Worplestrop Case Study - Assignment Example

Worplestrop case study Product cost and budgetary control methodologies and system Budgets are plans of activity records kept of a given period, containing formal, quantitative documents and statements of company’s resources. Budget preparation and practice is widely used and applied in quite a number of organizations, and in all levels of the involved organization. We have three methods of budget control and systems (Hofstede, 2001). These include; a) Forecasting It is the most important technique of budgetary preparation; it gives the company ability to lay out future plans for the organization. It gives a comprehensive plan and look outs of the future. We prepare targeted plans, and the resources needed, then make percentages of the head accounts, and let other concerned groups compare. b) Variable Analysis It is usually done every month, with a quarterly processed closing summary. This budgetary control shows the difference between the actual results and the budget, noting the differences down and then accounting for them. This form of control reduces significantly the necessity of going through all the review cycles (Hofstede 2001). c) Control centres It prepares the budget within the business groups by creating budgetary control centres. We have different kinds of responsibilities within the created centres. Control centres methodology is ideally accepted within Worplestrop organization, because the control centres are segmented, creating an easy environment of managing the budgetary information. The budgets operate in terms of monetary relation. This is because most organizational activities run by use of money, so the budgets describe the organizations, usage of the available capital in the organization. Therefore, easy to keep track of the profits, and capital resources of an organization by establishing a clear, and well-defined model of financial performance in the company. Therefore, budgets control all the coordination activities that run in the organization. Control systems are used to monitor and manage organizational projects and functions (T. A. D, 2008). Worplestrop organization, has the responsibility centre, managed by the manager responsible for the organizational unit and its activities. This division is responsible for the usable resources like input and cost, which gives rise to revenues and direct output of Worplestrop organization (K. C V, 1997). This unit involved the centres below; a) Expenses centre This are input measurements, done by the control system. b) Revenue centre This includes evaluation of production of the organizational units in terms of pecuniary form. Then they are compared to the input measurements or cost. c) Investment centre Here, Worplestrop control systems measure the pecuniary values of the input and output, then evaluates how the output comparison to the laid assets used to generate the results. d) Profit centre It is clearly responsible for measuring, the numerically evaluated values of the output, and comparing it to the input, then finding the difference (K. C. V, 1997). Product cost will be derived from the organized accounts of all costs and revenues Worplestrop organisation obtains. For clarity, we must produce explicit and precise accounts for each and all expenses and revenue in the accounting system of this company. There is also the issue of low level accounts, whereby we face two different types of costs; fixed and variable costs (MWE, 2001). Both of these accounts must be dealt with by introducing reports that show the financial state of the organization, which include; a) Cash flow statements This report delivers or poses the inflows and outflows of the organization over a given period. b) Profit and loss statements This statement merges the company’s expenses and revenues of a given period, and then categorise the list of the account and finally indicating the benefit gained within that business period. c) Balance sheets This involves the liability and equity statements. They show the accumulated wealth acquired at the end of a certain period. Total cost of a product is never concerned with the variable cost but with the costs involved in production of the product (Myers, 2002). These product cost is prepared, and included in the budget. The steps involved in coming up with the product costs include; We design a product that fulfils the standard demand of the customer. We then determine a target rate which is attainable by the quality demand of the customer. We then decide which process attains the target cost. Primarily, the product costing approach is only use of direct costs. To get this, we develop a design technique. This design consists of five phases (Myers, 2002). These stages include; a) Planning This summarizes the product plan in the form of a document, to explain the product mission, primary specification, product design, manufacturing, marketing, product target cost, product volume and product selling price, which are all well stated in the budget b) Concept design Develop the basic concept of the product, by adopting the requirements specified in the planning stage. c) Basic design It makes a general, abstract drawing of the product grounded on the initial stages. d) Detailed design Here, we write the manufacturing specification of the product based on target cost and expense estimate. e) Manufacturing preparation We write the manufacturing specification of the product based on the manufacturing process design. Lastly we have implemented ways to balance the budget to avoid impractical target settings. This element requires a strong discipline approach, so the Cardinal Rule is applied. The Cardinal rule states that: “the target cost must never be exceeded” (MWE, 2001). This rule implements ways to ensure that the control rule is followed, these are; We do not set up any product that is past the company’s cost target. We must find offset saving externally if the target value is not reached during design. We manage the manufacturing transfer from design to attain the target cost. 2. Information output to support management decision-making Decision making is the action of getting a reasonable conclusion on an idea or an issue (T. D, 2002). Operational level These are decisions usually done by the employees. This decision making determines and influences how activities are done. They are short term decisions about ways of implementing the tactics. They are also known as administrative decisions. This is the foundation of decision making, that shows who, what and when it is to be done. In financial management of the organization, this type will provide guidance on; Who will be doing responsibility centre management? How to spend the organizational money How will we deliver our products and services to the customer? What are our manufacturing procedures? What is the process of delivery of the products? When to change tactic of approach to our products and clients This decision making will come in handy when making decisions that include procedures and processes in the company. They are also made promptly and in real time, so as to produce results that are required to make quick changes or modification in the production sector, to achieve the