Evaluation of Proposed Solutions
Discuss about the Contingency Theory of Management Accounting.
The current paper aims to evaluate the case study of General Productions, which is a manufacturer of electronic products. In order to increase its revenue and profit margins, various members of the management have become up with different proposals, which are discussed in the study. After proposing the most feasible solution, the benefits that could be obtained by developing budget systems for the cost management of the organisation are discussed. Moreover, the importance of activity-based costing (ABC) system to ensure appropriate pricing for the products is elaborated. Finally, the paper sheds light on identifying the impact of change in inventory accounting method on adverse variance in gross profit of the organisation.
This particular section lays stress on the case study of General Productions (GP), which is involved in manufacturing electronic products. The customisation of electronic components is made for sale to the various customers including SMEs and MNCs. Based on the provided case study, it could be identified that four members of the senior management of GP have expressed different views in order to increase revenue and profit, which are elucidated as follows:
According to the chief marketing officer of GP, the organisation could use social media for marketing its new mobile phones. In addition, the organisation could use the various local celebrities and celebrity bloggers for drawing the attention of the customers. In this case, it needs to be mentioned that there are several active users in social media like Facebook, Twitter, Instagram and Pinterest. Thus, developing accounts in one or two of these platforms could enable GP to provide exposure to those users. Another benefit that the organisation could obtain is that social media does not require any form of registration fee; thus, the investment would be made in the form of time. In addition, paid advertising options are present in most of the platforms that could help GP in increasing its follower base. Finally, social media helps in two-way communication enabling to develop effective relationships with potential and meaningful customers (Alammar & Kohn, 2016).
However, there are certain drawbacks that could have adverse impact on the revenue and profit of GP. The first drawback is that the unsatisfied customers could post negative comments on the platform and some of these comments might come from the disgruntled staffs as well (Butler & Ghosh, 2015). Due to such negative feedback, the organisation might find difficult to retain its existing customers and as a result, the revenue and profit margins of the organisation would decline in the market. Moreover, adequate amount of time and effort needs to be devoted for maintaining the social media presence. This is because the limited resources of the organisation might make it difficult in devoting the required resources to social media (Barr, 2018).
Benefits of Budget Systems for Cost Management
According to the individual, attention needs to be placed on creating new features on the new line of mobile phones. This is because effective designs would help in assuring the success of the new mobile phones. Moreover, the addition of new features would help the organisation in pricing the new phones at greater premiums (Bushman, 2014). On the other hand, if high prices are charged to the customers, they might switch over to the competitors selling similar products at lower prices. As a result, it might minimise the overall revenue and profit generated for the organisation.
According to this individual, GP need not have to focus on aggressive investment on design and features of the mobile phones. This is because there would be involvement of risks in technological investments that could be easily substituted with the initiation of new technologies in the market (Edmonds et al., 2016). With the rising advancements in technology, it has become possible for all the organisations to imitate that of its competitors and thus, competition has increased considerably in the market. Hence, if the adopted technology becomes outdated, it would result in additional financial burden for GP.
According to the individual, the product lines need not be extended along with minimising the product life cycle. This is because inclusion and exclusion of product lines would increase the overall research cost. In addition, the production facility could not be improved due to the lack of inexperienced staffs and these staffs could not be replaced due to the niche skill sets needed. As a result, it might minimise the revenue to be generated and profit level expected for GP.
Hence, based on the above evaluation, it is assessed that GP needs to use social media for increasing its revenue and profit margins. This is because with the help of social media, it would be possible for the management of the organisation to generate the attention of the customers. Even though some customers might not be satisfied with the mobile phones of GP and they might negative feedback on social media platforms, the representatives of the organisation need to respond appropriately to such comments by providing strong evidences (Finkler et al., 2016). Although social media hampers the brand image of an organisation, it helps in improving the same as well by attracting the potential customers. With the generation of additional customers, the revenue margin of GP would be increased and as a result, this would increase the profit level of the organisation as well.
Importance of Activity-Based Costing (ABC)
A budget is developed on a group of assumptions that are not too far from the operating conditions under which it was established. In case, there is change in the business environment to a certain degree, there might be change in the revenue or cost structure of the organisation. As a result, there might be huge differences between the actual results and the expected budget results (Freeman et al., 2017). Such condition might result in problems during inflation, as the budget authorises a specific spending level, which is not supportable anymore under a minimised level of revenue.
The budget process emphasises on the attention of the management team of GP on strategy at the time of budget preparation period near the end of the accounting year. However, in the remaining time of the year, there is absence of procedural commitment for revisiting strategy (Garrison et al., 2015). Hence, if the market shifts fundamentally after the completion of a budget, there is absence of a system to review the system formally for making changes. Due to this, GP might be placed at a significant drawback in contrast to its competitors.
In order to develop a budget, it requires plenty of time where many budget iterations might be needed. The budgeting procedure is well-designed, if the staffs are well-versed with the process and they know to use budgeting software (Henderson et al., 2015). In case of GP, the work needed could be highly extensive due to the changing business conditions calling for repeated iterations of the budget model.
In the words of Hermason, Edwards & Maher (2016), a competent manager might attempt of initiating budgetary slack, which takes into account deliberate minimisation of revenue estimates and enhancing expense estimates for accomplishing favourable variances in contrast to the budget. This could be a significant issue and thus, it needs significant oversight in relation to spotting and elimination. Along with this, the managers using gaming in GP are encouraged to engage in unscrupulous behaviour, which could result in further difficulties associated with fraud. However, there are certain benefits of budget in the cost management for GP, which are discussed as follows:
Budgets are considered as an essential part of the management process, since they compel planning, as the individuals in an organisation start to make future planning (Hunton, Libby & Mazza, 2015). With the help of formal budgeting process having particular guidelines, the operations manager of GP are needed to change the attention along with completing the budget.
