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How to reduce cost gap by the firm to a significant level

3366 Downloads1 I Published: 14 Mar ,2019

Accounting for Strategic Management and Control

Introduction

In the business unit, strategic management and control is highly required to attain success in the competitive arena (DRURY, 2013). Cost is one of the main factors that closely influence the profit margin of firm. Hence, it is highly required for the firm to exert control on cost level by employing suitable tools and techniques (Simons, 2013). Hence, cost control techniques are highly significant which in turn helps in enhancing profitability aspect to a great extent. Further, strategic management aspect is highly associated with making effectual use of financial resources through the means of sound framework. Thus, by framing highly competent strategies and policies business unit can get desired level of outcome or success. The present report is based on different case situations which will develop understanding regarding the concept of balance scorecard, target and other costing methods. Report will shed light on the manner through which cost gap can be reduced by the firm to significant level (Rothaermel, 2015).

Content on:

How Balance score card may help in performance management

Balance score card is the essential tool that supports the organization in measuring their performance. It is the semi standard structured report that supports the managers in tacking the execution of all activities which are related to the business operations. The main characteristics of the balance score card is that it focuses on the strategic agenda and selects the small data items in order to monitor the overall performance of the all activities (Simons, 2013). It is the tool which acts as closed loop controller that is applied by the management of the organization in order to compare the actual performance of the company with expected performance.

It is the kind of semi standard structured report which is used by the management of FCH in tracking the execution of each activity and making control over them. Managers of cited firm can monitor the activities and can take necessary action on time to reduce consequences (DRURY, 2013). Balance scorecard is the strategic planning tool that splits the essential activities into four parts; financial, customers, operational and people. These four perspectives give clear path to the FCH firm in implementing the action plan . Balance score card is the great tool through which company can align its day to day business operations and can make effective strategy in order to accomplish its goal soon. It helps in measuring the overall business performance so that drawback and strength can be identified, it helps in making strong strategy for the growth of the FCH (Hiebl, 2014)

Implement the use of Balance score card across FCH

BBalance score card is the business approach that helps the FCH in making coordination with the business operations so that resources can be utilized effectively and wastage can be minimized. It helps in improving the efficiency of the FCH and assist the organization in improving its operations. When this tool applies in the finance department then company can get to know about return on investment, cash flow and financial results (Simons, 2013). By this way it can identify whether the investment would be profitable for the organization or not. By this way company can measure its performance and can take sound decisions which can assist in improving the business performances. When it is applied in the sales operations then FCH can evaluate the delivery performance to consumers, quality performance, customer retention, customer satisfaction level with the help of balance score card. In this tool management level, people score the each activity and measure their level in the organization. Hat helps them in identifying the loop fall in the system so that they can improve the issues soon. By this way cited firm can enhance t its brand reputation and can deliver quality services to the target audience (DRURY, 2013)

Balance score card plays an important role in managing the future growth of an organisation. It measures that the goals been set up by the company have been met or not. Based on the needs and deeds of the company, balance score card is set up. It also helps to measure the capabilities of the workforce and get the work done according to it.

FCH faces the difficulties in establishing the mechanism but with the help of this balance score card cited firm can get to know that whether modified process will be able to achieve the goal of the company or not. So according its evaluate the situation and implement the activities significantly Balance score card is the great tool that find out the drawback in the current process and modify the existing procedure in such manner so that overall goal of the entity can be achieved. It is the great tools through which FCH can reduce the time frame works and can utilize its resources well. With the help of this mechanism, cited firm can improve its decision making and can take better decisions. That supports in increasing the overall performance of the business. With the help of balance score organization will able to get the full picture of the organisation and organization structure. It will help in taking immediate step in case of crisis and will help to measure uncertainties, to some extent, beforehand. It drives a business towards learning its future perspectives and research on various other growth aspects of business. It will basically pushes a business to tremendous growth.

