Help Gwent Association - Essay Example

?Running Head: Help Gwent Association Help Gwent Association [Institute’s Help Gwent Association The purpose of Gwent Association is to provide low-income people with contemporary as well as affordable houses. As it is clear from its name that this association is not a profit making organization, therefore it needs to strategize its policies and costs in a way that it is able to meet the demands of the people. The demand of these houses has increased, at the same time Welsh Government has reduced its funds by 3%, which it used to give to Gwent for constructing flats. It is clear that there is decrease in supply and increase in demand, which is very crucial for any organization (Cokins, pp. 14-15, 2001). The only thing that Gwent can do is lowering its costs and using costing methods that are beneficial for both itself and its customers. There are many accounting methods, which organizations use in current era to convert an inefficient organization into efficient one. That helps reduce the costs, add the value and make wise decisions. These are “Activity-Based Costing method, Life Cycle Cost Analysis, and many other small techniques such as marginal costs, absorption costs, and Throughput accounting” (Barringer, pp. 1-10, 2003). This paper will discuss each of these techniques briefly and tell how they can be helpful in making Gwent accomplish its goal in such a crucial situation. Firstly, Activity based costing method, in this method organizations estimate cost of a certain product or service by adding the individual costs of all other assets that have contributed in making one product or service (Brismon, pp. 20-24, 1994). These costs include manufacturing costs, selling costs, and general and administrative costs. This technique is very helpful in determining correct costs, ultimately corrects prices because it distinctly shows the contribution of all the assets, and accordingly sets the prices. This can also be helpful in allocating resources, determining wages and salaries of employees and making capital budgeting decisions. Capital budgeting decisions are the investment decisions using which organizations invest in the projects that possess superior return on their investment that is return on cost of capital and add value to the organizations. Moreover, ABC method also helps in determining most profitable and least profitable customers, products, services, raw materials and areas. It can identify the components that contribute in improving the financial performance and the ones that become hindrance in improving the performance (Barringer, pp. 1-10, 2003). Gwent can take a huge advantage from this method and work efficiently in the crisis. It can identify the factors that consumers do not like about the houses and cut the costs of those factors. For example, in the current era people do not like over decorated and colorful houses rather go for simple ones. If Gwent is spending more on different colors and decorations, it can cut these costs because these expenditures do not add value to the organization. With this cut down there will be a decrease in the wages of labors working on decorations and other such stuff. It can also make a cut down in the raw material by taking help of commodity and future markets. If organizations implement this method, it also motivates its employees and labors to work more as their salaries will depend on the contribution they make in making the final products (Cooper & Kaplan, pp. 130-135, 1991). It will indirectly increase the efficiency and productivity of employees. Moreover, Gwent should properly analyze the backgrounds of people before giving them flats on rent, that after four years would they be able to buy the flat. As if they do not buy it and leave it, Gwent will have to invest on the flat again to renovate it so that they can give it on rent. If tenants buy the flat, it reduces the cost of renovating the house. This technique is a part of ABC method as it adds value and reduces costs. It also provides builders with cash, which they can use in other activities that add value to the organization or fill the gap of 3% in funds. ABC method also uses multiple cost-drivers; of them four categories are unit level, batch level, product level and facility level. In unit level, the main driver is volume for example there is a separate washing area in each house, which will result in increased cost. Therefore, the wages of labors will be set accordingly (Gosselin, pp. 105-122, 1998). In batch level, Gwent should record the wages of all the labors at same place whether they are working for big flats or small flats this would help in setting the rent rate or price of house. Nevertheless, wages would be different according to the work they perform. In product level, unit and batch are of no importance it talks about entire product range, for example, some labors are responsible for only painting the house and they should get wages for that service only. Facility level focuses on the customers who are going to use the flat. This is under cause and effect relationship. Although, this method has many benefits but it is not very easy to use it because keeping records of all the contributors individually and estimating their part in the final product requires skills and time. Therefore, it is good if Gwent uses ABC software, it will make the work very easy. Moreover, Gwent should first make a pilot use of ABC to check whether it will be helpful for the organization or not and it should hire experts who are good at making calculations and keeping measurements for the special purposes (Hicks, pp. 50-60, 1999). Secondly, Life Cycle Cost Analysis, using this method companies have to take into “account all the costs that is acquiring costs, owning costs, disposal costs and building costs for assessing the total cost” (Barringer, pp. 1-10, 2003). This method is very helpful in making comparison between the initial costs and maintenance cost of a building. Some projects might have low initial costs but they require high maintenance costs on the other hand, others have high initial costs but low maintenance costs. LCCA helps organizations in deciding how they can achieve maximum net savings either by investing at the beginning or by periodic investment for repairing and maintenance (James, pp. 100-110, 1991). Organizations should use LCCA at the very beginning of any project to estimate which process will result in lowest costs not compromising the quality so that they should implement that process from the inception. The most difficult task must be to evaluate different methods and choosing one that has more benefits and less