expected result (T. D, 2002). To achieve a satisfactory operational decision, these components are taken into consideration; a) Discover operational risk position Here, we identify the affected sector in the organization. It involves identification of the risk and the areas where the event occurs. b) The critical mission This will involve the prompt action taken when there is an alarm of a risk occurrence. c) Situational knowledge At this phase, it involves the collection of detailed information on the place to look. d) Cumulative effects The employee or person in charge should be aware of cumulative effects on the organization, which are increase of successful addition of effects. e) Action response It involves what is done to deal with the arising issue. Strategic decision level It simply creates a driving force in the business advancement. Therefore, it deals with how we develop as a competitive company. Its focus is entirely external to the organization and, therefore, it mostly focuses on the future plan of this organization. This level majorly involves in making decisions about; The vision of this company What is the function of this organization? What does this company stand for? What is this business identity? Many at time’s people may confuse strategic decision with the tactical one, but clearly strategic decision making shows the big picture of this organization, and it is well captured in a (statement of intent) overall organizational strategy (Gopinath, 2010). We can also indicate this decision making helps us to address unstructured decision making, where we use abstract technology models to illustrate the outcome possibilities. Decisions of this nature demand use of a great amount of the organizational resources, this is because these decisions not only affect the internal process of this organization but also affect the external environment and societies. The whole process of strategic decision making is characterised by complexity, freshness and lastly open-mindedness. These decisions are usually made by the board of directors (Gopinath, 2010). Tactical decision making Involves how things are done. This is developing ways to achieve desired results or outcome. They involve establishing tactics and key initiatives that assist in achieving Worplestrop’s mission, vision and identity. Is majorly connects the day to day progress with the long term mission. These decisions are normally made by managers, to push the organizations forward in the competitive world of business. Therefore, they are intermediate decisions that affect how to implement a strategy. The manager should be aware of the competition facing the organization, what percentage the company gets on the resources and how to increase or profits as a company, currently and in the future (T. D, 2002). 3. Samples of the routine and “on-demand” reports Strategic decision samples 1. The table report below shows the calculated decisions on what the company will do about centralization, make to order or make to stocks, and to install a pull or a push in the organizations (Gopinath, 2010). Variables Definition Mean Std Dev. Cost of goods sold (€) 21,458.26 7,435.09 Obsolescence 1 / (Life cycle length in months) 0.03 0.05 Perishability 1 / (Shelf life length in months) 0.14 0.29 Lead time ratio = (Finished product average delivery time – in days) / (Raw material average delivery Lead-time – in days) 0.16 0.33 Demand information visibility If yes, then = 1 If no, then = 0 0.23 0.43 Delivery time Time from order placement to order delivery – in days 5.34 11.26 Process technology If continuous, then = 1 If discrete, then = 0 0.58 0.25 Cost density (€/kg) = (Cost of good sold) / (weight in kilograms) 1,889.89 11,055.20 Coefficient of variation of sales = (Standard deviation of sales) / (sales average) 0.4499 0.176 Inventory turnover (turns/year) (Annual sales – units) / (Average inventory level – units) 9.00 33.16 The Strategic decisions are Centralization vs. Decentralization If decentralization, then = 1 If centralization, then = 0 0.62 0.49 Make to order vs. Make to stock If make to stock, then = 1 If make to order, then = 0 0.77 0.43 Push vs. Pull If pull, then = 1 If push, then = 0 0.31 0.46 2. This table show the actual results of the company logistic regression for the “make to order verses stock strategic decision Variable B Wald Significance Constant 2.328 3.825 0.050 Delivery time -5.370 6.444 0.011 Coefficient of variation -1.601 2.533 0.098 Notes: Criterion variable: make to order vs. Make to stock; R square = 0.751; Chi-square for the Model = 21.265 (Sig. = 0.000) Tactical decision example 1. Resource offer by an external source This is a decision making requirement, where this company is offered additional revenue. The company will not accept this offer; because the additional cost is more than the additional revenue: We produce 5000 packages. Incremental revenue per package €4.20 Incremental cost per package € 4.25 Loss per package €0.05 Total loss: €0.05 x 5,000 = €250 Costs associated with the layoff: Increase state UI premiums (0.01 x €1,460,000) €14,600 Notification costs (€25 x 20) 500 Rehiring and retraining costs (€150 x 20) 3,000 Total €18,100 The order should be accepted. The loss of €250 on the order is more than offset by the €18,100 savings by not laying off employees. 2. This is a sample report assessment, showing how we came up with the product prices of the product at the 2nd quarter of the last business term. Revenues €856,500 Cost of goods sold: Direct materials €489,750 Direct labour 140,000 Overhead 84,000 713,750 Gross profit €142,750 Administrative expenses and selling 25,000 Operating income €117,750 We first compile and get the revenues then we calculate the cost of goods sold, by summing up the direct material, direct labour and overhead. After that, we deduct the cost of goods sold from the revenue value. Then, from the value we receive we subtract the administrative expenses and selling. Then we end up with the operating income. Operational decision making samples 1. This process below show the processing of client requests. The above flow chart shows how customer request are processes differently depending the nature of the request or product. 2. This below shows how products are developed in the company. This flow chart presents how two different products are processed in this company. References Gopinath, C. & Siciliano, J. I., 2010. Strategize!. 3rd ed. Mason: Cengage Learning, Inc.. Hofstede, G. H., 2001. The Game of Budget Control. 1st ed. London: Routledge. K., C. V. & K, C. M., 1997. Accounting and Business Research. Strategic choices, Environmental Uncertainty and SBU Perfomance: A Note on the Intervening Role of Management Accounting Systems, 27(4), pp. 268-276. MWE., G. & B., U., 2001. Accounting Theory and Practice. 7th ed. Financial Times Prentice Hall: Pearson Education. Myers, j. J. K., 2002. The Exploration of Product Costing and Cost Control Methods in the Curent Manufacturing Environment. 1st ed. Michigan: University Microfilms International. P., A., D, H. & E, M., 2008. "Accounting: An Introduction". 4th ed. Butterworth Heinemann: Prentice Hall. T., D. & B., P., 2002. Business Accounting and Finance. 1st ed. New York: McGraw Hill. Read More