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Operational Case Study Mock Exam 1

CIMA Operational Case Study

Tracs Europe – Mock Exam 1

Suggested Solutions

O Astranti 2023 1 astranti

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Task 1 – Solution

From: Finance Officer (FO)

To: Karl Lomas, Finance Director (FD)
Subject: Cost benefit analysis (CBA) and human and behavioural aspects of budgeting

Hi Finance Director,

The issue
Please find below an analysis of the potential benefits and costs of producing a smart
tractor equipped with IOT technology, alongside my recommendation as to whether
or not we should go ahead with this venture. Please also find an explanation of the
key human and behavioural aspects of budgeting and budgetary controls that you
should consider when discussing the issue of operational managers and their lack of
involvement in budget setting.

Sub-task (a) - 68%: Cost benefit analysis (CBA)

The Internet of Things (IOT) is the interaction of internet devices that gather device-
specific and user-specific data. Different devices can send and receive information
through an online connection, which has the potential to provide a wealth of data to
an organisation about their processes, products and customers.

In our industry, the IOT is already in use and will continue to grow in its importance,
particularly as the global population increases and farmers are expected to produce
more with less. According to a 2020 Deloitte report, Transforming Agriculture through
Digital Technologies, the IOT, amongst many other digital areas, helps to increase
production, reduce waste and optimise the use of farming resources.

lai - Benefits of implementing IOT technology

As mentioned, there are many benefits and, thus, selling points of implementing IOT
technology into our tractors, some of which are explained below.

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Premium product

By releasing a smart tractor equipped with IOT devices, farmers would be able to send
and receive data related to the conditions of the farm and crops in real time. This will
help farmers to identify and solve any issues more rapidly.

IOT technology can also provide a greater specificity of data regarding operations, as
devices can be used to monitor different processes. For example, IOT devices could
collect data related to the amount of idle time tractors incur while loading or coupling.
This could allow farmers to identify specific inefficiencies in their operations.

The technology would also allow continuous monitoring of the tractors' status,
meaning any mechanical issues could be identified early or dealt with pre-emptively,
minimising the disruption that unscheduled downtime can cause to farmers as a result
of tractor breakdowns.

All of this means that if we decided to release a smart tractor, we could price it
significantly higher than our standard tractors. All of the additional time and resource-
saving benefits that a smart tractor provides for the end-users could be reflected in
its premium price point.

Competitive advantage

As indicated in your email, smart technology is already starting to be implemented

into tractors and subsequently into farming processes, such as by our competitor,
Meiji.
Another of our competitors, John Deere, for example, recently released the
autonomous 8R tractor at the Consumer Electronics Show (CES) in 2022. This tractor is
controlled by a smartphone and equipped with GPS and obstacle detection,
showcasing John Deere to be at the forefront of technological innovation in our
industry.

The positive press coverage and consumer awareness associated with this technology
mean that we may lose competitive advantage if we fail to keep up with the offerings
of other agricultural equipment manufacturers. On the other hand, if we act now, we
may gain an advantage over our other competitors who have not introduced a smart
tractor.

Our parent company AgRi, was founded in 1860, meaning as a company, we have had
to continuously evolve our products with changes in society and technology in order
to have survived for this long. As smart tractors and the IOT continue to develop and
change the makeup of the farming industry, we could potentially benefit from a

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significant advantage if we stay at the forefront and adopt some of the latest
technologies.

Better equipped to adapt to future change

We know that, in the European agricultural industry, there is increasing demand for
smart technology, which is unlikely to decrease. In fact, it is probably only going to
continue to grow.

By developing our internal understanding of the IOT and our capability to produce
smart tractors, we will be better equipped to adapt to future changes in relation to
new processes and technology. This will then allow us to be more responsive to
technological advances in our industry and will help us to be seen as a leader in
innovation, rather than trailing behind our competitors, as is the current situation with
Meiji.

laii - Costs of implementing IOT technology

While there are undoubtedly benefits to implementing IOT technology, there are also
several associated costs that we will need to consider, some of which are explained
below.

Hardware and system design costs

Implementing IOT technology into our smart tractors would require purchasing new
hardware and designing new systems to ensure the tractor and its associated
devices worked effectively. We have limited experience with IT and data analytics,
so external expertise may need to be engaged or skilled individuals will need to be
hired in order to design and implement the required systems.

