Management Accounting and Control Systems - Example

Accounting Systems Name Institution Date QUESTION 1 (a) Assuming that TopCables Company’s overall goal is profitability, what are the company’s critical success factors? Most companies go into business or operations to make profits and TopCables Company is no exception. As per definitions given, a critical success factor refers to a factor or variable within the company that the company is able to control to ensure its success. Looking at the hierarchy of TopCables Company, there are two main variables that are critical for the company’s success which are sales and manufacturing divisions which fall under the category of internal environmental factors that could influence the success of a business or organization. According to Macintosh and Quattrone (2010), the management of TopCables Company should develop strategies that will ensure that the company uses the given variables to achieve its main goal and that is profitability1. Given the variables are the manufacturing and sales divisions TopCables Company should create strategies revolving around the divisions’ strengths and weaknesses and thereafter identify TopCables Company’s main competencies and this can be done by employing the right accounting systems2. TopCables Company runs in a perfectly competitive market where they have no control of the prices of the products but they can ensure profitability by ensuring that the company produces products that are of high quality and improve on customer services such as delivery and time consciousness. TopCables Company should also invest more in marketing strategies that will ensure that their products have high popularity ranking given the competitive nature in the industry. Although the key area that will ensure more success is the manufacturing division3 (Macintosh & Quattrone, 2010). QUESTION 1 (b) Which responsibility accounting arrangement is most consistent with achieving success on the company’s success factors? Responsibility accountings are measures put in place to establish the level of performance of the employees of a company as well as the performance of the departments in that company. The most efficient and effective responsible accounting can be achieved by dividing or placing the various divisions in a company into different responsibility centres which could either be; cost centres, investment centres, revenue centres and also profit centres. The issue at the vice president of TopCables Company in the manufacturing division had his responsibilities extended to making budgets for his division as a cost centre but given the goals of TopCables Company to ensure profitability the manufacturing division will also have to double as a profit centre and that means that he will have to prepare budget estimates and also ensure that the set targets for both responsibility centres are met. The challenge however, is that the vice president of the manufacturing division has no expertise of converting his division into a profit centre. Having looked at responsibility accounting and the various responsibility centres the most consistent responsibility centre that will ensure that TopCables Company achieves its goal of profitability is the profitability centre that involves the manager overseeing the budgeting of the estimated profits for TopCables Company and also ensuring that the targets are met4 (Macintosh & Quattrone, 2010). QUESTION 1 (c) What responsibility centre designation is most appropriate for the company’s sales district? So far we have identified the following four responsibility centres in responsibility accounting systems and we can confidently state that the company’s sales should be placed under the revenue centre. This is because the manager responsible for the revenue centre is charged with the role of preparing the budget estimates for the revenues that will be collected from the sales of the products made by the manufacturing division. Managers responsible for revenue centres afterwards prepare reports that will help them compare the actual results achieved from the results they had estimated to achieve while preparing their budget estimates. According to Holtzman (2014), sales fall under revenue centres and their control is not extended to costs but strictly sales. During the evaluation of a revenue centre, other factors or variable in a company are ignored and the manager focuses his attention on the sales of the company only. That is the main challenge or drawback associated with revenue centres. The main responsibility of the manager in charge of the revenue centre is to increase the sales of the company and in this case increase the sales of TopCables Company. Therefore, the most appropriate responsibility centre for TopCables Company’s sales district is the revenue centre (Holtzman, 2014). QUESTION 1 (d) Suppose that TopCables Company often experiences rush orders from its customers. Which of the two proposed responsibility accounting arrangements is best suited to making good decisions about accepting or rejecting rush orders? Specifically, should the plants be the cost centres or profit centres? There is a distinction between the two proposed responsibility accounting arrangements that is the profit centres and the cost centres. Cost centres are charged with the responsibility of manufacturing the goods and services that are later distributed to other parts of the company and that is their sole responsibility while the profit centres are considered as smaller businesses that exist within a bigger business or company and they are the ones that select the goods and services they wish to provide to their customers. Profit centres unlike cost centres have more autonomy on their operations and they are not restricted to their area of responsibility. Another difference that helps to determine whether the manufacturing division of TopCables Company should either be a cost centre or a profit centre is that a cost centre does not determine the price of the products but a profit centre controls its own revenue, expenses as well as set its own prices for goods and services it offers (Langfield-Smith, Thorne and Hilton, 2012). Looking at the evaluation between the two proposed responsibility accounting arrangements and also considering the market environment of the company, TopCables Company as well as the company’s objectives of ensuring profitability the best responsibility accounting arrangement for TopCables Company is making the manufacturing division a profit centre and the only way to make profit to increase their use of assets in the company to produce their products instead of using assets of low quality to increase revenues and profitability. However, the challenge that will face TopCables Company is that the department will not be able to determine the prices of its own products instead the prices are determined by the market and market forces5 (Holtzman, 2014). QUESTION 2 (a) Explain why Marge and Pete might behave in this manner, and describe the benefits they expect to realize from the use of budgetary slack. Budgeting is a very crucial process in many organizations and it refers to the process of establishing the financial activities of the various responsibility centres in the company which include estimating sales, profits as well as expenditures among other financial activities. The budgets prepared by the various managers are always expressed in monetary values and the activities extend to a period of one financial year that is one year. These budgets hold the various managers of the given responsibility centres accountable for ensuring that the targets set are also achieved that is cost estimates, revenue estimates, profit estimates as well as the estimates in the investment division