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Performance Measurement And Control Systems

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Question:

Discuss about the Performance Measurement and Control Systems.
 
 

Answer:

Introduction

In the modern world, the companies that operate in the economy try to increase their profit by undertaking various strategies. The management of accounting is an important function of an organization as maintenance of accounts is useful for the recording of the transaction and understanding the profit that is gained by the organizations. The process of accounting consists of two methods namely Traditional Accounting, which is even known as the Conventional Method and Activity Based Accounting. In the process of conventional method all the expenses gets assigned equally irrespective of the department contribution in that particular department. On the other hand incase of ABC costing all the expenses get allocated in the ratio in which a particular department has contributed.

The paper tries to analyze the accounting and the production process of Bakverk Company who manufactures a variety of pastries. Initially the company had only three lines of products and it is seen that the company produced huge volume of each product by making use of hard work by the labor and the easy and simple machines. It is seen that the company primarily sells their original line of products and it is seen that the current scenario, the company even manufactures low variety of pastries and it is seen that the production of these pastries become costly as it requires to the use of additional machineries and handling of materials.

The company has undergone a huge change in the business strategies and it is seen that the performance of the organization has increased as stress has been given on the quality and the delivery of the performance. However, the profit of the company has been decreasing at a fast rate and therefore, it is seen that the management are under the consideration of transforming their conventional method and adopting ABC costing method so that profit of the organization can increase. Therefore, in this paper the use and advantages of ABC Costing will be analyzed and then the analysis of the income and expenses of the firm will be discussed.

ABC Costing Method and its advantages

The ABC Costing method is used because of its rational process to apply within the industry. The use of ABC Costing is significant as the traditional method assigns the costs equally regardless of the contribution of each department whereas ABC method does not do the same.  ABC method is more precise because this process does not allocate the overheads equally but assigns the cost to the department who contributes to the product line. Therefore, it is seen that this process helps in proper allocation of the costs and thereby reduces the challenges of the firm.

It is seen that Balverk Company makes use of simple machineries for the production of three product lines of pastries. The use of ABC method will help the management to understand the departments that contribute to the manufacturing of the product and therefore, the operational cost of the organization can be managed properly. ABC method will even minimize the struggle of the firm and it will be seen that organizational changes and the profit of the firm wil go hand in hand.

 

Steps required for using ABC Method

The process of ABC utilizes the base of cost allocation to assign the overheads.  The various steps undertaken for the usage of ABC is discussed below:

Initially the product is selected on which the overhead cost requires to be assigned.

The next step involves the recognition of the direct costs that requires to be assigned on the product that has been chosen earlier. It is seen that this is one of the complex steps that is to be implemented while making use of ABC method as it is necessary to recognize the direct costs that are associated with the production of a commodity.

In this step, the selection of the actions are chosen over which the overhead costs are assigned evenly. This is step is even a difficult one as the firm requires to construct the cost pools based on the direct cost that are related to the services and the products.

In this step, the computation of the rate per unit of the cost allocation base is exploited to assign the indirect costs that are related to the product. In this step, it is essential to compute the rate per unit. It is seen that in this step it is essential to segment the cost allocation base with the recognized drivers of cost. The use of this step is helpful for the calculation of the per unit rate that will be used to understand the percentage of cost that is allocated to every step of the manufacturing process.

The last step involves the formulation of the report. The results that are gained from the process of ABC is converted into several reports and statements as wished by the management. For instance, if the management wants to have knowledge about the cost of a machine with respect to a specific product or the total cost that is suffered in a specific commodity so that various types of reports can be constructed.

Analysis of the data

The case study of Balverk Company reveals that there are 6 schedules that are related to the performance of the data and every schedule will be discussed separately.

Activity Centers

 Wages

 Building Costs

 Depreciation

 Consumables

 Energy

 Other 

 Total 

New Product Development

           96,000.0000

                               14,200.0000

                           -  

                       959.4595

 

       1,000.0000

         112,159.4595

Sales & Dispatch

         336,000.0000

                               35,500.0000

                           -  

                       959.4595

 

       3,500.0000

         375,959.4595

Inspecting

           48,000.0000

                               35,500.0000

                           -  

                                     -  

 

          500.0000

           84,000.0000

Mixing

         816,000.0000

                               71,000.0000

     284,000.0000

                 10,554.0541

       42,600.0000

       8,500.0000

     1,232,654.0541

Filling

         816,000.0000

                               71,000.0000

     355,000.0000

                    6,716.2162

       63,900.0000

       8,500.0000

     1,321,116.2162

Baking & packing

         672,000.0000

                               71,000.0000

       71,000.0000

                 10,554.0541

       42,600.0000

       7,000.0000

         874,154.0541

Administration

         336,000.0000

                               35,500.0000

                           -  

                    3,837.8378

                           -  

       3,500.0000

         378,837.8378

Corporate management

         288,000.0000

                               21,300.0000

                           -  

                    1,918.9189

                           -  

       3,000.0000

         314,218.9189

 

