Performance Indicator, Product and Service Costing, Budgeting - Essay Example

?MANAGEMENT ACCOUNTING Table of Contents Introduction 3 Dealing with Performance Indication 3 Dealing with Product and Service Costing 5 System of Incremental Budgeting 7 Potential Problems in Current Approaches 7 Incremental Budgeting 7 Zero-based Budgeting 8 Resource-restricted Budgeting: 9 Effective Alternative Approaches in Operational and Strategic Management 10 Conclusion 11 References 12 Introduction Management Accounting as the name suggests is the process of accounting for the effectiveness and efficiency of both the staff as well as the allocation of the available resources and their uses. In this given paper we will mainly concentrate on the areas such as performance indication, product and service costing and budgeting of various kinds along with its disadvantages and process to overcome the same. Through performance indication of the organisation we will be judging the internal as well as external achievement of the institution at present and suggest the necessary tools that would help the organisation in overcoming the hurdles thus faced. Product and service costing analysis will clear out the unnecessary costs that are being incurred by the institution thus taking corrective actions for the same. Through the estimation of the incremental budgeting we can assess as to the implementation of the same is required or not thereby suggesting other budgetary procedure which may or may not be implemented by the institution based on the present circumstances. The University of Newland has therefore adopted measures through the mode of financial tools like return on capital employed, incremental budgeting, standard costing and various other cost restricting tools in order to increase the profit margin of the organisation. These tools would also help them in setting a probable standard for themselves so that any deviation from the same could be anticipated beforehand. Dealing with Performance Indication From the given data related to the project of Management accounting we can observe that few performance tools have been used as in the separate subject department is considered to be an investment centre. Return on investment is one of the main tools for calculation of the various investment centres mentioned in the paper. The total income earned by the institution is 185mn pound which also gives us the estimation of the capital employed or to be employed by the organisation (Mowen, 2011, p.554). However, the targeted return of 7% on capital employed is the return to be generated from the operations of the institution. The assets here have to be forecasted in order to bring a change in the operating cost so much so that the target could be easily achieved. If higher productivity is achieved with lower manpower so that the cost of labour can be saved; this in turn will be the major factor behind building the base for the return of the capital employed. As the pay rates will rise over the time span, labour hour saving will help in the generation of positive return on capital employed. It is calculated as: ROCE= Net Operating income after tax (Morrell, 2001, p.131) Capital Employed Here investment centre means the responsibility that is designated to the manager for executing the responsibility of managing cost and revenue of the organisation. They are responsible for generating income and executing responsibility related to investment base (Drury, 2007, p.396). The responsibility centre has three sub heads namely, cost centre, profit centre and investment centre. The measurement of the performance in the cost centre depicts the efficiency of operation in quantitative terms of inputs used for the production of the given output. From the word profit we can understand the difference between the expenditure made of acquiring the input and the income generated from output of the organisation. Hence it is quite possible to derive both the effectiveness and the efficiency from the profit centre. On the other hand, the possibility or scope of a probable investment opportunity gives rise to an investment centre. Through a detailed analysis of all three we can determine the income generated of an institution we can determine as to whether there is scope for the bonus which would again act as a motivational factor for the staff members. The responsibility centres also undertake the responsibility of measuring the performance of the various departments. The responsibility centres creates a framework for the performance appraisal of the staff. Thus as motivational benefits, promotions are entitled to the staffs whose contribution in the recent past has been note worthy (Vidyanagari, 2011). As we can see from the data given that each responsibility centre that is the individual subject departments are contributing to the institution wide cost as well as income generated ability which is an important criteria for the further growth of the institution. Here the income thus generated is a direct result of the head of the institution responsible for taking decisions related to cost and revenue. It is indicated that identification of the responsibility centres helped the university heads in diverting their focus in controlling the factors within their arena of influence (Plunkett et al., 2011, p.555). Standard costing helps the management in planning as well as controlling the cost of the organisation. Standard costing as the name suggests is setting the standard, then the results derived from it are checked after which the deviation if any is taken care of. This deviation is known as the variance of standard costing. Investigations are made based on these variations and appropriate actions are taken. It acts like a yardstick which helps in the calculation of the actual cost. Economies of scale can be achieved as the best material can be obtained based on the standard. Thus it is a very important financial tool used by the institute for services like catering, cleaning, etc. The institution must have applied for the standard costing on a periodic basis on which the current conditions has been displayed through the data given and are hence based on the cost flow assumption. One of the basic reason for the adoption of the standard costing technique by the institution is that majority of the cost can be controlled without much hassle. Measurement of the actual cost and the performance of the various service industries can be determined by the institution in order to judge the income generated against it (Bragg, 2011, p.342). Thus performance measurement tools are very much essential for carrying out the managerial responsibility with due diligence (Sivakumar, n.d.) Dealing with Product and Service Costing Product costing is generally incurred in the production process related to those cost which goes into the