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.
This assignment is designed to give you an opportunity:
• apply management accounting concepts and finance frameworks…to increase the effectiveness of management decision making (Objective 2)
• apply management accounting concepts …to help assess the impact on organisational systems (Objective 3)
• apply and use management accounting concepts and finance frameworks…to provide solutions to real world problems (Objective 4)
Part One (60 Marks)
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, lowballing 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. (Guideline: 2000 – 2500 words.)
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. (Guideline: 800 – 1000 words)
Part Two (40 Marks)
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 $100
Total Manufacturing Costs $900
Mark Up (60%) $540
Target Sales Price $1440
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.
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.
Calculate the payback period.
General Requirements:
1. Answer each question using a heading indicating the question number. Part one and part two of the assignment should be answered within the same word document.
2. Full referencing is required in accordance with the USQ preferred Harvard Referencing style.
3. There is no specified word length for this assignment. However, be as concise and efficient in your writing as possible. Word limit guidelines are provided for part one only.
4. Assignment extensions will only be granted if there are extenuating circumstances. University policy provides that the maximum extension is 5 business days.
5. The assignment is to be submitted electronically. Submit the assignment using the link on the study desk. File types allowed include doc and docx. Only one file will be accepted. If more than one file is uploaded, only the first file listed will be marked. Do not submit a cover sheet.
(Sources withheld: Questions for this assignment are taken from other sources. Details of this source have been withheld for assessment purposes. This material is reproduced under the provisions of the Section 200 (1) (b) of the Copyright Amendment Act 1980.)
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