Preliminary Analysis of Cost and Budgetary Information Systems - Essay Example

Report on Preliminary analysis of cost and budgetary information systems More than often, organizations ensure that an analysis of varied product cost and budgetary control methodologies and systems are carried out. This is because, introduction of a suitable cost and budgetary information systems allows for effective planning for the future, controlling of present activities, and an evaluation on the past performance within an organization. Considerably, the choice of a suitable cost and budgetary information systems allows for planned action, co-ordination, and optimum use of resources as it defines responsibilities. Outline of Product Cost and Budgetary Control Methodologies and Systems • Product costs include the cost estimates that are based on material, labor and machine process that influence decisions made by management. It is either based on activity based costing or traditional based costing (Kaplan & Anderson, 2007). • Activity based costing is adopted from the conventional costing system and it assumes that activities act as fundamental cost objects because, cause costs and cost objects are known to create demand for activities. • Traditional based costing utilizes costs based on a single, volume-based cost driver, it assumes that product causes cost because; it assigns the overhead costs to products based on relative usage of direct labor. • Budgetary control is a tool used by management in maximizing profits through minimization of costs involved in operation forecasts using management and accounting control. • Budgetary control systems are classified according to time, function and flexibility to ensure controls are made based on the estimates that are compared with actual budget outcome (Lucey, 2003). • It is recommendable for the management of Worplestrop Partnership to adopt the activity based costing control method because it ensures efficient maximization of profits as it allocates costs to key cost drives (Kaplan & Anderson, 2007). • It is also decisive for the management to prepare budgetary control tools ranging from long term to short term, all functional budget estimates and both functional and flexible budget to control costs used in products (Weygandt, Kimmel & Kieso, 2009). Levels of Management Decision-Making More than often, the levels of decision-making are classified as operational, tactical and strategic levels. Nonetheless, decisions made at each level play an important role in product costing and budgetary control, as relevant information is transmitted in order to make an organization successful. More so, successful management decision-making ensures that managers remain responsible as they set up decisive decisions based on effective planning, controlling, staffing and organization as a way of achieving set objectives. As a result, decision making at every level of management remain as an integral part of management within the organizational structure. Considerably, managers at various levels of management have the ability to analyze and make appropriate recommendations based on decisions made in relation to the budget according to set down hierarchical structure of management (Koontz & Weihrich, 2007). Strategic Level of Management More significantly, the strategic level of management is made up of top-level management who are involved in developing long-term plans that are of high-level qualitative nature as it affects the daily running of company’s cost and budgeting activities. As the highest level of management, its output focuses on requests for the performance levels of the organization. The strategic level has yearly production quotas that identify best product mix, and policies on cost and budgetary information system replacement and modernization. Noticeably, the strategic level is made of the board of directors and other heads of functional divisions dealing with finance, marketing, production and human resources activities within an organization (Kerzner, 2009). Considerably, the top management allows for the establishment of directional long-term strategic policies focused on purposefully driving the success of company’s future direction. More so, the top-level management bases their strategic decisions on information that is mainly collected from sources outside the company that mainly relates to competition, market trends and, new product developments. As Worplestrop Partnership top-level management, perceives the development of a new software and computing system it is necessary for them to consider using external information before making decisions because it gives a high level of uncertainty based on its qualitative nature. Nonetheless, internal information based on the company’s cost and budgetary information systems could be used primarily for forecasting. Eventually, the top level management, should come up with a unstructured complex plan on what must be done but it does not give details on the expected procedures to be followed in the successful implementation of the new cost and budgetary information system in the company. More considerably, decisions made largely do not have standard procedures but are influenced by quality of managerial judgment based on forecasting, past experience, and intuition that occurs infrequently, as the top management remain updated on company information through summary reports (McGrath, 2004). More so, top-level management principal tasks in the organization are based on analysis, directions and comparison of courses of actions. Tactical Level of Management After the top-level management makes strategic decisions on the viability of installing, a new cost and budgetary information system the tactical level of management undertakes its implementation in within the company. The main objective of the managers at the middle level is to ensure that the organizational goals set up are achieved by efficiently and effectively obtaining and using resources available. More than often, the output at this level of management involves the requests made for the performance of specified tasks within the organization. Considerably, the tactical level of management gives information that remains essential in identifying and controlling areas of high cost, identifying critical bottlenecks in production, and performance measure of the cost and budgetary information system making decisions on replacements. More so, the middle level of management is delegated with the duty of management control through controlling and monitoring of the organization’s resources as it formulates budgets, plan working capital, schedule production, and make short-term