Use of Budget to Monitor and Control the Activities of the Organisation and Tasks to be Undertaken in Implementing the Process
The current report aims to evaluate the importance of budget in the context of Happy Lim Limited, which is a manufacturing organisation established over 50 years back. The organisation is involved in manufacturing a kind of expansion valve, which is a primary component of an air conditioner. The son of the founder, Martin Lim, has now been looking after the operations of the organisation. The person is planning to purchase new equipment, which would help in increasing the production capacity and the overall sales of the organisation. Hence, the first segment of the report would concentrate on discussing the use of budget for monitoring and controlling the activities of the organisation along with identifying the tasks to be undertaken at the time of process implementation. The second section provides a brief elaboration of the use of responsibility accounting approach and problems that are likely to be encountered in using the approach. Finally, the report sheds light on the kind of information or factors required in making decision to buy the additional equipment.
In order to monitor and control the activities of the organisation, Martin could use the budget in the following ways:
For helping in monitoring cost control and productive efficiency, Martin could create standards. Such standards would denote benchmarks against which the actual productive activity could be contrasted (Christensen, Nikolaev and Wittenberg?Moerman 2016). Significantly, standards could be formed for labour cost and efficiency, material utilisation and cost along with additional general evaluation of the total deployment of equipment and facilities.
Martin needs to concentrate on standards by identifying the important deviations from the norm. Such deviations would provide warning signs that would need corrective actions. In this case, Martin could seek help from the company accountants to focus on the exceptions by providing the outcome of variance analysis.
Martin needs to undertake utmost care to monitor variances. It is expected that Happy Lim Limited would expect a rise in demand, which requires the manager to authorise considerable overtime prudently. Such overtime might lead to greater than anticipated wage rates and hours (Collier 2015). Hence, variance analysis could result in various unfavourable variances. However, such added cost would be incurred for increased customer demand, which would be a sound decision. Hence, the variances need not be interpreted in a negative light. For avoiding such kind of data misinterpretation, Martin could use flexible budgeting and analysis tools for sorting out confusing signals.
Use of Responsibility Accounting Approach and Problems to be Encountered
The managerial accountant of the organisation would be the major facilitator of the control process including the exploration of alternate corrective strategies in order to remedy unfavourable conditions. In addition, the organisation needs to involve the controller along with several support personnel to help with each phase of the process of management accounting (Demski 2013). Moreover, it is necessary for the CFO to look after external reporting, treasury function, financing management and general cash flow. Furthermore, the separate internal audit group would review the accounting work and treasury units.
The tasks to be identified in order to undertake in implementing the process could be implemented with the help of balanced scorecard, which are discussed briefly as follows:
At the time of controlling through a balanced scorecard approach, the process needs to be balanced carefully. The objective is to identify and concentrate on components of performance, which could be improved and gauged (Drake, Guest and Twedt 2014). Moreover, to financial outcomes, such components could be classified as relating to customer development, business processes and organisational betterment. The processes associated with items like machinery utilisation rates, delivery time, outcomes of customer satisfaction surveys and referrals of customers. The betterment is related to items such as staff turnover, advanced training hours, mentoring and other identical items.
In case, these balanced scorecards are developed and implemented carefully, they could be useful to further the goals of the organisation. On the contrary, if the assessed elements do not result in improved performance, the staffs would devote time and energy for tasks having no association to create value for the business (Drury 2013). Thus, Martin needs to exercise care and control for striking an effective balance between costs and resulting benefits.
Martin could deploy total quality management, which would concentrate on customer service and systematic problem-solving through teams made up of front-line staffs. These teams would benchmark against the successful rivals and other businesses. A further sweeping change could be implemented with the help of a complete process reengineering (Simkin, Norman and Rose 2014).
For implementing responsibility accounting approach within Happy Lim Limited, the organisation needs to be organised for assigning responsibility to the individual managers. The different business managers and their lines of authority need to be defined fully (Nallareddy and Ogneva 2016). The below-stated organisational chart could be used for defining the lines of responsibility and authority for responsibility reporting:
Figure 1: Proposed organisational chart for responsibility reporting in the context of Happy Lim Limited
Type of Information Needed in Making Decision for Purchasing the Additional Equipment
(Source: Eierle and Schultze 2013)
For identifying the items over which each manager has control, the lines of authority need to follow a specific path. For instance, the department supervisor needs to report to the store manager. The store manager, in turn, would report to the Vice President of Operations, who would report to the President. Thus, the President would be accountable for all items of revenue and expense within the organisation. The individuals at a particular management level would be on a horizontal line and all managers would not have identical responsibility and authority (Ismail and King 2014). Even though the President might delegate some decision-making power, some expense and revenue items would stay under the control of the President.
