and aspects of overtime, bonus, incentives and other above base rate payments. All these aspects need to be carefully deliberated upon before final cost assessment is done for any organisation. By far labour costing is one of the most intricate and complex areas of costing, not only because it seeks to regulate and justifies the regulatory measure that may govern it, but it has also to keep in mind the surrounding industry and company best practices that may be in vogue in its implementation and use. All such aspects have to be kept in mind before a wage overhead recovery system could be enforced. Basically the aspects of standard costing and variance analysis to which this case study refers is the setting of realistic and achievable budget for each head of cost and the constant analysis of the budgeted figures with the actual resultant figures. There may be favourable variances and /or adverse variances, depending upon the actual performance of the concern. Serial number Description Adverse Favourable 1. When the standard or budgeted costs are more than the actual costs 2. When the standard or budgeted costs are less than the actual costs 3. When the standard or budgeted revenues are more than the actual costs 4. When the standard or budgeted revenues are more than the actual costs The main objective of standard costing is to exert control and monitoring of cost reduction and stability in price movements. The constant comparison of the targets with the actual would ensure a strong and vibrant control system. In this case it is seen that there is an under recovery of material overheads and an over recovery of labour overheads. Under normal circumstances, variances are classified under controllable or uncontrollable. Controllable overheads can be traced down to a particular department, unit or individual and could therefore be better controlled. If there are any adverse variances in the controllable overheads, these could be reduced and made positive by exercising cost reduction and monitoring the payments closely. Also efficiencies could be brought about by labour saving devices (LSD) and by controlling wastages, spillages and faulty production methods. These could be controlled by turning faulty products into good ones by reworking or by taking necessary to reduce the incidence of faults by better training, supervision and control mechanism. The excessive usage of materials, higher rate of idle time and high cost of indirect overheads could be controlled by setting standards and ensuring that actual adhere to the standards as much as possible. It is only when standards or benchmarks are set that it is possible to compare the actual with the standard yardsticks and ensure compliances. Therefore controllable costs could yield to better productivity and all round efficiencies which could reinforce the bottom line of the business enterprise. Coming to uncontrollable costs, these occur due to extraneous factors like inflation, general price rise due to budgetary constraints, Governmental policies and so on. Except in the long run, when strong economic measures can be taken, it would be difficult to control the uncontrollable costs. However, the effects of uncontrollable costs could be kept at the minimum by suitable financial and economic measures like hedging for material costs, forward transactions and long term business planning. The uncontrollable costs could be made controllable in the medium term and could help in bringing about efficiencies in the business performance. It could be concluded that in the case of Quick Tyre and Exhaust Centre, there is the reduction in profits due to material and labour recovery differences. Therefore, the material and labour efficiencies and correct booking of overtime needs to be ensured for higher profits for which the employees need to be rewarded Question (ii) Discuss how you might have analysed the result using all four perspectives of the balanced scorecard. The Balance Score Card system was evolved in order to take care of not only the financial aspects, but also the impact of certain non financial and qualitative aspects that impinge upon the performance of companies In other words, it measures the non financials performance indices of Companies and suggested methods by which it could be integrated into the total framework of the organisation. It suggests methods which could be employed by companies to monitor the financial views and, through the use of strategic vision, seeks to provide answers to managerial decision making and how they could be put into action (What is a Balance Score Card 2007). There are basically four aspects of balanced score card and they are : The learning and growth perspective The business process perspective The Customer perspective The financial perspective (What is a Balance Score Card. 2007). It is now proposed to study it in more detail. 1. The learning and growth perspective: This lays emphasis on the enhancement of knowledge bank of the employees. The aftermath of the technology boom and the high popularity of electronic technology have necessitated the requirement for employees to be in a constant state of knowledge satiation and constantly refurbishing knowledge databases. In the present case study, the employees of Quick Tyre and Exhaust Centre need to be retrained in all aspects of their work and they also need to increase their present working knowledge and techniques to enhance productivity. 