Auditing Porfolio - the Use of Budget Slack - Assignment Example

Running header: Auditing Portfolio Student’s name: Instructor’s name: Subject code: Date of submission: QUESTION ONE 1. Critical success factors are essential activities that must be well undertaken in order to achieve the set organization objectives. They Are factors which the organization must place special attention on in order to achieve the set organizational goals. If any of the critical success factors is ignored by the business, then, the development of its products and goods will be at risk. The set goals will also be hard to realize (Chung,1987). That is the main reason underlying the key attention given to them. One of the key success factors that the organization should put to use is effective marketing. Marketing is crucial for any business that seeks to sell its products. Marketing is crucial due to the many advantages to a business attached to it. One of the advantages is that it helps in increased product recognition to the market. Effective marketing enables the current and the prospective customers to be aware of the existence in the market. This helps in increasing the level of the sales of the products of the company. An increased level of sales insinuates increase in the levels of profits of the business. Marketing also helps the business in recognizing the emergence of new markets. Through effective marketing, the company is able to identify new markets where they can sell their products. This also helps in increasing the level of the sales for the company and in turn also the levels of the profits. It is also vital in that it enables the company to know the special needs and specifications and preferences of the customers. This enables it to place their products in such a way as to meet this demand change. Customer satisfaction is one of the main motives of any business. Through satisfying the customer needs, the business is able to raise its proceeds and hence increase in the profitability which is the motive of the company. Another key success factor is good distribution techniques. Good distribution means that the products of the company can reach the customers at a strategic place which is cost effective and efficient for them. Mostly, products which are in accessible to the customers have low levels of sales. Through the enhancement of the distribution patterns, the levels of the sales are expected to increase in the business which will be replicated by increase in the profitability of the company. The other key success factor which the company should employ is massive advertising techniques. Advertising helps increase the consumer awareness of the product and hence increase the sales levels. It also helps distinguish the products of the company from those of the competitors. Through this, the levels of profitability will increase in the company and the company will have an upper edge in the competition industry. The last key success factor that the company should put into use is employing the latest technology in order to increase the quality of its output. Good quality output means that the company will be able to compete well with the fellow competitors and to also increase the levels of its sales. 2. Responsibility accounting is a strategy used in the better control and performance of a business. It goes for the assumption that individual departments should not be judged based on the level of their profitability. It is also referred to as profitability accounting. The most efficient responsibility accounting arrangement is where each manager accounts for every product that comes out of their production line (Cheatham, 1981). Through this arrangement, efficiency will be increased and each and every manager will strive to his/ her level best to see to it that their respective departments are the best performing and are the most profitable ones. 3. The most effective responsibility center designation for this firm based on its profitability motive is the profitability center. This is a strategy where each segment of the firm accounts for both its revenues and its expenditures. Through this, each particular department / division will make its own profits which are different from those of the other divisions. It is hence treated as a separate business (Körlin, 1976). The managers of the respective divisions strive to increase the levels of the sales in their departments so as to see to it that profitability is at the highest level. They also strive at putting in place various strategies to minimize the expenses they incur in their operations. Through this, the set organizational goals are achieved through a divisional approach. Through the separation of the expenses of the division from those of the main business, it becomes easy to calculate the respective spending of each division in the organization. The profitability level of this strategy is in line with the motive of the business of increasing its level of profitability. A cost center is an arrangement whereby the center does not make direct profit to the business but rather adds up to the general administration costs of the company. This form of arrangement adds up revenue to the main business indirectly as compared to the profit center. By adding up the resources indirectly, it means that the various cost centers seek at putting in place measures that will increase the profits of the venture in the long run. Examples include where innovation strategies are put in place which will yield profits in a later period to the business. 4. t is difficult to determine the respective profit made by a certain department in the cost center as compared to the profit center. This venture seeks at a quick profitability making motive. Through this, the use of the cost center approach is not efficient for the company. It is advisable to use the profit center arrangement. This is due to the fact that through this method, it will be easy to identify the respective profits made by the various departments. It should hence apportion its operations into various departments which are easy to administer and allocate a manager for each of them. Each division made should be able to account for all their respective activities and operations. QUESTION TWO 1. Budget slack takes two different forms. It refers to a situation where the revenues and the other incomes of a company are understated whereas the expenditures and other expenses are understated. It is a deliberate attempt to distort the expected outcomes of a business over a certain time. This is mostly so in cases where the attainment of certain future benefits in unclear and the outcomes of the business activities are also uncertain. It is also based on the result of the previous year’s results and o the overall business performance. There are many benefits that accrue from the use of budgetary slacks. One of the benefits is that it creates flexibility in the operations under uncertain circumstances. Through such cases as increase in the budgeted expenses, the budgetary slack acts as a source of the company to reduce the losses that might be made (Welsch and Yoshirō, 1980). In cases where