Financial Management and Strategic Management Accounting - Assignment Example

Strategic Management Accounting Contents Question 3 Question 2 8 Question 3 12 References 17 Question She would critically evaluate how alternative costing methods could be employed to both reduce costs and provide information on product range profitability. The alternative costing methods that could be employed by BI6bike Ltd (BBL) to reduce cost and also providing information related to profitability of the product range are Since Bi6 bike Ltd is associated with automobile industry it has to undergo and adopt the change in the design and development, marketing of the motor cycles. In order to update itself it requires reducing the cost of its manufacturing and increasing the profitability. And it is also responsible for providing timely delivery of its products to its customers in UK, USA and Germany. The two costing method that is adopted by BBL for reducing its cost .are: Standard Costing: Standard Costing may be defined as the cost that is associated with the manufacturing cost of the company such as the direct material cost, direct labour cost and the manufacturing overheads. Standard costing and the variances related to it serve as a valuable tool for the management. Standard cost are mainly used as the target cost and it acts as a standard for comparison with that of the actual cost and it is analyzed and formulated on the basis of the historical data analysis . The standard cost changes and differs from that of the actual cost as each and every situation is composed of unpredictable factors. The main objectives of standard costing are to provide a standard for assessment of efficiency and performance, setting the standards for budget, setting some challenging targets in order to motivate the performance. The main basic control cycle for standard costing are Advantages of Standard Costing: 1. Standard Costing includes the involvement and the participation in order to create an attitude that is cost effective and positive throughout all levels of management. 2. Standard casing generally and usually supports the techniques and the procedures applied for the reduction and decrease in the unfavourable variances. 3. Standard costing helps in reduction of the wastage by identifying the various variances and then adopting corrective and accurate actions. 4. Standard costing encourages the workers and supervisors by providing them various incentive schemes. 5. Standard Costing is considered and identified as an important and vital tool for marginal costing, budgeting, business planning, and inventory valuation. 6. The well formulated standard costing initiates the attention of the management towards the items that are not progressing and developing according to the expectation. 7. Standard costing acts as a standard in evaluating the performance of the company. Figure 1: Calculation of Variances This figure defines that in Standard Costing the price is calculated by deducting actual cost from the standard cost and multiplying it with the actual quantity Gunasekaran, 1999). The usage is calculated by deducting the actual cost from the budgeted cost and multiplying it by standard cost. Disadvantages of the Standard Costing The main disadvantages of Standard Costing are: 1. The variance in the report related to the Standard costing are mainly prepared on monthly basis and they are released very late. Therefore the information that is provided in the report becomes meaningless. 2. The standard costing mainly deals with controlling and maintaining the operating part of the organization and it usually neglects the other factors that are the quality, customer satisfaction and the lead time service. 3. The standard costing as a technique is gradually losing its popularity in those companies that are adopting just in time principles. 4. The standard costing is suitable for application and implementation only in large firms. It is not suitable for implementation by the small firms as it requires high skill and effort. 5. Standard costing is not suitable for application in those companies that manufactures non standardized products and services. 6. Only meeting and fulfilling the standard may not be enough. Continuous improvement is required for the survival in the present competitive environment Standard costing technique can be adopted by BBL s it will help in reduction of cost and increase in efficiency. The standard costing will help and assist the company in determining and estimating the value of the inventory, the selling price and also the cost of the goods sold. Standard cost is very suitable for large and heavy industry as it estimates the cost properly and accurately. BBL being a large size company can adopt standard costing as a technique for reducing and minimising its cost. The main criticism in adopting standard costing is that standard costing is only suitable for application where the elements and the components that are used for the production are uniform in nature. And the method is very repetitive in nature which leads to the formation of the standardized product. The differentiation in the products based on the preference of the customers depends on the various work elements, components and various expenses. Standard costing mainly takes into consideration the utilization of the production capacity and ignores over production. Standard costing that sets the standard is very different from that of the logic set for frequent and continuous