The Competitive environment of J&J & C&S has changed due to unforeseen factors that have caused a shortfall of almost two million dollars in its profit objective for the year.
The three factors are:
Deterioration of the dollars - This has pushed up the cost of its specialty instruments in European. Although the weakening of the dollar has improved its competitive market position it has offset the profits accrue by the European company.
Unfavourable mix variance - This arise when the mix of materials used differs from the predetermined mixed included in the calculation of the standard cost of an operation.
High inventory variance - This is due higher than anticipated start-up costs of its recent combined manufacturing operations.
Technological innovation - Due to shift to become more efficient and cost-effective, it has to continue to push for technological innovation to meet customers need.
Price sensitive - Due to high competitive and price sensitivity of its market, it has to offer unique product with cost-in-use benefits to the professional users.
Change in social security refinancing legislation - Changed in medical reimbursements to hospital from cost-plus to fixed-rate system has caused its sales volume to reduce by 20%, resulting in the closure of its 14 locations to 4 locations and a reduction of over 20% staff levels.
Crucial success factor
Decentralised management - each operating unit within J&J was responsible for preparing its own plans and strategies for the long term to ensure its success and overall organisation success. As such middle management was heavily involved in the planning process. With better knowledge of the market and environment, it is in a very good position to adapt to changing markets requirement.
Strong established brand and ownership allows J&J to dominate the consumer market on a global basis.
Extensive R&D and innovations ensure that they have the first-mover advantage
Strong diversification of products in commercial and medical fields.
Lean internal operations approach like Target costing based on cost-in-use benefits to the professional user.
Long range planning allows management to take a much closer look at the organisation to highlight its strengths and weakness. With a long range plan, the business and its components parts are all pointing in the same direction where division knows what the company is trying to achieve. In another word, it is setting aspirations. In addition, bonus is tight to the long term plan not short-term
The process of planning allows it to sort out what its objectives should be and apply analytical questioning to those objectives. It is inherently a control system where the chances of success are increased by the planning approach.
Top management must see that the entire company becomes saturated with the idea of creativity and the merits of self-criticism. It must develop and transmit some guiding philosophy about the creative function - indeed, the creative necessity - of the really effective business enterprise.
Nevertheless, many of the benefits of a planning process are difficult to provide in absolute terms. This is because once planning is introduced, the company changes. It is never possible to compare what has happened with what would have happened under different circumstances. In addition, there is a major problem in identifying the costs of planning. Real benefit can only come if the additional profit earned exceeds the additional costs of planning. Quite apart from the conceptual problem of specifically separating the benefits of planning from those of other causes, it is almost impossible to identify costs. It may be easy to isolate the costs of any specialist planning staff, but this is only a part. It is very difficult to estimate the cost of the participation of other managers in the process - and an overwhelming task to try to see how the cost of their participation differs from what it would be under some other style of management.
Budgeting system (short range) is used as benchmark for next year's profit plan that adds up to the strategic plans. It is used as hindsight to evaluate the forecasting ability and performance of managers. It allows the organisation to
For example, the comparison of 1986 profit plan revealed a $2.4 million profit shortfall against the second-year forecast. To reconcile this, it becomes necessary to put on a special budget presentation by each department to remove all the variance and ensure earlier target could be met if possible.
When all forecasted revenues and expenses were budgeted, a contingency expense item was added to it managed market uncertainty in achieving budget targets
Performance evaluation system - Performance management is a critical and necessary component for individual and organisational effectiveness. The performance of division is aligned with the top management's financial goals in the long haul. Another words, it is forward looking and focused on how performance can be even better in the future. Salary and bonus reviews are entirely subjective and qualitative as it is intended to reward effort and give special recognition to those who have performed uniquely.
Strength of their Budgeting and control system
Improved planning - the planning process forces managers to consider the objectives to be achieved and the resources that will be required to reach these objectives. This includes how environmental conditions might change in the future and the financial impact of these changes. Thus, some options might initially seem attractive, but may actually be risky given possible adverse market conditions.
Improved coordination and communication between business units and departments. For example, the production department will need to be aware of expected sales and the required levels of finished goods in order to plan for potential changes in production facilities. The sales department will need to be aware of potential constraints on the production process that will limit the level of sales. If the production department needs to recruit additional staff, in order to meet an expected increase in sales, then the personnel department should be aware of this in order to advise on recruitment. Increased sales at certain times of the year might mean additional marketing resources are required in order to achieve the increased sales.
Given the discussions involved in preparing the annual budget, every staff in the organisation should have a clear understanding of the part they are expected to play in its achievement. Appropriate individuals are then made accountable for implementing and achieving the budget.