forecasts mainly based on weekly or monthly basis. Unlike top management who use external information, the middle level management uses internal information analysis focused on corrective action based on comparison between actual performances and the company's s desired goals (Kerzner, 2009). Nonetheless, the managers at this level use semi-structured information based on quantitative details and external qualitative information to make their own analysis judgment that influence the increase in productivity levels. More considerably, the middle level managers can evaluate the company’s position in the industry as the focus is placed on competitive advantage based on industry averages and other companies productivity levels information compared to internal productivity data. Operational Level of Management Based on the hierarchical structure of management levels the operational management remains responsible for the implementation of structured plan that are routine and repetitive, as it includes supervisors who work directly with the rest of the employees. In most cases, the output at this level of management involves elemental operations based on the small activities carried out within the organization. At the operational level of management the information required include—monitoring up to date production information by detecting likely shortages and giving early warning, scheduling better production dynamically, monitoring tool, machine and personnel availability, preventive maintenance schedule (McGrath, 2004). Mostly, the operational-level decisions are based on factual data because managers focus on quantitative information whose outcome is mainly predictable. More so, as the low level management, operational managers make straightforward decisions based on specific rules and patterns with less qualitative input they maintain inventory records, requisition for material and prepare sales invoices and shipping orders. In most cases, the operational managers take out operational controls to measure levels of factory-level operation efficiency and undertake remedial action to improve wherever there is a possible deviation. More than often, the operational managers will fully utilize the cost and budget information system as they carry out cost control of an organization’s production process while focusing decision made based on standard and actual costs of production at the end of the accounting period (Koontz & Weihrich, 2007). More considerably, through comparison between the expected costs and actual costs, the operational level of management calculates cost variances levels that determine the necessary corrective action. Management Routine and “On-Demand” Reports As the different levels of management focus on improving the performance levels of Worplestrop Partnership, there should be a steady flow of communication through reports. Depending on the levels of activities and decision making required, the frequency of reports produced by the different levels of management, vary greatly. Whereas it remains mandatory for managers to produce both routine and on-demand reports, the contents and types of reports will not be similar because there are those that are structured and the unstructured one based on the course of the plan of daily activities within the organization(McGrath, 2004). More considerably, as the different management levels work as a team, the coordinated individual actions calls for commitments on reporting status based on the ongoing activities and support of the activities carried out by other employees in the organization. More than often, the top-level management does not give reports regularly because their decisions involve carrying out of internal and external analysis of the company before deciding on strategies to be implemented. Nonetheless, the reports issued by the strategic management are considered equally important because they give guidelines to the other levels of management on activities to be undertaken as they set goals (Koontz & Weihrich, 2007). Considerably, the strategic level managers give ad hoc reports focused on contingencies likely to occur in long term based on activities within the economy that are more likely to affect the performance levels of the company. The top-level management also gives a strategic plan report that uses organizational information that is supplemented by external market research input, based on competition levels, technological, economical, political, legal, social and environmental changes in carrying out sales, production cost forecasts and budgetary allocations. On the other hand, the tactical level of management is involved with instructions and actual analysis of the materials required for production and availability of markets. As a result, this level of management focuses on giving weekly and monthly reports based on the procurement and manufacturing processes to be followed. As a middle level of management, the managers ensure that they carry out activities based on goals set by top management. The managers also offer instructions to lower level managers through exception reports that focus on information based on out-of-control situations that include inventory shortages or machine breakdowns as the focus is maintained on minimizing cost, serving a wider market and maximizing shareholders investments. As the lowest level of management, the operational managers make reports based on daily activities of the company (Kerzner, 2009). More so, as the low-level management, operational managers give reports based on inventory records, material levels and prepare sales invoices and shipping orders they focus on cost controls. As a result, the operational level of management gives exceptional reports in case of cost variances as it ensures effective and efficient control measures in the production level is made with maintenance of high quality levels. References Kaplan, R., & Anderson, S., (2007), Time-Driven Activity-Based Costing: A Simpler and More Powerful Path to Higher Profits, UK: Harvard Business Press Kerzner, H.,(2009), Project management : a systems approach to planning, scheduling, and controlling, Hoboken, N.J: John Wiley & Sons. Koontz, H. & Weihrich, H., (2007), Essentials of management : an international perspective, New Delhi: Tata McGraw-Hill. Lucey, T., (2003), Management Accounting, New York: Cengage Learning. McGrath, M., (2004), Next generation product development : how to increase productivity, cut costs, and reduce cycle times, New York: McGraw-Hill. Weygandt, J., Kimmel, P., & Kieso, D. (2009), Managerial Accounting: Tools for Business Decision Making, Hoboken, N.J: John Wiley & Sons. Read More