The Manufacture of the Motorcycle - Coursework Example

Strategic Management Accounting Question A Bi6bike Ltd is a motorcycle industry that is engaged in the manufacture of the motorcycle, the product design and the marketing of the product is carried out in UK but the main manufacture is carried out in China. Since it is an automobile industry costing plays a major role as they have to change the design and update the technology according to the demand and preference of the consumers. In order to evaluate the alternative costing that could be employed by Bi6bike Ltd in order to reduce cost and provide information on the range of profitability are standard costing, activity based costing and zero based costing. Out of these three methods of budgeting standard costing is considered to be the traditional budgeting but it is still followed or adopted by the heavy industry because it assists in reducing the cost. Standard Costing Standard costing can be defined as the budgeted cost of the unit of output. It includes the cost associated with direct material, direct cost and material overhead. Standard cost is mainly used for comparison with the actual cost. Standard cost does not vary from year to year but it remains constant and static and serves as a base for the measurement of the course of action. The standard cost can be adopted in the most favourable conditions without providing allowance for the waste, normal losses delay in machine down time and normal losses (Lalli, 2011). Figure 1: Control cycle for standard costing Benefits of Standard Costing 1. Standard costing is considered as a reliable base for calculating the total cost that is incurred in production of goods and services (Röhm, 2007). 2. Standard costing makes much easier valuation of the inventory. 3. Standard cost acts as a yardstick against which the cost is measured and it also determines that either the variance from the standard is unfavourable or favourable. 4. Standard costing assist in setting and establishing the budgets for the organization and the departments of the organization. 5. Standard costing requires the full involvement of the employees of the organization that creates a sense of motivation for the employees and employees feel that they are the part of the organization. Figure 2: Calculation of Variances The figure signifies that price of the standard costing is calculated by deducting the actual cost from the standard cost and then multiplying it with the actual quantity. And the usage is calculated by deducting the actual quantity from the budgeted quantity and multiplying it with the standard cost (McLean, 2002). Limitations of Standard Costing 1. Standard costing is very difficult to understand and formulate 2. Standard costing involves a very high cost for its installation. 3. Standard costing is very time consuming as lot of time is consumed in installing the standard costing. 4. Standard costing is subjected to obsolescence. The main criticism for the application of standard costing by Bi6bike Company is that standard costing is not consistent. It does not provide any incentive for further improvements when the goal has been achieved. It mainly focuses on the production capacity and ignoring the over production. It is more favourable for application where the various elements that are used in production are of similar nature. Activity Based Costing The activity based costing is adopted by the organization for identifying the activities performed by the organization and allocating the indirect cost to the products. Activity based costing is mainly used for creating relationship between the activities, cost and products. Figure 3: relationship of Activity based Costing with Activity based budgeting This figure represents the relationship of the activity based costing with the activity based budgeting that determines the cost involved in performing a particular activity. It process starts from incoming of resources then determining the cost involved in performing the activities resulting in production of goods and delivery of the services (Goektuerk, 2007). Benefits of Activity Based costing 1. Activity based costing provides proper allocation of overhead and information are provided for determining the profitability and also making decisions (Innes, Mitchell and Sinclair 2000). 2. Activity based costing is easy to understand and formulate 3. Activity based costing is considered as a benchmark. 4. Activity based cost helps in identifying the areas where the cost is high or low and then evaluating and analyzing the cause (Baker, 1998). Limitations of Activity based Costing 1. Activity based Costing consumes more time if the cost of all the activities are to be calculated. 2. The application of Activity based costing is not suitable for small firms. 3. Selection of the most appropriate cost drive is very difficult and complex. The main criticism of Activity based costing is that it is very time consuming, complex and costly. It involves a huge amount of cost in performing the activities from incoming of the resources to the delivery of the products and services (Gunasekaran 1999). Zero based Budgeting Zero based budgeting can be defined as the budgeting which involves all the expenses. It generally starts its budgeting from a zero base and all the functions in the organization are analyzed and evaluated for the needs and cost. Zero based budgeting helps in implementing the strategic goals by specifying the functional areas of the organization (Kaplan and Atkinson, 1998). Benefits of Zero based budgeting 1. Zero based budgeting provides efficient allocation of resources. 2. Zero based budgeting provides more importance on the value of money. 3. Zero based budgeting formulates many cost effective way for improving the operations. Limitations of Zero based budgeting 1. Zero based budgeting is very time consuming in nature. 2. Zero based budgeting is not suitable for defining the financial benefits. 