Some of the problems that Martin might encounter in implementing the responsibility accounting approach are described briefly as follows:
- It becomes complex to have a further evaluation of expenses than provided through conventional categorisation of expenses. For instance, the wages of workmen are controllable; however, the fringe benefits included in it have to be paid under law or according to the agreement with the union of the workers.
- At the time of introducing the system, supervisory staff might need additional categorisation, particularly in the responsibility reports. They need to be explained properly the benefits and purpose of the new system (Kim and Zhang 2016).
The following are the types of information needed in making decision in order to buy the additional equipment:
In order to buy the additional equipment, Martin needs to review the current financial position of the organisation. As identified from its financial statements, Happy Lim Limited has a stable financial condition, which permits the organisation in purchasing the new equipment for increasing its overall production and boosting the sales margin (Klychova et al. 2014). Moreover, Martin could arrange funds for its additional equipment, which would help the organisation in saving additional funds.
It is important to anticipate the cost of ownership associated with the additional equipment. This is because ownership results in operating and maintenance costs, insurance and other fees like government licensing and such costs differ from machine to machine. In this case, the new equipment has additional production capacity, which would help in meeting the expected increase in demand and overall revenue margin.
As the new equipment would be used for long-term purpose, buying the same would be feasible; as the rental costs could rise quickly the longer a job is continued. In addition, the machine would be implemented within a short span of time and hence, buying the equipment would reduce the operational cost, although there would be fall in cash base of the organisation. Thus, this is a significant factor for Martin in deciding the purchase of the new equipment.
Conclusion:
From the above discussion, it has been evaluated that for helping in monitoring cost control and productive efficiency, Martin could create standards. Such standards would denote benchmarks against which the actual productive activity could be contrasted. The managerial accountant of the organisation would be the major facilitator of the control process including the exploration of alternate corrective strategies in order to remedy unfavourable conditions. At the time of controlling through a balanced scorecard approach, the process needs to be balanced carefully. The objective is to identify and concentrate on components of performance, which could be improved and gauged. For identifying the items over which each manager has control, the lines of authority need to follow a specific path.
However, it becomes complex to have a further evaluation of expenses than provided through conventional categorisation of expenses. For instance, the wages of workmen are controllable; however, the fringe benefits included in it have to be paid under law or according to the agreement with the union of the workers.
References:
Christensen, H.B., Nikolaev, V.V. and Wittenberg?Moerman, R.E.G.I.N.A., 2016. Accounting information in financial contracting: The incomplete contract theory perspective. Journal of accounting research, 54(2), pp.397-435.
Collier, P.M., 2015. Accounting for managers: Interpreting accounting information for decision making. John Wiley & Sons.
Demski, J., 2013. Managerial uses of accounting information. Springer Science & Business Media.
Drake, M.S., Guest, N.M. and Twedt, B.J., 2014. The media and mispricing: The role of the business press in the pricing of accounting information. The Accounting Review, 89(5), pp.1673-1701.
Drury, C.M., 2013. Management and cost accounting. Springer.
Eierle, B. and Schultze, W., 2013. The role of management as a user of accounting information: implications for standard setting.
Ismail, N.A. and King, M., 2014. Factors influencing the alignment of accounting information systems in small and medium sized Malaysian manufacturing firms. Journal of Information Systems and Small Business, 1(1-2), pp.1-20.
Kim, J.B. and Zhang, L., 2016. Accounting conservatism and stock price crash risk: Firm?level evidence. Contemporary Accounting Research, 33(1), pp.412-441.
Klychova, G.S., Zakirova, A.R., Mukhamedzyanov, K.Z. and Faskhutdinova, ?.S., 2014. Management reporting and its use for information ensuring of agriculture organization management. Mediterranean Journal of Social Sciences, 5(24), p.104.
Nallareddy, S. and Ogneva, M., 2016. Predicting restatements in macroeconomic indicators using accounting information. The Accounting Review, 92(2), pp.151-182.
Simkin, M.G., Norman, C.S. and Rose, J.M., 2014. Core concepts of accounting information systems. John Wiley & Sons.
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