Managers of the cited firm can cross check whether their consumers are satisfied or not. For analysing their satisfaction level they can ask question with them regarding services and quality of the FCH. That helps them in knowing the drawback and they can take immediate action to resolve the issues. In addition, to this, through balance score card managers of FCH can look upon the critical internal operations of the organization that will give them clear picture of the internal workplace environment (DRURY, 2013). With the help of balance score card cited firm can measure the level of performance of the FCH and managers can discuss the critical issues with the higher authorities. That will support in making good plan and it will enhance overall productivity and profitability of the corporation (Hiebl, 2014)

Potential difficulties that company will face in choice of performance measures

FCH is planning implementing balance score card in the organization for measuring the performance of the cited firm. But cited firm can face number of difficulty which are discussed as below

Lack of efficient data

If FCH implements the balance score card in the workplace then it may be possible that it would not get relevant information from the reliable sources (Bauer and Matzler, 2014). On other hand if data collection takes too much time and energy then they will not be captured significantly (Bauer and Matzler, 2014). By this way cited firm will not be able to make good planning for improving the performance of the entity. Due to lack of information organization can not understand the reason of poor performance that is why it fails to make improvement in its process. Performance measurement is an essential tool that can helps in identifying the mistakes in the current process and can help in improving the performance. But due to lack of efficient data FCH fails get to know about actual mistakes in the current operation thus, it creates problem for the organization in improving its business performance to great extent.

Getting lost in the mechanics of tracking

Absence of auto motion in recording and rolling up the results can create difficulty for the FCH and by this way it will not be able to implement it effectively (ArAs, 2016). That is the big problem because due to this it will not be able to track the activities and coordination will get affected (ArAs, 2016). It is another issue for the FCH because of that cited firm is unable to measure the overall performance, if it improves its process of tracking them it can help in measuring the performance in appropriate manner. FCH is unable to track the mechanism t hat is the major issue faced by the entity now days. It is the big problems because in the absence of proper monitoring cited firm can not be able to identify the loop fall so it can not take necessary actions to improve its performances. Tracking, monitoring are the essential part of the business operations so that if there is any loop fall then company can take immediate action to improve this. But in the absence of proper tracking cited firm will not be able to resolve its issues soon.

Elaborate further on likely difficulties the interpretation of performance measures

For implementing the balance score card in the workplace, it is essential that staff members if FCH put their heart and mind in it. They be commitment to the set targets. If employees so not engaged with each other well then actual performance will not be measured by the managers of cited firm. One of the best remedy for this difficulty that to enhance engagement among team members and enhance their participation. That will help in successfully implementing the balance score card in the workplace (Jeston. and Nelis, 2014). For working well it is very important that employees and other staff put their best efforts but due to absence of cascading to individual level company can not measure its performance that can give loss to the entity to run its operations smoothly

Adoption rate

It is another difficulty which can be faced by the FCH in performance measurement. If company is unable to adopt the necessary action then it may cause the difficulty to the organization and it will not be able to improve its condition soon. If cited firm is not choosing the appropriate technique to measure the performance then it would be difficult to implement the strategy in the workplace. It will waste the resources and time of the organization and cited firm will not be able to accomplish its goal significantly (DRURY, 2013).

Absence of integration

It is another difficulty that FCH can face which measuring the performance of the organization. Balance score is the tool that helps in measuring the overall performance of the organization, but it is essential that company integrate all activities and accordingly it makes strategic planning. All structure, culture, resources and execution need to be aligned. But if there is absence of integration them it may create problem for the FCH and cited firm will not be able to identify the draw back in the system (Bauer and Matzler, 2014).

Ratios based on the book value

It is another difficulty which is faced by the FCH in relation to choosing the performance measures. Because managers look at the rations which are reflected through he financial statement. These all rations are based on the historical data and define the financial health of the entity. But with the help of this ratios company can not measure its existing loop fall. It can assume the thing which may be wrong but actual mistake can not be identified by the organization by this method (Jeston. and Nelis, 2014). It is the major difficulty for the FCH and that is why cited firm face difficulty and is unable to improve its loop falls accordingly.