3. Zero based budgeting may not be suitable for long term perspective. The criticism for Zero based budgeting is that the application of this method is to be done on the basis of new data and information which is very time consuming and tedious. All the above costing method is suitable for large firms. Since BBL is a motor bike manufacturing firm it can adopt all of the budgeting technique or any one. All these budgeting method will assist the company in increasing the profitability and when the reduction of cost is taken into consideration then standard costing can be preferred. Question 2 Traditional budgeting comprises of many limitations and exceptions in its application in the modern organization. Traditional budgeting is time consuming and it incurs a lot of cost when the activities are combined together. Traditional budget are not focused strategically. It mainly focuses on cost reduction and not on value creation. It does not reflect the strategy and results to an unreliable evaluation of performance. Traditional budgeting is very hard to change and the information is provided on the basis of past data. Due to the limitations in the application of traditional budgeting, the companies and the organizations now a day has switched to beyond budgeting methods. Beyond budgeting is considered as an alternative approach of budgeting. It is used in place of the traditional budgeting. 80% of the companies are now dissatisfied with the planning and budgeting process under traditional budgeting. The main weakness of the traditional budgeting can be classified into three parts that is competitive strategy, business process and the organizational capability which includes the disadvantages like focusing on cost reduction rather than value creation, it is bureaucratic and it discourages in thinking creatively, it is usually time consuming and costly when the activities are assembled together, they mainly make people feel unvalued. Value based budgeting, profit planning and rolling budget and forecast are now a day’s treated as the modern or the beyond budgeting techniques. The main objective in formulating the beyond budgeting is to provide a new approach to the budgeting technique and a modification over the traditional budgeting. Beyond budgeting is mainly used for performance management. Performance management is a process or technique that leads to the contribution of the effective management of the team and the individuals for achieving high level of organizational performance (Hope and Fraser, 2013). Rolling budgeting is considered as a tool for beyond budgeting. Rolling budgeting is mainly used by the organization that requires the performance of the budgeting activities that is repeated on a monthly basis it mainly focuses on the future accounting period. It is generally termed as rolling horizon budget, a perpetual budget or a continuous budget. Rolling forecast method is best suitable for bbl ltd because it provides an in-depth analysis of the industry and it provides the future forecast for the growth of the company. Incremental budgeting is also considered as the modification of the traditional budgeting. Incremental budgeting takes into consideration the information and the data of the previous year and also the addition and deletion according to the changes. The increment that is provided is on the basis of the previous year. The main advantages in adopting this method are it is very easy to understand and it is less expensive. Beyond budgeting also reduces and it controls the fixed cost. BBL is a motorcycle industry firm which is involved in designing, developing and selling of the motor bikes therefore beyond budgeting is required to be adopted as rolling forecast method will provide future forecast, incremental budgeting will be less expensive for application (Higgins, 2008) Beyond budgeting also deals with Management control system which mainly includes four processes such as rolling financial forecast, balance score card, controlling fixed cost and investment management. Figure 4: Borealis Management Control System The above figure represents the management control system which is developed as a modification of the traditional budgeting and it is implemented for delivering broader capabilities at a lower cost and without the budgeting dysfunctional consideration. With the application of this model the beyond budgeting can be used by three managers of the organization in developing the process cost and maintaining the total cost of the project rather than explaining and reporting the variances of cost for each month. Beyond budgeting should be formulated in such a way it provides a guide to the top management by establishing guidelines. On the basis of which the departments generally prepare their initial budget then the review or analysis of the budget by combining them together and finding out the result or the outcome as a whole (Jackson, 2007).  The behavioural aspect of budgeting is also required to be considered, the action and reaction of the individuals and groups requires managerial accounting information that will influence the activities in the organization. There are two main approaches of the behavioural aspect of budgeting they are the Authoritative and the participative approach. The authoritative approach mainly deals with the better control over the decision making and it is concerned with setting goals and then preparing the budget that will help in attaining the goals. Participative approach mainly deals with establishes the relationship between the employees and the management and sharing the problems with the employees. Participative approach acts as a motivational tool when the employees are allowed in the preparation of budget. When the behavioural aspect of budgeting is taken into consideration it should be structured in such a way that a balance between the top level management and lower level management is involved. Behavioural approach of budgeting is very useful for BBL as the manufacture of its vehicle is carried out in China and it is sold in UK, USA and Germany. Standards have been set for lowering the cost and increasing the efficiency. The variances are calculated that assumes the difference between the planned outcome and the actual outcome. It reflects the past performance which serves as a basis for comparison. Figure 5: Control Charts This figure represents the random variances that are within the control limits. It is used by the organizations for identifying and evaluating the problems. BBL has also tried to adopt strategic management accounting as a tool for modifying and reducing the limitations of the traditional budgeting. The strategic decision will mainly involve the important effect on the organization by considering both internal as well as the external element. Strategic management accounting will assist BBL in gaining competitive advantage by analyzing and evaluating the ways to reduce cost or emphasize on differentiation of the products by discovering the connection in the value chain and optimizing the cost drivers. Question 3 Responsibility centre may be defined as an organizational unit that is responsible for carrying out its activities and results. In order to increase the accountability she needs to