Budgeted Manufacturing Overhead And Direct Material Costs For Heidegger Pty Ltd

Direct Material Budget

Dsicuss about the Innovation In Evolution Of Management Accounting.

The report is prepared to address the concerns of the sales manager of Heidegger Pty Ltd of the new manufacturing facility. Making investment in new production facility will enable organization to manufacture anemometers that is used in the production of wind power energy generated equipment. The current market for the equipment of alternative power generation is uncertain and volatile and in light of this volatility and uncertainty, introduction of new manufacturing facility will help in addressing such issues. There are two parts in which the manufacturing will be carried out under this facility, the assembly will be purchased and the assembly process that is somewhat labour intensive will be significantly automated (Bromwic and Scapens 2016). Furthermore, the impact of intended investment in the new production capacity has been evaluated that is supported by relevant calculations.

The new manufacturing facility is implemented with the deliberation of reduction in material cost and direct labour cost. However, it is projected that the new manufacturing facility will increase the fixed manufacturing overhead resulting from increased investment made in the production facility. For the preparation of various budgets, Heidegger Pty Ltd will make use of flexible budgeting formula. Some of the budgets that are prepared include direct labour budget, direct material budget, direct labour budget, cost of goods manufactured statement, cash collection from debtors account and budgetary income statement. There is likelihood that fixed manufacturing overhead will increase by 50% and reduce labour and direct cost by 25% due to increased investment in production capacity (Tappura et al. 2015).

From the sales budget, it can be seen that the budgeted sales revenue initially reduced from $ 134685000 to $ 121216500 and thereafter it increased to $ 161622000. Volume of budgeted production has increased significantly from 18940 in first month of operation to 35040 in third month of operation. In addition to this, there is considerable increase in budgeted direct labour cost from $ 2272800 in month of April to $ 4204800 in month of June. It is depicted from the production budget that the budgeted volume of production has increased considerably. On other hand, the budgeted sales volume has initially reduced from $ 36500 to $ 29200 and further the volume has increased significantly to $ 43800. The total cost of cups has increased to $ 3661680 as against $ 1281280 initially. Furthermore, there has been phenomenal increase in budgeted direct material purchase from $ 4576840 to $ 8034380 and further to $ 9758640. Therefore, it can be inferred from the analysis of several budgets that with the introduction of new manufacturing facility, there is significant increase in direct material cost, direct material purchase, direct labour cost, production volume and sales volume (Mårtensson et al. 2016).

Manufacturing Overhead Budget

The budgeted manufacturing overhead has increased from $ 54741854 to $ 60747655 as revealed by the manufacturing overhead budget. It can also be noticed that direct labour hour and indirect labour cost has increased since the month of operation (Kokubu and Kitada 2015). Furthermore, there has also been increase in total and variable maintenance cost.

In addition to this, the collection from debtors has initially increased from $ 117073800 to $ 126603900 and thereafter the value has reduced to $ 108286470. The cash payment for administration and selling expenses, the amount stood at $ 31031550 in first month of operation to $ 23980500 in second month of operation and the amount stood at $ 27853515 in third month of operation.

The cash budget prepared by organization depicts the net cash generated from operating, financing and investing activities. Net cash flow from operating activities has increased from $ 26275756 in first month of operation to $ 31545554 in second month of operation and thereafter it has reduced drastically to $ 4807305. No cash flow has been generated from financing activities in second and third month of operations. The closing cash balance has increases month on month from $ 27454706 to $ 40020261 and further to $ 44827566.

Now, the value of net operating income will form the basis whether the project should be undertaken or not. It can be seen from cost of goods sold manufacturing statement that the cost of goods manufactured has increased. However, the per unit cost of goods manufactured has reduced. There has been increase in gross profit along with increase in net operating income. Nevertheless, the total amount of net operating income is negative (Wouters and Kirchberger 2015).

Conclusion:

From the evaluation of new manufacturing facility in terms of sales volume and material and labour cost, it can be seen that there is no change in percentage of sales made. Moreover, fixed manufacturing overhead has increased. Therefore, it would not be viable to undertake investment in new manufacturing facility as the total net income generated is negative.

