Alternatively; Total production quantity = (Good production quantity/0.97)

• Kaizen costing is a Japanese concept focused on obtaining small incremental cost reductions during the production stage of the Product Life Cycle using principles such as Value Analysis and Functional Analysis. Kaizen Costing is typically based on the following principles: Employees are the source of solutions; Cost reductions are achieved by continuous improvement; Cost reduction targets are set every month.
• Target costing ie estimated selling price -target cost=desired level of profit. It is an integral part of a strategic profit management system. The determination of the target cost starts by determining an estimate of the selling price for a new product that will help achieve the required share of the market (revenue/market size *100). This selling price is then reduced to obtain the desired level of profit, having regard for the firm’s required rate of return on new capital investments and working capital requirements. The difference b/n the SP and the desired profit produces the target cost. This target cost is then compared with the estimated current cost level. Where a gap exists it is bridged by using value analysis, value engineering, functional analysis, continuous improvement etc.
• While target costing is a critical means of managing the costs in a new product design and development stage, Kaizen costing supports continuous improvement activities in the manufacturing phase. It is an alternative to ABC and combined with target costing, Kaizen costing helps Japanese manufacturers accomplish their objective of cost reduction in the full cycle of design-development-production cycle.

(2 points well explained @2.5 marks each=5 marks)

The annual budget model has several inherent weaknesses. These exist no matter what approach to budgeting is used.

• The budget is for a one-year period. Targets are set for the 12 months and actual performance is measured on the basis of achievements in one year. However, to achieve strategic change, planning needs to be for the longer term and performance should be measured by progress towards longer-term objectives as well as shorter-term achievements. The annual budget is not compatible with longer-term planning.
• The annual budget is also seen as a system for imposing financial discipline and control. This focus on financial targets and cost control is not compatible with setting corporate objectives, where external factors and competitiveness are just as important as internal efficiency and financial returns.
• The annual budget focuses on internal efficiency and improvements, and lacks an external focus. However, strategic objectives and strategic planning have to take account of external factors as well as internal efficiency.
• It can be argued that the annual budget process adds little value and is unnecessary. It wastes management time, since management should be doing other things to add value and contribute to the entity’s objectives.
• There is also an argument that the annual budget is to rigid and discourages change once the budget targets have been agreed. Management will focus their attention and efforts on achieving the agreed targets, even though circumstances might change and the budget targets might no longer be the most appropriate.
• In theory, the budgeting process should help management to identify 12-month objectives that are in the best interests of the entity and that will help it to achieve its longer-term objectives. In reality, however, the budgeting is often a ‘battle’ between managers for resources and status. Budget targets are often the result of negotiated compromises rather than rational decisions.

(Any 3 well explained points @ 2 marks each = 6 marks)

Flexible Budget

Flexible budget is a budget which recognises differences between fixed and variable costs when volume of activity changes. Flexible budgets are useful for control purposes as the actual volume of activity may be compared to budget by flexing the budget so that it is based on actual activity. Flexible budget cannot be prepared until the end of a budget period.

• A static budget is fixed for the entire period covered by the budget, with no changes based on actual activity. Thus, even if actual sales volume changes significantly from the expectations documented in the static budget, the amounts listed in the budget are not changed.
• In more dynamic environments where operating results could change substantially, a static budget can be a hindrance, since actual results may be compared to a budget that is no longer relevant.
• Static budget is not effective for evaluating the performance of cost centers as management may be comparing unlike terms.      (Any 2 points)

The budget manual is a collection of instructions governing the responsibilities of persons and the procedures, forms and records relating to the preparation and use of budgetary data.

MEMORANDUM
To         : Sales Director
From     : Technician Student
Re         : Accounting Terminology
Date      : X/X/XX
Management accounting can provide information for managers to support decision making, planning and control within an organisation. You have been introduced to a number of management accounting theories and related terminology. This paper aims to provide further information and explanation of a number of key terms.

Activity Based Budgeting
Is a method of budgeting in which the activities that incur costs in every functional area of an organisation are recorded and their relationships are defined and analysed. Activity based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period’s budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides opportunities to align activities with objectives, streamline costs and improve business practices.