Both acquiring the skills and the other costs involved with the initial design and setup
of systems are likely to be significant.

Implementation costs

After the new technology and systems have been designed, we will need to cost the
labour involved in installing the infrastructure needed to produce these smart tractors.
The costs will most likely include hiring external expertise to undertake some or all of
the installation process. The implementation may also cause some disruption to some
of our existing operations while the machinery, equipment and technology is being
set up.

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Staff training

Producing a smart tractor will introduce different processes and challenges for our
staff, who have so far only worked on standard tractors. Staff would, therefore, have
to undertake specialist training in order to ensure they have sufficient understanding
and skills to not only produce the tractor, but also to assemble and fit the tractor's
associated devices and technology.

If our network of dealers are not suitably equipped or skilled to service or repair our
smart tractor, we will need to either provide training to them or train our own staff to
handle after-sales service to our smart tractor customers. Both of these possibilities
would represent significant costs as well.

Recommendation

Overall, I believe that the benefits of introducing smart tractors and IOT technology
into our product range will prove to be of great value to us as a company, both now
and in the long term. Smart tractors appear to be a growing trend in the industry, with
several of our competitors already offering their own versions of smart tractors.

Although there will be significant initial and ongoing costs and challenges associated
with this venture, it will help us to stay ahead in our industry and put us in a good
position to ensure that we are well-equipped to adapt to future changes.

It is also worth remembering that our Information Technology Director, Priya Golt, is
keen to embrace smart technology. Priya's support will help mitigate the cost issue in
terms of budget allocation and buy-in to have someone in a Board-level position, such
as Priya, willing to advocate for Tracs Europe's development in this area.

Sub-task (b) - 32%: Human and behavioural aspects

of budgeting
Ibi - Human and behavioural aspects of budgeting
There are several human and behavioural aspects of budgeting that need to be taken
into consideration when you discuss with Gina the issue of operational managers and
their lack of involvement in budget setting or their perception that the process and
the budgetary controls in place are unfair.

80% of the operational managers who have recently left Tracs Europe have at least
mentioned their lack of involvement in the budgeting process. As such, we cannot only

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think about the direct economic benefits of our budgetary control system, we need to
think about the people it impacts.

Some of the key aspects are:

Staff motivation

Budgets should provide some sort of incentive to motivate staff. The most effective
way of achieving this is through goal congruence, where the goals of the operational
managers are aligned with the goals of the organisation.

For example, we could offer a bonus to our managers for exceeding their budgeted
profit for the period. This would have a positive impact whereby managers are
encouraged to increase the profit of their areas, which would subsequently benefit the
company as a whole.

From the anecdotal evidence mentioned in your email, we can infer that our current
budgeting system does not achieve goal congruence. The reported focus on
punishment for not achieving targets, but lack of reward when targets are met, may
be perceived by some managers as a lose-lose situation for them. They have to work
hard to achieve the budget or they are punished, with no reward for positive
performance.

It is also worth noting that involving staff in decision-making is an effective way to

earn their buy-in to the decisions. Managers are less likely to buy-in to the budgets
if they are not involved in setting them. Without buy-in, managers will be less
motivated to achieve their budgetary targets.

This lack of goal congruence and buy-in could eventually lead to our budgets being
sabotaged, or it could encourage managers to only achieve only the bare minimum. It
has obviously had a negative impact on staff motivation and morale, as it has been
mentioned by several operational managers who have left us most recently. As
reported, the lack of involvement in budget setting contributed to the decision to leave
for most of the recently departed operational managers, increasing our staff turnover
rate.

Budget negotiation

Currently, operational managers have limited involvement in the budget-setting

process. This presents a risk of budget padding or budgetary slack, especially if
managers become more involved in budgeting setting in the future. Budget padding
or budgetary slack are where managers aim to negotiate a budget that is easier to
achieve by inflating estimated costs or downplaying expected profits. This

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manipulation can negatively impact the budgeting process and lead to inaccurate
budgets being produced in the future.

