By: Chak Kam Yin

Strategic Financial Decision

QUESTION 1

a) The nature for each of the problems which relating to the use of budgeting is as follows:

Meeting only the lowest targetsOnly lowest targets are met when the budget holder easily satisfied with the level of performance when the negotiated budget has been achieved. They would not exceed the target budget as there are no any benefits for them to work harder to exceed the target budget. However, they would attempt to achieve a higher standard if there are good reasons and motivations such as bonuses and incentives.

Using more resources than necessaryBudgeted utilisation of resources would be provided once the budget has been set on what is needed to be achieved. The allocation of resources will be fully utilised to avoid any reduction in resources allocation for the future. However, the resources might be used more than the budget level of resources provided when output production is more than the budgeted level. In addition, the current system does not offer any specific incentives for the excessive of resources amount used. However, the failure of achieving budget targets would be reflect badly on few causes such as future promotion prospects or job security.

Making the bonus whatever it takesThe bonus system is linked to the achievement of budget target and budget setting which will motivate the employee and management to expand. This is because they view the maximizing of bonuses will be the main priority to achieve budget target in the aspect of performance work output and budget setting. This is causing the employee to take advantage by maximize their bonuses and at the same time, budget target could be achieved.

Competing against other divisions, business units and departments Competition would be happened between other divisions, business units and departments when there are relation to the setting of transfer price of goods or services. There will also be lacking of cooperation to share business information such as methods, expertise and sources of supply which lead to pursue own division. These would affect the overall budget target of the company as each division has different decision makings.

Ensuring that what is in the budget is spentThe budget setting process often known as a resources competition by the management. This happened when the management has to utilise all the allocation of budget allowance for the current budget period and avoid showing any unused allowance as it may result in reduction of future allocation of budget allowance. For example, this would be relevant to the fixed cost where some expenditure is considered to be discretionary to some extent.

Providing inaccurate forecastsBudget holder might provide inaccurate estimation and forecasts in the budget to obtain advantages from the company. The budget might presented in the form of figure distortion and the alteration of shortage in the budget to gain some tactical benefit within themselves. In addition, budget holder also might misrepresent the budget by proposing that the figure forecasted would be accurate. This happened so that the budget holder would be able to demand more than what is required.

Meeting the target but not beating itThe current system does not provide any incentive to motivate them to achieve more than the budget target. Therefore, management would only focusing on achieving the budget target and they would not exceed beyond the targeted budget. Once they had meet the target, the level of effectiveness would be end at that point as there are no reason for them to continue.

Avoiding risksThe management would not want to change on their current system as they feels that the achievement of budget target has been shown to be satisfactory in the past as budget objectives would be always been achievable. Therefore, they thinks that they should continue with their current system that has been used over the years. This is because changes of system would increase the probability of unwanted risk and uncertainty of the achievable of budget target.

b) Below are the illustrations of each of the problems by using the data from the Battamould division/TRG scenario:

Meeting only the lowest targetsIn this scenario, $200 per tonne has been agreed as the cost of budgeted variable by Bettamould division. Therefore, TRG would only expect the actual value of $200 per tonne to be achieved by Bettamould division as there are no benefits and incentives offered for them to work harder to achieve a better level of performance by exceeding their target budget. Hence, Bettamould division would only meet the lowest targets by $200 per tonne.

Using more resources than necessaryIn this scenario, budgeted of resources has been allocate 5% of machine idle time. At the same time, there is evidence that a move to machine maintenance being outsourced from specialist company could help to reduce machine idle time which allow the possibility of annual output in excess of 100,000 tonnes of moulded products. However, resources might be used more than the budget level of resources set (100,000 tonnes) as the current system does not offer any specific incentives for the excessive amount of resources used.

Making the bonus whatever it takesA bonus of 5% of salary will be payable as long as the budgeted output of 100,000 tonnes has been achieved. At the same time, processing losses allowed would be amounting to 15% of material inputs. However, there is no any remark whether the bonus will still be payable even when the budgeted output of 100,000 tonnes has been achieved if the processing losses rise more than 15% of material inputs.

Competing against other divisions, business units and departments Materials are sources on a Just in Time basis by Bettamould division from their chosen suppliers who have been used for some years. Evidence has been proven that materials of an equivalent specification could be sourced for 40% of the annual requirement from other division within TRG which has spare capacity. However, this case has not been carefully evaluated as this would probably save more cost if Bettamould division source the materials from the other division of the same company within TRG.