     3,408,000.0000

                             355,000.0000

     710,000.0000

                 35,500.0000

     149,100.0000

    35,500.0000

 

The analysis of schedule 1 reveals that there are 8 activity centers and everyone of them has costs related to them. The use of ABC method allocates the cost individually in all the activity centers with respect to the building cost, wages, depreciation, consumables, energy and other. The total value that is seen with respect to the new product development accounts to $112, 159.4595. The next activity center is the sales dispatch and the total amount of cost allocated to it is $375,959.4595. The inspecting center of the firm is an important department and the value comes to $ 84,000. The mixing and the filling of the raw materials for the production of pastries associate to $, 232,654.0541 and $1,321,116.2162. The baking and packing of the pastries involve an amount accounting to $874,154.0541 and $378,837.8373 respectively. The administration and the corporate management has a total amount of $ 314,218.9189 and $ 0 respectively.

Activity

 % of Labour time 

 Amount of labour

 % of floor space

 Amt of floor space

Setup mixer

10%

                               81,600.0000

5%

                    3,550.0000

Load Mixer

10%

                               81,600.0000

5%

                    3,550.0000

Operate Mixer

40%

                             326,400.0000

70%

                 49,700.0000

Unload Mixer

20%

                             163,200.0000

5%

                    3,550.0000

Clean Mixer

10%

                               81,600.0000

5%

                    3,550.0000

Mover to filling room

10%

                               81,600.0000

10%

                    7,100.0000

 

100%

                             816,000.0000

100%

                 71,000.0000

The space and the labor associated with the function of mixing involves set-up mixer that occupies 5% of the space and 10% of labor. The load mixes involves 10% of labor time and 5% of the floor space. The operate mixer 40% of the labor time and 70% of the floor space revealing that this process is a crucial process and involves extensive labor time and machinery. The unload mixer takes 20% of the labor time and 5% of the floor space. The clean mixer takes 10% of the labor time and 5% of the floor space. The filling room mover takes 10% of the labor time and 10% of the floor space. Therefore it can be said that the activities that are crucial takes more labor time and floor space of the firm.

Total of Mixing room

 

                                  8,400.0000

Set up mixer

10%

                                     840.0000

Load Mixer

10%

                                     840.0000

Operate mixer

40%

                                  3,360.0000

Unload mixer

20%

                                  1,680.0000

Clean mixer

10%

                                     840.0000

Filling room

10%

                                     840.0000

This schedule reveals the total number of labor used in each activity of mixing and the total number of labors associated with this activity is 8400. It is seen that 10% of the labor is used by the set up mixer, the load mixer uses 10% while the operate mixer utilizes 40% of the labor. 20% of the labor is taken by the unload mixer and 10% each is taken by the clean mixer and the filling room.

Activities consumed

 Annual quantity of activity driver

 Drivers

 Cost assigned to Custard tart

Corporate management

           63,065.0000

 Directly to products

       63,065.0000

Process receivables

                 400.0000

 Invoices

       16,442.7778

Process payables

                 100.0000

 Purchase orders

          4,603.7778

Production planning

                   60.0000

 Production schedule

       12,505.7746

Reports to health department

                      6.0000

 Reports

             709.8592

Process sales order

                 360.0000

 Sales orer

       29,494.1408

Disptach sales order

                 300.0000

 Dispatches

       23,880.6667

New product development

                               -  

 Directly to new product

 

Inspect filling ingredients

                   60.0000

 batches

          2,729.5775

Disposal of substandard filling

                   60.0000

 batches

             709.8592

Move to mixing room

                   60.0000

 batches

             709.8592

Set up mixer

                   60.0000

 batches

                70.9859

Load mixer

                   60.0000

 batches

                70.9859

Operate mixer

           28,500.0000

 Litres

             674.3662

Unload mixer

                   60.0000

 batches

             141.9718

Clean mixer

                   60.0000

 batches

                70.9859

Mover to filling room

                   60.0000

 batches

                  0.0085

Set up pastry cases

                   60.0000

 batches

          3,783.8028

Weigh ingredients

                   60.0000

 batches

          7,267.6056

Load hopper

                   60.0000

 batches

       14,535.2113

Fill pastry cases

           28,500.0000

 Litres

     176,713.2465

Clean hopper

                   60.0000

 batches

          7,567.6056

Move to baking

           28,500.0000

 Litres

          9,699.0317

Stack cases on baking trays

         113,600.0000

 Prodcucts

       37,500.0000

setup ovens

             1,140.0000

 trays

          7,170.1585

Move to ovens

             1,140.0000

 trays

          3,763.2042

bake products

             1,140.0000

 trays

       50,091.1585

Unload oven

             1,140.0000

 trays

          3,763.2042

Inspect finished products

                               -  

 trays

 

