Accounting & Financial Management, Budgetary Limitations - Assignment Example

Question 1(Part a) Question 1 part b) March Payments made within the month: Inventories at the beginning of March: 120/100*11,800 = 14,160 units Inventories: 54/100*14,160*10=$74,464 SGA: 10/100*177,000 = $17,700- $2,500 = $15,200 54/100* 15,200= $8,208 Payments Made in April: Inventories: 46/100*14,160*10= $65,136 SGA: 46/100*15,200= $6,992 April Payments made within the month: Inventories at beginning of April: 120/100*12,100= 14,400 54/100*14,400*10= $77,760 SGA: 10/100*181,500= $18,150 Less Depreciation: 18,150-2,500 = $15,650 Total Payments in April= $65,136+$6,992+$77,760+$15,650 =$165,538 Payments to be made in May: Inventories: 46/100*77,760= $35,769.6 SGA: 46/100*15,650 = $7,199 May Inventories at beginning of April: 120/100*11,900 = 14,280 units 54/100*14,280*10= $77,112 SGA:10/100*178,500= $17,850 less depreciation amount of $2,500 = $15,350 Therefore: Total Cash Payments Made in May: $35,769.6+$7,199+$77,112+$15,350= $135,430.6 Question 2 (part a) The discussion below portrays some of the possible limitations associated with budgetary control; First, it is argued that the process poses a threat of availing inaccurate estimates. It is important to note that the budget plan for different organizations entirely based on both forecasts and approximations, which do not produce exact figures in most cases (Dahlan, Auzair, & Ibrahim, 2007). Thus, in the event that the budgets are formulated on the basis of inaccurate forecasts then it is quite clear that the overall budget initiative will not be accurate and thus, inefficient and inefficient for that matter. Secondly, there is a high possibility of the budgets becoming rigid so that it can be very tedious and challenging to make necessary changes in order to conform to the ever-changing conditions of the operational environment (Dahlan, Auzair, & Ibrahim, 2007). Budgetary controls set out budgetary limits that are perceived as being final and thus, little of no opportunity is allowed for such crucial aspects as initiatives and judgments on the part of the junior staff. The inflexibility that results from these rather rigid budgets makes operations unrealistic and invalid under the changing operational environment for different organizations (Dahlan, Auzair, & Ibrahim, 2007). Third, it is ascertained that the immediate implementation of budgetary controls is entirely dependent on such aspects as willingness, co-operation as well as comprehension amongst the junior employees for proper execution (Dahlan, Auzair, & Ibrahim, 2007). Thus, possible lack or even poor co-operation might result to inefficient and ineffective performance altogether. Consequently, it is established that budgetary controls are a costly affair given that in needs lots of resources like money and time (Dahlan, Auzair, & Ibrahim, 2007). For instance, sufficient amounts of time are required for leaning the process of effective budgeting process. Notably, budgets are not fairly positioned to provide end outcomes within a short span of time and for that reason; enough patience is needed especially on the part of management (Dahlan, Auzair, & Ibrahim, 2007). In fact, there is a possibility of management losing interest and confidence in the entire budgeting process especially in cases where almost immediate results are expected. Additionally, budgeting process will probably fail in cases where department goals and objectives are allowed to overlook organizational objectives (Bruns Jr. & Waterhouse, 1975). This is especially true when functional budgets fail to portray the overall goals and objectives of a given organization. Lastly, despite the fact that budgeting process is deemed to be of significant help in attaining effective decisions; it cannot be substituted for an efficient management function. Personnel are required to formulate, interpret and implement it altogether (Bruns Jr. & Waterhouse, 1975). Question 2 (part b) The possible alleviations for the abovementioned budgetary limitations are noted as follows; The first problem that relates to the budgeting process providing inaccurate estimates can be alleviated by the management coming up with realistic assumptions for which their forecasts and estimates are based on (Bruns Jr. & Waterhouse, 1975). These assumptions should clearly reflect the underlying operational position of the organization at hand. In the case of rigid and inflexible budgets, the management should ensure to operate under ultimate objectives that realize that maximum benefits should be made a priority. It thus goes without saying that these budgets should be open for possible scrutiny even from junior staff so that hidden benefits might be enjoyed from this analysis (Bruns Jr. & Waterhouse, 1975). The problem associated with a possibility of lack of willingness and co-operation from the junior employees can be alleviated by engaging them in most of the budget-making process so that their respective grievances are ascertained and handled in a timely manner. Organizations should conduct in-house training for all employees that will enlighten them on the need for this tool (Bruns Jr. & Waterhouse, 1975). To cut down on costs related with preparation, the management should ensure to prepare budgets for specific periods of time. Issues related to conflicting goals can be eased by ensuring to provide clear cut goals and define objectives in a more elaborate manner. Question 