How to Achieve New Heights for Industrial Jones - Essay Example

a) The sales revenue budget and production cost budget fo the period of July through October, 2006 for Industrial Jones Limited is presented below: Sales revenue budget MONTH PARTICULARS JULY AUGUST SEPTEMBER OCTOBER BUDGETED SALES UNITS 110 115 110 80 BUDGETED SALES PRICE 250 250 250 250 SALES VALUE 27500 28750 27500 20000 Production cost budget a. DIRECT MATERIAL BUDGET MONTH JULY AUGUST SEPTEMBER OCTOBER I. USAGE BUDGET Budgeted production in units 100 120 110 70 Direct material requirement 100 120 110 70 0ne kg per cog mechanism Cost per kg 45 45 45 45 Cost of direct material used 4500 5400 4950 3150 2. PURCHASE BUDGET Direct material usage 100 120 110 70 Budgeted closing inventory 100 90 80 70 Total requirements 200 210 190 140 Beginning inventory 100 100 90 80 Purchase 0f direct material 100 110 100 60 Cost per kg 45 45 45 45 Cost of purchase 4500 4950 4500 2700 b. DIRECT LABOUR BUDGET Budgeted production requirements 100 120 110 70 Direct labor cost per Cog mechanism 65 65 65 65 Total direct labour cost 6500 7800 7150 4550 b. FACTORY OVERHEAD BUDGET fixed factory overhead cost 3000 3000 3000 3000 Total factory overhead cost 3000 3000 3000 3000 b) I) Industrial Jones limited is going to achieve new heights in the coming years. In order to increase the efficiency the ways to increase profits and to the polices to increase the efficiency of the organization has to be developed. Hence, this Memo. The preparation of the budget is helpful to ensure efficient and maximum use of limited resources. The resources of the organization such as the land and the finance arranged through the overdraft facility can be utilized only through careful budgeting. The targets set in the budget will guide the business operations and help in overcoming problems and analyzing the future. The budget shown here will be very useful for coordination of the various activities such as the production, sales and purchases. The sales budget shown here is the guidance for formulating departmental plans. Estimates have to be done for departmental requirements to achieve the targets. After the budgets for the various activities are formulated and agreed upon , the amounts specified in the budget become the desirable limits of spending. The materials usage, labour utilized, purchases made and the overheads realized will all have to be done with the budgeted figures as the basis. After the budgeted period, the actual expenditures and the budgeted figures will be compared. This comparison will be the basis for judging the performances and fixing the responsibility for deviations. Hence, to make this budget a success the organization has to ensure that the objectives and policies are designed properly. What is going to be the Vision, long term objectives and short term goals of the organization has to be decided. Based on these objectives and goals the policies for the general operations have to be formulated. The budgeted estimates have to communicated to the other members of the organization so that if there is any changes or modifications to be made, the suggestions are incorporated. The other members of the organizations have to acknowledge that the budget is the authority/ target for the activities concerned. For example the usage of labor for the production should be within the limits specified in the budget and likewise for other activities. When an employee has to decide on an issue which in voles flow of money then the budget will be the main guide for his decisions. The employees should understand clearly the importance of the budget in the development of the organization and their job evaluation. Hence, department level meetings have to be organized to highlight the importance of budgets. After the budgets are implemented, the next important task that has to be carefully planned is the gathering of periodical information about the activities that are carried out. Performance reports have to be prepared regularly by the various departments. These reports will be used as the input for the analysis of the performance of employees and for assigning responsibility. After the end of the budget period, the performance reports will be compared with the budgets and again employee appraisal has to be done. During the appraisal interviews, discussion will be held to suggest changes to improve the efficiency and achieve budgetary goals. ii) For improving the efficiency of the budgets made, I intend to use the Responsibility accounting approach. Responsibility accounting is a process that reports how well managers have fulfilled their responsibilities. Responsibility accounting recognizes various decision centers throughout the organization and traces costs to the individual managers who are primarily responsible for making decisions. In case of Industrial Jones Limited, the purchases, production and sales managers will be the primary responsibility centers. The sales manager will be responsible for sales in terms of quantity, selling prices, rebates, sales forecasting, planning and controlling selling costs. the production supervisor will be responsible for production in terms of