adopt the behavioural aspect of budgeting. The behavioural issues related to budgeting can be analyzed with the help of two approaches or model that is Hosted and Ansari. Hofstede model mainly deals with setting the target and the Ansari model is considered as a comprehensive model. Figure 6: Hofstede model This model mainly establishes the interrelationship of the actual performance, budget level and the aspiration level. It focuses and provides importance on the nature of setting and establishing the target. In this figure too slack refers to as the little motivation that is required by the manager to apply in order to control the cost. Tight refers to as the improvement in the performance of the manager in order to accomplish the tighter budget. But while adopting Hofstede model too slack and too tight is to be avoided as too slack represents that no effort has been made to achieve the outcome and too tight scenario generally destroys the motivation of the subordinate. The main disadvantage of using this model is that the most favourable variance may not be able to provide most effective result. BBL in order to increase the accountability and allocating the responsibility she is required to evaluate the performance evaluation of the managerial and the performance of the responsibility centres. The responsibility centre mainly comprises of the investment centre, cost centre and profit centre. Investment centre mainly deals with controlling the capital investment the sales revenue and cost. The method for calculation of cost, sales revenue in investment centre is return on capital employed and the investment centre. The profit centre mainly deals with the control of sales revenue that is establishing the relation between the price and volume and controlling of the cost. Standard costing and market share performance is used as tool in the profit centre. Cost centre mainly deals with allocation of cost. Standard costing and budgetary control is used as a technique in standard costing. Therefore BBL can adopt the return on capital employed in order to evaluate the cost and utilization of the resources effectively and efficiently. By evaluating the drawbacks and the limitations of the traditional financial performance measurement system BBL wants to adopt the modern and effective performance measurement system. The main problem or the drawback of the traditional performance measurement is in the stages of planning, measurement and implementation (Luecke and Hall, 2006). Figure 7: Strategic Gap in traditional performance management This figure mainly represents the strategic gap in the traditional performance measurement. Therefore the effective and modern performance measurement has been implemented by providing importance and also adopting Balance score card (Kaplan and Norton, 2006). Figure 8: Balance Score card Balance score card mainly includes four perspectives that is business, customers, internal process and finance. Balance score card provides a framework for translating the strategy into operational terms. It includes the need, strategy, sponsorship, data, resources and support of the participants. BBL as it is a motor cycle manufacturing company and it has to deal with various, marketing strategy it can adopt balance score card as a tool for measuring the performance effectively (Niven, 2010). BBL in order to increase the accountability proposes a strategic audit that will deal with the SWOT analysis of BBL. Figure 9: Strategic Audit The advantages or the benefits that can be provided to BBL through the application and implementation of the Non financial performance indication and the behavioural issues are by establishing the long term organizational strategies; it can be termed as the better indicator for evaluating the future performance. BBL wants to adopt transfer pricing in order to facilitate the intergroup transfer. Transfer pricing mainly deals with establishing the price at which the organization can transfer the goods and services within the organization. BBL mainly carries out its transaction between countries as its parts and the motor cycle is manufactured in China and the vehicle is marketed, designed in UK and then it is sold in UK, USA and Germany (Eden, 1998). Therefore transfer pricing will facilitate in transfer of the vehicle within the stipulated time. When the transfer pricing is adopted or carried out between two different countries tax plays an important role as the country has to determine the amount of tax that is required to be provided. BBL has to negotiate and determine the amount of tax that is required to be paid. BBL faces a problem of inflation of transfer prices in countries where repatriating the funds may be difficult for them. When the price gets in inflated in the economy the organization gets affected as it becomes impossible for the organization to procure raw materials. If the price gets inflated in UK it will adversely affect China and vice-versa (Michelle, 2005). In this situation of credit crunch it is expected that at the time of emergency the government should ensure that all the tax revenue are identified and collected in the proper manner. The national government is mainly concerned with the fair share that is created by the transactions carried out at cross border. Transfer pricing mainly deals with inters border transaction the price is mainly ascertained by the non independent body therefore there is no discrimination in the price. As BBL not only manufactures its motorbike from china but also carries out its trade with USA and Germany (Wittendorff, 2010). Therefore establishment of transfer pricing will help or assist BBL in carrying out it’s inter trade transactions across countries effectively and efficiently. Considering the behavioural issues also adoption of suitable transfer pricing is beneficial as it provides an opportunity to the local management in reducing the cost. The most important aspect for adoption of transfer pricing is that the decisions cannot be overstated and the organization is required to have a wider perspective towards the planning and control process related to the adoption of transfer pricing decisions. In order to facilitate the inter border transaction of BBL in transferring the vehicle it is necessary or required by BBL to identify the profit or losses that is incurred from such transactions for evaluating the performance of both the responsibility centres and the local management. References Baker, J.J. (1998). Activity-based Costing and Activity-based Management for Health Care. 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