improvement. Activity Based Costing Activity based costing is formulated or established in order to provide more correct and accurate way of allocating the indirect and the support cost in relation to the cost objects. Figure 2: Relationship of Activity based costing to activity based budgeting The relationship of the activity based costing with that of the activity based budgeting is established in order to reduce the cost and increase the profitability. The steps in this process includes the collecting and incoming of the resources and then undertaking the cost pooling activities that is done in order to reduce the cost, and then the product or the services is delivered (Kaplan and Atkinson, 1998). Advantages of Activity Based costing: 1. It provides a better understanding of the overheads and it uses the unit cost rather than using the total cost. It acts as a yardstick and bench mark. 2. Available information can be gathered for taking decisions relating to the profitability of various lines. 3. The cost determination of the product under activity based costing is accurate and very reliable and it also provides importance on the cost and effect relationship. 4. The selling price fixation of the various products is accurate as the overheads are appointed on the basis of the cost drivers (Innes, Mitchell and Sinclair, 2000). Disadvantages of Activity Based costing 1. It is very complex to identify the cost for the overall activities. 2. Selection of the cost driver and evaluation of cost depending on activities is difficult. 3. It is not applicable for small manufacturing firm. The main criticism of Activity based costing is that it is very time consuming. Activity based costing helps in analyzing the per unit cost of the products. BBL is a company which deals with motor cycles therefore the per unit cost of its materials that is used in production is to be evaluated properly so that the total cost can be evaluated in order to increase the profitability. Since BBL is a motor manufacturing firm it is a large firm so it can apply both standard costing as well as activity based costing which will help in reduction of cost and enhancement of productivity. As it is a manufacturing firm the combination of both standard costing and activity based costing will help in reduction of cost and increase in productivity (Gunasekaran, 1999). Question 2 Traditional budgeting are surrounded and are faced by many disadvantages that is it is very inefficient as it is very time consuming and includes too many resources of the management. Traditional budgeting is subject to the errors in the data entry, difficulty in accurate formulations. The managers often tend to forget the strategic objective of budgeting as traditional budgeting mainly provides importance on the reduction of cost instead of value creation which signifies that the management adopting traditional budgeting gives less priority to the strategic initiatives. Under Traditional Budgeting the people generally feel undervalued. It is very rigid and very hard to change and even the data are irrelevant as the information that is provided is based on the past data (Gregory, 2005). Therefore the companies now a day is focusing more on beyond budgeting as a technique. The planning and budgeting also creates problem as it fails to implement the strategic behaviour. 80% of the companies are not satisfied with the planning and budgeting done by the traditional budgeting (Röhm, 2007). The main use of budgeting is that the budgeting should coordinate the activities of the organization and meet the short term goals of the organization. Beyond budgeting is termed as a modification of the Traditional budgeting. Some of the better budgeting techniques are zero based budgeting, rolling budgets and forecast, value based budgeting and profit planning. As BBL deals with manufacture of motorcycle hence it is a heavy industry therefore efficient budgeting is required and essential as it deals with the manufacturing, engineering and assembly of the components. BBL requires a budgeting technique that will define the inflows and outflows which will determine whether the financial plan will fulfil the organizational goals and objectives. Incremental budgeting is one of the technique of the beyond budgeting it is superior than that of the traditional budgeting in the sense that traditional budgeting provides information on the base of past data but incremental budgeting takes into consideration the present and the past data for preparation of the budget (Higgins, 2008). It is usually adopted by the motorcycle in order to estimate and provide increment to its employees or the staff on the basis of the past results and it is also less expensive as compared to other technique. The only disadvantages of incremental budgeting are the slack in budgeting. Another technique of beyond budgeting is Zero based budgeting it deals with the aspects that is required to be achieved and what are the elements required to achieve those aspects. ZBB is termed as the efficient technique of budgeting as it justifies and explains each element required for the budgeting activities (Kaplan and Atkinson, 1998). It provides the alternative decision making package. It mainly deals with core package, mutually exclusive package, and incremental packages. As in motorcycle industry the motorcycles have to perform in different situations therefore decision package is required to be adapted by the company BBL in order to formulate different