In a system where managers have the opportunity and desire to manipulate their
budgets with padding or slack, this can also mean that those managers who
consistently meet or exceed their budgeted performance may only do so because they
are good negotiators. The managers might be considered successful when they have
just learnt to play the system, rather than perform as effective and efficient managers.

It is also worth mentioning that if it becomes known that the achievability of budgets
may be based on a manager's negotiation skills during the budget setting and not
their management skills, this could negatively impact other managers' motivation as
well.

To try and stop this from happening, we could turn our focus to rewarding those who
exceed their budgets, rather than punishing those who do not meet their targets.
This would help to prevent budgetary slack as there would be no punishment for not
meeting the budget. Rewards may also help to boost employee morale and
motivation. However, this would obviously have to be within reason, as if all of our
managers started spending too much over budget, this would cause financial issues.

Irrational spending

Budgets can often be seen by managers as targets, not guidelines, particularly if there
are negative consequences for not reaching them. This can lead to irrational spending
if a manager is under budget near the end of a period, simply to ensure that the
budget for the following period is not reduced.

Irrational spending results in wastage, but could potentially be addressed by offering

incentives for coming in under budget. However, this may then cause irrational under-
spending and lead to a substandard service. Essentially, a balance needs to be met.

Attempting to address the human and behavioural issues associated with our current
budget-setting process is a step in the right direction and will hopefully mean more
motivated staff and a lower turnover for us in terms of operational managers. Refining
our budgeting process may also help us to improve our operational efficiency if we
are able to solve the issues of over- and under-spending. This will, of course, also
improve our operating profit margin, so it is something that is definitely worth
exploring further.

I hope all of the above helps with your upcoming meetings. If you need anything else,
please let me know.

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Task 2 - Solution

From: Finance Officer (FO)

To: Ben Sholtz, Finance Manager (FM)
Subject: Digital costing and working capital and liquidity

The issue
Please find below my report explaining the effect that introducing a digital costing
system will have on our current costing system and three benefits associated with this.
I have also included my analysis of Quixco's working capital and liquidity position and
a recommendation on whether or not we should partner with them.

Sub-task (a) - 56%: Digital costing

2ai - Digital costing

Standard costing system

Currently, we use a standard costing system in which budgeted costs for each of
our products are calculated and recorded using standard cost cards. The standard
cost per unit of our tractors then allows us to set budgets and allocate resources
accordingly.

Using a standard costing system also provides us with a benchmark so that any
inefficiencies in production can be identified by comparing our actual costs to the
standard costs in variance reporting. However, we only review and update our
standards annually. Therefore, it is likely that we are not always using the most up-
to-date information to calculate the standard costs of our tractors.

Digital costing system

A digital costing system collects, analyses and allocates relevant data relating to the
cost of a product in real-time. Digital costing systems are particularly relevant for larger
companies like us that manufacture complex products through various production
stages, each of which incurs a number of different costs. If we choose to implement a
purpose-built digital costing system, we would still be using standard costing as our

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costing method, but the standard costs would be digitized, up-to-date and more
relevant.

Implementing a digital costing system would involve linking our internal systems with
information from suppliers and the wider tractor market. This may necessitate us
digitizing our production lines where possible. Under a digital costing system, different
possible costs can be applied to a range of scenarios using real-time information to
provide highly detailed and accurate cost options, based on exact component prices
and production times.

For example, we could gain real-time information about the length of time each tractor
spends in the engine assembly, chassis assembly, body panel production, main
assembly and testing departments. We could then allocate overheads more accurately
based on this information. Similarly, a supplier system could compare existing input
prices for the raw materials and components we need for each tractor with the prices
of other suppliers, and determine how changing suppliers could impact the cost of
each product.

2aii - Benefits of digital costing

There are various benefits that we may experience by deciding to implement a digital
costing system.

Component value

A digital costing system will give us access to a wider variety of real-time supplier
information about our production components. This will enable us to compare
variables such as price and lead time to ensure we can make the most informed
purchasing decisions. Some digital costing systems even use artificial intelligence to
suggest the most optimum supply options, which could add a further layer of efficiency
and effectiveness to our operations.

Better costing information

As mentioned, a digital costing system would provide us with more accurate and up-
to-date information about the costs of production. This will allow us to regularly
update our standard costs as opposed to our current annual adjustment. Our current
process means that our standard costings can become outdated quickly when costs
fluctuate.

