The company’s business is largely affected by the government policies and government in action. The policies introduced and implemented by the government for the betterment of the economy might not be favorable for the company as in this case also. In case there is a change in government, the new government might not continue to prefer wind power electricity as the new source of energy. They might switch to other sources like thermal, coal, etc. as an alternative source of energy.
The Sales Manager is concerned about the upcoming elections because the current government has recognized and acknowledged the alternative energy sources (wind power energy) as one of the major innovations and achievement of the company. However in case, the new government comes to the power, they may or may not consider and acknowledge the alternative source of energy to be continued in their reign (Lanen et. al, 2008). So her concerns are valid due to which there may be a possible hit on the revenues of the company as there are high market volatility and highly uncertain future.
On the other hand, the production manager is positive enough and plans to install a highly automated machine which will reduce the variable costs by 30%. For the implementation of this plan, a land is also proposed to be purchased in the month of February. The new plant and machinery will help the company in- house manufacturing of two major parts that are being currently purchased from outside. Also, it will automate the assembly function which is currently labor based (Needles & Power, 2013). This will also lead to increase in the fixed manufacturing overheads likely by 60%. So, there are both benefits and disadvantages of the plan proposed by the production manager.
Likely impact in case the plan proposed by the production manager is implemented:
- The decrease in direct material and labor cost- the total cost of material (bearing) in February was $ 2,58,24,960 with cost per kg at $98. After the implementation of the proposed plan, this per kg cost shall be reduced by 30% which would amount to $ 69 per kg. The total cost comes to $ 22847916. So the total saving shall be $ 2977044.
The total cost of material (Shaft) in February was $ 15407380 with cost per kg at $73. After the implementation of the proposed plan, this per kg cost shall be reduced by 30% which would amount to $ 51 per kg. The total cost comes to $ 13652898. So the total saving shall be $ 1754482. The total cost of Labour in February was $ 14688800 with cost hour at $40. After the implementation of the proposed plan, this per kg cost shall be reduced by 30% which would amount to $ 28 per kg. The total cost comes to $ 12912480. So the total saving shall be $ 1776320. So this shows that there is a clear saving of $ 4731526 in material cost and saving of $ 1776320 in labor cost, the total comes to $ 6507846.
- Increase in fixed manufacturing overheads- if the proposed plan is implemented, the fixed manufacturing overheads shall increase by 60%. In February, total fixed manufacturing overhead amounted to $ 103930500 which shall increase to $ 166288800 in March due to change in plan. The net increase shall be $62358300.
On one hand, there is a cumulative saving of $ 6507846 in direct labor and material cost while on the other hand, there is a cumulative fixed cost increment of $62358300. Now, the company has also made a capital expenditure on the land purchase. Both the expenditures will help the company in long run. The company should also calculate the cumulative PV factors of the cash flows after considering the life of the plant and machinery. In case the net outcome is positive, the company can continue with the implementation and discontinue if vice versa.
iii. The benefits of in-house production are as follows:
- Better quality control –as every production step is in-house and closely monitored.
- There shall be no delayed supplies by the suppliers.
- The company can produce as much as they want to produce and the company will not be bound by any minimum purchases from the suppliers.
- The company will gain a reputation as they can be sure of the quality and the quantity of their product and can go for major deals without any hesitations.
- The automation in the production process will reduce the errors and faults and human fatigue. The machine can run whole day without any delays. This will increase the sales and supplies to the market and the company may recover the capital expenditure made in plant and machinery at the earliest (Kaplan, 2011).
- As the labor is affected by strikes, hike in salaries, incentive payments, fatigue and breakdowns, this all leads to a slowdown in the production process which delays the sales order completions. The company is also prone to delayed supplies and loss of business at times because of labor issues.
There are pros and cons to every situation. However, the selection should be done considering the returns and the management of resources. It is evident that the cost structure is an important element when it comes to the selection of a product. If the cost structure is as per the planning then the investment should be done otherwise, the returns will be negative.
Both are distinct in their approach. However, on the font of better management and administration, a participative method of budgeting is considered as a most appropriate method. As we all know that human resource is the lifeline of every organization. So for the long-term benefits of the organization, it is necessary to include the human resource into the planning and decision making and its implementation by the company (Horngren & Foster, 2008). We may call it as participative budgeting where the employees are included wholly in repairing, finalizing and implementation of the budget. In this scenario, the employees share their ideas and actively engage themselves in the process of budgeting. They are also required in implementing the same. By doing this activity, employees not only find themselves in the middle of the planning process but more so as they are responsible for implementing the same as well. They also are responsible for the shortcomings and the variances. Hence, this method of budgeting is very beneficial to the entire progress of the organization.
On the other hand, where the employees do not participate in the planning process of the company and are not directly aligned to the objective achievement, it is known as imposed budgeting. Here only the top level management are involved in the whole planning and budget designing process. The plan or budget is finalized and conveyed to the middle and lower level employees and hence termed as imposed. The disadvantage of this kind of budget making is that the employees do not feel themselves a part of the budget and thus do not like to be accountable or responsible for any action done.
Hence for the betterment of the company and the employees, it is highly anticipated to adopt participative budgeting method. With regard to the situation given in earlier parts of the question, the following observations can be concluded:
The budget is made by the company which is of participative nature as it can be seen that while preparing the budget, the sales manager discusses it with the production manager also. The budget is set by taking advice and opinion of different departments. This is quite beneficial for the company as the strengths and weakness of all departments will be known to the top level management and hence they can take corrective steps to overcome the weaknesses before finalizing of budgets (Damodaran, 2010).
The budget made in Part A is a participative budget as the managers in the hierarchy have discussed the pros and cons of the budgets and its impacts on the business. As the market is agile and volatile, the sales manager feels that the company can lose business in case the government in power changes (Lapsley, 2012). However, if this was not planned by the managers and had been implemented by the top management without consultation, the middle and lower level of management would never have understood the purpose of investments and its benefits and that could have led to a total mismanagement. Their possible outcome could be increased material loss, increased labor turnover, higher wastages, delayed order completions and mishandling of stock of goods (Drury, 2011). So it is not advisable for the company to adopt imposed budget approach on the staff and advised to adopt the participative budget approach (Clark et. al, 2010).
The production manager’s idea of expanding the business by a capital expenditure is backed up by material and labor cost. This idea will reduce the dependency of purchase from suppliers of one of the major products as the plant and machinery will be able to produce the product in-house. Also, the labor hours cost will be reduced as the assembly function will be automated (Cousineau, 2009). This will lead to less human intervention which in turn will avoid human fatigue and possible errors in production and assembling. However, it may also lead to resentment in the lower level of management as their jobs may be cut down as most of the assembling function will be automated (Horngren, 2011). So the company has to carefully implement the idea of production manager as it may have serious effects on the working of the company.
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