Conclusion

From the above report it can be concluded that balance score card is the greatest tool that supports entities in measuring their performances. With the help of this techniques manager can identify drawback in the system and can improve the condition. But measuring is not an easy task because managers have to face difficulties like lack of efficient data, Getting lost in the mechanics of tracking. So it is required to monitor the activities closely so that individual can evaluate the performance of the workplace and can take necessary action to improve it

 Part 2 Tuition block

Question1

Applying the concept of target costing and compute gap

Target costing may be defined as a approach which is used by the business organization for setting suitable framework on the basis on price which exists in the market. For setting suitable target level or cost profit margin is also considered by an entity (Bauer and Matzler, 2014). The rationale behind this firm can attain high profit margin only when it keeps low cost level in line with the target assessed (Sakas, Vlachos and Nasiopoulos, 2014). Formula of target costing method varies according to the different situations. On the basis of cited case situation, Greenie Pte Ltd produces widgets and wishes to earn 20% profit margin. Thus, by undertaking the following formulas business entity of GPL can determine the cost level is as follows:

When profit margin is based on selling price

Target cost = selling price-(profit% * selling price)

When profit margin is based on unit cost

Target cost = selling price * (1 + profit %)

Computation of target cost

table
Particulars  Amount (in $)
Raw material  12
Direct Labor  7
Packaging  9
Royalties  10
Variable production overhead 5
Total cost  43
Market or selling price  50
Target cost (on the basis of unit cost) 41.667
Target cost (on the basis of selling price) 40

Cost Gap

Difference between actual and budget cost are called as cost gap.

Estimated selling price= $50

Target profit required=20 % of estimated selling price

Estimated cost= $43

Target cost= Estimated selling price- target profitability $50-(20%*$50)=$40

Target cost gap=estimated cost-target cost-accounting=$43-$40=$3

Suggesting the manner through which company can minimize the cost gap

Cost gap can be defined as estimated cost less target cost. It is found that cost gap in the Greenie Pte Ltd found on the basis of unit cost 1.34 and on the bases of selling price it is found 10 (Ratnatunga, Tse and Wahyuni, 2015). It can be suggested that GPL needs to reduce number of components from the system and should use standards components so that it can increase sales volume. It should hire cheaper but skilled staff members those who are able to perform their work well. Further more cited firm can also use advanced technologies for improving its quality of production that will satisfy the consumers thus, sales and cash inflow will get increased to great extent, by this way cost gap will be eliminated. In addition, cited firm is required to review the supply chain system so that it can get quality raw material that will enhance demand thus revenues will get increased and overall cost gap will be minimized (Bauer and Matzler, 2014).

Discussing the pricing method which is highly appropriate for GPL

From the scenario it is found that Cost based transfer prices are not appropriate for the BPL because it was unfair as it did not incentivise the GPL and due to this market position of the cited firm get affected. Transfer pricing mechanism is appropriate for the entity it will help in gaining high revenues from the transaction and it will reduce its cost too. Apart from this, this method does not consider the competitive market so due to this cited firm got failed to sustain in the market. It can be suggested that GPL should use the marginal cost plus pricing method. That will help the cited firm in making effective short term decision making for the development of the entity (Sakas, Vlachos and Nasiopoulos, 2014). With the help of this method GPL can know break even point and can keep prices accordingly, it will help in increasing profit of the company. In the stock valuation are not being destroyed so cited firm will be benefited by this way and it will be able to sustain in the competitive market for longer duration (Schaltegger and Burritt, 2014).

Question 2

Discussing the differences that takes place between internal and external cost failure

Internal and external failure cost is highly associated with the products or services which are offered by the manufacturer. Hence, internal failure costs are the one which business unit incurs for the removal of defects (Stead and Stead, 2013). In this, company detects all the defects and thereby take action for improvement before product is provided to end customers. Cost of rework, rejected products, scarp etc. is the examples of internal cost failure. On the other side, external failure cost implies for the one that is incurred by the due to selling of unexpected products or services. Hence, warranty, replacement cost, payment for damages, loss of brand image etc. Cited case situation presents that Charlie Pharmaceuticals (CP) faced negative press due to the drugs pricing policy setting down by it (Stead and Stead, 2013).