As we use our standard costs for variance reporting, we may be holding our
operational managers accountable to outdated standards. This will no doubt have a
negative impact on managers' morale and motivation. Under a digital costing system,

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standards would be more reflective of the market, which means that when operational
variances do occur, they would be more clearly attributable to how production is
being managed as opposed to outdated standard costs.

Utilising a digital costing system would also give us a better understanding of the cost
drivers behind our costs. Being able to see where the highest level of costs are coming
from will allow us to analyse these processes and better manage these costs. This will
also give us more accurate information about how our costs should be absorbed.

Save time and money

Our current standard cost cards are updated manually on a yearly basis. This is a long
process that takes up a lot of time and resources. Despite the fact that implementing
a digital costing system would be expensive initially, it would be relatively cheap to
run once it is set up. This would help us to save time and money in the long term by
streamlining the process and reducing the need for as much staff input.

The automation of a digital costing system also means that information would be
processed more quickly than if it was done manually by the finance team. Complex
costing and purchasing decisions will, therefore, be processed more efficiently
using a digital system.

Overall, implementing a digital costing system would help us to transform what is

currently a long and complex costing process into something that is more relevant
and efficient.

Sub-task (b) - 44%: Working capital and liquidity

2bi - Quixco's working capital position
We can garner a lot of information about Quixco from the working capital figures you
have provided.

Inventory days

Quixco's inventory days have remained fairly stable over the past three years, ranging
from 39 to 45 days. The average of Quixco's inventory days over this three-year
period is 42 days, which is slightly lower than the industry average of 44 days.

There has also been a decline in Quixco's inventory days from 2020 to 2022. In 2020,
Quixco's inventory days were slightly higher than the industry average at 45, which
may have been a matter of concern if this continued to increase. However, we can see

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that Quixco's inventory days decreased in 2021 and then again in 2022, with both years
coming in below the industry average. This indicates that Quixco is consistently
capable of selling its inventory and generally holds less stock than the industry
average.

Receivable days

Quixco's receivable days have been stable over the past three years, with an average
of 31 days. This is lower than the industry average of 38. This is positive as it shows
that Quixco has good credit control procedures and is paid by its customers in good
time.

Although we don't have any information about Quixco's credit terms, historic
receivable days can give us an estimate of what to expect. We can, therefore, infer that
our credit period with Quixco will be somewhere around the 30-day mark. Payment
terms with our existing suppliers range from 30 to 60 days, so this is manageable.
However, it would be better for us from our own working capital perspective if we
could arrange a longer payable period.

Payable days

Quixco's payable days increase along with its receivable days, which is positive. We can
infer from these figures that Quixco pays its suppliers after it receives cash from its
receivables. Of course, these ratios are averages, so this may not always be the case.
However, it's a good sign that Quixco is getting cash into the company before it needs
to pay its suppliers.

Quixco's average payable days of 42 is slightly higher than the industry average of 40
days, which could indicate that the company is capable of leveraging its position to
gain better credit terms with its suppliers.

Working capital cycle

Based on the three-year period between 2020 and 2022, we can see that Quixco's
working capital position is very stable and, on the whole, better than the industry
average. Quixco's working capital cycle is lower than the industry average in each of
the three years, which indicates that it is in a good position regarding cash flow.

2bii - Quixco's liquidity position

We can also gain information about Quixco by analysing its liquidity position.

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Current ratio

A current ratio measures the ratio of current assets to current liabilities, and so it
indicates how well a company can pay its debts as they fall due. Quixco's current
ratio over the three-year period has gone from 2.08 to 2.10 to 2.17. This is greater
than the industry average on all counts, and a steady improvement year on year.
This is good news since it indicates that the business is healthy and has a strong
liquidity position.

Quick ratio

A quick ratio is a shorter-term measure of liquidity as it recognises that inventory may

not be able to be sold immediately, so it does not include inventory in the calculation.
We can see that over the three-year period, Quixco's quick ratio has gone from 1.27
to 1.35 to 1.33. All of these figures are greater than the industry average of 1.2, which
is good to see.