2. The business process perspective: This involves two aspects of business and they are: 1. How the business is currently performing and 2. How conformity to customer need satisfaction is ensured and elevated. This perspective entails two aspects- one, the mission critical aspects and the other, the routine aspects. The mission critical aspects would mean those areas of business that are crucial for its continued existence and future, in terms of sales turnover, business planning and forecasting, diversification plans, composition and capabilities of board of directors, compliance with government rules and regulations, financial controls and debt management, etc. As the name suggests, the mission critical assumes grave significance, especially when the concern is challenged by threats, either external or internal. In the present context of Quick Tyre and Exhaust Centre, the mission critical would be in terms of production budgeting, client servicing, sales forecasting, overheads control and financial planning. The other aspect is with regard to the support processes, that is, in terms of helping the mission to become successful. It plays a supporting role of helping the mission reach its goals. Since it is repetitive and routine in nature, it can be subjected to control mechanism and needs to be effectively monitored. In the present context, the Company's administrative and support functions could be the one helping the main unit. 3. The Customer perspective: In recent times, most companies have realized that customer focusing is the mainstay of any business Endeavour and are the bedrock of any concern, big or small. The need for customer satiation has become the password for business development, especially in the context of globalisation and the emergence of e-commerce in the global markets. In today's business scenario, customers have wider options with the opening up of the global markets and would use their discretionary powers, whenever, it was justifiable in the context of seeking better and more competitive markets to buy their products. In the present case study, it is necessary for Quick Tyre and Exhaust Centre to focus on consolidating its sales and increasing its profit margins. This could be done by strategising customer focus as a key ingredient of their business and trying to increase their profit margins by lowering overheads and costs through business rationalisation and better production and distribution techniques. Since their core business is in tyres and exhausts, their core business needs to be strengthened for achieving better prospects in the future. 4. The financial perspective: The fourth and final aspect of balanced scorecard relates to what their pioneers Kaplan and Norton would term as the financial perspective. Under this viewpoint, it is seen that the significance of financial accounting, cost accounting and management reporting systems are not being undermined, since they do contribute immensely to overall reporting systems, and are essential for business planning and forecasting, strategic decision making and all other aspects of business with quantitative implications. This has become even more important in the changing scenario of business enterprises with newer techniques and technology emerging in the worldwide financial markets. While it is necessary for financial information to be needed, it is also needed not to place undue emphasis on the financial information alone, to the detriment of other equally significant factors, like goodwill, business reputation and image that needs to be maintain in order to sustain in the competitive business world. While quantitative measurements and analysis forms the bedrock of any business enterprise, it is also necessary that qualitative measures are taken into consideration while taking long term business decisions. In this case study, the aspects governing labour in terms of wage enhancements and incentives could be introduced in order to induce the workmen to work harder to achieve budgetary targets. This would also serve as an inducement for striving to reach higher targets. 5. Another aspect that needs to be taken care of is in terms of non-accounting concepts like risk assessment, contingency accounting and environmental accounting including efficiency audits. Environmental conscious companies are being increasing aware of the perceived threats that their corporate activities are capable of causing to the immediate environment. Hence, greater care needs to be given to the production processes, especially in terms of producing tyres and exhausts which may emit environmentally hazardous materials into the environment. The management of the Company needs to consider these aspects when drafting and implementing their production plans and policies. It is therefore, necessary that business needs to take into account the elements propagated by the Balance Score card in order to achieve balanced business approach and also sustain the value systems of business enterprise in the years to come. Undue emphasis on any one element tends to neglect other aspects which may cast a deprecatory effect in the years to come. Such a situation needs to be avoided as much as it could be possible. Bibliography What is a Balance Score Card (2007). [online]. Balanced Score Card Institute. Last accessed 13 February 2008 at: http://www.balancedscorecard.org/BSCResources/AbouttheBalancedScorecard/tabid/55/default.aspx Read More