Hence, pharmaceutical products are highly associated with the health aspect of individual. Thus, if business unit fails to supply quality medicines then it may result into loss of brand image and market share (Stead and Stead, 2013). Further, due to the disappointment in relation to applying appropriate quality control technique or process internal cost failure occurred (Burkert and Lueg, 2013). Thus, external cost failure has direct impact on internal aspects to the significant level.

Identifying the significant risks that are facing by CP

Major risk which CP will face are discussed as below:

  • Financial risk At the time of recall of drugs, CP can face economic risk because it will have to put extra cost for improving the products. Because due to this many investors will bring back their money from the CP that will be loss for the entity and it will affect its market share to great extent (Target Cost Gap, 2017).
  • Operational risk At the time of recall unexpected failure in the operation will have to be beard by the CP.
  • Reputation risk It is another difficulty which will have to bear by the CP by recall because consumers will lose their trust from the cited firm. It will affect its sales volume to great extent (How to reduce Target Cost Gap?, 2011).

Conclusion

From the above report, it has been concluded that negative press or publicity in relation to the cost aspect places bad impact on the brand image of CP. Hence, by considering the cost control tools and techniques risk level can be minimized by Charlie pharmaceuticals.

References

Books and Journals

  • ArAs, G., (2016). A handbook of corporate governance and social responsibility. CRC Press
  • Bauer, F. and Matzler, K., (2014). Antecedents of M&A success: The role of strategic complementarity, cultural fit, and degree and speed of integration.Strategic management journal. 35(2). pp.269-291
  • Burkert, M. & Lueg, R., (2013). Differences in the sophistication of Value-based Management–The role of top executives. Management Accounting Research. 24(1). pp.3-22.
  • DRURY, C. M., (2013). Management and cost accounting. Springer
  • Hiebl, M. R., (2014). Upper echelons theory in management accounting and control research. Journal of Management Control. 24(3). pp.223-240
  • How to reduce Target Cost Gap?, 2011. [Online] Available through: <http://managerial-accounting.blogspot.in/2012/12/how-to-reduce-target-cost-gap.html>. [Accessed on 15th May 2017].
  • Jeston, J. & Nelis, J., (2014). Business process management. Routledge

 

Ratnatunga, J., Tse, M. S. & Wahyuni, D., (2015). Societal Role Expectations of Management Accounting Professionals: An Australian Study. In Advances in Management Accounting (pp. 29-48). Emerald Group Publishing Limited

  • Rothaermel, F. T., (2015). Strategic management. New York, NY: McGraw-Hill
  • Sakas, D., Vlachos, D. & Nasiopoulos, D., (2014). Modelling strategic management for the development of competitive advantage, based on technology. Journal of Systems and Information Technology. 16(3). pp.187-209
  • Schaltegger, S. & Burritt, R., (2014). Measuring and managing sustainability performance of supply chains: Review and sustainability supply chain management framework. Supply Chain Management: An International Journal. 19(3). pp.232-241
  • Simons, R., (2013). Performance Measurement and Control Systems for Implementing Strategy Text and Cases: Pearson New International Edition. Pearson Higher Ed
  • Stead, J. G. & Stead, W. E., (2013). Sustainable strategic management. ME Sharpe
  • Target Cost Gap, 2017. [Online] Available through: <http://opentuition.com/topic/target-cost-gap-3/>. [Accessed on 15th May 2017].
  • Target Costing: Definition, Objectives and Advantages, 2017. [Online] Available through: <http://www.accountingnotes.net/cost-accounting/target-costing/target-costing-definition-objectives-and-advantages/5775>. [Accessed on 15th May 2017].

 

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