Strategic Management Accounting - Assignment Example

Budgeting and Budgetary Control Introduction Budgets help to look into future. They provide help and source that can be used to plan manufacturing activities for the purpose of satisfying the corporate and business objectives of the organisations. Without the help and use of these budgets and budgetary controls, it would be nearly impossible for the organisations to achieve and sustain the required level of unit production and motivate their employees in the most required and needed way. With the help of budgets and with the help of budgetary control, different objectives of the organisations are determined and served. To increase efficiency, to highlight inefficiency, to motivate and to understand and pinpoint the causes of demotivation, the source of budgets are greatly used and applied. Furthermore, to increase the range of profitability, to ensure the resources, which are available, are used in the most required and desired way for the purpose of attaining and maintaining the short term and long term goals of the organisation, budgets are mostly used with this intention as well. After this part, a more critical discussion will be done on the traditional concept of standard costing. The uses and purposes of standard costing would be highlighted and discussed in the most appropriate way. The main purpose of standard costing is to provide a planned unit cost of a product. On the other hand, the main uses of standard costing are to provide a standard to measure the performance measurement, stock valuation, control and the establishment of selling price of different products. Standard cost is self-assumed and planned cost given to a product for the purpose of comparing it with the actual cost and cost price of the product. This actual and planned comparison of the cost and price is greatly required and used by the management. There are different uses offered and given by this comparison. The original and true efficiency and effectiveness of the organisations can easily be compared with the given set of the standard cost. This comparison would clearly highlight whether the required level of organisational short term and long term goals and objectives are achieved or the management has failed to achieve the required level of organisational objectives in the most required way and most required manner. There are different types of budgets: Zero based budgeting and activity based budgeting. Zero based budgeting is totally a new approach towards the understanding of the concept of budgeting. Traditionally, budgeting is made by adding some additional percentage to the previous year budgeting and implementing it in this added budget in the current year. But, this is not done as far as zero based budgeting is concerned. Here, the activity of budgeting gets started from scratch. Additionally, the budget maker is required to give and produce a statement authenticating the true and valid reasons and causes to justify any additions or to justify any reductions in the zero based budgeting. Also, it is very much expected of the budget manager to prioritise the entire set of activities by also providing and giving a reasonable explanation for prioritising any set of activities. On the other hand, activity based budgeting provides an additional source that can be used for the purpose of doing the activity of budgeting. In this budgeting, first certain targets are determined and highlighted. After determining the certain targets, then activities are highlighted and determined for the purpose of attaining and meeting those targets with the help of these activities. Afterwards, only those available and required resources are used that help and ensure the attainment of these targets. The activity based budgeting facilitates the identification of such opportunities that help to reduce cost and eliminate those factors that are wasteful. Activity based budgeting highlights and helps management to constantly pursue the areas that have improvements. Budget is defined as ‘a quantitative statement for a defined period of time, having planned revenues, expenses, assets, liabilities and cash flows ‘(Performance Measurement, ACCA paper F5 text book). In this definition, a particular period of time is mentioned attached with a self-determined and self-planned specific amounts for the purpose of future activities. Budgets help management to look into future and determine the level of output and production. With the help of planned budgets, the management can see and understand the possible costs incurred in achieving certain objectives. For instance, if a management wants to know the future factory overheads, they need to plan and identify those production and non-production activities that give rise to the cost of overheads. With the help of this understanding, the management would be able to highlight and draw a rough figure with the help of budgeting to look into future. Budgetary control system is a way to monitor revenues and costs. By monitoring the revenues and costs, the management becomes in a position to exercise its control. And this control is used with the help of budgets. Since the management has already had planned budgets, the subsequent outcome or results would be achieved by comparing the actual data with the budgeted data. These outcomes would clearly highlight the efficiency and effectiveness of the management. These outcomes would clearly pinpoint the areas of discrepancies between the budgetary and the actual data. This would enable management to understand the real causes of these discrepancies. As a result, management would be able to take appropriate and relevant corrective measures. There are various objectives which determine the use and application of the budgetary control system. These objectives have various benefits and uses. It is these objectives that have a considerable amount of importance for the management and other budget makers in the organisation. Planning various activities of the organisation Providing a means of communication Coordinating the activities of different departments Evaluating the performance of executives and non-executives Motivating managers and other staff members Ensuring the optimum utilisation of available resources These are the fundamental and basic objectives of the budgetary