Ensuring that what is in the budget is spentIn the scenario of Bettamould, fixed cost budget allowance of $50,000,000 has been provided. The salaries of all employees and management have contracts based on fixed salary basis of annual agreements. The management may not want a reduction of future allocation of budget allowance by reducing the number of employees because this would effect on the ability of division to meet its annual budget output target of 100,000 tonnes.

Providing inaccurate forecastsIn this case, the management of Bettamould might provide inaccurate estimation and forecasts in the budget to increase the agreed budget amount in term of costs and measures. For example, the management might argue that the budget requirement for processing losses of 15% is acceptable as the ageing of the machinery will lead to a reduction in the efficiency of output levels. This would probably happened so that the management would be able to demand higher range of processing losses to meet the budget requirement. Although the reason given is reasonable, no action is taken to lower down the processing losses by the company.

Meeting the target but not beating itA bonus of 5% of salary will be payable as long as the budgeted output of 100,000 tonnes has been achieved. Actual result would not be showing any improvement in other aspects from the budget. As an example from the scenario, some competitor companies are able to achieve consistent acceptable quality with quality check level of only 10% of throughput on daily basis. However, Bettamould division do not need to reduce their current level of quality check (25% of daily throughput) just to be on par with their competitors as this would not be contribute to the actual result. In addition, Bettamould division is also allowed to transfer its output to market based profit centres at $200 + $500 = $700 per tonne based on the current budget set. No penalty is stated if the target level has been exceeded. Overall, there are no actions taken to improve some factors of the budget such as reducing processing losses and changing old machinery as the management are satisfied with the current level of the performance.

Avoiding risksTaking the example that the materials could be sourced for 40% of the annual requirement by the Bettamould Division from other TRG division which has not been investigated. This happened might probably because to avoid risk that the division with spare capacity could supply the material based on marginal cost which is more expensive compare to their current supplier. This also may happened because of the risk which related to the quality of the material supply and the material availability as the material are sourced on a Just in Time basis. Therefore, the chosen supplier of Bettamould Division would be considered more trustworthy rather than other TRG division as Bettamould Division has been trading with their chosen suppliers for some years.

c) The followings are the ways which each of the problems might be overcome:

Meeting only the lowest targetsThe current system only paid the bonus of 5% of salary when the budgeted output of 100,000 tonnes has been achieved and there is no additional bonus paid if the budgeted output exceed 100,000 tonnes. In order to overcome the problem, additional bonus must be provided so that the employees will be motivated to increase their level of performance production. This could be done by revising the basis of bonus payment policy when the output is exceeding 100,000 tonnes.

Using more resources than necessaryA change of bonus system to provide benefit from the output in excess of 100,000 tonnes may not be enough to achieve the output in excess of 100,000 tonnes if there are machine idle time. A culture continuous improvement must be created within the employees to ensure that they are actively finding ways to reduce idle time levels. Bettamould Division are also suggested to evaluate with the 40% internal material supply in term of cost and quality from another division within TRG which has spare capacity which could probably help to reduce cost of material.

Making the bonus whatever it takesAs there is not motivation to produce more than 100,000tonnes, the bonus system policy need to be revised. The concept of work ethics need to be developed to create the culture of continuous improvement within all employees for the achievement of targets and the success of the company. Information need to be disseminated to all employees regarding to targets meeting, performance trends and rewards system in order to improve the employees motivation on continuous improvement.

Competing against other divisions, business units and departmentsSome problems may need the intervention of the head quarter from TRG director to solve the problems. For example, the director may want to encourage Bettamould division to source the materials from other division with space capacity by explaining the transfer pricing system. This could help to overcome the conflicts of transfer pricing problems and the impact on division budgets between these two divisions. This can bring both advantage to Bettamould division and the supply division if the transfer price has been agreed by these both divisions. Bettamould division could transfer the material from the supplying division at a lower cost and the supply division would not have to bear the space capacity.Ensuring that what is in the budget is spentIt is necessary to educate the employees of work ethics related to budgeting management where they have to be committed and carefully evaluate on their spending level. The top management of TRG are suggested to monitor their divisions and make sure that the budget set is well spent with appropriate manner. Any addition cost should be reduce such as reducing the number of rewarded employees who involved in the quality checking department if there are any additional employees who are not needed in the department.

Providing inaccurate forecastsIntegrated approach would help to overcome inaccurate forecasts problems during the budget setting process. This can be done where all aspects of the budget have to be agreed by every department involved. For example, production line department and other departments have to reach the agreed link between processing losses of output and the dropping efficiency of the old machinery. Headquarter of TRG company might want to insist an independent audit by inspecting the budget revisions with the accounting department in order to obtain an accurate forecast. Budget set from accurate forecast would help to save cost and achieve company goal effectively.