The slight decrease between 2021 and 2022 could potentially be something for us to
keep an eye on as it indicates that Quixco had less capacity to cover its liabilities than
in the previous year. However, when taking into consideration all of the other
available figures, alongside the fact that it is a very marginal decrease, I do not think
that this should be a great area of concern.

Recommendation

Quixco's working capital and liquidity ratios show that the company is performing
better than the industry average in all areas. On the basis of these ratios alone, there
is no reason to assign high risk to a partnership with this supplier. However, additional
financial and non-financial metrics should be considered to make a well-informed
decision. I also think it would be worth attempting to negotiate for better credit terms
than the company's current customers seem to have.

I hope the above has been useful.

Kind regards,

FO

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Task 3 - Solution
From: Finance Officer (FO)
To: Ben Sholtz, Finance Manager (FM)
Subject: Upgrade and disposal of machinery, capitalising expenditure and KPIs

The issue
Please find my explanation of how, under IAS 16, the upgrade and disposal of the two
machines will be accounted for in our financial statements for the year ending
31/12/23, as well as whether we will need to reclassify the machine being sold as held-
for-sale under IFRS 5.

Please also find in the following report which parts of the expenditure on the new
machine should be capitalised and which should not according to IAS 16: Property,
plant and equipment. As requested, I have also identified the key performance
indicators (KPls) that could be used to measure the performance of a smart
Production Facility in relation to the proposed CSFs.

Sub-task (a) - 36%: Upgrade & disposal of

machinery
3ai - Accounting treatment of non-current assets
Machine l - Upgrade

According to IAS 16, expenditure on already recognised assets, such as the cost of
day-to-day servicing, needs to be charged to the statement of profit or loss as an
expense when incurred. However, subsequent expenditure on a non-current asset can
be capitalised if the expenditure increases the future economic benefit that the asset
generates.

The upgrade planned for Machine 1 will extend the machine's useful life by three years
and make it compatible for use in the production of our smart tractor. This is a clear
increase to the future economic benefit that the machine will generate, meaning that
the
T $25,000 that it will cost to upgrade the machine can be capitalised. The carrying
amount of Machine 1 will be depreciated over its remaining (newly-increased)
economic life.

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Machine 2 - Disposal

Under IFRS 5, in order to be classified as held-for-sale, an asset needs to be available

for immediate sale and the sale needs to be highly probable (within 12 months).
Management must also be committed to a plan to sell, and an active programme to
locate a buyer needs to be in place. Finally, the asset also needs to be actively marketed
at a reasonable price and it must be unlikely that the plan to sell it will be significantly
changed or withdrawn.

As detailed in your email attachment, no buyer has been found for Machine 2 as of
yet. However, we are confident that a buyer will be found in the next 12 months and a
plan is in place to achieve this. We can assume that the buyer will purchase the machine
at a reasonable price since the expected sale price is T $60,000. After 31/07/23, when
the machine is no longer in use, it will become available for immediate sale.

Therefore, from 01/08/23, Machine 2 should be classified as an asset held for sale and
the depreciation of T $2,000 should no longer be charged. As the sale is likely to
happen in 2024, the machine should be recorded separately in our statement of
financial position for the year ending 31/12/23 as a non-current asset held for sale.

Machine 2 will be valued in the statement of financial position at the lesser of its
carrying value T $75,000 and fair value less expected cost to sell (T $60,000 expected
sale price less the T $1,500 cost of delivery). As the fair value of the machine is lower
than its carrying value, the difference of T $16,500 (T $75,000 - T $58,500) will be
expensed to the income statement for 2023.

Sub-task (b) - 24%: Capitalising expenditure

3bi - IAS 16: Property, plant and equipment
Under IAS 16, an asset is recognised in the financial statements if it fulfils two specific
criteria: it is probable that any future economic benefit associated with the asset will
flow to or from the entity, and that the asset has a cost or value that can be measured
reliably.
In the case of our new machine, it has been purchased to be used in the production
of our E Power smart tractor, so we can safely say that it is likely to generate future
economic benefits.