Weaknesses of their budgeting and control system
Often budget does not flow from the levels of future outputs to determine the needed resources. The budgeting process is often too long, too detailed, and excessively burdensome. With constant market changes and high level of competition in the industry, the forecasted figures and assumption often lead to high variance like fluctuation of the dollars and legislation changes for instance. Generally, it is backward-oriented and simply takes last year's expenses plus a small amount for inflation.
At time, it can be view as a political game that usually results in some departments being overfunded while others continue labouring for tight funds. This latter group of workers toils without relief. With organisational downsizing, management often removed the headcount but they have not taken out the work. Across-the-board percentage cuts in manpower, some of the slash-and-burn variety, are likely to cut into the muscle in some places while still leaving excess capacity in others.
It may warrant unintended and wrong behaviour. It can waste lots of time usually hiding excessive and unneeded spending. It may involve gaming to protect self-interests, leads the sales force to attempts to pull a customer order earlier than needed and ultimately can result in unethical cooking of the books.
Problem or Issues:
Lack of administration of the budget
In order to coordinate the activities of a potentially large number of different managers who are involved in the budgeting process, it is necessary to identify a proposed timetable for receipt of information. If different managers within an organisation are preparing budgets, then it is also important that they are working to common assumptions.
Accordingly, communication of budget parameters, such as likely price and wage increases, headcount reduction and any expected major environmental change, is required. For example, if a senior manager was reviewing a budget, it would be extremely difficult to judge different budget submissions by two subordinate managers, if one budget had been calculated assuming a 10% wage increase in April and a downturn in sales demand, while the second budget assumed a 5% increase in June with an increase in sales demand.
Information about any factor that restricts performance should also be communicated to relevant operational managers at an early stage. For instance, high inventory level.
Identifying Best Practice in the Design of Budgetary Control Reports. Budgetary control information is usually provided to management in the form of a formal report provided on a regular basis, for example, monthly or quarterly. Over time, best practice in the design of control reports can be adopted:
The use of comparison of actual results against flexible budget.
Management by exception.
Whether to separate controllable from non-controllable expenditure.
Frequency of reporting.
Presentation of information.
Reporting non-financial information
Improve evaluation of the performance of managers.
The comparison of actual performance against budget can also be used in the evaluation of management performance. Where financial results are better than expected this may be interpreted as an indicator of good performance, while adverse results against budget may indicate the reverse. If rewards are linked to performance then it is likely that the attention of employees will be further attracted to the different aspects of performance that are rewarded. A guide can be given by the organisation about the amount of time that should be given to the different areas of performance. Rather than just being told which are the important areas, rewards such as promotion and bonuses can be provided. Having a reward can be motivational. An employee may put in extra time and effort in order to gain a reward. An inappropriately designed reward system can, however, negate the potential benefits of an otherwise well-designed performance measurement system as managers may spend excessive time on improving
In addition to providing a budgetary control report for the organisation as a whole, setting up a responsibility accounting system will provide control reports for individual responsibility centres of the organisation. This is critical to the success of a highly decentralised organisation. A responsibility centre is a unit of an organisation where a manager is held responsible for the performance of the unit. Responsibility centres can be treated as profit, cost, revenue or investment centres.
Profit centres. Some units of the organisation will be involved in the sale of goods and services to customers. A responsibility centre can be treated as a profit centre where a manager is held accountable for both the revenue and the costs of the centre.
Cost centres. Some departments will not be selling their services to others. Cost centres are responsibility centres where managers are held accountable for the expenses under their control.
Budgetary control reports focus on functional/departmental performance rather than internal business processes
Consider approaches that measure the impact of actions on processes that cross functional boundaries.
Identify potential changes to the organisational processes and the management accounting/information system that might be appropriate in complex environments. The use of the budget for performance management purposes should be reduced.
Due to increasing problems with the annual budget process, and not just because individuals are not getting the approval for funding they want, businesses are disturbed by the budgeting process altogether. Executives and employees are all recognising that a fixed contract budget does not transmit the continuously changing and relentless market pressure nor competitor actions. There is great cynicism about budgeting as a bureaucratic exercise disconnected from reality. The other reason for discontent is that a better way to budget exists, such as with business modelling and less invasive rolling financial forecasts that can provide better ways to motivate people.
Thus, activity-based planning and budgeting is a better approach to forecasting the location and level of resources and budgeted expenditures than traditional budgeting methods. It recognizes that the need for resources originates with a demand-pull triggered by customers or end-users of the organisation's services and capabilities. In contrast, today's traditional basis for budgeting tends to extrapolate the level of resource spending from the past, but the past is not a reliable indicator of the future.