2 (part b) In my opinion, I think that the process of setting up budgetary limits is more of an ethical dilemma as opposed to being organizational negotiation process. It is an ethical dilemma because even in a participative model managers would opt to involve junior employees in the budgetary process just as a procedure and not merely out of a need to listen to their views and perspectives on the budgeting process. In fact, managers involve employees in order to boost their morale so that they can put more efforts into accomplishing set objectives but in real sense; these managers will make sure to provide staff with guidelines in relation to the overall direction the process should assume. In most cases, the junior staffs are never involved in formulation of high-level strategic decisions relating to these budgets. References List Bruns Jr., WJ, & Waterhouse, JH 1975, 'Budgetary Control and Organization Structure', Journal of Accounting Research, vol. 13, no. 2, pp. 177-203 Dahlan, M, Auzair, SM, & Ibrahim, WW2007, 'Tight Budgetary Control, Business Strategy, External Environment and Firm Performance', Malaysian Accounting Review, vol. 6, no. 2, pp. 81-97. Question 3(Part 1) Sales revenues: 61,000*10= $610,000 Total expenses: 8.70*61,000= $530,700 For 10,000 liters; 8.70*10,000= $ 8,700 Trial batch per month cost: 10,000*8.40*0.10= $8,400 Plus commission: 5/100*8,400 $420 Total cost $ 8,820 From a financial perspective, the trial batch is somehow attractive for Deep South in the long run since the overall cost of purchasing 10,000 liters will save the company about $300 every month. This is possible if the commission is not recurring within every month and is only paid once. In the event that the commission is paid only within every month of purchase then it will be unattractive since these costs will increase the overall cost of acquiring the product. It is important for the Deep South management to comprehend that they will only be required to purchase 10,000 liters every month and no more than that hence a slight reduction in the overall financial cost associated with the deal. Question 3(part 2) In the case that the product is successful and the government orders increase to the official projected level, I do not think that Deep South should accept the deal. This is because the deal will not add any more benefits with a $0.3 difference in production cost. Subsequently, from an ethical perspective, it will be totally wrong to engage in such a deal since the product is meant to cater for the needs of the population in the country of product origin. Accepting the deal might mean that the citizens of that country would be exploited in the manner for which they should access public-based goods. Notably, given the fact that the government orders can Question 3(part 3) The two non-economic considerations used in making this decision include; first, there might be an enormous risk that can arise in relation to the business being associated with fraudulent behavior. This might in turn negatively affect the overall public perception of the company since it will be associated with exploitation of others for their own gain. Notably, there is a likelihood that if the company’s rivals are made aware of this illicit trade might also play it to their advantage and as a result use it to gain more customers, which might bring operations at Deep South to a halt. From an ethical perspective, it is indeed wrong and unethical to pay commissions for products initially meant for the public. In fact, these commissions are paid in form of bribes, which is yet another risky affair that might expose the Company to negative public scrutiny. Subsequently, the official demands a 5% commission for his efforts but in real sense; it is a form of bribe in order to access the product. Given that the management operates under an oath to conduct transparent operations engaging in such dealing might result to future contingent liabilities, which might affect the reputation of not only the managers involved but also the company as a whole. Thus, there is more harm than benefits that can be accrued in this dealing. Question 4 (Part 1) (I) Determining if a shortage of material exists Product Type Maximum demand (to be produced if possible) units Machine-hours to be used for each unit Total machine-hours required per week (hrs) Monsoon 100 90/20 = 4.5 450*7=3,150 Aqua 120 150/40 = 3.75 450*7= 3,150 HydroDrip 100 230/100 = 2.3 230*7= 1,610 Total machine-hours required for full production(week) 7,910 Total materials supply available 6,000 Material short supply 1,910 ii) Product Mix Allocation (to maximize profits) Monsoon Aqua HydroDrip Step 1 (Contribution unit) $__/unit 150-60-30 = $60/unit 250 – 120 – 30 = $100/unit 500 – 200 – 30 = $270/unit Step 2 (Qty of material used) hrs/unit 4.5 3.75 2.3 Step 3 (Contribution per hrs of material) 13.3 26.7 117.4 Step 4 (Ranking for production) 3 2 1 iii) Production Mix Decision Product (sort by ranking) Machine-hours allocated (hr) Qty to produce (up to max) units Total Contribution ($) HydroDrip 1,610 100 100x270 = 27,000 Aqua 3,150 120 120x100 = 12,000 Monsoon 1,240(balance) 1,240/3= 413.3 413.3x60 = 24,798 Total 6,000 63,798 Part 2 (a) Part 2(b) Part 2(c) Question 5 (part a) From the above calculations, it can be seen that the manager in this division opted to apply the return on investment(ROI) using the net book value book of assets as a performance measurement because it generates