The cost of the machine includes the invoice price, as well as any amounts incurred to
bring the asset to the location where it needs to be and to condition the asset to
become operational. The T $120,000 purchase price of the machine should, therefore,
be capitalised, as well as the T $5,000 spent importing the machine from North America

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to our Production Facility (bringing it to the location where it needs to be). The T $2,000
spent installing the machine in our Production Facility should also be capitalised, as
this falls under conditioning it to become operational.

The machine itself would be ready for use regardless of whether or not our staff
members were trained on how to use it. Staff members who have been trained may
also leave the company and take the knowledge learned with them. The T $900 spent
training staff members on how to use the machine would, therefore, not be capitalised.

Under IAS 16, subsequent expenditure can be capitalised if the expenditure increases
the asset's future economic benefit, replaces a component that results in the
derecognition of an old component, or if a significant inspection is carried out to
search for faults.

The planned weekly cleaning of the machine does not fall under any of these
categories: it only maintains the economic benefit of the machine and does not
increase it. It also doesn't involve the replacement of components or a significant
inspection for faults. Therefore, the weekly cost of T $200 to clean the machine would
not be capitalised, and would instead be expensed to the income statement.

In summary, the total cost of T $127,000 (purchase price, cost of import and cost of
installation) would be recorded as the cost of the machine in the financial statements.
These are the only parts of the machine's expenditure detailed in your email that
should be capitalised.

Sub-task (c) - 40%: Key performance indicators

(KPls)
3ci - Smart Production Facility KPls
Key performance indicators (KPls) are measurements that companies use to evaluate
how well they are performing in certain areas. The areas that KPls measure are referred
to as critical success factors (CSFs). These are key areas in which the organisation has
to do well if it is to remain competitive and profitable.

Jack Newman identified CSFs of production efficiency and effectiveness and of brand
and reputation for the proposed smart Production Facility. If we proceed with Jack
Newman's proposed smart Production Facility, we will need to select suitable KPls to
measure our performance relating to these CSFs.

Please find below four relevant KPls that I have identified.

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Production cost

To measure how the investment in this smart Production Facility improves our
production operations, we should initially measure the change in our production cost
resulting from it. There are various KPls we could use to assess how efficiently we are
producing our individual tractors, but the clearest one will be our gross profit margin.

If the smart Production Facility is more efficient, meaning we produce more tractors
and spend less time on their production, then we should see an increase in our gross
profit margin. For 2022, this stood at 25.9%, with the industry average being 28.1%.
Therefore, a simple way of measuring the effectiveness of this proposed smart
Production Facility would be to compare our gross profit margin against the industry
average, as well as by assessing the change in this metric internally over time.

Production time

Due to the complexity of our production process, there is a lot of wasted time when
employees need to move around the facility to acquire tools, manuals and materials.
The smart Production Facility aims to automate some of these processes and
streamline them so that employees can spend more of their time actually constructing
the tractors.

By measuring our production time, we can ensure we are utilising our labour hours
more efficiently and potentially producing more tractors for sale within a given period.
Our production time is currently 3.5 days, which is half a day longer than the industry
average of 3 days, so we do have room to improve in this area.

However, it is important to note that we would not want to focus on measuring speed
to the detriment of our tractor quality; a balance will need to be struck.

Wastage

When considering efficiency, it is also important to address waste. There are a whole
host of costs associated with waste generated during tractor production, from scrap
material that can be recycled to hazardous waste that needs special disposal
treatment. There is also the issue of defective tractors or components. Given that a
smart Production Facility would focus on improving employee efficiency and
effectiveness, a relevant KPI would be one that measures the waste produced per
tractor.

As indicated in Jack's email, our target wastage per tractor is 7kg and the industry
average is 9kg. We currently produce 12 kg of waste per tractor. The smart Production
Facility is expected to produce less waste than our current facility due to the use of

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machines and assistive equipment to reduce defects and material usage. If it is

effective in these areas, then we should be able to measure a decline in the waste we
produce per tractor.

Customer satisfaction

Introducing a smart Production Facility would be a huge change for us and a new
way of producing our tractors. We would need to closely monitor the tractors
produced to ensure that our customers were satisfied with the functionality, safety
and quality of them, especially given the nature of our products and the quality
associated with our well-established brand and reputation.

