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Management Business Performance Assignment Sample

Question 1

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Part 1.1

Life cycle costing is also known as whole life costing is used to estimate how much amount is to be spent over the life of production or asset over its useful life. Life cycle costing is a type of costing activity that is used for the selection of the best alternative by considering current as well as future activities. It involves the identification of various courses of action, selecting the best available, and analyzing the results in the future as well.

It considers current investment and the period for which such investment will continue. The return is calculated considering both these aspects. There are various set guidelines for estimating the cost using the Life cycle costing technique.

Life cycle costing takes into account all the asset-related costs, life cost of acquisition, ownership disposal-related activities, etc. This system is most beneficial, when multiple alternatives, all with different initial outlays, different life cycles, different scape value, etc are available.

There are two types of life cycle costing – Product life cycle costing and project life cycle costing.

  • Project life cycle costing – This deals with the acquisition, usage, and disposal cost o tangible assets. This deals with finding out how much money will be spent during the life of an asset. It includes all the costs – right from the time the asset is purchased till the time it is disposed of (Cha, J., & Maytorena-Sanchez, E. (2019)). It includes the cost of research, testing, handling types of equipment, energy costs, cost of purchasing any technical data, etc.
  • Product lifestyle costing – This life cycle begins with the identification of a new group of consumers to sell products to, innovation of a new product, development of a process for production, expansion of the market, etc. It means the cycle of a product write from its first production till when it is no longer needed. This cycle generally starts with research expenses and ends with decommissioning charges.

The principles behind life cycle costing are as follows:

  1. It helps in the identification of revenue and cost during the life of the product. This is because once the business plans to invest in a project or a product, the expenditure to be incurred is not one time. Funds are to be regularly deployed for successful operation and businesses must identify the fund requirements beforehand.

Coldrain should follow a life cycle costing approach, as this will help it to identify the magnitude of expenses that are needed to be done on an estimated basis.

  1. Research and design - life cycle costing tracks designing expenses so that the same can be spread over the life of products.

This will help companies like Coldsarin the most since the company is engaged in the gaming business, where substantial funds are invested towards designing and innovation. Coldsarin shall be able to keep track of its research expenses and write them off throughout the life of the project.

  1. Each stage in the life cycle will have a different SWOT ( Strenght, weaknesses, opportunities, and threats). A business needs to identify the stage their product is in so that they can effectively deal with the problems that may arise and grab the opportunities available.

In the gaming industry, the SWOt at different stages is substantially volatile, as new competitors are entering at the introduction stage, the competition during maturity stage, etc. Coldrain should identify the life cycle well in advance to be able to deal with all these issues effectively and in time.

  1. Increasing the cycle – If the business is aware of the cycle, it will know when the product is at a decline stage and can, therefore try to venture into the business or maybe find new users or new markets to expand into.

Since Coldarin has identified the life cycle of video games to be of 3 years, once 2.5 years have elapsed, the firm should try to develop a new game or should try to venture out to a different market or to modify the existing game to interest more people.

In short, I Coldarin follows Life Cycle costing approach, the business will be highly beneficial, as is reflected from the facts made above.

 

 

Part 1.2

Lifecycle of the games – 3 years

Net profit that Coldarin expect = 25% of total turnover

Cost = 75% of total turnover

Selling price = $ 50

Total cost at 10,000 = $ 1,30,000

Total cost at 14,000 = $ 1,50,000

An increase by 15,000 implies a fixed cost increase by 50 %

An increase in variable cost can be measured by dividing change in total cost by change in output.

Therefore,

Variable cost increase (In percentage) = ($ 130000 – $ 150000) / (14000 u – 10000 u) = 5%

= Fixed cost ($ 80000 ($ 130000 – ($ 10000 *5))) / ($ 150000 – ($ 14000*5))

If variable cost increase more than $ 15000, than Fixed cost will increase by $ 40,000

Table showing profit for various years

Particulars

Year 1

Year 2

Year 3

Sales Value

 

$ 375000

(7500 * 50)

$ 840000

( 16800 * 50)

$ 210000

(4200*50)

Cost ( $ 5/ unit)

$ 37500

$ 84000

$ 21000

Contribution

$ 337500

$ 756000

189000

Fixed cost

$ 80000

$ 120000

120000

Marketing cost

$ 80000

$ 50000

0

Net Profit

$ 177500

$ 586000

69000

Percentage of turnover

47.33 %

69.76 %

32.85 %

 

Colin designs should accept the offer because the net profit or contribution is above his expectations. However, in year 3, the fixed cost may be taken as $ 80000 but if the fixed cost incurred in year 2 will continue in year 3 also (Assumption taken)

Part 1.3

Incremental Budgeting is based on the concept that for developing a new budget, only selected things to need to be changed in the existing budget (Ouassini, I. (2018)). This is called the MARGINAL approach, that is, only marginal aspects of the budget will be changed, and the rest of the budget will remain the same.