costs. This is difficult because there are various sub headings under the names of acquiring costs, owning costs, disposal costs and building costs. These are fuel costs, repairing costs, replacement costs, residual values and non-monetary costs (Mabberley, pp. 20-30, 1996). For Gwent, initials costs might include costs of purchasing the land, costs of constructing a building, costs of raw material such as cement, water, and iron and costs of equipments such as fans, tube lights, and bulbs. The costs of purchasing a land should include in initial costs if there is a difference in designs and locations of land. For construction, estimation in detail is not compulsory for beginning economic evaluation of substitutive building designs or systems. These estimates are generally not accessible until the design is quite complex and company has lost the chance of cost-reducing design. Companies can substitute LCCA any time during the process if information in detail becomes available. Primarily, “companies estimate the construction cost from any present similar sort of building, they can estimate it from any public, or private sector cost estimating guides” (Cokins, pp. 78-84, 2001). Gwent has an advantage on estimating the construction costs because it has already worked on number of buildings so it must have a clear exposure of all kind of raw materials and other expenses. It should work wisely and make use of the information available to it (Miller, pp. 70-79, 1999). Moreover, it can also work on contract basis with the suppliers on reasonable prices in bulk amount; it is beneficial for both Gwent and its suppliers. Operational expenses also play a significant role in construction of a building because these expenses are interrelated. Energy, water consumption, building design, and building cover hugely depend on each other because a large building requires a large amount of water and small building requires small amount. Therefore, Gwent should assess energy and water costs collectively for the whole building rather than bringing separate amount for separate components (Nair, pp. 65-69, 1999). It would be very difficult for Gwent to estimate the energy costs during the designing phase however, it make guesses because of its profile, tenancy rates and schedules. Initially, they can also estimate it with the help of special analysts and engineers however, they cannot estimate in detail until the later period of designing. There are many types of software, which can assist Gwent in such kind of problems, therefore, the architects, engineers and other important participants should be aware of the latest technology. When experts select any software or program that estimates the energy costs, they should keep in mind the period of consumption that whether they need it for a month, an hour, or a year. This analysis can also be very helpful in saving the costs. Gwent should also consider the price of energy very seriously and analyze all the factors such as rate of type, rate of structure, summer, and winter differences and demand of a particular type. Gwent must take into account energy price projections, energy prices do not increase and decrease with a general rate of inflation. Gwent should make a proper account of this increase and decrease and consider the factors that contribute in change in prices; this can be very helpful in estimating future costs of energy. This will make them buy the energy when it is cheap and they will know this beforehand. Gwent should treat water costs in the same manner as they treat energy costs. Like energy costs, operating costs and maintenance costs are also very difficult to estimate. Different buildings have different materials and locations therefore; one may not find any standard rule or method that can estimate the cost of operating expenses. However, engineers can play a significant role in estimating these costs, especially the experienced ones, because they have worked at different places with different materials so they might tell about life span of a particular product. These products can be water pipelines, fans, tube lights, and water tankers. This is pertinent to initial costs, if initially Gwent buys expensive equipments of high quality then they will bear less maintenance costs but if they do not have enough funds at the beginning they will have to bear high maintenance costs later. Suppliers’ information and different guidelines about maintenance and operating expenses can be helpful. Moreover, factors such as average owning and operating costs per square foot, by age of building, geographic location, number of stories, and number of square feet in the building also help in determining the operating costs (Turney, pp. 10-11, 2005). Decisions about investing in a building possess a huge uncertainty about the estimation of savings and costs because there are rapid changes in trends of certain factors. However, implementing LCCA can result in savings in long run but still there is doubt about many things in short run. Companies usually perform LCCAs in the earlier periods of designing when they can estimate the costs but many times estimated and actual costs differ by a large number therefore, completely relying in LCCA can be risky. Sensitivity Analysis and Break-Even Analysis are great helps in determining the impacts of inputting uncertain data on the analysis result. Conversely, probabilistic techniques measure risk disclosure by obtaining possibilities of getting diverse values of monetary worth from probability distributions for input values that are doubtful. Nonetheless, they have better informational and scientific necessities than do deterministic methods. Choice between these techniques depends on number of factors such as size of the project, its significance, and other resources. Sensitivity and Break-Even Analysis should be part of every LCCA to make it more effective and less uncertain. Gwent should use sensitivity Analysis for water and energy preservation purposes as it can make out what number of doubtful input values has the maximum impact on a particular measure of economic assessment. It can determine that how inconsistency in the input value influences the array of a measure of economic assessment and it can test different circumstances to answer different contingencies. Sometimes decision makers desire to know the maximum cost of input that will allow it to break even. Additionally, any project can cover the costs with the minimum benefits that it produces. To implement a “break-even analysis, one equals the benefits and costs, specifies all the variables, and solves it mathematically” (Turney, pp. 39-59, 2005). Gwent should use LCCA