to a higher rate of return of 17.4% in comparison to other possible scenarios as expounded above. From the calculations above, it can be seen that the manager used the residual income using the net book value of assets s the invested capital as a performance measurement evaluation technique. The technique generates a value of $70,550. From the calculations above, it can be seen that the division manager used the return on investment of the net book value as a performance measurement technique for bonus promise. The technique allowed more than 42.6% rate of return on the initial investment made. Question 5 part b In the case that the managers operate under different country environments then issues might arise that might include; differences in stakeholders’ interest that might have a direct impact on the return on equity, which forms of a significant component of ROI. There might be complications in the level of the stakeholders’ interest in such aspects complications in labor relations, training and development as well as compensation that might affect the level of operating profits; a major component for calculating return on investment and residual income. Subsequently, these managers might be exposed to different tax regimes that might affect the level of operating income. It is important to note that different countries impose different taxation policies on corporate hence operations might be subjected to intensive levels of tax expense that has a direct impact on the level of profits. Question 5 (Part 2) Non-financial key performance indicators or rather non-KPIs are measures other than financial measures that are used to evaluate the immediate activities of a given organization, which are perceived to be the backbones of operations and have a capacity to ensure the accomplishment of its overall strategic objectives (Kaplan & Norton, L992). For most cases, these non-financial KPIs are mostly measures that relates to such crucial aspects as customer relationships, employees turnover rates, operational procedures, quality as well as supply chains embraced by the company within given periods of time (Kaplan & Norton, L992). Advantages of Non-Financial Performance Indicators First, it is important to note that non-financial performance measures are positioned fairly to portray an organization’s drivers of future financial performance (Yenyurt, 2003). A perfect example is when managers of a given division consider the assumption that possible improvements in quality as well as customer satisfaction can be altered a bit to ensure that there is top notch financial performance. Secondly, non-financial performance indicators are more actionable when compared to their financial counterparts (Yeniyurt, 2003). A perfect example is when divisional managers are fairly placed to investigate the immediate sources of product effects as well as poor customer feedback as opposed to investigating the cost of variances given that the former are directly involved with the operations of an organization. Third, non-financial indicators are far much more understandable and easier to comprehend especially in the operational level of management (Yeniyurt, 2003). It is easier to understand what causes customer complaints and employee welfare. Disadvantages of Non-Financial Performance Indicators First, unlike financial performance indicators, non-financial key indicators constitute a wider range of options of non-financial measures. This might post an enormous challenge for operational level managers that are tasked with overseeing the operations at almost a similar moment (Maltz, Shenhar, & Reilly, 2003). It might also be difficult for them to ensure the selection of the most appropriate and proper quality aspects within any given moment in time. Subsequently, the immediate formulation and development of non-financial indicators can be undirected. This is especially because the generation of measures can happen over a significant period of time while still newer measurements are embraced in relation to certain possible challenges (Maltz, Shenhar, & Reilly, 2003). However, in most cases past and old measures can never be discontinued in the course of operations. In addition to this, it is determined that some non-financial measures may lack the aspect of integrity. This is especially since collection of data of non-financial indicators might go beyond manual, computerized and through a third –party hence a higher chance of resulting poor judgment due to possible manipulation and errors (Maltz, Shenhar, & Reilly, 2003). Lastly, it is argued that some of the non-financial indicators might be easily translated into much-needed financial outcomes (Maltz, Shenhar, & Reilly, 2003). In fact, some managers might take it literally that improving such aspects as customer satisfaction and machine hour breakdowns will automatically translate to improved operation profits, which is never the case for most cases. References List Kaplan, RS & Norton, DP L992, 'The Balanced Scorecard--Measures That Drive Performance', Harvard Business Review, vol. 70, no. 1, pp. 71-9. Maltz, A., Shenhar, A. & Reilly, R. 2003. Beyond the balanced scorecard: Refining the search for organizational success measures. Long Range Planning, vol. 36, no. 2, pp. 187-204. Yenyurt, S. 2003.A literature review and integrative performance measurement framework for multinational companies. Marketing Intelligence & Planning, vol. 21, no. 3, pp. 134-142. Read More