making of the companies final product. It is required for various kinds of accounting and managerial processes. Service industry has the property of inseparability that is the moment service is offered it has to be consumed. Similarly the cost associated with also gets incurred instantly. Hence some financial tools are to be used for the determination of the cost and its dealing which has been explained in the following paragraphs (Hilton, 2009, p.82). Incremental budgeting which is also known as the traditional form of budgeting which has not been successful in reflecting the complexities in the activity overhead in relation to the job size. The capital invested for the institution is in the form of fixed assets which again becomes a matter of great concern as the risk associated with it is an unsystematic one which cannot be controlled. Thus the sales force here is the key factor for pushing the income generating ability level which can otherwise become the reason behind closing down of the business(Plowman, 2001, pp.120-121). From the Direct Labour Hour based overhead recovery method for all indirect costs we can conclude that the contribution made by the indirect cost are not uncontrollable at the departmental level due to which there has been a sharp rise in the labour hour rates . Therefore the question out here is that how far is the set of annual fee contributing to the fixed cost of the organisation which is also equivalent to the overhead cost of the institution. Here the break-even analysis of the institution is also to be determined on the basis of contribution costing as it is the key to take an appropriate decision for the institution. So from the above discussion it can be said that the undertakings of the institution is based on the short –run duration hence only depended on the direct labour hour. Incase of the service department it can be seen that the overhead cost is depended on two departments such as undergraduates and post graduates and EEC students and non EEC students. The method of recovering these overheads is by attaching them to the variable cost factors. Here again the analysis of the break-even point is very important based on the above data as the income generated by the institution can be forecasted with certainty as to choose the correct line of production method and the products to deal with. Since the institution is showing traits of great uncertainty hence a low breakeven point is to be implemented in order to minimise the risk of losses. However the total income generated from the institution may be restricted which could have been earned had the sales rate/admission rate been high. Thus the above conditions are to be keeping in mind before taking a decision which will help the institution earn fruitful results in the future (Marriot et al, 2002, pp.427-436). System of Incremental Budgeting In incremental budgeting accounting is done based on the actual performance of the organisation which is later added to the next period of budgeting. The type of budgeting is not recommended as it believes in on the spot occurrence. But it is a relatively easy approach towards the accounting system as the operation of incremental accounting is a simple one. Incremental budgeting should not be adopted as it always shows a favourable result not depicting the true picture of the budget. Dealing with budgeting: there are a lot of issues that are to be taken care of while dealing with budgets like problem solving, creativity, knowledge levels, etc. With budgeting arises the predicament of problem solving as the organisation deal with various kinds of cost centres, handling expenditures, balancing revenue. However these problems can be overcome by the glancing through the accounting notes of the organisation generally given in the balance sheet. As far as creativity is concerned it is indirectly linked to the handling of the problems related to solving the hindrances of the budget. Again, knowledge is the main factor behind dealing with the budget. Potential Problems in Current Approaches There are various kinds of budgeting which are related to some kind of problems or the other which are as follows: Incremental Budgeting As discussed earlier incremental budgeting is a form of retrospective where agreements are secured through negotiations. It is the cheapest of all forms of budgeting and specifically useful where quantifying the output is difficult. But a few problems follow during the adaptation of the incremental budgeting like it is based on previous budget and focus less on the future operations. Here budgetary slack is unidentified. Thus incremental budgeting is chosen by the university as it mainly concentrates on the broad areas of the various departments neglecting the smaller components which may result in the growth or fall of the institution. Since the annual appropriations are made ignoring the spending made in the multiyear; hampers the decision of time value analysis. We can judge from the above analysis that the criticism of the incremental budgeting arises due to the complete ignorance of the macro budgeting process which takes care of the intricacies of the budgeting process (Rubin, 1988, p.23). Zero-based Budgeting Zero based budgeting does not depend on any carry forwards of the previous period. In fact, everything present in the budget has to be justified. Unlike Incremental budgeting, zero based budgeting is a useful process when it comes to resource allocation. It is also an adaptive process which changes according to the changing situations and priorities. But there may be some potential problem if the zero based budgeting is followed like it is very time consuming, Bureaucratic in nature, proper training is required for the execution of zero based budgeting, etc. From the teaching assistance provided by the University of Newland it can be assumed that it is new organisation hence the adoption of the zero based budgeting system can be an option as this kind of budgeting is generally used for organisation which are starting from scratch. It will hence help the institution in identifying the individual activity of the organisation and the department that requires funding or further improvement. Zero based budgeting can be categorised as follows: i. Priority- based Budgeting: it is the modified version of the zero based budgeting. Its main focus is corporate priorities and results in the growth and savings of the budget in accordance. It also helps in providing essential information to all the business units enabling them to take proper decisions. Since it is a modified part of the zero based budgeting, hence the disadvantages are quite alike (Maddox, 1999, p.224). ii. Performance-based budgeting: The alignment of the information related to performance along with the allocation of management resources is called performance based