STRATEGIC FINANCIAL MANAGMENT

Table of Contents

QUESTION 3 ........................................................................................................................... 3
TASK 3 OF 3 – MANAGEMENT REPORT ......................................................................... 3
ANSWER TO QUESTION 3 ..................................................................................................... 4
1.1 Critical Discussion of the Key Concepts, features, and the importance of the cost
accounting ........................................................................................................................ 5
1.1.1 Concept of Cost Accounting ...................................................................................... 5
1.1.2 Features of Cost Accounting ..................................................................................... 6
1.1.3 Importance of Cost Accounting.................................................................................. 6
1.2 Evaluation of the Weakness of the Current Budgeting System of the Excitec o’s and
whether it is Suitable for the Environment of Exciteco’s ...................................................... 6
1.2.1 Time: ........................................................................................................................ 6
1.2.2 Budget Planning ....................................................................................................... 7
1.2.3 Budget Accuracy ....................................................................................................... 7
1.2.4 Market Research ...................................................................................................... 7
1.3 Evaluation of Exciteco’s Poor performance of the last year can be attributed to external
factors: .............................................................................................................................. 8
1.4 Discussion of the potential benefits to Exciteco’s for analyzing the variance into
planning and operational elements .................................................................................... 8
1.4.1 Guidance: ................................................................................................................. 8
1.4.2 Utilization of Resources: ........................................................................................... 9
1.4.3 Commitment and Motivation...................................................................................... 9
1.4.4 Performance Standards ............................................................................................ 9
1.4.5 Flexibility .................................................................................................................. 9
References: ........................................................................................................................... 10

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QUESTION 3
TASK 3 OF 3 – MANAGEMENT REPORT
Scenario:
Penco is excited by the results of your previous work and has asked you to review
operations at Exciteco where it is an institutional investor. Exciteco manufactures
electronic components for export worldwide, from factories in Finland, for use in
smartphones and hand-held gaming devices. These two markets are supplied with
similar components by two divisions, Phones Division (P) and Gaming Division
(G). Each division has its own selling, purchasing, IT and research and
development functions, but separate IT systems. Some manufacturing facilities,
however, are shared between the two divisions. Exciteco's corporate objective is to
maximize shareholder wealth through innovation and continuous technological
improvement in its products. The manufacturers of smartphones and gaming
devices, who use Exciteco's components, update their products frequently and
constantly compete with each other to launch models which are technically
superior. Exciteco has a well-established incremental budgeting process. Divisional
managers forecast sales volumes and costs months in advance of the budget year.
These divisional budgets are then scrutinized by the main board and revised
significantly by them in line with targets they have set for the business. The
finalized budgets are often approved after the start of the accounting year. Under
pressure to deliver consistent returns to institutional shareholders such as Penco,
the board does not tolerate failure by either division to achieve the planned net
profit for the year once the budget is approved. Last year's results were poor
compared to the annual budget. Divisional managers, who are appraised on the
financial performance of their own division, have complained about the length of
time that the budgeting process takes and that the performance of their divisions
could have been better but was constrained by the budgets which were set for
them.

In P Division, manager had failed to anticipate the high popularity of a new

smartphone model incorporating a large screen designed for playing games and
had not made the necessary technical modifications to the division's own
components. This was due to the high costs of doing so, which had not been
budgeted for. Based on the original sales forecast, P Division had already
committed to manufacturing large quantities of the existing version of the
component and so had to heavily discount these in order to achieve the planned
sales volumes. A critical material in the manufacture of Exciteco's products is
silver, which is a commodity which changes materially in price according to
worldwide supply and demand. During the year supplies of silver were reduced

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significantly for a short period of time and G Division paid high prices to ensure
continued supply. Managers of G Division were unaware that P Division held large
inventories of silver which they had purchased when the price was much lower.
Initially, G Division accurately forecasted demand for its components based on the
previous years' sales volumes plus the historic annual growth rate of 5%. However,
overall sales volumes were much lower than budgeted. This was due to a fire at the
factory of their main customer, which was then closed for part of the year. Reacting
to this news, managers at G Division took action to reduce costs, including closing
one of the three R&D facilities in the division.