design and strategy for each model. Zero based budgeting provides value for money (Jackson, 2007). Rolling budgeting is also considered as one of the important tool of the beyond budgeting as the budgeting activities can be repeated when it is required. Different and varieties of features can be included in the motorcycle from time to time therefore Rolling budgeting acts as a important tool of budgeting as it will help in forecasting the changes or modifications that will be adopted or undertaken by the company. The rolling budget is generally termed as the continuous budget, horizon budget, or a perpetual budget (Van der Stede, 2000). Figure 3: Management Control System The behavioural issues are to be focused as this also affects the budgeting techniques. The two different approaches of budgeting are authoritative and participative. The authoritative approach generally focuses on the decision making and it is known as top down budgeting and the participative approach deals with communicating and understanding the problems of the employees and then controlling the managers and it is known as bottom up budgeting (Das, 2001). But both this approaches has advantages and disadvantages therefore effective budgeting is required to be formulated in such a way that the top management in formulating the goals and the guidelines. The effective budgeting techniques help in maintaining a balance or equilibrium between the involvement of the top management and the lower level management. For the successful implementation of the budget BBL should focus on the variance as variance provides the difference between the planned outcome and the actual outcome. The budgeting can be referred to as effective if the benefit received from the information provided is more than that of the cost of the budget. As in this case study the company BBL manufactures its motorcycles in China which is then sold at UK and USA therefore the cost for manufacturing should be less than that of the benefits or the revenue that is generated from the sale of the motorcycles. Standards have been set or established for the variance that is historical or the past standards and engineering standards. In order to identify the problem trends control charts are prepared. Figure 4: Control charts This control charts helps or assist in controlling charts. In addition to the adoption of the budgeting technique it is required to formulate and adopt strategic management approach as it assist in establishing and building relationship between the strategic position in the organization and the accounting that is related to the strategic positioning. BBL should incorporate strategic management together with the budgeting technique as it will help BBL in gaining competitive advantage by identifying different ways of decreasing cost and increasing the differentiation of the products. While comparing the traditional budgeting with that of the beyond budgeting it is found that the plans in the traditional budgeting is done annually whereas in beyond budgeting it is event driven that is supported by the strategies. The resources that are used in traditional budgeting are allocated centrally which leads to the wastage of the resources whereas in beyond budgeting it is allocated on demand which reduces the probability of wastage. The coordination of the traditional budgeting is linked centrally whereas it is linked dynamically in case of beyond budgeting. Question 3 Responsibility centre can be defined as the unit that is concerned with controlling of the cost. She has to also consider the behavioural aspects which can be explained with the help of the Hofstede model and Ansari model. Hofstede model deals with the budget levels, aspiration level and also the actual performance. Figure 5: Alternative budget model from very loose to very tight The figure indicates that by focusing on the target and budget. The figure indicates that the budget is very slack and very less motivation is required by the management in controlling the cost. The technique is favourable variances as the actual spending will be less than that of the budget. Too slack situation represents that no effort is required to achieve or attain the goal or the outcome. Whereas too tight refers to as the situation that destroys the motivation of the subordinate. The behavioural issues of budgeting focus on the targets that are aimed by the employees. By comparing the two approaches of the behavioural budgeting that is the authoritative and participative budgeting it is found that participative budgeting is encouraged. Behavioural issues of budgeting also deal with the setting of standards that differentiates the difficult budgets and the unattainable budgets (Arnold, 2008). BBL should adopt and focus on the behavioural issues of budgeting as it deals with varieties of model and it has to receive order and deliver its order in time so behavioural issues of budgeting will assist BBL in achieving the target. Some other advantages that the company will get by adopting the non financial performance indication and behavioural issues are it establishes a link that is closer to the achievement of the long term organizational issues, it serves as a better indicator for estimating the future financial performance. It is very suitable for BBL as it acts as a source of success for innovation, building employee relation, capability of the management, establishing a quality and brand value. In order to increase the accountability of the