control system. To satisfy the objectives of this piece of writing, only two objectives would be further elaborated and discussed. Budgetary control evaluates the performance of executives. Since budgets provide a specific and particular targets given to the management and other staff, the comparison between the actual figures with the budgetary figures would clearly highlight whether the management has performed well; whether the management has become successful by completing the required level of given targets. If the management has successfully achieved the given required in the required period of time, then it would be concluded the management has become able to achieve its targets. In this way, the performance executives would be rewarded. Contrary to that, if the management is unable to achieve the required level of targets in the given period of time, this would highlight that executives lack in certain areas where they have not performed well. By highlighting those areas, the management would easily understand the causes. Subsequently, the relevant and appropriate corrective actions would be taken. Standard costing- traditional budgeting technique Standard cost is the self-determined and planned unit cost of a product, service or some other components in a given period of time. The fundamental uses of standard cost are in the measurement of performance, inventory and stock valuation, control and in determining and establishing the selling prices. In fact, using the technique of standard costing provides the first step towards determining and developing the required type of budget. The use of standard cost in the case of variance analysis provides a standard to clearly highlight and identify the main causes of any given variance. This would easily help management to take appropriate and relevant corrective measures. Activity based budgeting Activity based budget is based on an activity framework. Identifying activities that cause costs is defined as activity based budgeting. In this type of budgeting, instead of analysing or evaluating the elements of cost, those activities are highlighted and identified that causes certain costs. Activity based budgeting is one of the most appropriate forms of budget. It highlights the cause and effect relationship between a cost and its activity. This type of budgeting technique is mostly applicable to those organisations where the concept of activity based costing system is used and applied. Since the activity based budgeting tends to be more relevant with the concept of activity based costing, the use of this budgeting technique undoubtedly helps management to take a great benefit from the synergistic effect of both concepts. Zero based budgeting Cost justification tends to be the focal point in the concept of zero based budgeting. Budget managers before going to implement their budgets, they need an approval from the top management of an organisation. While presenting their budgets, the managers are required to prioritise their activities besides giving and elaborating the specific justification in order to validate their costing decisions. Zero based budgeting provides the benefit of reducing unnecessary and irrelevant costs as the cost justification process tends to be more exhaustive and intensive in its nature. Additionally, the concept of zero based budgeting is considerably useful for both profit seeking and not-for-profit organisations for the purpose of making budgets. But, the latest trends in the industry suggest that the concept and application of zero based budgeting is best suited to the service industries and not-for-profit organisations. Since each activity, alternative courses of action are possible, the concept and application of zero based budgeting would be suitably able to facilitate objectives of such types of organisations. Working capital operating cycle Working capital means simply the firm’s holding of short-term or current assets such as inventory, cash, receivable and other marketable securities. There are two possible interpretations that can be used to explain the concept of working capital: (a) Balance sheet concept; (b) Operating cycle concept. Balance sheet concept of working capital is an excess of current assets over the current liabilities are called as the net working capital or net current assets. Some argue that the working capital is a part of long term finance; where the long term finance is locked in and that is currently used to lubricate the engine of the organisation. The balance sheet concept of working capital highlights and indicates the firm’s current solvency in repaying the amount of credit to its creditors. On the other hand, working capital operating cycle concept is different than the balance sheet concept of working capital. In the operating cycle concept, working capital is basically divided into three primary activities: purchasing resources, disturbing or selling the product and before that producing the product. These operating cycle activities generate funds flows that are both unsynchronized and uncertain. Here, un-synchronized in the sense those cash disbursements; in which certain payments of purchased resources are paid, normally and usually take place before the collection of receivables. Additionally, since the future sales and future costs, which create and generate the respective disbursements and receipts, cannot be predicted with complete amount of accuracy. Aggregately, operating cycle of working capital is defined as an operating cycle which is equal to the length of inventory and periods of receivable conversions. Management of Stock Stocks are very important factor for a manufacturing firm. Since it is the role of stocks and inventories for the making and manufacturing of the final products or finished goods, the management of stocks becomes utterly significant. Undoubtedly, the financial health of the firm considerably and hugely depends on the stocks of the manufacturing firms. But, for the manufacturing firm, the management of stocks would not be an easy work for them as there are three types of stocks normally stocked and maintained by the manufacturing firm- raw material, work-in-progress and finished goods. Each one of them requires different type of management. On the basis of this situation, the manufacturing firm is required to manage them