Zero Based Budgeting
Traditional budgeting approaches are not always clearly linked to strategy and are focused on financial aspects only. In this scenario, the annual budget uses an incremental approach whereby increases and decreases are applied to previous out-turn positions. In contrast, Zero based budgeting supports a more innovative approach, requiring managers to justify all costs as if the proposals were being considered for the first time. This approach is focused on opportunity costing and can eliminate efficiencies, however it can be quite complex and time-consuming to administer.

A definition of zero based budgeting provided by CIMA is ‘a method of budgeting whereby all activities are re-evaluated each time a budget is formulated. Each functional budget starts with the assumption that the function does not exist and is at zero cost. Increments of cost are compared with increments of benefit, culminating in the planning of maximum benefit for a given budget cost’.
An example of zero based budgeting
It is proposed to increase the maintenance budget by 20% to take account of the age of some equipment and other inflationary factors. Due to zero based budgeting analysis, it is identified that a particular machine, which costs €/£8000 to maintain is only used once per quarter. An alternative outsourcing option has been identified and the budget adjusted accordingly.

A rolling budget
Is one that is revised at regular intervals by adding a new budget period to the full budget as each budget period expires. A budget for one year, for example, could have a new quarter added to it as each quarter expires. In this way, the budget will continue to look one year forward. Cash budgets are often prepared on a continuous basis.

• Identification of “Decision Units”
• Preparation of “Decision Packages”
• Prioritization of decision packages within a decision unit.
• Prioritization of decision packages of various decision units.
• Allocate resources.
• Monitor and evaluate.
  Decision Unit: Each cost center can be a decision unit. Decision units should be a particular activity or a group of activities that can be independent and meaningfully identified and evaluated. Decision units should not overlap. The decision units should be discrete entities for management purposes, e.g. sites or programs.
  Decision Package: A decision package is a document, which identifies a discrete activity, function or operation within a Decision Unit for evaluation and comparison with other activities. Each decision package should be “standalone” containing the following information:
  *Identification data – program/activity for which the package is made.
  *Objective of the decision unit.
  *Objective of the decision package.
  *Feasibility Assessment:
  Is the program required?
  Is the program technically feasible?
  Is the program operationally viable?
  Is the program sound?
  *The benefit-cost analysis:
  Benefit /output (tangible) at existing/threshold/optimum level.
  Tangible costs at the existing/threshold and optimum level.
  Yearly phasing of the proposed expenditure.
  Consequence of non-funding.
  Alternatives considered

Ranking/Prioritization: The following are examples of criteria for ranking a decision package:
Statutory/Legally committed active programs.
Emergent programs arising from national events.
Advancement of knowledge or using innovative methods
Application of knowledge – proven methods for raising output.
Development of Technology based solutions
Welfare/safety issues
Facilitation of policy/decision making

Funding Decisions: Once all the decision packages have been ranked on the basis of pre-determined criteria, the funding decisions for the cost of total decision packages is made. While funding a decision package, it is necessary for management to indicate also the level at which activity/program should be carried out existing, threshold, or optimum level.
Monitoring & Evaluation: Since all the decision packages have to compete for funding, only those, which are most relevant to the organization, are funded. The monitoring and evaluation is done on the basis of the content and particularly the outputs described in the decision packages with fixed accountability.                                                                         (Any 3 points)

• Lack of clear organizational objectives
• Unclear definition of responsibilities
• Lack of top management support
• Lack of involvement by staff
• Poor monitoring and feedback system
• Too much exercise of discretional powers by top management.
• Lack of understanding of the entire concept and process                                                                            (Any 4 points)

This principle requires that managers of responsibility centres are evaluated based on only items (revenues and costs) that they have over. The principle is implemented by:
1. Eliminating uncontrollable items from the areas for which managers are held accountable
2. Calculating the effect of uncontrollable items so that the performance assessment reports distinguish between controllable and uncontrollable items.

This is the process by which managers seek to obtain budget targets that can easily be achieved by understating revenues and/or overstating costs. Some of the ways in which budgetary slacks arise include the following:
1. Managers avoid risky but profitable projects.
2. Managers negotiate for lower targets
3. Managers dispute performance assessment results