Budget preparation can have considerable impact on the behaviour of human and overall performance of organization. The approach of imposed budgeting involve senior level management who has the responsibility of facilitating the process of decision making by setting parameters for achieving desirable targets. Lower or middle level employees are involved in the computation of budgetary elements but have little say in the decision making. Under this method, the management does not make effective human resource utilization. Effective budget requires input in the form of financial and non financial information from all the departments so that it covers broad range of aspects. This would make the budgetary system reliable. Imposed budget might permit much budgetary slack if such budgets are not properly scrutinized and such slack would create waste and inefficiency (Chiwamit et al. 2017). Therefore, before accepting the outcomes of such budgets, it is required that such budgets should be reviewed carefully.

Budget Preparation and Impact on Human Behavior

Participatory approach of budgeting on other hand involves active participation of employees at all levels from different departments. Such budget intends to provide benefits in terms attitude and performance of preparers of budgets. The implications of participatory budget are measured in terms of congruency of goals, communication and motivation. There is increased involvement from employees and increased flow of communication because of participation of employees from different level of management. Organization is able to set realistic targets by preparing a well designed budget involving employee’s participation. Participatory budgetary approach helps in encouraging goals congruency and prevention of any undesirable behaviour on part of employees (Chenhall & Moers 2015). Moreover, behaviour implication in terms of motivation is generally higher when there is participation from individual employees in setting his or her budgetary goals.

Analyzing both types of budget that is imposed as well as participatory budget, it can be inferred that behavioural concerns of employee are addressed using the later budgetary approach. The reason is attributable to the fact that the imposed budget does not facilitate flow of communication between employees of different departments. Favourable outcome will be produced by budget if the preparation of budget involves employees from upper to lower level of management along with staffs and employees. Participatory budget will help in addressing the issues experienced by the employees at behavioural level. In addition to this, the performance of managers is evaluated by using the participative approach. Therefore, the preparation of budget is considered desirable if it involves participation from top as well as lower level of management. Budgets should be created in such a way that it receives contribution from management in preparation of budget. Detailed budgeted data is provided if the participation is sought from subordinates who are involved in day to day operations (Cleary 2015).

Reference list:

Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years on. Management Accounting Research, 31, pp.1-9.

Chenhall, R. H., & Moers, F., 2015. The role of innovation in the evolution of management accounting and its integration into management control. Accounting, Organizations and Society, 47, 1-13.

Chiwamit, P., Modell, S., & Scapens, R. W., 2017. Regulation and adaptation of management accounting innovations: The case of economic value added in Thai state-owned enterprises. Management Accounting Research, 37, 30-48.

Cleary, P., 2015. An empirical investigation of the impact of management accounting on structural capital and business performance. Journal of Intellectual Capital, 16(3), pp.566-586.

Fullerton, R. R., Kennedy, F. A., & Widener, S. K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), 414-428.

Hopper, T., & Bui, B., 2016. Has management accounting research been critical?. Management Accounting Research, 31, 10-30.

Horton, K.E. and de Araujo Wanderley, C., 2016. Identity conflict and the paradox of embedded agency in the management accounting profession: adding a new piece to the theoretical jigsaw. Management Accounting Research.

Kokubu, K. and Kitada, H., 2015. Material flow cost accounting and existing management perspectives. Journal of Cleaner Production, 108, pp.1279-1288.

Mårtensson, M., Höglund, L., Holmgren Caicedo, M. and Svärdsten, F., 2016. Management accounting of control practices: a matter of and for strategy. In the 9TH INTERNATIONAL EIASM PUBLIC SECTOR CONFERENCE, held in LISBON, PORTUGAL, SEPTEMBER 6-8, 2016..

McLean, T., McGovern, T. and Davie, S., 2015. Management accounting, engineering and the management of company growth: Clarke Chapman, 1864–1914. The British Accounting Review, 47(2), pp.177-190.

Messner, M., 2016. Does industry matter? How industry context shapes management accounting practice. Management Accounting Research, 31, 103-111.

Tappura, S., Sievänen, M., Heikkilä, J., Jussila, A. and Nenonen, N., 2015. A management accounting perspective on safety. Safety science, 71, pp.151-159.

Wouters, M. and Kirchberger, M.A., 2015. Customer value propositions as interorganizational management accounting to support customer collaboration. Industrial Marketing Management, 46, pp.54-67.

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