budgeting. It is mainly depended on the information related to the input, output, efficiency & effectiveness of the organisation. It is quite similar to the zero based budgeting process. Though performance based budgeting helps in gathering of the required information for the organisation yet decision making is not a probable option based on the same. Hence it will be a useful tool for any educational organisation as the test score of the students can be measured easily. But again there is also a problem in adoption of the said budgeting process as will not be a driving force behind the improvement of the students in the institution. iii. Participatory Budgeting: This is an approach which is generally used by the local government generally in Great Britain. Participatory Budgeting deals with prioritising the activities of the local communities (public meetings, debate led by communities and voting rights in the neighbourhood). It generally involves groups that are rarely reachable and who do otherwise does not involve them in decision making. There can be also the possibility of biased decisions being taken while practising participatory budgeting. This type of budgeting generally concentrates on grants instead of the core activities; democratic process may not be followed. Again many key services of the local bodies which may be outside the jurisdiction of the local government control may call for the intervention of the formal partnership arrangements in order to make probable progress. This will encourage the pupils of the organisation in the participation of the social activities of the organisation but will not benefit the institution as a whole (Maddox, 1999, p.224). Resource-restricted Budgeting: These types of budgets are the reverse of the incremental budgeting approach. It starts through the supply condition, which is the availability of workers to fulfil the future requirements (the said condition is assumed to be fixed). From here the reverse incremental budgeting applies. From the process it can be assumed that it can be applied only in certain specific situations. So this process cannot be applied to the as the staff is reducing for the organisation which will not fulfil the above given criteria. These are the various types of zero based budgeting that may be adopted by the organisation to overcome the problems faced due to incremental budgeting; though the disadvantages of the same makes it optional. Effective Alternative Approaches in Operational and Strategic Management In order to avoid the hindrance related to the above budgetary process the following processes can be adopted: Rolling Budgets A rolling budget is a budget which is constantly updated by the addition of further periods. It may be for a month or quarter by removing the period which is at the earliest. Since the budgeting is done in a short duration hence we can always have the true picture of the organisations current financial position. It also helps in the reduction of uncertainty in situation of high volatility. The information is always up-to dated for a significant future period. Since in rolling budget, a regular revision of the statistical data is done, hence the institute will always be updated in financial terms. The information thus generated from the institute could be always relied upon. Contingency Budgets Contingency Budgets are prepared when the reliable data is missing from which no experience from the past can be drawn. A contingency budget helps in filling up the gap of uncertainty. By the adoption of the contingency budget the institution will be in a position to overcome the areas of conflict. The institution will also be prepared for any sudden expenses which may occur in the future. Thus the adoption of the contingency budgeting will protect the institution from any financial losses in the future. Conclusion The University of Newland is a large modern university based in the midlands of the UK. It comprises of various department of subjects which are also individual investment centres that is separate investment have been made under each of the department so that the individual performance of the various departments can be assessed along with the performance of the entire university. Specific target is set for each of these departments to earn a return of 7% on the capital employed by the institution. The income thus generated will be paid as bonuses to its staff and even provide promotion opportunities as a motivational factor for the staff. The standard costing system has been adopted by the institution to keep a check on the costing of the service sectors like catering, cleaning, etc. For the determination of the profit/loss of each course established direct labour hour based recovery method for all indirect costs has been incorporated so that the uncontrollable cost factor can be determined. But still the institution is witnessing a rapid rise in the direct labour hour rates in the recent years due to the sudden fall staff. This problem can be overcome by the implementation of the budgetary measures suggested above. But they are trying to cover up the problem by setting a single annual fee for all undergraduates and a higher single annual postgraduate fee. Similar to the above condition the EEC (European Economic Community) students pay less than students from outside the EEC. References Accenture, 2001. Methods of Budgeting. [Pdf] Available at: http://www.som.cranfield.ac.uk/som/dinamic-content/media/CBP/Areas%20of%20Expertise/Neely%20A%20Sutcliff%20MR%20Heyns%20HR%20-%202001%20-%20Driving%20Value%20Through%20Strategic%20Planning%20and%20Budgeting.pdf [Accessed on May 10,2012] Bragg, S.M., 2011. Wiley GAAP 2012:Interpretation and Application of Generally Accepted Accounting Principles. Canada: John Wiley & Sons. Drury, C., 2007. Management and Cost Accounting. Canada: Cengage Learning. Hilton, 2009. Managerial Accounting 7E. New York: Tata McGraw-Hill Legislative Research Commision, 2001. Performance Based Budgeting. [Pdf] Available at: http://www.lrc.ky.gov/lrcpubs/RR302.pdf [Accessed on May 10, 2012] Maddox, D.C., 1999. Budgeting for Not-For-Profit Organizations. Canada: John Willey & Sons Marriot, P., et al., 2002. Introduction to Accounting. United Kingdom: SAGE Publication Morrell, J., 2001. How to Forecast: A Guide for Business. England: Gower Publishing Ltd. Mowen, M. M., 2011. Cornerstones of Managerial Accounting. Canada: Nelson Education Limited. North Ireland Assembly, 2010. Methods of Budgeting. [Pdf] Available at:http://www.niassembly.gov.uk/researchandlibrary/2010/0610.pdf [Accessed on May 10, 2012] Plowman, B., 2001. Activity Based Management: Improving Processes and Profitability. England: Gower Publishing Ltd. Plunkett, W. R., et al., 2011. Management. Canada: Cengage Learning. Rubin, I.S.,1988. 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