However, when the customer's factory reopened, G Division was not unwilling to
recruit extra staff to cope with increased demand; nor would P Division re-allocate
shared manufacturing facilities to them, in case demand increased for its own
products later in the year. As a result, Exciteco lost the prestigious preferred
supplier status from their main customer who was unhappy with G Division's
failure to effectively respond to the additional demand. The customer had been
forced to purchase a more expensive, though technically superior, component from
an alternative manufacturer. Penco’s institutional shareholders' representative,
recently appointed to the board, has asked you as a Performance Management
Expert for your advice: 'We need to know whether Exciteco's budgeting process is
appropriate for the business, and how this contributed to last year's poor
performance.' However, the shareholder representative did also acknowledge that
external factors had contributed to Exciteco's poor performance in the last year and
suggested that it would be useful if Exciteco's performance reports distinguished
between variances which had resulted from its own operational performance as
opposed to external circumstances which could not have been anticipated when the
budgets were produced.

You noted that many organisations address this issue by analyzing variances into
planning and operational elements. Prepare a report that deals with the following:

• Critically discuss key concepts, features and importance of cost accounting,

• Evaluate the weaknesses in Exciteco's current budgeting system and whether it is
suitable for the environment in which Exciteco operates.
• Evaluate the extent to which Exciteco's poor performance for the last year can be
attributed to external factors.
• Discuss the potential benefits to Exciteco of analyzing variances into planning
and operational elements.

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ANSWER TO QUESTION 3
TASK 3

1.1 Critical Discussion of the Key Concepts, features, and the importance of
the cost accounting
1.1.1 Concept of Cost Accounting
Cost accounting is an approach of accounting where the cost that the company has
enquired for the performance of any business processes. The cost accounting
assists the management of Exciteco in making better strategic decisions. In cost
accounting, there are prime three elements are present as without them the cost
accounting will not be calculated. They are the materials, other expenses, and
labor. Furthermore, for analyzing the costs accounting in a precise manner the
names of the different types of costs are the variable cost, fixed costs, sunk cost,
and opportunity cost. Moreover, in cost accounting there are different techniques of
costing are present. As such techniques help to take any managerial decisions
effectively. They are marginal costing, direct costing, standard costing, historical
costing, absorption costing, and uniform costing (Yagi and Kokubu, 2021).

1.1.2 Features of Cost Accounting

The cost accounting will assist Exciteco to make decision-making for the systems
of the budgeting for the future. The cost accounting will provide with help the
Exciteco is fixing the proper price of the goods and the services. This will also
assist Exciteco to analyze the cost of the different operations and the process of
Exciteco. If there are nay ways in the company where the wastages of the
materials, time or expenses are taking place for the finished products it can be
controlled. As the cost accounting through the making of the reports will be able to
identify such areas in the Exciteco. It can figure out the profitability that has been
earned by Exciteco from the products y using the cost accounting. This will assist
the management of Exciteco in taking strategic steps to maximize profits. It gives a
bigger insight as to how to minimize the total capital in the products and services
of Exciteco through cost accounting. The overall data that the cost accounting of
the Exciteco will present will help in interpreting the information of the planning,
control, and decision making.

Cost accounting helps to price the budgets of the company. Thus, this will help
Exciteco in the implementation of better budgetary control.

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1.1.3 Importance of Cost Accounting
Monitoring Costs
The cost accounting will assist Exciteco in forecasting the cost price and the selling
price of the products of the company. This will assist Exciteco in formulating the
plans of the business and also its policies. For instance, considering the cost value
of the product of Exciteco will assist the management of the company in
developing the different techniques that will reduce the cost to maximize
profitability (Biancone et al., 2021).

Identifying the Per-Unit Cost

The different techniques of cost accounting will help Exciteco in identifying the
per-unit cost of the product. By having proper knowledge of the per-unit cost the
Exciteco will be able to set an adequate price for selling the product (Dekamin and
Barmaki, 2021).

Detecting Non Profitable and Profitable Activities:

Knowing such activities will help the management to put a halt to the activities that
do not assist the company in giving profits to the organization. Therefore, Exciteco
can put more emphasis on the activities that generate profits for Exciteco (Huang et
al., 2021).

