ACC 307 INDIVIDUAL ASSIGNMENT

ACC 307 PERFORMANCE MANAGEMENT

Name: Rosalin J09006059 Section: A1 Programme: BATUH Lecturer: CHOW CHEE LING Date of submission: 8th NOVEMBER 2011

ACC 307 INDIVIDUAL ASSIGNMENT Question 1 - Part A A participative approach to budgeting A participative approach to budgeting is also known as a bottom down approach. It is a budget that is prepared with full opportunity participation of all budget holders at all levels. This is in contrast to a non-participative approach or also known as a top down approach which involves preparation of budgets by fewest people mostly are senior managers.

The advantages of a participative approach It is believed that by using this approach, it will produce a more accurate and reliable budget since the information are based upon from employees who know the most with the areas concerned such as how many resources needed to use, and therefore likely to be more rational. Effectively, this approach will eliminate the issue of a manager who cant meet the realistic and possible budget to meet. Whats more, participative approach is likely to bringing out more commitment to budgets from employees since they have had some contribution into its creation. Hence, it could create and improve the motivation to employees since every single individual is counted in into the process of setting their own goals. The Disadvantages of a participative approach On the other hand, this approach also gives some disadvantages. The disadvantages are as follows: Firstly, this approach isnt efficient in time instead it is a time-consuming process, as many employees must give contribution than in the non-participative approach. Hence, it can result in a more extended and complex budgetary process (Avis, 2009). Secondly, top management may lose some control of the business caused by delegating decision-making to local managers since top management is generally unfamiliar with the detailed day-to-day operations. It is true that subordinates are familiar with the detailed of process in day-to-day operations of the company. However, it is found that subordinates are not aware with the companys strategic perspective and therefore may make decisions that are not match with companys strategy.

ACC 307 INDIVIDUAL ASSIGNMENT In addition, another disadvantage is the risk of budget slack where participants overestimate costs and underestimates revenues when submitting budgets (Avis, 2009). Budget slack also can be caused by the belief of the all budget holders that achievable the target easily could make their tasks easier and to ensure the result appear favourable. Lastly, it is found that to get good quality of decision, the top management and subordinates have to share their skills and experiences of working since everyone doesnt have the same standard. However, a poor communication between top management and subordinates could be led to produce poor quality decisions. The effect of targets upon motivation Motivation is the aspiration or pushed to accomplish the goals. It is believed that the targets that set in the budgets could bring some effects on motivation. For the example, if the subordinates set the budget or target at the minimum level, it will be discourage the budget holders to reach their full capacity. Although they could complete the target set, this task isnt probably be their best working achievement. In the other hand, the budget holders will be thinking that they cant achieve a target as it is set at a very challenging level because it is too hard and discourage them effectively before they give effort on it, that resulting in very low actual performance. So the best part is the target of budget should be set between the minimum and maximum level. There is no need to set at the highest level since it will be demotivated but the main point is the target should be set at the level that challenging enough to motivate budget holders to be hardworking in order to achieve it. In conclusion, it is very hard to define the level of difficulty since everyone skills and abilities is relative.

Lack of goal congruence and dysfunctional behaviour Goal congruence is when the goal of managers of individual responsibility centres is aligned with the goal of organizations as a whole (Avis, 2009). Goal congruence is a very crucial consideration to be achieved in designing a management control system. Meanwhile, a lack of goal congruence can be showed in the part of responsibility centre managers when the behaviour that is may be best interest of the responsibility centre, but it is not in the best interest of the organization as a whole. These decisions are generally referred to as dysfunctional behaviour or decision making.

ACC 307 INDIVIDUAL ASSIGNMENT Question 1 - Part B Potential problems with the new managing directors approach The approach taken by the managing director has the following potential problems
i.

The new budgeting system that is applied is a non-participative approach. This situation could lead its hotel general managers are unable to show its ability and skill to company. This is able to become unfavourable to company since the managing director may be not familiar with the local culture from each city throughout the world. Further, it may increase the discouragement and a lack of responsibility amongst managers who are used to setting their own budgets.

ii.

It is not possible to hotel managers to achieve the budget that required the large increases in profitability by budget holders since resulting in a lack of motivation and a consequent reduction in profit.

iii.

Dysfunctional decisions might be happened when hotel managers set the hotel restaurant cost budget is lower 20% as compared to previous year. Further, these cost reductions could cause the changes of quality (services and goods) become poor, leading to decrease of customer numbers and profits. Besides that, managers could increase their own salaries by reducing restaurant costs.