quantity, production costs, forecast of production, labor and variable overheads, work in progress and capital requirements. The purchase manager will be responsible for estimating the raw material requirements, maintaining stock, issuing of materials to the production departments, negotiating with the suppliers, selecting the suppliers ensuring the quality of the supplies. The Company has to identify employees to handle these jobs. The sales manager has to be recruited by the company, but the current production supervisor has to be appraised about the responsibility accounting process and its relative importance in evaluation of performance. The role of purchase manager can be filled up by somebody internal or has to be recruited fresh. The finance related activities will be held by the accounts assistant who will be responsible for estimating the financial needs, identifying resources, collecting information about the expenses and incomes, reporting to the management and government. These managers will have to actively participate in establishing goals and objectives for the budgeted period against which their performance will be evaluated. But responsibility accounting process is useful only when the reporting of the actual activities is efficient. The information about the actual performance have to collected periodically by issue of forms that have to be filled in by the employees as and when the operations are carried out. The reports have to be collected promptly and the promptness of the reports collected itself is an evidence of the quality of the work carried out. The forms used for collecting information should be easy to understand and should not be very time consuming for filling up. The reports should also not collect too much of information which are irrelevant and time wasting during processing. The reports should highlight departmental efficiencies and inefficiencies, results achieved future goals and targets. c) In any organization, when an order have to accepted, the availability of factors of production have to analyzed. In our case, when Brenda wants to accept a special order, she has to first consider the capacity of production. The existing production capacity and the order size has to be compared. If the production capacity is very less compared to the order size, then the organization has to consider the option whether to make or buy. The company can either raise finance to increase the production capacity or can outsource the additional quantity. For making this decision the finance manager should undertake marginal costing approach. Also, the capability of the company to deliver the quality as mentioned by the customer should be analyzed. The quality specifications by the customer and the quality control procedures inside the organization have to be compared and necessary quality control measures have to introduced. Next, analysis should be about the market conditions. In future what will be the market. If the market is going to be brilliant, then the demand will be high and the prices can also go up. But if the predictions show a very dull future, then the special order has to be undertaken at any cost which will serve as a cushion during dull market conditions. Another factor is the managerial and technical skills of the employees. The current production supervisor and his team of employees should have the necessary competency to produce the product at the specifications of the buyer within the cost budgets. A skills inventory analysis has to be done and the areas in which technical and managerial up gradation is necessary should be identified. Then training and development programs should be arranged to improve the quality of the employees. Another aspect that requires serious analysis is the availability of labor. Because, at present the company is hiring temporary labor according to the requirement. When the special order is undertaken, the production department should have regular availability of labor which has to be ensured. The finance manager of the company has to check the finance position of the company. The current financial position and the cash reserves to start the production on the special order. He has to prepare a cash budget to show the relevant additional expenses. The management has to take this into consideration and arrange for finance for carrying out the order smoothly. References 1. Lal, J (2002) Accounting for management, Himalaya Publishing House, New Delhi 2. Lane, K A and SollenBerger, H M (1992) Managerial Accounting, South Western Publishing Co, Cincinnati 3. DeCoster , DT (1988) Management Accounting: A Decision Emphasis, John Wiley and Sons, New York 4. Hansen, D R and Mowen, M M (1992) Management Accounting, South Western Publishing Co, Cincinnati 5. Fox, R (1990) Decsion making: A management accounting perspective, Butterworth Heinman, Oxford 6. Johnson, H T and Kaplan, R S (1987) Relevance Lost – The Rise And Fall Of Management Accounting, Harvard Business School Press, Boston 7. Kaplan, R S and Atkinson (1989) Advanced Management Accounting, Prentice Hall, New York 8. Drury, C (1992) Management and Cost Accounting, Chapman and Hall, London Read More