Product Cost and Budgetary Control Methodologies and Systems - Essay Example

? Support Systems Introduction A budget is a recorded plan of action. It a ment that contains the projected results in financial and non-financial basis over a period of time. The budgetary information assists managers to plan, control and to even coordinate business activities. It further enables top management to anticipate the effects and outcomes from a given set of events on the company. This brings out the budgetary control methodology that involves systematic planning the most effective use of the company’s resources to achieve the entity’s objectives. The budgetary control systems controls costs through the preparation of budgets, comparing actual performance with the budget. This allows the managers to act upon the budget and results in order to attain maximum profitability (FAO, 2010). Over the last two decades the computer world is changing how companies operate and report. The need to incorporate computerized systems in every business aspects is still ongoing research. Budget information systems and product cost systems are analysed in this report, their benefits and challenges they pose. The product cost and budgetary control methodologies and systems There are two budget control methodologies i.e. the budgets and the budgetary control. The budget is the formal statement that represents the projected financial resources that are needed to undertake business activities. Budgetary control on the other hand is a technique and a tool that is used by management to compare the budget with the actual performance. Any discrepancies are then acted upon either by revising the budget or exercise control action. The budget information system (BIS) BIS has been in use for the last 25 years having been used for budgetary needs in schools, cities and even countries. BIS integrates all the budget functions into one single application. These functions are capital budgets, human resources, operations, performance measures, reports and producing final budget documents. The system provides all the necessary features for maximizing the efficiency of the budget process. BIS is software that interfaces with the finance, personnel and payroll departments. It then condenses the historical data into database structures. This enhances performance in strategic planning, reporting, document processing, capital planning and improvements. Benefits of BIS The system improves overall performance by enhancing planning process. The system reduces errors hence planning is made easier and effective. The use of BIS accelerates the speed with which comparison of data is undertaken. It enables accurate tracking of costs in the system. The system quickens the budget preparation process hence few hours are spent in this process. Use of the BIS lowers the number of personnel needed for database management. To implement BIS in an organisation, there is need for training the involved staff. This is enhanced through videos materials, online sites, documents that come with the softwares and use of experts. The system can be customized to meet the individualized needs of a company i.e. application process, reports format and document processing. Different computer softwares are used for the BIS depending on the manufacturing company. However aspects of budgeting can be incorporated in one single software or broken down into budget softwares separately, control aspects, comparison parts etc. It is highly recommended for the company to incorporate the single application software of BIS. It may be expensive and complicated but with enough training and customer support from the producing company, the system is easy to use. The product cost is defined as the cost of direct labour, direct materials and direct overheads utilized in the production process. These costs are incorporated in the budget process and actual results compare for any variances. The product cost system sets out the process for accounting for the organisation’s product costs for the purpose of producing information required for planning, controlling and pricing, for inventory valuation and for preparing financial statements. The product costing systems has also been stated as a management tool that allows for the calculations of the actual costs involved in producing a given product or item. The systems allows the management to identify profits or losses for each product/ item hence promotion is done for profitable one and decision undertaken to drop, redesign or change prices for the non-profitable products/ items. Among the cited benefits for using product cost systems are maximizing on profits, selling profitable items, managing resources effectively, and understanding each item or product towards what it contributes to the organisation. A company usually develops an individualized spreadsheet depending on the products it produces. This spreadsheet enables the calculation of actual costs to be undertaken. The raw materials are identified and labor costs for each product. Historical overheads are used to determine actual costs of the product. The spreadsheet is then customized with the ability to adjust for materials and labour costs, overheads, sales etc. it also enhances new products to be added in the spreadsheet (MME, 2012). It is recommended that the product cost system to be incorporated in LOTUS software as it enhances different users to use the same information. Product costs are widely found in the different production lines hence the system needs to be widely available. Information outputs to support management decision-making At the operational level Sales performance – to compare with the expected budgets Time checks, job cards reports – to monitor labour hours. Stores reports for inventory, materials used, work in progress inventory, materials re-ordered. Electricity bills – for production overheads Water bills, telephone bills, and other utilities – need by accountants to determine manufacturing overheads Maintenance reports for machinery and other equipment e.g. conveyor belts used. Tactical level Equipment and factory performance – for expert’s analyst to determine needs for maintenance. Sales report – for