Question 2 (a) absorption cost; Absorption cost method is also called full cost. This method ensures that all incurred costs are recovered from the selling price of a good or service. Under this method, the company will be given some major advantages. Firstly, the company will get availability of cost information easily that is provided by the accounting system currently. Secondly, according to Tomkins and McAulay (1996) as cited in Drury (2004) suggest that the practice of transfer pricing above variable cost may be quite consistent with pricing at the economists marginal cost. Next, absorption cost brings the advantage for a manager of one department to take back the total cost that is used up in the term of output. Furthermore, by using absorption cost it is able to give the motivation to foreign subsidiary managers to increase their divisional contribution as long as the full absorption cost exceeds the variable cost and there is additional capacity to accommodate the incoming orders (Abdallah, 2004).
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ACC 307 INDIVIDUAL ASSIGNMENT However, this method also gives some disadvantages. Firstly, it gives an unstable transfer price since the cost per unit is always changing as capacity use varies. If the absorption cost exceeds the market price, the buying department would prefer to buy the components externally rather than buy the components internally. This situation consequently leads to the ineffective operation for the company as a whole. Second, by mixing the short-run and long-run components of cost, it obscures the underlying cost structure from decision makers in the organization and therefore fails to suggest how cost savings can be obtained by using capacity more efficiently (Kaplan and Atkinson, 1998). Whats more, the selling division may not be given an incentive since the transfer prices do not include a profit margin. If internal transfers are recognized as a part from selling divisions business, the divisions profits will be devalued by them.

(b)

Marginal cost; Marginal cost method is also known as variable cost. This method provides some

advantages to the company. Firstly, if the transfer pricing is set to be equal with the marginal cost of the selling subsidiary hence the marginal cost also will be equal to marginal revenue since the selling subsidiary also produces at its marginal cost. As a result, marginal cost will bring the company to enjoy the maximization of profits. It is believed that marginal cost will show the production at the maximum level for the company. Meanwhile, it brings some disadvantages too. Firstly, information on marginal cost cannot be easily gathered from the company accounting system. It will lead to the inefficiencies in operation of the transferor department such as being time consumed in collecting the related information. Secondly, marginal cost method cannot be fully applied practically, even the studies found that it is only very little used in practice and it is not a practical technique to be used. It is only popular as a theoretical technique.

(c)

Cost plus profit; The computation concept of cost plus profit in transfer pricing is different from other

methods. This method will be using a percentage that decided in advance that will be added into absorption cost in order to cover profit. It is found that compromise is allowed by some companies for this objective.
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ACC 307 INDIVIDUAL ASSIGNMENT The benefit of using this method is its easy, simplify, perfectly clear, and its estimation of the market price, especially when the goods has an international market and it is a determinable and reasonable transfer price when the market for the product doesnt exist. In addition, this method provides every process in the company or department to stand on its own that leads to the higher efficiency and economics. However, this method also has disadvantages. First, the transferor department may experience inefficiencies in operation using the transfer price. Second, the cost of production is not constant, it may change due to certain circumstances, when there is an increase in cost, and more profit is allowed. Third, problem arises during the valuation of inventory. This is because unrealized profit is included in closing stock and this is opposite to the principle of inventory valuation.

(d)

Standard cost This method is done by having all departments agree at the beginning of the year to the

standard costs that will be used for transfer pricing until the end of the year. The changes are allowed during that year if only for significant and permanent cost changes, the reasons of changes should be closely reported to ensure that the changes are appropriate. The standard cost method has a number of advantages. By using this method, the buying departments can easily budget the cost of incoming components from the selling departments without having any responsibilities about unusual pricing variances arises. Secondly, the selling departments can now fully concentrate on their attention on reducing their cost levels at which transfer prices are set for the year since it is no longer have an incentive to transfer cost to the buying departments. As a result, they can improve financial results that reflect well not only on the department managers performance, but also on the performance of the company as whole. Furthermore, there is no need continuously monitoring of costs thats happening by the corporate headquarters staff, because standard costs are fixed for the whole year. Instead the headquarters staff can concentrate its attention on the annual setting of standard costs; this is the one time during the year when cost can be manipulated to favour selling divisions, which requires in-depth cost review to avoid (Bragg, 2005).

ACC 307 INDIVIDUAL ASSIGNMENT On the other hand, this method will bring some disadvantages. Since there is no need for constant monitoring of cost because its fixed for the entire year, this method will discourage the selling division to control cost. Moreover, transfer price at standard cost will include cost of inefficiency. According to Lengsfeld, Pfeiffer, and Schiller (2006) as cited in Chapman, Hopwood, and Shields (2007), the trade quantity of components between selling and buying department cannot be adjusted to actual production and demand conditions and will therefore necessarily be inefficient.