Meeting the target but not beating itThe current system only paid the bonus of 5% of salary when the budgeted output of 100,000 tonnes has been achieved and there is no additional bonus paid after the target of 100,000 tonnes output has been meet. In order to overcome the problem, bonus system must be revised so that the employees will be motivated to increase their level of performance production. This could reflect any failure to control costs per tonne at the budget level.

Avoiding risksAs Bettamould division is considered about risk which related to the quality of the material supply and the material availability, TRG should provide some assurance to Bettamould management that the quality of the material sourced from the supply division would be sustained at the required level and supply would be available anytime at the initially agreed transfer price. TRG also should offer some incentives in case the supply department does not meet the requirement of Bettamould division in term of quality of material, availability of material and time delivery of material to reduce production idle losses and provide confidence of material transfer internally from other division. These effort made by TRG would help to remove the risk which Bettamould division are considered to be exist.QUESTION 2a) One Malaysia Dental Health CentreSummary of Profit and Loss Account (Income Statement) of the One Malaysia Dental Health Centre for the year ended 31 May 2010

Calculation of percentage of total capacity required to break-even during the year ended 31 May 2010

Note 1 Fees receivedAdult fees = Payment plus government refund Children/Senior citizens = Government refundAdjusted patient mix is as follows:

The weighted average fee per patient is as follows:

Hence, fees received during the year ended 31 May 2010 would be:= 28,800 x 1.5 x $28.40 = $1,226,880

Note 2 CapacityEach dentist had a maximum of 24 patients each day but treated 20 patients each day on average which equates to 83.333% of maximum capacity.= 20/24=0.8333

b) Quantitative non-financial performance measures that can be used to assess the 'quality of service' provided by the Malaysian Dental Health Centre would be the percentage of 'on time' treatment of the patients who are able to arrive earlier than their appointment time. This can indicate on the effectiveness of appointments scheduling by the Malaysian Dental Health Centre. For example, if the staff of the centre always call the patients to confirm and remind them of the time of their appointments, this could increase the percentage of 'on time' treatment of the patient which the 'quality of service' provided by the Malaysian Dental Health Centre would also increase. However, if the centre become ignorant and did not do any afford to remind the customer about their appointments, the percentage of 'on time' treatment of the patient would be decrease which the 'quality of service' provided by the Malaysian Dental Health Centre would also low.

Next, quality of patient care also can be measured by the percentage of re-arranged of patient appointment which requested by Malaysian Dental Health Centre. If there are low level of re-arranged appointment, this would increase the level of service quality provision to the patients. However, if there are high level of arranged appointment, the level of service quality provision would be low. This would cause the patient to go to alternative dental centre since the service quality provided is bad. Patient would also feel disappointed as the dental centre had postponed their appointment which the patient already prepare the spare time for their appointment. Therefore, Malaysian Dental Health Centre should schedule their clients appointment properly and evaluate the time spend for every patients carefully to avoid re-arranged of patient appointment. Thus, this would lowered the percentage of re-arranged of patient appointment and increase the level of service quality provision to the patients.

Lastly, performance measures that can be used to assess the quality of patient care would be the amount of percentage of patients who return for treatment after their appointment. This would be the indicator of the patient satisfaction toward service quality of Malaysian Dental Health Centre. Satisfaction of service quality provided would also affected by the attitude of the staffs and the doctors skill. Referring to the example which stated above, if the staff of the centre always call the patients to confirm and remind them of the time of their appointments, this could increase the 'quality of service' provided by the Malaysian Dental Health Centre. In addition, if there are low level of re-arranged appointment, this would increase the level of service quality provision to the patients. Therefore, patients would likely to return for treatment after their appointment if they are satisfied with the service provided by Malaysian Dental Health Centre

REFERENCES1. BooksColin, D. 2010. Management & Cost Accounting. 6th ed. Thompson Books.Inamdar, S. 2010. Cost & Management Accounting. 14th ed. Everest.Vashist, S. 2009. Advanced Cost & Management Accounting. 4th ed. Sultan Chand & Sons.

2. Power Point SlidesPower point slides which provided by Asia Pacific University of Technology and Innovation for the course of Strategic Financial Decision Making from the degree of BA (Hons) Accounting and Finance.

3. LecturerReferences taken from the guide and teaching of the lecturer for the course of Strategic Financial Decision Making, Mr Kumaraseh @ Hariraj.