Act507 Accounting For Managers-Sources Of Assessment Answers

Answer:

In the given question, two issues have been highlighted namely the possibility of the use of alternative sources of energy generation under the new government when the elections would be over and the 2^nd issue being introduction and building of the highly automated manufacturing facility on the land in the future which will cut short the direct labour hours and direct material by 25% but will increase the fixed manufacturing overheads by 50% due to the increase in the manufacturing production capacity. Both the situations have been analaysed using relevant circumstanaces and option. (Alexander, 2016)

Analysis and Outcome

The sales manager is skeptic regarding the use of the alternative sources of energy and power generation equipment since the current market itself is extremely volatile an the results of the election in case the new government is chosen will make the market even adverse and negative towards the use of it. Political instability always is one of the major factors when we are introducing the new kind of technological development.

Further, it is generally opposed as since it would be away from the normal and would result in killing the employemnet of the general people and moving towards automation which warrants for minimal use of manual labour. In terms of costing, this would further add to the cost in the beginning as it requires advanced technologies and would result in losses upfront however, going forward, this may break even in the long run. (Belton, 2017) Besides the above mentioned factors of political instability,

these power generation equipment have a fixed maximum capacity however, the demand of the energy and power may be multifold at times, so it may be difficult for the company to cater the demands at that time. Rita Arthurs, being the sales manager is concerned since the sales of the equipment may come down on account of all these factors but in order to convince the particular set of market, she needs to do the cost benefit analysis and come out with the positive NPV and >1 profitability index in order to make her sales be in line with the target.

Going further, the production manager Paulo farmer who is planning of building a highly automated assembling equipment needs to be aware that this should noyt exceed the costs in terms of the manufacturing overheads such that the company results in losseson account of indirect costs. (Abbott & Kantor, 2017) These costs needs to be miinimised and he has to ensure that the economic life of the asset is long such that the depreciation benefit can be enjoyed by the company when the taxes are computed.

From the costs given in part A, we can see thar the earlier cost per unit was $ 4236.18, however, with the decrease in the direact material cost, direct labour cost and the variable manufacturing overhead and with the increase in the fixed manufacturing overhead of 50%, the amount per unit has jumped up to $ 4245.51, i.e., an increase of $ 9, which means that the automation is resulting in increase in the per unit cost and the company’s management may not accept the same considering the cost benefit analysis, even though in the future the investment may break even. (Boccia & Leonardi, 2016)

Conclusion:

From the above 2 situations and various factors discussed, it can be concluded that the automated systems and machineries and other alternative sources of power generation will only be lucrative and implemented if they fit well in the business scenario and is profitable for the company. Political instability, environmental issues and other factors come later on in the scenario analysis.

On close review of the actual expenditure on direct material and direct labour costs, Mr. Paulo farmer, the production manager has come across many discrepancies and major differences of the actual numbers from the budgeted figures. (Bromwich & Scapens, 2016) Even though it is well considered and constructed budget but the differences might come on account of the sudden change in market price of the material and the ditrect labour, the inefficiency of the labour, low productivity of the machines, higher overhead costs, abrupt planning and many other causes.

Analysis and causes of the deviations:

In the given case, data of budget and the actual against it has been taken from part A of question and the variations and the percentage of variations have been computed considering budgeted as the base.

From the above table, it is clear that the the management’s estimate of the sales itself was not correct based on the past data. (Félix, 2017) The actual sales were higher than expected by 11% and that might be on account of quality goods being delivered by the company or the market being good enough during the period. The part 714 raw material was over utilised by 16% which might be attributed to the increase in sales and therefore increase in the production units whereas part 502 was underutilised by 10% even after the increase in the production units by 11% which shows the management’s inefficiency in forecasting the units of raw material being required to produce a particular unit of the finished good.

This may have 2 reasons, i.e., either the company has become efficient in utilising the raw material and are using it considerably less to produce finished goods or else in the past, the company has been inefficient and has been overutilising it. Further more, the company has gone terribly wrong in the estimation of the cost of the raw materials. The per unit cost of part 714 was 109 as compared to 91, which is a 20% increase and the cost of the part 502 was 80 as compared to budgeted 122 which is 34% down.