Question 3 (i) TARGET COSTING According to Drury (2004), target costing is a technique that focuses on managing costs during a products planning and design phase. In order to achieve target cost, there are some steps that needed to fulfil.
Determine the target price

Determine the target cost

Estimate the actual cost of the product

Drive to customer value

The first step of target costing is to determine who the customer is and what kind of products that will match with the customer based on its functions and features. Then, the company needs to specify the customers needs and determine the customer value weighting that will help the company to figure out the target cost. In this step, it leads to cost reduction since the company will be eliminating the unnecessary features. The value of product will be added by eliminating the unnecessary features than adding more. Lastly, the target cost will be compared with the estimated actual cost, if estimated actual cost is higher than target cost; the intensive efforts are given to cover the gap so that the estimated cost equals the target cost.
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ACC 307 INDIVIDUAL ASSIGNMENT Overall, we can conclude that the key principle of target costing is actually a product price that based on what the market willing to pay for it, not on what actually costs to produce the product (Modarres, Ansari, and Lockwood, 2005). KAIZEN COSTING According to Drury (2004), kaizen costing is the Japanese term for making improvements a process through small incremental amounts, rather than through large innovations. Kaizen costing is used for reducing cost on existing products when the product is in primary production stages. Kaizen costing works efficiently through aiming at a specified cost reduction objective; reductions are integrated into original production standards to sustain improvements and provide new challenges. It is also very important in kaizen costing to have accountable people to achieve the kaizen cost goal. Modarres, Ansari, and Lockwood (2005) added that it must become part of the culture for the work cell to always strive to meet their target and be able to recognise the progress made over the course of the year. (ii) Differentiate the two costing approaches. Firstly, the differentiation can be looked based on the time usage; the target costing works to reduce cost in the development stage while Kaizen costing works during the primarily production stages. Lastly, target costing provide the greater amount of cost reduction because it happens during the design and development stages rather than kaizen costing that only has limited potential for reducing cost of existing products.

(2117 words)

ACC 307 INDIVIDUAL ASSIGNMENT References Abdallah, W.M., 2004. Critical Concerns in Transfer Pricing and Practice. United States of America: Greenwood Publishing Group, Inc. Available at:

<http://books.google.com.my/books?id=imQropno9GgC&dq=absorption+cost+in+transfer +pricing&source=gbs_navlinks_s> [Accessed 30th October 2011]. Avis, J., 2009. P2-Performance Management , Managerial Level. Oxford: Elsevier Ltd. Available at : <http://books.google.com.my/books?id=fOwkjrtNEGkC&dq=a+participative+approach+to+ budgeting&source=gbs_navlinks_s> [Accessed 31st October 2011]. Brag, S.M., 2005. Inventory Accounting: A Comprehensive Guide. United States of America: John Wiley & Sons, Inc. Available at:

<http://books.google.com.my/books?id=lytv4nXeqI4C&printsec=frontcover#v=onepage& q&f=false> [Accessed 30th October 2011]. Chapman, C.S., Hopwood, A.G., and Shields, M.D., 2007. Handbook of management accounting research, Volume 2. Netherlands:Elsevier Ltd. Available at:<

http://books.google.com.my/books?id=Nwg69xNyG54C&printsec=frontcover#v=onepage &q&f=false> [Accessed 30th October 2011]. Davis, C. E., and Davis, E.B., 2011. Managerial Accounting. United States of America: John Wiley & Sons, Inc. Available at: <http://books.google.com.my/books?id=lFfs_DKfn2wC&pg=PA252&lpg=PA252&dq=lack+ of+goal+congruence+leads+to+dysfunctional+decision&source=bl&ots=AnKpXbkxux&sig= C0egXYPdkFIwuEeNrizKx02HCXc&hl=en&ei=Or2uTolAoXJrQeQg_TqDA&sa=X&oi=book_result&ct=result&resnum=2&ved=0CBwQ6AEwAT gK#v=onepage&q&f=false> [Accessed 31st October 2011]. Drury, C., 2004. Management and Cost Accounting. 6th ed. Italy: Thomson Learning Kaplan, R.S., and Atkinson, A.A., 1998. Advanced Management Accounting.3rd ed. United States of America: Prentice Hall. Modarres, B., Ansari, A., and Lockwood, D.L., 2005. Kaizen costing for lean manufacturing: a case study. International Journal of Production Research, [e-journal] 43(9), 1751-1760. Available through: Ebsco Host database [Accessed 5th November 2011].