in the most appropriate and required way since a significant amount of costs are invested in them like the cost of holding stock. Raw materials are also known as production supply. Raw material is the raw input that would be used into the production process. Considerably, it is the raw material where most of the amount of working capital is invested and involved. Since the manufacturing firms buy raw material in the bulk quantities, besides, the opportunity cost of investing amount in the raw material is also involved, the manufacturing firm puts its best effort to quickly convert this raw material into finished shape for the purpose of selling them. But before that, work-in-progress, which is also known as semi-finished goods, is the second stage under which the items of raw material are required to underpass before they reach the stage of finished goods. The amount of working capital is also considerably involved in this stage of production as well. As the manufacturing firm’s business mostly demands and requires a constant but continuous cycle of production of finished goods, a considerable amount of working capital is also involved in this case as well. For the manufacturing firm, the amount of working capital is less involved in the case of finished goods since they have crossed the most important aspect of the production process. Although they have reached the point of selling or going to market, yet they contribute a significant amount of working capital. Economic Order Quantity Economic order quantity is a stock management model. This stock management model minimises the total cost of managing stock by holding the average amount of stock held. In economic order quantity, the ordering and holding costs are the key costs which have a considerable role in the management of stocks. Undoubtedly, the cost of holding stocks can be very high and substantial. In order to find the cost and quantity order that give the most appropriate and reasonable cost of holding, the stock is found with the help of this stock management model. But, some negative implications cannot be avoided when the concept of economic order quantity is used. For instance, by reducing the level of stock held may directly increase the number of orders in a given period of time, consequently, ordering cost would go up. Debtors Management The management of debtors tends to be not an easy task for the manufacturing company. Numerous factors directly or indirectly impact on the management of debtors. For example, the choice of customers, the method of generating and increasing the volume of sales; the sales invoicing system; the mechanism for the correction of errors and resolution and disputes between customers and company; the available appropriate means of settlement, the process of monitoring of customer settlement performance; and overdue amount or un-collected amount of receivables from debtors. These are the basic and fundamental factors that are needed to be considered in order to properly managing the debtors and its procedure. Aspects of creditors’ payment Allowing credit transactions brings and increases the risk factor. It is of great significance for the organisations to determine appropriate credit policies in order to reduce the chances of bad debts and in order to increase the chances of recovery. For this purpose, credit policies must ensure that credit must only be given or extended to those customers who have positive credit ratings; and credit must not be given to those who have negative credit rating. Additionally, it is also important for the company to determine how much credit should be offered; and what length of credit period should be given to customers. Also, it must be noted whether any type of discounts are going to be offered for the purpose of securing prompt payment. Furthermore, it should be made clear that how the risk of non-payment can be handled and how the risk of non-payment can be reduced. Since these are pretty significant and important factors that needed a considerable amount of consideration in order to ensure the achievement of department related objectives. Just in time (JIT) The just in time ensures to produce or procure products or units of productions as they are required by the customers or for the use. The just in time approach does not support the concept of producing goods for the purpose of putting them in the warehouses or inventories. Instead, the just in time support the approach of pull system, this system becomes active when a particular demand for some goods is arisen; and in order to fulfil the needs of that demand the work of production is started. The just in time is not like push system, where a large amount of inventories are produced and stored; and these inventories work as a buffer inventories between the different elements of the system, such as sales, purchasing and production. There are many benefits offered by the philosophy of just in time. First, the warehouse maintenance and inventory storage cost are sufficiently reduced and they save a lot of funds of a manufacturing company. With these savings, the manufacturing company may be able to utilise these savings for some more lucrative investment options. Additionally, some inventories require a considerable amount of money to provide required environment, which means some raw material cannot maintain its required shape and condition without the help of special physical environment. If this company switches to just in time philosophy and applies its; as a result, it would be able to save a considerable amount of overheads. References ACCA textbook for performance management, 2008, GTG, UK Appendices Example of activity based budgeting A stores department has two major activities; receiving deliveries of raw material from suppliers into stores and issuing raw materials to production department. Two major cost drivers are identified as number of raw material deliveries (250) and number of production runs (120). Following are the further details: Total deliveries costs issuing costs dept: cost Cost $000 $000 $000 $000 Salaries-MGT 25 8 12 5 Salaries-Store workers 27 13 12 2 Salaries-adm: 15 4 5 6 Consumables 11 3 5 3 IT cost 14 5 8 1 Other costs 19 10 6 3 ___ ___ ___ ___ 111 43 48 20 ___ ___ ____ ___ activity volumes 250 120 cost per unit of cost driver $172 $400 $20,000 Read More