performance appraisal, Competitive analysis reports – to determine the way forward Payroll reports – to determine the need for more Labour force Utility reports – to determine the performance and discrepancies from target. Consumption analysis – the managers needs to understand the movement of the product in the market in order to regulate production Stock prices and volume of shares sold – enables the comparison of financial activities of the company to those in similar industry. Dividend reports – enables the mangers at this level to determine the next investment to be undertaken and how to improve on the dividends amounts as well as the shareholders’ value. Advertising strategy and related cost – the marketing campaign impact can only be determined by the value of sales made that are directly related to advertising and marketing. The value should be measured and reported. This output is very necessary since it can save the company a lot of unnecessary costs. Strategic levels Budget forecasts – they are necessary for predicting future outcomes Actual performance reports i.e. income statements, cash flows, statement of financial position. – These will enable for comparison purposes Budget variances versus actual output – these will enable for the historical comparison and future forecasts of the company’s performance Equipment and other machinery performance report e.g. fixed asset registers etc. – these are important to determine the need for new equipment and other fixed assets. Strategic plan – this enables the directors evaluate the current position of the plans made and future actions to be undertaken. Samples of the routine and “on-demand” reports Operational level Cash collection report for a company – i.e. a hospital set up Facility Month Charges Adjustments Charges Charges Payments (Pmnts vs. Net) Gross Census Census Expenses (Gross-Adj-Exp) (Pmnts-Exp) Cancer Institute 2004 (Ave) 1,000,000 650,000 65% 350,000 345,000 99% 35% 49 925 300,000 50,000 45,000 Cancer Institute Jan-05 1,100,000 700,000 64% 400,000 395,000 99% 36% 50 950 325,000 75,000 70,000 Cancer Institute Feb-05 1,200,000 800,000 67% 400,000 359,000 90% 30% 51 970 325,000 75,000 34,000 Sales report Tactical level Key indicator reports is a routine report that is used to show the performance of the company in summary format in relation to other organisation (Baldauf & Stair, 2010). Daily sales key Indicator report company Comparator 1 Comparator 2 Sales information – end month march $140,125 $160,000 $120,000 sales for the month of April $152,000 $164,000 $118,000 Comparator report – this enables for comparison to different company’s performances. Comparator report This month Last month Last year Total orders month to date $1808 $1694 $1014 Forecasted sales for the month $2,406 $2242 $2608 Strategic level Porter’s five report system The directors should consider the five aspects of this model i.e. suppliers – they should get the best quality at the best prices; customers are always right hence it is important to consider feedback analysis; substitute vendors and new vendors present the competition in the market hence these two groups need to be studied and new strategy adopted in time; the rival groups is at the middle because they present direct competition to our company. They compete for suppliers and customers. It is therefore the responsibility of the top executives to come with strategies that prevent substitution of our product lines, new vendors taking up our customers and most importantly Rivalry Companies who can remove an entire organisation from business (Haag & Cummings, 2007). An example of Toyota Company: Force Strong force bargain power for customer Purchase of auto paint Threat of substitution Frequent travelers or customers prefer auto rental cars rather than purchasing Rivalry Used car dealers Threats of new entrants Corner latte stand Bargaining power of suppliers Students purchasing gasoline- cheap product Competitive strategy reports – porters’ four competitive strategies. Industry wide Lower cost across the industry Better product across the industry focus Lower cost within an industry segment Better product within industry segment The key in this report is to maintain lowered cost and produce the best products in order to stay in the competition. A company can choose any of the four strategies. A good example is the reporting structure for Walmart that maintains low cost leader in retail industry. Apple computers stay on the lead with bettering its product. PESTEL analysis Analysis factor Example Political Trade barriers effected to protect domestic suppliers Economic Overseas economies versus our country Social Supply of the product globally – will it be accepted Technological Protection of property rights of our products Environmental Pollution from waste products Legal Regulations in place for our products. Conclusion: Cost and information systems are developing in day to day business activities. It is therefore vital to acknowledge this in order to stay in the competition. Adoption of BIS and product cost systems are beneficial since they enhance reporting, comparison, profitability, document processing amongst other benefits. However there are challenges that are faced i.e. user friendly systems – there is need to train personnel on the use of these softwares; this may be costly but in the long run it is cost effective. The transition from old systems to new ones may be resisted. Gradual change is recommended and running the two systems concurrently. Reports deemed appropriate are comparators, key indicators, competitiveness, cash collection, sales report etc. are generated by these support systems. The systems can customized to the applications, processes, product line and other factors that relate to an individual company. Bibliography Baldauf, K. & Stair, R., 2010. Succeeding with Technology, 4th Ed. London: Cengage Learning. Pg. 490 FAO, 2010, Basic Finance for Marketers, US: FAO Haag, S. & Cummings, M., 2007, Information Systems Essentials, 2nd ED. US: McGraw-Hill College. Pg. 77 MME, 2012, Product costing, retrieved from http://www.mtmanufacturingcenter.com/services/BusinessMgmt/product_costing.htm on 23/4/2012 Read More