Among other methods of budgeting, Incremental Budgeting is considered as the conservative approach, since it takes an actual budget as a base. The current budget is taken as a precedent, current actual situations are considered, and the new budget is prepared. Herefore, no unnecessarily high claims or expectations are reflected in the budget.

The reasons that Incremental Budgeting is such a widespread concept is because:

  1. It is comparatively simpler to draft. Managers just need to take the current Budget and make and make changes therein. There is no need to apply costing principles from the scratch
  2. Incremental Budgeting provides a consistent budget s the new budget is derived from the existing one. There will not be any major variations, since the budget is only marginally different from the existing one.
  3. The approach ensures that funds are adequately available for a long period since the funding needs of the business will be identified beforehand itself.
  4. Incremental Budgeting generally is done by incrementally changing the existing budget. This ensures that everyone is given equal raises and reduces the chance o favoritism that often leads to internal rivalry.

However, there are various shortcomings of the approach, which must also be considered, while deciding whether or not to adopt it. The disadvantages of Incremental Budgeting are as follows:

  1. Leads to unnecessary expenses - Incremental Budgeting can cause unnecessary spending in a company. This is because the departmental heads generally try to spend the entire amount that is been allocated to them, without considering the necessity or relevance of the same. It may be possible that some of the departments don’t even need funding every year, but will still be allotted the funds since the distribution is made incrementally.
  2. Lacks innovation – The managers generally put no ideas or thoughts while developing the budget. It leads to redundancy since the managers just pick the original budget and increase the expenses by a certain percentage, without giving it any thought. If any mistakes were made in the previous budget, the same will be carried forward in the upcoming years as well.
  3. Fails to take into account external factors – while developing a new budget, Incremental Budgeting just takes the earlier budget and increases thereon. However, it does not consider external and internal changes that have taken place during the year and must be reflected in the budget. Businesses must account for external changes in the economy and plan accordingly.
  4. No comprehensive review – While preparing the budget, the managers should properly evaluate all the activities of the business and draft the budget accordingly. However, with incremental budgeting, managers just increase a certain percent to draft a new budget. Shortfalls in the existing process, deficiencies in the current budgets are not considered.

 

 

Question 2

 

Part 2.1

Environmental management accounting is a branch of management accounting that focuses on the informed information requirements of the managers for activities that affect nature and has an environmental effect. The impact can include pollution, carbon footprints, recycling, power consumption, water wastages, etc.

Business is set up in society and naturally, uses resources of the society for its activities. It is, therefore the responsibility of businesses to watch the consequences of their action on the environment. Carbon footprints must be monitored and reduced. Carbon footprints are a unit of measure, used to identify how much carbon gases are produced by an individual or a business for running its activities.

Environmental Management accounting is a recently developed concept. To say that this is just a managerial fad would be grossly understating the need and benefits of the same. (Gibassier, D., & Alcouffe, S. (2018)) This is a highly innovative and beneficial technique, that shifts the consequences of actions to the managers and hold them accountable for the actions the business performs.

Environmental management accountingcould include:

  • Identification of cost of environmental activities,
  • Monitoring the use of limited resources like water, power etc.
  • Considering environmental impact o any capital budgeting decision
  • Considering the likelihood of environmental risks
  • Budgets be drafted after considering the best environmental decisions.

Role of environmental accounting in business can be summed up in below mentioned points:

a)     Reducing sales erosion – day by day, consumers are becoming more aware of the hazards of industrial activities on business, and are getting inclined towards buying more environmentally friendly products. If an entity properly follows environment management accounting, it can assure its consumers that the products are indeed environmental friendly and can even provide tangible data for them to confirm the same.

b)    Cost reduction – managers generally tend to cut down harmful processes and innovate new techniques to conduct business that are more effective and do not harm nature. Therefore, the cost is bound to be reduced.

c)     Reducing litigations – Nowadays the government is more rigid than ever on the harms caused by businesses to the environment. Various environmental laws have been enacted to prevent the same. If the company adequately follows Environmental management accounting, these litigation costs can be reduced.

 

d)     Improving the image in public eyes -a company that cares about the environment, cares about its people as well. These activities create a positive image of the company in the eyes of the public, and as a result, the company attract better talent and efficient employees

 

e)     Moral obligation – Even if Environmental management accounting were not to derive any tangible benefits, entities must use these steps, to fulfill their moral obligation towards society.

 

 

 

Part 2.2

Total quality management is a model used by management to monitor the activities of the business with the object of improving the quality of its product and services. This is done by establishing an integrated and full-fledged system, that involves employees and is completely focused on quality derivation.

