Strategic Management Accounting Author Institution Strategic management accounting Introduction The mobile phone industry is characterized by an environment in which market and technological changes occur at an ever-accelerating pace. Pear Ltd faces potential challenges in the form of rising margin pressure and decreasing return on invested capital, quality and cost reduction pressures, and increasing expectations on customers centring on quality…
The business functions within Pear Ltd’s value chain encompass aspects such as research and development, design of products, services, and processes, production, marketing, distribution, and customer service. As such, cost management is critical component to the company’s operation in integrating and coordinating activities in all spheres of business function. Alternative Methods of Budgeting The traditional budgeting employs the incremental approach whereby the previous year’s budget is used a basis, subsequent to adjustments up and down, from that budget to mirror the changing assumptions for a new year. This incorporates employing the previous year’s budget, adjusted to accommodate known factors such as anticipated price inflation. Although, incremental budgets are crucial for planning, they may be less useful for control. The incremental approach to budgeting has the effect of incorporating last year’s inefficiencies into the present budget (Bhimani and Bromwich, 2010). This necessitates the consideration of alternative methods of budgeting. Zero Based Budgeting Zero-based budgeting avails a better approach to dealing with the drawbacks associated with incremental budgeting. Unlike in incremental budgeting, zero-based approach does not necessarily start from the previous year’s budget level; instead, the existing operations remain evaluated and continuance of the operation or activity ought to be justified based on its utility and its need to the company (Bhattacharyya, 2011). Every plan in this case remain justified as per the total cost, and the total benefits and past performance are not in any way referred as a building block. Zero-based budgeting approach avails some distinctive advantages compared to traditional incremental budgeting such as it allocates financial resources based on planning requirements and results; and, in order to attain efficiency, zero-based approach encourages managers to search for alternative operation plans. However, the process can consume a lot of managerial time and may appear to be “too drastic a solution for the task at hand.” Moreover, short-term benefits may take precedence and obscure long-term planning and there may be annual conflicts over budget allocation (Bhattacharyya, 2011). In order to circumvent these drawbacks, especially concerning the managerial time required, one alternative may be to conduct a rolling budget every year and carry out zero-based budgeting perhaps three to five years, or in cases where a considerable modification that occurs within operations. This compromise may aid weeding out waste and inefficiency, especially within a period of intense competition and reengineering that is characteristic of the mobile phone industry (Bhattacharyya, 2011). The adoption of zero-based budgeting will aid Pear Ltd to save costs and exercise restraint in developing budgets, minimizing the entitlement mentality with regard to cost increases, and budget decisions to be more meaningful during review sessions. Zero-based budgeting approach is applicable to Pear Ltd in aiding the company to utilize the latest insights and business priorities that reveal fresh opportunities to minimize investments and costs in areas where Pear Ltd market share is lower than critical thresholds. Activity Based Budgeting ...
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