of the company6. Budgets are used to lay down foundations for strategies to be used to ensure that the main objectives of the company are met and it achieves this by ensuring that the organization utilizes its strengths and also seeks opportunities that will help meet its goals and objectives. The budget also ensures that the company only invests in projects that are going to help the company meet its objectives for that given financial year. Strategies found in budgets can either be long term or short term strategies depending on the objectives being targeted. The main functions of budgets include making forecasts or predictions for future results, ensure that the goals of each division are communicated well across the company, the budget is also used for determining how the resources of a comp-any should be distributed as well as measuring the company’s performance by comp0aring the budgetary estimates to the actual results at the end of the financial year. Budgetary slack However, following the conversation between Scott and the two division managers Marge and Pete who are managers of the sales and production divisions respectively we learn that the budget may not be a reliable document for the company’s performance and therefore they have resorted to budgetary slack a concept they assume other managers are using as well7. Belkaoui, (1994) notes that budgetary slack refers to the concept of underestimating the revenues to be expected in the financial year and overestimating the costs or expenses incurred and this is done to cover the difference that may arise between the revenue and cost projections in the budget and the actual results of the company. The process of overestimating costs and underestimating expected profits is also known as padding the budget. Therefore one can say that budgetary slack refers to the process of intentionally distorting information in the company that results in reducing the sales projections for the company and also leave an allowance for increasing the levels of budgeted costs or expenses for the divisions in a company. Budgetary slack affect the final results of the company in that the performance will appear as if it is within the targets set in the budget or even surpassing the projected estimates in the budget. The reason as to why Marge and Pet employ the use of budgetary slack is to make the performance of their various divisions look like if it is performing better than the expected results in the budget. The concept of budgetary slack is also used to shield the divisions from requests being rejected by the lead management of the company8 (Belkaoui, 1994). Benefits of use of budgetary slack As discussed budgetary slack makes the division’s performance appear to be better than the expected results in the budget. It creates a mirage of success for the division and in the company in general. The managers are able to deal with the uncertainty of not achieving the targets set out for them in the budget. Budgetary slack also protects divisions from budget cuts since their performance will appear better than the targeted performance. The division will also be shielded from any rejection for requests made by the given divisions (Way, 2014). At personal levels budgetary slack will allow Marge and Pete some breathing space for themselves because they will be working towards targets they are comfortable to achieve and not strain themselves more than they wish to. Budgetary slack can also be beneficial to the company in that it is a form of hedge against any uncertainties in the environment they operate in and the extra resources that remain could be used to boost the company during tough times (Way, 2014). Negative effects of using budgetary slack; Personally Budgetary slack gives a wrong impression of personal satisfaction but it makes Marge and Pete too lazy to exert their best efforts in the work place. Therefore budgetary slack does not motivate Marge and Pete to meet the set targets in the budget for the company. Budgetary slack also gives a wrong sense of achievement as it affects the accuracy of a manager’s evaluation for the performance of Marge and Pete9 (Way, 2014). Using budgetary slack means that Marge and Pete can distort information and manipulate the results into their favour when they do not meet their set targets and also manipulate the information to use up the resources left behind when they have exceeded their targets and therefore allowing them to always meet their goals. Therefore looking at the figures they present it means that seem to be meeting their targets and even exceeding them but the reality is that the figures are virtual and therefore cannot be used to measure their actual contribution to the company’s performance and this is considered unethical and if detected could cost Marge and Pete their positions in the company10 (Way, 2014). To the organization The use of budgetary slack leads to a waste of the organization’s resources. This is because not all resources are utilized to ensure the success of the organization. The distortion of such information also affects the way other activities in the organization are planned such as underestimation of the production and overestimation of other expenses such as advertisement and distribution affects the actual cash flow of the organization. This can therefore gives the lead management team a false sense of success of the organization from the manipulated information given. Budgetary slack reduces the motivation of employees that Marge and Pete are charged with because the manipulated targets they set for them barely give them a challenge as they can be easily attained. This will affect the overall performance of the company as the key divisions in the company that is production and sales do not desire to strive for better results for the organization. Therefore budgetary slacking encourages wasting of organization’s resources and lack of growth of the organization11 (Way, 2014). Conclusion Accounting is a very vital organ in any organization and there are various accounting arrangements that an organization could use to ensure that it meets its set goals and objectives. We have been able to see that different divisions within a company can use different responsibility centres to help the organization achieve its goals and these have been identified as cost centres, profits centres, investment centres and also revenue centres. Organizations need to prepare budgets to help them achieve their goals but the budget could be distorted by the managers preparing them for various reasons ranging from personal to reasons beneficial for the company through a process known as budgetary slacking s=which is also identified as an unethical accounting practice. References Anthony, R. K, Hawkins, D. F. and Merchant, K.A. (2011) Accounting: Text and Cases, 13th edition, London: McGraw-Hill Irwin. Belkaoui, A, R. (1994). Organizational and Budgetary Slack. Chicago: Quorum Books. Duska, R and Duska, B, S. (2011). Accounting Ethics. New Jersey: Wiley- Blackwell Holtzman M, P. (2014). Managerial Accounting: Types of Responsibility Centers. Retrieved on 11th August, 2014 from http://www.dummies.com/how-to/content/managerial- accounting-types-of-responsibility-cent.html Langfield-Smith, K., Thorne, H., and Hilton, R., (2012). Management Accounting: Information for creating and managing value, 6th edition, London: McGraw-Hill. Macintosh, N, B. & Quattrone, P. (2010). Management Accounting and Control Systems: An Organizational and Sociological Approach. New Jersey: Wiley. Way, J. (2014). The advantages and disadvantages of the Budget Contingencies Method. Retrieved on 12th August, 2014 from http://smallbusiness.chron.com/advantages- disadvantages-budget-contingencies-method-41296.html Read More