to reduce future operating costs by spending higher initial costs so that the profit they earn invest in other projects rather than in operating expenses. It is mostly appropriate for the assessment of construction design alternatives that assure a vital level of building performance; however, may have dissimilar initial investment costs, diverse operating and maintenance and repair costs, and perhaps dissimilar lives. LCCA offers a considerably better evaluation of the enduring cost-effectiveness of a plan than other economic techniques that only consider initial costs or on operating costs. The direct costs of “material and labor, variable manufacturing cost, and fixed manufacturing cost include in long-term pricing that is absorption cost” (Turney, pp. 40-46, 2005). This concept works as a reminder for manager; it reminds them that firm must cover the production cost from its sales. Moreover, these figures are easily available as companies record them as inventory in balance sheet. However, this might not be the case for Gwent as it is a nonprofit making organization; still if the managers of Gwent keep this in mind, they can achieve break-even point. A drawback of implementing absorption cost is the irregularity with cost-volume-profit investigation, which permits managers to study the effects of variance in sales and prices on effectiveness. Throughput accounting implies the concept of generating money through sales. Using throughput companies desire to expand as much as they can. This concept opposes the concept of ABC technique, as it does not suggest companies to reduce their costs rather goes for profit maximization and achieving its goal. Throughput Accounting offers managers with a clear method decide the plans that consistently guide them in the correct track. In the course of superior managerial decision-making, Throughput Accounting enhances “a company’s capability to earn more profit because it sees accounting as cash management basis” (Bragg, pp. 20-31, 2007). Managers must ensure that the local decisions have a huge impact on the overall goal of the company therefore local managers should think like business people and work to generate revenues, meet expenses, earn profits and get a superior return on investment. Frequently, managers in struggle of managing the budget and cash forgoes the decisions that might be profitable for the whole organization rather that one department. Every manager should realize that their single decision could have huge impact on the global goal of organization therefore; every manager of Gwent should use same method of calculating the profits and making the decisions. Throughput Accounting asks for “increasing revenue, enhancing cash flow and endowing capacity; every management decision should be based on probable changes in throughput, investment, and operating expense” (Bragg, pp. 46-77, 2007). Throughput Accounting permits managers to use an impartial approach to decision making and think about accurate results of any decision before making it. Throughput accounting also shows “ways to make marketing that is more profitable and pricing decisions” (Bragg, pp. 23-29, 2007). Throughput Accounting moves the stress in decision making from managing costs and budgets to capitalizing throughput and profitability. Gwent should use this technique to consider all the aspects of company such as pricing, marketing, funds generating, setting wages, and all other aspects that can have an impact on the funds of Gwent. Gwent should make use of all the techniques that this paper has discussed but it should make sure it should use right technique for the right purpose. Moreover, it is not a profit making organization but it should still strive for achieving profits only then it would be able to generate more funds and break even for further developments and constructions. Reflective Journal When I was making this report, I faced many problems but the main problem is lack of information about Gwent. Although I tried to search it on internet but could not find sufficient information about what kind of workplace is there and what is the motivation level of employees in Gwent. I did not know who the suppliers of Gwent are and what do they do with the waste. Despite all these problems, I got an opportunity to learn a lot while making this report. I came to know about many accounting techniques that companies use to analyze their performance, generate profitable returns, and make effective decisions. I found these techniques very practical and useful for the organizations. If I had more knowledge about Gwent, I would have been able to write it in a more profound manner with examples about the techniques. As far as performing the best, I have given my best in defining the techniques so that the reader of this report does not find any difficulty in understanding different concepts and implementing them. I think I have performed worst at giving examples from Gwent. I believe that I have given my best to this report because I have described each technique individually and described the way in which Gwent can use these techniques. My abilities of solving problems and making decisions have improved largely after making this report. I will surely implement all my leanings in the organization to enhance the performance of that organization and achieve its goals. References Barringer, H. P. 2003. A Life Cycle Cost Summary. International Conference of Maintenance Societies (pp. 1-10). Perth, Western Australia: Maintenance Engineering Society of Australia. Bragg, Steven M. 2007. Throughput Accounting. John Wiley & Sons. Brimson, J. 1994. Activity-based Management for Service Industries, Government Entities and Nonprofit. Wiley. Cokins, G. 2001. Activity-based Cost Management: An Executive's Guide. Wiley. Cooper, R., & Kaplan, R. S. 1991. Profit Priorities from Activity-Based Costing. Harvard Business Review , 130-135. Gosselin, M. 1998. The Effect of Strategy and Organizational Structure on the Adoption and Implementation of Activity-Based Accounting. Accounting, Organizations and Society , 105-122. Hicks, D. 1999. Activity-based Costing: Making it Work for Small and Mid-Sized Companies. Wiley. James, B. 1991. Activity Accounting: An Activity-Based Costing Approach . J. Wiley. Mabberley, J. 1996. Price Waterhouse Guide to Activity-based Costing for Financial Institutions. Irwin. Miller, J. 1999. Implementing Activity-based Management in Daily Operations. Wiley. Nair, M. 1999. Activity-based Information Systems: An Executive’s Guide to Implementation. Wiley. Turney, P. 2005. Common Cents: the ABC performance breakthrough: How to Succeed With Activity-Based. McGraw-Hill. Read More