Accounting and Financial Management Assignment-
This assignment is designed to give you an opportunity:
- apply management accounting concepts and finance frameworks...to increase the effectiveness of management decision making
- apply management accounting concepts ...to help assess the impact on organisational systems
- apply and use management accounting concepts and finance frameworks...to provide solutions to real world problems
Part One -
Question One
Corporate budgeting is a joke, and everyone knows it. It consumes a huge amount of executives' time, forcing them into endless rounds of dull meetings and tense negotiations. It encourages managers to lie and cheat, low balling targets and inflating results, and it penalizes them for telling the truth. It turns business decisions into elaborate exercises in gaming. It sets colleague against colleague, creating distrust and ill will. And it distorts incentives, motivating people to act in ways that run counter to the best interests of their companies.
Source: Jensen, Michael C. (2001) Corporate Budgeting is Broken - Let's Fix It, Harvard Business Review, Volume 79, Issue 10, November, p. 94-101.
Required:
1. Critically evaluate the above quote in regards to contemporary budgeting practice. You should review current business and academic literature relevant to management control and budgeting. Use appropriate sources to summarise and support your personal views about corporate budgeting. Ensure you relate your discussion to the above quote. You should also make a determination as to whether you agree or disagree with Jensen's view.
2. Apply the Jensen commentary to a business scenario in which senior management are consistently exceeding financial targets. In this hypothetical organisation senior management receive significant financial benefits for favourable budget outcomes. Currently senior management set the budgets with limited input from line personnel. The organisation uses an incremental budgeting system.
Using your knowledge of budgeting processes and performance evaluation systems address the following:
(a) Suggest potential reasons for why the managers are able to consistently exceed budgetary targets.
(b) Suggest refinements to the budgeting system.
(c) Suggest refinements to the performance evaluation system.
Part Two -
Answer the following questions:
(1) Complex Resources has a current breakeven point of 93 400 units. To reduce the break-even point Complex Resources should:
a. increase the variable costs per unit
b. increase fixed costs
c. reduce the sales price per unit
d. increase the contribution margin per unit
(2) Sanjay Ltd has 1000 units in inventory that cost $2.00 per unit to produce. Due to changing technology, the sales department is having difficulty selling the product. It will cost $500 to scrap the units. What is the minimum price Sanjay should sell these units for?
(3) Leisure Life manufactures various sporting equipment. During the first year of operations the company worked on four jobs. The predetermined overhead application rate was 150% of direct labour cost. Job 104 included direct materials of $20,000 and total costs were $25,000. Calculate the manufacturing overhead allocated to Job 104 to date.
(4) Te Rangi Photographic Ltd manufactures digital camera equipment. For each unit $1,475 of direct material is used and there is $1,500 of direct manufacturing labour (at $30 per hour). Manufacturing overhead is allocated at $35 per direct manufacturing labour hour. Calculate the cost of each unit.
(5) Unique Mistique Ltd has fixed costs of $400,000 and variable costs are 75% of the selling price. To realise profits of $100,000 from sales of 500,000 units, the selling price per unit must be?
(6) Diamond Interiors is approached by Mr John Lee, a new customer, to fulfil a one-time only special order for a product similar to those offered to regular customers. The following per unit data apply for sales to regular customers:
|
Direct Materials
|
$455
|
|
Direct Labour
|
$300
|
|
Variable Manufacturing Overhead
|
$45
|
|
Fixed Manufacturing Overhead
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$100
|
|
Total Manufacturing Costs
|
$900
|
|
|
|
|
Mark Up (60%)
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$540
|
|
Target Sales Price
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$1410
|
Diamond Interiors has excess capacity. Mr Lee wants the cabinet in a metallic finish rather than laminate, so direct materials will increase by $30 per unit. What is the minimum selling price that Diamond Interiors would accept for this one time only special order?
(7) The mayor of Snowbrook, Western Island, is considering the purchase of a computer system to automate the city's rate collections. The system costs $75 000 and has an estimated life of five years. The mayor estimates the following savings will result if the system is purchased.
|
Year
|
Savings
|
|
1
|
$20 000
|
|
2
|
$25 000
|
|
3
|
$30 000
|
|
4
|
$15 000
|
|
5
|
$12 000
|
If Snowbrook uses a 10 per cent discount rate for capital budgeting decisions, what is the net present value of the computer system?
(8) A piece of equipment has an estimated five-year life, an internal rate of return of 12 per cent and estimated annual savings of $15 000. What was the cost of the equipment?
(9) Imperial Airways Ltd is planning a project that is expected to last for six years. During that time, the project is expected to generate net cash inflows of $75 000 per annum. The project will require the purchase of a machine for $280 000. This new machine is expected to have a salvage value of $10 000 at the end of six years. In addition to its annual operating costs, the machine will require an overhaul costing $50 000 at the end of the fourth year. The company presently has a minimum desired rate of return of 12 per cent. Based on this information, the accountant prepared the following analysis:
Therefore, the accountant recommends that the project be rejected, as it does not meet the company's minimum desired rate of return.
i. Critically assess the accountant's evaluation of the project.
ii. Use cash flow analysis to determine whether the project should be accepted. Ignore tax effects.
iii. Is the internal rate of return greater or less than 12 per cent?
(10) Cyndy Ltd recently invested $25 000 in equipment with an estimated life of five years. The manager projects the following cash flows.
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Year
|
Inflows
|
|
1
|
$7 000
|
|
2
|
$8 000
|
|
3
|
$7 000
|
|
4
|
$6 000
|
|
5
|
$5 000
|
Calculate the payback period.
References -
1. Bulletin of the Transilvania University of Brasov Series V: Economic Sciences • Vol. 8 (57) No. 1 - 2015
The pros and cons of budgeting system within economic entities by Mariana ZAMFIR
2. Why local governments need performance evaluation: intermediary institutions in the performance-based budgeting process in China by Zaozao Zhao
To cite this article: Zaozao Zhao (2016) Why local governments need performance evaluation: intermediary institutions in the performance-based budgeting process in China, Journal of Chinese Governance, 1:4, 564-573, DOI: 10.1080/23812346.2016.1245472
To link to this article: https://dx.doi.org/10.1080/23812346.2016.1245472
3. Jensen's views on intelligence and a pre-empirical image of man by J. J. Smolicz
To cite this article: J. J. Smolicz (2006) Jensen's views on intelligence and a pre-empirical image of man , Melbourne Studies in Education, 47:1-2, 99-124, DOI: 10.1080/17508480609556435
To link to this article: https://dx.doi.org/10.1080/17508480609556435.