A company that has a proper Total quality management model in place will have loyal customers, efficient processes, high innovations, etc (Setyadi, A. (2019)) The model focuses completely on customer satisfaction and all the steps are taken considering its impact on the customers. To sum it up, Total quality management is a customer-oriented management model.

Main features of Total quality management are mentioned below:

a)     Customer-oriented: the primary aim of this model is customer satisfaction. customer is the king and all the activities are done as per his likes. The model aims to derive products and services that exceed the expectations of the customers and provide ultimate quality

b)     Employee involvement: for the success of Total quality management, employees must be a part of the system. This is because employees are the key to any organization, and they are the ones who actually perform the activities. Lack of interest or involvement on the part of employees will deliver the whole model useless.

c)     Focus on the process: this model aims at creating and modifying the process of a business so that they are fully efficient. The management identifies the processes that are wasteful or time-consuming and tries to eliminate those.

d)     The approach is strategic – the managers need to set their vision and mission right from the start and work towards achieving those

e)     Improvement is continuous: Total quality management cannot be implemented in a single day. It is a series of activities that needs to be continuously undertaken to achieving perfection. The manages and employees must continuously strive towards improvement and employee satisfaction.

f)      Decisions are based on data - Total quality management is a completely scientific process, that runs based on data analysis. It is crucial for the successful implementation of the model, that the data is continuously monitored and examined to produce results. If the managers ignore the numbers, the system will fail. It is very important to identify and assess the impact of the decisions taken by the management and decide further course of action based on this data..

g)     Effective communication – for the successful implementation of Total quality management, proper communication is the key. If there are communication gaps between various levels of management, the system will fail without a doubt

 

 

 

Part 2.3

Target cost for Pamtasian can be calculated by reducing the target profit of 20% on selling price from the estimated selling price.

Target Selling Price = $ 60

(-) Target profit (20%) = $ 12

= Target cost = $ 48

Calculation of cost per unit

Direct material

$ 5.21

Direct Labour

$ 3.23

Direct Manufacturing cost

$ 0.12

Ordering cost

$ 1.23

Quality assurance

$ 3.60

Design

$ 19.80

Marketing cost

$ 8.15

Distribution cost

$ 3.25

Warranty Cost

$ 1.30

Total Cost

$ 45.89

 

While deciding whether or not to start any business activity, it is important for a business to identify and be sure that it will be able to meet its target profit. For this, the business should calculate the target cost that it can bear in the production of the process. The business must be started only when the actual estimate of cost is less than the target.

The total cost in the case of Pamtasian is $ 45.89/- whereas the target cost is $ 48. The entity must run this project, as the target cost is more than the actual cost by $ 2.11. This means that the entity will earn profits more than expected.

References

  1. Zhang, Y., Ren, S., Liu, Y., Sakao, T., & Huisingh, D. (2017). A framework for Big Data driven product lifecycle management. Journal of Cleaner Production159, 229-240.
  2. Camarillo, A., Ríos, J., & Althoff, K. D. (2018). Product lifecycle management as data repository for manufacturing problem solving. Materials11(8), 1469.
  3. Cha, J., & Maytorena-Sanchez, E. (2019). Prioritising project management competences across the software project life cycle. International Journal of Managing Projects in Business.
  4. Zhang, Y., Ren, S., Liu, Y., Sakao, T., & Huisingh, D. (2017). A framework for Big Data driven product lifecycle management. Journal of Cleaner Production159, 229-240.
  5. Ouassini, I. (2018). An introduction to the concept of Incremental Budgeting and Beyond Budgeting. 
  6. Savenko, H., & Zinkevych, T. (2018). Alternative methods of budgeting: aspects of their implementation in Ukraine.
  7. Latan, H., Jabbour, C. J. C., de Sousa Jabbour, A. B. L., Wamba, S. F., & Shahbaz, M. (2018). Effects of environmental strategy, environmental uncertainty and top management's commitment on corporate environmental performance: The role of environmental management accounting. Journal of Cleaner Production180, 297-306.
  8. Gibassier, D., & Alcouffe, S. (2018). Environmental management accounting: the missing link to sustainability?.
  9. Setyadi, A. (2019). Role of Enterprise Resource Planning and Total Quality Management in Supply Chain Organizational Performance. International Journal of Supply Chain Management8(2), 222-231.
  10. Nugroho, A., Christiananta, B., Wulani, F., & Pratama, I. (2020). Exploring the Association among Just in Time, Total Quality and Supply Chain Management Influence on Firm Performance: Evidence from Indonesia. Int. J Sup. Chain. Mgt Vol9(2), 920.
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