Due to this, the company’s direct material cost has gone up by 39% for part 714 and has decreased for material 502 by 41% on a overall basis. This indicates that the quote for the material were not taken adequately by the management while preparing the budget and it has changed significantly during the year having an impact on the profitability of the company. (Goldmann, 2016).

The other reasons might be wastage of the material during production or lower production capacity being given by the machines. Finally, on account of direct labour hours being used for per unit, the budgeted cost was $50 per hour as compared to the actual $ 57 per hour which has further hit the profitability. The direct labour being utilised in actual has increased by 37% and the cost of direct labour has increased by 57%. This means that besides the increase in the per hour labour cost, the labour hours being required per unit has also increased quite significantly. This might be on account of increase in non productive labour hours or non efficiency of labours. Considering the steep increase in labour price, automation is warranted. (Gooley, 2016)

Conclusion:

From the above analysis, it is quite clear that the management has gone wrong in estimating the per unit requirement of raw material, direct labour hours and the cost per unit and per hour respectively for a number of reasons. This might have an adverse impact on the projected profitability, therefore the company needs to prepare a more flexible budget based on the requirement so that the variances can be dropped below 10%.

 Discussion on Participative Budgeting

Budgeting is the base on which the management and the labours of the company work towards achieving the actual goals of the company. The more effective it is, the more will be the profitability and less will be the slack. (Jones, 2017) It is the blueprint of the management’s plan and serves as the target and control table for the lower management. To achieve the correct actual vs budget, human resource is required.

Budgets may be imposed or participative. The imposed budgets generally come from the top management and there is always the risk that the lower management may resent against it and later on tell that the same was unrealistic and unachieveable. Th eapproachh in which the managers prepare their own budgets estimates is called the participative budgeting and is one of the best forms of the budgeting and it is prepared in close coordination of all the levels of the managers, be it top level, middle level or the lower level of management.

It generally flows from the bottom to the top and includes the sense of realistic numbers and the lower management will be the one who is aware of the ground reality of the costs rather than those at the top. (Visinescu, et al., 2017) Once it is prepared by the lower levels, the same must be reviewed by the managers to avoid the chances that it is loosely prepared or to allow budgetary slack. However, in this case too, the top management should give the overall strategic plan as they would have the proper view of the entire company.

Participative budgeting helps to fix responsibility on the managers against which their actual performance can be measured and they can be held responsible for the deviations. Further, it has other advantages in the form of being more accurate and reliable, being motivational from the ground staff and lower level to work as it is more realistic, and it embeds the sense of participation and inclusiveness in the organization. There are disadvantages too of participative budgeting like it is costly, time consuming and may result in wrong use of budgets through slack. (Raiborn, et al., 2016)

With reference to part C of the question, Paulo Farmer would have rebudgeted the figures for Quarter 2 for the company has the imposed budgeting been used. Further, it would have been difficult for him to impose the responsibility of the slack and the deviations and variations of the individual persons but on all who prepared the budget. It will be difficult for him to find out the exact reason or focal point of the huge variances.

However, in case he had used participative budgeting, might be the deviations would have been less and the requirement of the raw material and the per unit price of the raw material and the labour would have been correctly identified. Further, he would also have been able to fix the responsibility on the respective persons for the budgets being prepared and use of the incorrect budgeted data. Therefore, from the above discussion it is very much clear that the participative budgeting is a far better option than the imposed budgeting and is result oriented. (Trieu, 2017)

References

Abbott, M. & Kantor, A., 2017. Fair Value Measurement and Mandated Accounting Changes: The Case of the Victorian Rail Track Corporation. Australian accounting Review.

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy. Markets, Taxation and Appropriate Economic Models, pp. 1-16.

Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.

Félix, M., 2017. A study on the expected impact of IFRS 17 on the transparency of financial statements of insurance companies. MASTER THESIS, pp. 1-69.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.

Gooley, J., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.

Jones, P., 2017. Statistical Sampling and Risk Analysis in Auditing. NY: Routledge.

Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance. Journal of Corporate Accounting and Finance, 28(2), pp. 10-21.

Trieu, V., 2017. Getting value from Business Intelligence systems: A review and research agenda. Decision Support Systems, Volume 93, pp. 111-124.

Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.