the incomes made are lower than had been expected, it also acts as reinforcement to the company. It also helps the company reduce the losses that might occur in case of events such as inflation. Budgetary slack is also useful in offsetting the costly setups which might occur in the changes in designs for the products of the company. The use of budget slacks is also useful in curbing the pressure that arises when the company is obligated to meet its current year’s targets of earnings per share. This pressure mostly results to constant postponement if certain expenditures of the company. The use of budget slack approach is essential in any business due to the fact that it helps reduce the occurrence of risks in the business. Through this, it can be defined as a risk avoidance concept whereby the risks that emanate from the normal day to day operations of the business. Such risks include unforeseen changes in the supply prices by the suppliers, unforeseen changes in the demand patterns of the customers, changes in the distributor arrangements and also changes in the competition market. Such risks in case of occurrence may make the business to be unable to attain the set objectives and also the budget estimates of its operations. As such, the use of budget slack is useful due to the fact that by overstating the expenses, and the actual expenses exceed the estimates, they will be well catered for in the budget. The use of budget slack also helps to boost the budget performance of the current budget. This is because all changes that might emanate are well dealt with in the budget and hence a reduction in the levels of losses that might occur. It also helps improve the performance of the budget currently being used by the business. In the case where Marge and Pete put into use budgetary slacks, it is crucial for their business. By adjusting the levels of the expected sales, the problem or reduced sales is well dealt with. Through the use of the budgetary slack approach, they expect to achieve the set targets as it comes to the sales and the expenses. Through this, the performance of the budget will be adjudged to be good. 2. The use of budget slack has many demerits to the users. First, it reduces the ability of the business or entity to detect weaknesses arising in its operations and to act timely based on this. For instance, the level of sales may reduce due to a change in the consumer preferences. In the case where a budget slack has been applied in the determination of the level of sales, it hides this aspect. When the level of sales drop to very low levels, it will be very difficult to lift them back to the level they were in before the use of the budget slack (Milne, 1983). Detection of problems as a result becomes impaired and hence the response to such problems becomes very untimely and too late to respond to. The use of budget slack reduces the effectiveness of the use corporate business planning. This is due to the fact that it hinders the full disclosure of the events that occur. It also acts as a deviation to the set plan of the business. Through this, the attainment of the organizational objectives may be hindered. Policies that are essential to the business are those that disclose the true and current position of the business. This should not be subject to any prejudice or alteration. Budgetary slack use falls out of this category. In the case of Norton Company, the budget is changed from time to time based on the performance of the various strategies. Through this, it is difficult to establish the actual position of the business. The performance is also difficult to determine first due to the fact that the budget is not stable and also due to the presence of the budgetary slack in its operations. The use of budgetary slack in the business reduces the main function of evaluation of the managers of the departments in the business (Presslee, 2013). Evaluation is mostly done through the comparing of actual performance with the budgeted performance. In this case, the budget cannot be fully relied upon to give a fair view of the expected performance of any department. This is because by constant alterations and the use of slacks make it inefficient to use in the evaluation process. For instance, by understating the figure of the budgeted sales, underperformance in the departments will not be noted. This is because it will be in line with the budgeted sales figure which in the actual sense is understated. The other aspect is on the expenses. The figure of expenses in the budget slack is always overstated. If the respective departments incur many unnecessary expenses, they will not be noted and will not raise an alarm. This is also because they are well catered for in the budget. It can be said to increase the level of wastages in departments especially so in companies which put in use the profit center approach. The other aspect is the income aspect. The budget slack approach goes for the assumption that the incomes and other revenues should be understated. Through this criterion, shortfalls in the income levels of the business will be under the budgeted income levels. This is a very dangerous aspect due to the fact that it will be very hard to point out the underperforming businesses based on the level of income they make. The managers of the various departments may take advantage of this and direct their attention elsewhere away from the business and not put ahead the business goals (Schoute and Eelke2007). They are more prone to underperformance due to the fact that even if it occurs, it will be hard to be noted during the comparison of their actual performance with that of the budget. The individual personality of Marge and Pete will be affected in different ways. First, they tend to lose their integrity in the performance of their activities. This is due to the fact that they report good performance of the business which is an untrue aspect for the business. Integrity is very crucial for any person not excluding those involved in the preparation of the budget. By the provision of misleading information, they lose their integrity. Another way through which they are affected is that they lose their independence. People who prepare the budget need to be independent in all their activities. Through this, they rely on factors that lead them to lose their independence in their work. REFERENCES Milne, R1983, Budget slack, Thesis--University of Illinois, 1981. Presslee, C2013, The Effects of Reward Type and Relative Performance Information on Budget Slack and Performance. Thesis (PhD)--University of Waterloo, 2013. Schoute, M&, EelkeW2007, The impact of budgetary slack on budget use. Amsterdam: ARCA, Amsterdam Research Center in Accounting. Chung, H. 1987, Management: critical success factors, Boston, Allyn and Bacon. Cheatham, C1981, Cost management for profit centers, Englewood Cliffs, N.J.: Institute for Business Planning. Körlin, E1976, Profit centre sales management with contribution costing, London: Business Books Limited. Welsch, G&, Yoshirō, I1980, Organizational slack in budgetin, Austin, Tex: Graduate School of Business, University of Texas at Austin. Read More