Disposal of substandard product

                               -  

 trays

 

Move to truck

             1,140.0000

 finished trays

          4,337.0714

Direct materials

                      6.0000

 

 

Current market selling price

                   14.0000

 

 

batch size

             2,000.0000

 

 

Annual Volume

         114,000.0000

 

 

This schedule reveals that the use of ABC method has been influential for the proper allocation of the quantity that has been consumed by the driver and the activities with respect to Custard Tart. It is seen that the annual volume amounts to 14000. The proper distribution of the cost and the quantity on each activity is helpful for the management to understand the activities with ease so that the performance of the organization gets improved.

Activities consumed

 Annual quantity of activity driver

 Drivers

 Cost assigned 

Corporate management

             7,745.0000

 Directly to products

          7,745.0000

Process receivables

                 100.0000

 Invoices

          4,110.6944

Process payables

                 100.0000

 Purchase orders

          4,603.7778

Production planning

                   40.0000

 Production schedule

          8,337.1831

Reports to health department

                      4.0000

 Reports

             473.2394

Process sales order

                 110.0000

 Sales orer

          9,012.0986

Disptach sales order

                 100.0000

 Dispatches

          7,960.2222

New product development

           37,013.0000

 Directly to new product

       37,013.0000

Inspect filling ingredients

                   40.0000

 batches

          1,819.7183

Disposal of substandard filling

                   40.0000

 batches

             473.2394

Move to mixing room

                   40.0000

 batches

             473.2394

Set up mixer

                   40.0000

 batches

                47.3239

Load mixer

                   40.0000

 batches

                47.3239

Operate mixer

             7,000.0000

 Litres

       33,126.7606

Unload mixer

                   40.0000

 batches

                94.6479

Clean mixer

                   40.0000

 batches

                47.3239

Mover to filling room

                   40.0000

 batches

             112.6761

Set up pastry cases

                   40.0000

 batches

          2,522.5352

Weigh ingredients

                   40.0000

 batches

          4,845.0704

Load hopper

                   40.0000

 batches

          9,690.1408

Fill pastry cases

             7,000.0000

 Litres

       43,403.2535

Clean hopper

                   40.0000

 batches

          5,045.0704

Move to baking

             7,000.0000

 Litres

          2,382.2183

Stack cases on baking trays

           14,200.0000

 Prodcucts

          4,687.5000

setup ovens

                 290.0000

 trays

          1,823.9877

Move to ovens

                 290.0000

 trays

             957.3063

bake products

                 290.0000

 trays

       12,742.4877

Unload oven

                 290.0000

 trays

             957.3063

Inspect finished products

                 290.0000

 trays

             462.0599

Disposal of substandard product

                 290.0000

 trays

             214.4366

Move to truck

                 290.0000

 finished trays

          1,103.2901

Direct materials

                      8.0000

 

 

Current market selling price

                   18.0000

 

 

batch size

                 400.0000

 

 

Annual Volume

           14,000.0000

 

 

This schedule reveals the distribution of quantity and the cost assigned to various drivers regarding the production of apple tart and it is seen that the company concentrates on the custard tart more than the apple pies. Therefore, it is seen that there might a need for the firm to balance their production process so that the operations of the firm improve thereby increasing the profit of the firm.

Conclusion

The analysis of the paper and the data that have been gathered for Bakvert Company reveals that it is necessary to make use of ABC method so that the management gains knowledge about the percentage of contribution by each department and the cost associated to it so that they can stabilize their operation and improve their profit and market share.

 

Bibliography

Dong, J., Liu, C. and Lin, Z., 2014. Charging infrastructure planning for promoting battery electric vehicles: An activity-based approach using multiday travel data. Transportation Research Part C: Emerging Technologies, 38, pp.44-55.

Frazier, W.E., 2014. Metal additive manufacturing: a review. Journal of Materials Engineering and Performance, 23(6), pp.1917-1928.

Kaplan, R. and Anderson, S.R., 2013. Time-driven activity-based costing: a simpler and more powerful path to higher profits. Harvard business press.

Simons, R., 2013. Performance Measurement and Control Systems for Implementing Strategy Text and Cases: Pearson New International Edition. Pearson Higher Ed.

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