employees working for BBL she has to evaluate the performance of the management by including the investment centre, profit centre and the cost centre. The investment centre mainly deals with the controlling of the capital investment and the cost, profit centre deals with controlling of sales revenue and cost, cost centre mainly deals purely controlling of the allocated cost (Higgins, 2008). In order to increase the accountability and for creating and establishing responsibility centres within BBL she is required to differentiate the performance of the responsibility centre and the performance of the manager. The responsibility centres operate within the open environment. It helps in evaluating the profits that is earned as compared with the assets that is employed. Return on capital employed as an accounting tool is applied sometimes in order to facilitate the effective and efficient use of resources. BBL wanted to adopt modern budgeting technique and modern performance management. The main problem with the traditional performance measures is that it was not consistent and dynamic with the present realities of the business. Therefore new and modern method can be adopted for providing a framework that is the introduction of the balance score card. The transfer is taken place for the movement of the products and services around the world that are basically concerned with the transfer between the different parts of the parent organization. In this case BBL has to adopt transfer pricing as it has to frequently transfer its goods from (Ittner. and Larcker, 1998). Figure 6: Balance Score card The balance score card includes the customers, learning and growth, internal process and financial. It is required to maintain by each company related to any industry as it provides the management with a measurement framework in order to evaluate and examine the performance of the organization in performing towards its strategic goals (Kaplan and Norton, 2006). Strategic audit has to be conducted by BBL as it will fetch and prepare a business report that will provide an in depth analysis of the market in USA and UK including the market analysis, competitive analysis, revenue forecast of the product (Camillus, 1986). Figure 7: Strategic Audit The suitable transfer pricing basis required for intergroup transfers are transfer pricing mainly deals with establishment of the price at which the organizations or the companies generally transfer the goods and services within the organization. In this case BBL has to adopt the transfer pricing as it deals with the manufacture of the motorcycles in China and it is sold in USA and UK (Eden, 1998).Therefore transfer pricing is a efficient technique as frequent transfer takes place. But there is a problem associated with transfer pricing is that transfer pricing may sometimes inflate the transfer prices in the countries where repatriation of funds may create problems for them. In this case also the manufacturing of the motor cycles is taken place in China and it is sold in USA, UK and Germany. Therefore if china inflates its price it will be difficult for UK to operate without the materials or the services that are considered as important for carrying out the business. The manufacture of the motor cycles will be affected (Michelle, 2005). Such a situation may lead to the credit crunch scenario in the economy. During the time or phase of the credit crunch the assistance and help of the government is required in order to ensure that all the revenues related to tax are properly identified and collected. The National Government are aware and concerned with the share of fair price that they receive out of the value creation by the cross border transactions and will pursue to increase their interest. But BBL can prevent itself from the disadvantages or the weakness of transfer pricing by following the guidelines related to transfer pricing formed by the Economic Cooperation and Development in the year 2010. The increase in the empowerment as a management strategy has generated the necessity of consideration of the technical and the behavioural issues that are occurred due to transfer pricing. As transfer pricing cannot be avoided by BBL as it is undertaking international cross border trade therefore BBL should consider the wider aspects of transfer pricing for planning and controlling (Wittendorff, 2010). References Arnold, W.G. (2008). Performance Budgeting: What Works, What Doesnt. Vienna: Management Concepts Inc. Camillus, J.C. (1986). Strategic Planning and Management Control: Systems for Survival and Success. New York: Lexington Books. Das, S. C. (2001). Management Control Systems: Principles and Practices. New Delhi: PHI Learning Pvt. Ltd. Eden, l. (1998). Taxing Multinationals: Transfer Pricing and Corporate Income Taxation in North America. Canada: University of Toronto Press. Gregory, J.N. (2005). The End of Traditional Budgeting. The Journal of Bank Cost & Management Accounting. 12(1), 27-39. Gunasekaran A. (1999). A framework for the design and audit of an activity- based costing system Managerial Auditing Journal 14(3), 118-126. Higgins, R. 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Shenyang: GRIN Verlag. Van der Stede, W. (2000). The relationship between two consequences of budgetary control, Accounting, Organizations and Society, 7(1), 609-622. Wittendorff, J. (2010). Transfer Pricing and the Arms Length Principle in International Tax Law. Netherlands: Kluwer Law International. Read More