Impact of Change in Inventory Accounting Method
With the help of budgeting, the primary principles of communication and coordination are promoted. This might be viewed as application of the obvious in case of GP; however, the formal process might make the sales function communicated to the customer service and/or operation function.
Budgets are considered as a significant part of control and procedure is reviewed in that they formulate agreed targets to be accomplished and for performance to be observed against (Otley, 2016). Thus, with the help of budgeting, GP could conduct performance evaluation. This is the reason that budget participations are highly crucial in GP, as the operations manager is to be asked to accomplish agreed objective within agreed parameters. Hence, GP could be able to control its cost activities over time by preparing budgets that would help in increasing its overall revenue.
As evaluated from the case study, GP uses traditional costing system, which implies that indirect costs are assigned to products depending on the predetermined rate of overhead. In this type of system, overhead costs are adjudged in the form of single pool of overhead costs (Park & Jang, 2014). However, traditional costing system could result in significant under-costing or over-costing of the products due to incorrect allocation of certain activities that are not taken into consideration. Along with this, the use of this system has resulted in aggressive price quoting for GP due to which the need for ABC costing methodology arises. This is because with the help of ABC system, it is possible to provide a precise breakdown of indirect costs and its contributions towards more appropriate pricing are enumerated as follows:
- With the help of ABC system, costs could be minimised through meaningful information on the opportunities present to minimise them.
- This type of costing system works on the activities only. Hence, the management of GP could undertake significant decisions by gaining an insight of the nature of each activity.
- Under this system, there are two types of activities and they include value-adding activities and non-value adding activities (Reider, 2016). Thus, with the help of this system, GP could keep its focus on the activities that add value, while the activities failing to add value are eliminated.
- Certain non-manufacturing costs are present within an organisation like GP such as advertisement. It is to be borne in mind that advertisement comprises of a significant portion of the overall cost of any product. With the help of ABC system, GP could allocate the non-manufacturing costs effectively, as the associations between costs and their causes could be understood easily.
- The accurate cost collection to various products would help the management of GP in setting effective pricing policy.
- The expenditure statement is prepared depending on activity and the cost of each activity would be contrasted with one another for ascertaining the activities to be eliminated or improved for enhanced performance (Scott, 2015).
- As the management of GP makes accurate cost information, it could adopt productivity improvement approaches such as total quality management and business process reengineering.
- With the help of ABC system, it would easier for the management of GP to undertake make or buy decisions by taking into account the manufacturing cost of a product or the same is subcontracted with an external agency.
- In case, the present resources could not be utilised properly even after subcontracting with an external agency, the management of GP could carry out the manufacturing activity of the mobile phones within the organisation.
- It is assumed that there are two departments in General Productions, which constitute of Department A and Department B. Thus, at the time the finished products of Department A are passed over to Department B, the product cost to Department B could be shown easily (Warren & Jones, 2018). This is the procedure that would help the management of General Productions in fixing transfer pricing.
- Another advantage that the management of GP could obtain by using the ABC costing methodology is that it could obtain adequate information for undertaking decisions regarding the profit level of the various product lines.
Based on the above discussion, it could be evaluated that the rising competition has necessitated the need for each organisation to streamline their cost structure. Accordingly, GP could prepare those sets of mobile phones suiting its organisational and manufacturing set-up.
Changing the supply sources or types of inventory could have direct impact on direct costs. In addition, working with the new suppliers could eradicate any discount on volumes that an organisation might have earned previously (Weygandt, Kimmel & Kieso, 2015). If this is considered as in the case of GP, the negotiations in the contract could be weaker. On the other hand, finding new suppliers might lead to minimised product costs and greater quality products that generate the awareness and attention of the customers for GP. Hence, if GP changes the type of inventory purchased and sold, the impact would be apparent on inventory cost, since new products signify new cost structures. This could have considerable influence on gross profit by assuming that the prices remain fixed.
Any change in the inventory costing method would affect the way of cost recognition in the accounting system, even though there would be no effect on the actual prices paid for inventory (Williams, 2014). In the provided case, the vice president for finance of GP has identified that the inventory method was changed from FIFO to weighted average. In case of FIFO, it is assumed that the beginning inventory unit is sold first, while the weighted average method takes the average cost of the inventories available for sale. Hence, the change in the inventory costing method from FIFO to weighted average method would raise the cost of goods sold for GP and as a result, this has some effect on the declining gross profit of the organisation.
Conclusion:
Based on the above evaluation, it has been found out that GP needs to use social media for increasing its revenue and profit margins. This is because with the help of social media, it would be possible for the management of the organisation to generate the attention of the customers. With the help of budgeting, GP could conduct performance evaluation. This is the reason that budget participations are highly crucial in GP, as the operations manager is to be asked to accomplish agreed objective within agreed parameters. ABC system is important, since the accurate cost collection to various products would help the management of GP in setting effective pricing policy. Finally, working with the new suppliers could eradicate any discount on volumes that an organisation might have earned previously. In addition, the change in the inventory costing method from FIFO to weighted average method would raise the cost of goods sold for GP and as a result, this has some effect on the declining gross profit of the organisation.
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