Comparison of Costs
The data that the company shows through the cost accounting will assist Exciteco
in the evaluation and comparing the costs multiple times. Therefore, the company
will be able to make changes in the cost of the products. Hence, Exciteco will be
able to set the prices that will be preferred by the buyers to purchase it (Ulupui et
al., 2021).

1.2 Evaluation of the Weakness of the Current Budgeting System of the

Exciteco’s and whether it is Suitable for the Environment of Exciteco’s

1.2.1 Time:
Once the budget of the weaknesses of the current budgeting system is prepared it
has to be approved by the board before the next accounting period starts. Since this
helps the organization to make some changes to the budget. Here, as the budget is
getting approved by the board after the starting of the accounting will create
difficult for the organization in following the budget. It is because once they may
have entered in the new financial year the majority of the activities are gets started
hence, to change everything from the middle of the quarter will disrupt the year of

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the company. Besides, once the budget is clear at the beginning of the year create a
goal for the entire members of the organization to focus on the specific goals that
Exciteco will have to achieve at the end (Nikulina et al., 2021).

1.2.2 Budget Planning

The planning of the budget has to do with a realistic approach. Since in the last
year the budget was poor. Therefore, this states that Exciteco has to make a budget
that the company will be able to achieve in the given financial year. Therefore, for
making the budget the Exciteco will have to consider the internal factors and the
external factors of the organization. This will assist the budget planner to consider
all the elements that qi lame sure for the Exciteco to achieve the target of the
budget easily. Besides, this will help the different sub-departments of the Exciteco
to make their respective strategies adhere to the annual budget (Muslih, 2021).

1.2.3 Budget Accuracy

While preparing the under the manager needs to follow a specific model. So that
the mistake of the overlong will not arise in the future years while preparing the
budget. By preparing a budget model for one time will ensure that Exciteco
adheres to all the elements of the budget. Once the model of the budget is prepared
y the organization, the company can follow the budget every year. However, in the
initial time of the preparation of the model, it could be time-consuming. However,
dedicating such time will ensure that the mistakes for not considering an element
will not be repeated. As creating of such mistakes creates an impact on the overall
volume of the sales of the products of Exciteco (Arsani and Sihombing, 2021).

1.2.4 Market Research

The knowledge of the present requirements of the market is important. Since this
helps to understand the present demand of the goods in the market. Furthermore, it
helps to ascertain the future demand for the products too. Therefore, if the P
division had done better research, then it would not have created many problems in
knowing the high demand for the new smartphones. As the smartphone is designed
with a large screen for ease of playing video. However, there were no technical
modifications have been made since there is a high cost for making such expenses.
It is because for such budgets there was no budget that the company has made
beforehand. Exciteco to increase the volume of the sales company started to offer
heavy discounts to the customer to reach the anticipated profit margin. It is because
Exciteco knows that the company has not updated the technology according to the
requirements. Therefore, to make the sales of all the smart phone in that particular

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financial year the Exciteco has to sell them off at a minimal price to manage the
fixed expenses for running the company

1.3 Evaluation of Exciteco’s Poor performance of the last year can be

attributed to external factors:
The Exciteco had experienced poor performance in the last year it was because the
main customer of the company had experienced a fire outbreak in their company.
Hence Exciteco had taken the initiative in reducing the costs of the product. So that
the stock of the products that Exciteco is having can be taken care of by selling the
products at a lower price. However, when the factory of the customer got opened
the G division was no more willing to recruit additional staff to manage the
increased demand of the product of its company. Therefore, Exciteco was not able
to retain its renowned supplier for a long duration. This is how Exciteco has
encountered poor performance that is related to the external factor of the
organization. Since the accident that the supplier had faced is related to the external
factor of the Exciteco. Moreover, as Exciteco did not work on the increased
demand the supplier had to purchase the products from other places where the
price of the products was high. However, the quality of the product based on the
technology is technically superior to that purchased from the alternate
manufacturer (Handin, 2021).

1.4 Discussion of the potential benefits to Exciteco’s for analyzing the variance
into planning and operational elements

The probable benefits to Exciteco’s for evaluating the changes into planning
and operational element are:

1.4.1 Guidance:
As Exciteco has started to make changes in the planning therefore it is going to
give the company the desired outcome that Exciteco has targeted to achieve. Since
all the future actions of the company will be coordinated with the specific
outcomes based on reaching the target of the particular mission of the company.
Therefore, will help the company to take it as a guide to improve the action of the
company to provide the company a better future (Ismail and Suhami, 2021).

1.4.2 Utilization of Resources:

To produce the products of the smartphone the Exciteco needs purchases raw
material from the market. Hence for such procurement, the company has to incur
expenses. Hence it is essential to take measures to utilize the resources of the

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company adequately. It is because even after making adequate takes of the finished
product the company might end up making losses. As it will be seen that the
maximum amount the company spends as the operational expenses. Therefore,
having proper planning will help Exciteco in including the tactics to improve the
utilization of the resources (Laird, 2021).

1.4.3 Commitment and Motivation

Every member who is associated with the organization will not feel motivated.
Hence Exciteco needs to have proper planning, as proper planning shows target the
company has reach for in a particular year. Planning also ensures that there is
complete clarity of the respective goals that each employee of the Exciteco is
supposed to achieve. There is a high likelihood that when the employee has a
targeted goal to accomplish, it gives them a sense of commitment and motivation
to accomplish that task (Shengelia, 2021).

1.4.4 Performance Standards

In the planning procedure, the performance standard of the people is also
mentioned. Therefore, the employee has the proper track to follow to know the
sequence of the works that they have to follow. Furthermore, this also works to
identify the progression of the work. Therefore, this can be used to assess the
standard of the work and also how much work has been accomplished by the
individual employee to reach the target. Once the target of each employee can meet
then only the Exciteco will be able to reach at the final target of the company as it
was planned (Bristol-Alagbariya, 2021).

1.4.5 Flexibility
Certainly, every work of the company cannot be applied according to the planning.
Since the rate multiple factors that lay a major role in accomplishing the plans that
were prepared at the beginning of the financial year of the Exciteco. Therefore,
having a plan makes sure that the managers have a record to maintain to find the
alternate ways to monitor it. Besides, the performance of the different operational
activities is also can be easily understood. Therefore, if a particular plan is not able
to work in a certain manner, then some modifications have to be done in such plans
(Yousuf et al., 2021).

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References:
Arsani, A.M. and Sihombing, P.R., 2020. Budget Ratcheting in Indonesia and the
Implementation of Performance-Based Budgeting System during Pandemic:
Budget Ratcheting in Indonesia and the Implementation of Performance-Based
Budgeting System during Pandemic. Jurnal Mantik, 4(1), pp.172-180.

Biancone, P., Secinaro, S., Brescia, V. And Calandra, D., 2019. Management of
Open Innovation in Healthcare for Cost Accounting using EHR. Journal of Open
Innovation: Technology, Market, and Complexity, 5(4), p.99.

Bristol-Alagbariya, E.T., 2020. IFC Environmental & Social Performance

Standards: Soft Law Project & Company Financing Partnerships towards Good
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Dekamin, M. and Barmaki, M., 2019. Implementation of material flow cost

accounting (MFCA) in soybean production. Journal of Cleaner Production, 210,
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Handini, S., 2020. The Influence of Internal and External Factors of the Company
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Huang, S.Y., Chiu, A.A., Chao, P.C. and Wang, N., 2019. The Application of
Material Flow Cost Accounting in Waste Reduction. Sustainability, 11(5), p.1270.

Laird, J.E., 2019. Translating Strategic Guidance into a Self-Development Platform

for Company and Field Grade Officers. U.S Army Command and General Staff
College Fort Leavenworth United States.

Muslih, M., 2018. The Influence of Budgeting System, Organizational Culture, and
Firm Size to Performance. FIRM Journal of Management Studies, 3(2).
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Nikulina, S.N., Butyugina, A.A. and Gorbunova, E.E., 2019, October. Investment
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Conference Series: Earth and Environmental Science (Vol. 341, No. 1, p. 012217).
IOP Publishing.

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Shengelia, T., 2017. Interpersonal and Organizational Trust, as Factor of Social
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Ulupui, I., Murdayanti, Y., Marini, A., Purwohedi, U., Mardia, M. And Yanto, H.,
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Yousuf, A., Haddad, H., Pakurár, M., Kozlovskyi, S., Mohylova, A., Shlapak, O.
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