We could conduct customer satisfaction surveys, both now and after the proposed
smart Production Facility is opened, to enable us to compare how satisfied our
customers are with their tractors. This would allow us to see if there is a change in
perception depending on whether the tractor was produced in our current facility or
in our smart Production Facility. As long as the smart Production Facility produces
tractors that maintain the premium standard our customers have come to expect from
our brand, then it will be a success in this regard.

I hope the above report fulfils your requirements.

Kind regards,

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Task 4 - Solution
From: Finance Officer (FO)
To: Ben Sholtz, Finance Manager (FM)
Subject: Activity-based budgeting (ABB), digital technologies and IT function KPIs

The issue
Please find below a briefing paper that includes an explanation of activity-based
budgeting and how we would implement it, as well as some of the benefits it may
provide for us. I have also provided a suggestion of three benefits we may experience
by utilising digital technologies when preparing and using our sales budget, and a
suggestion of three KPls we could use to measure the performance of our IT function.

Sub-task (a) - 48%: Activity-based budgeting (ABB)

4ai - Implementation of ABB
Activity-based budgeting (ABB) involves identifying the activities that drive costs and
then allocating funds based on the level of each activity. This contrasts with traditional
approaches to budgeting, such as our current incremental approach, which fail to take
into account the reasons for costs being incurred or the activities that drive them. Our
current incremental approach allocates funding based on the previous year's figures
and adjusts them, as the name suggests, incrementally.

To implement ABB into our budgeting process, we would first need to group our
overheads into individual activities called cost pools. We would then need to identify
each cost pool's cost driver, or in other words, what causes these different areas of
costs to be incurred. With the production of our new E Power smart tractor, for
example, machine maintenance is an example of a relevant cost pool. The number of
services and repairs we need to undertake will be driven in large part by the number
of hours the machine is used for, so machine hours would be a logical cost driver.

After we had identified all of our cost pools and cost drivers, the next step in
implementing ABB would be to forecast the activity levels for each of our cost pools.
So, to budget for the cost of the machine maintenance cost pool, we would need to
forecast the total number of machine hours required in the next period to produce
our budget.

Each additional E Power smart tractor produced will require a certain number of
additional machine hours, which will increase the total cost of the machine
maintenance pool. In the budget, funds would be allocated for machine maintenance

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based on this calculation. This process would then need to be repeated for all of our
other identified cost pools.

4aii - Benefits of ABB

There are various benefits that we may experience if we decide to implement ABB.

More informed budget

One of the key benefits of ABB is that we will be able to generate a better informed
and more accurate budget by focusing on individual activities and their specific cost
drivers. This will have a positive ripple effect in relation to some of our other
accounting processes, such as variance analysis, as they will be based on more accurate
information.

Our decision to invest in the production of the E Power smart tractor will increase our
overheads and the proportion of these costs that make up our total operating costs.
As we move forward, it will be increasingly important for us to have a high level of
control over this area of cost if we are going to manage it effectively. As we diversify
into new product ranges, now might, therefore, be a good time for us to implement
an ABB system.

Greater prioritisation and focus

As mentioned previously, our current incremental approach means that resources

are simply reallocated based on the previous year's budgeting figures with
incremental adjustments made to account for growth. This could see resources
unnecessarily being allocated to areas of our business with limited importance, at
the expense of key areas that are of strategic focus to us.

In contrast, an ABB system would ensure that resource allocation is directly linked to
the activities that are necessary for us to carry out our operations. By assessing the
activities that actually drive our costs, this approach will help to ensure that the most
important activities that are contributing the most to the achievement of our strategic
aims are prioritised in terms of budgeting and resource allocation.

ABB can also assist in the identification of value-adding and non-value-adding

activities. This would allow us to focus on allocating resources to activities which
add value, and make cuts to activities that are costing a lot but not adding much
value.

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Reduced inefficiency

Our current incremental budgeting approach allows business inefficiencies and

wastage to be carried forward on a year-by-year basis, as we are simply not aware of
where these inefficiencies occur. As ABB provides more detailed information about the
specific activities that incur costs, we will be able to reduce or redeploy resources from
the identified areas of inefficiency to more important and useful areas of the company.

Sub-task (b) - 20%: Digital technologies

4bi - Digital technologies in budgeting
There are various benefits that we may experience by utilising digital technologies in
our sales budgets.

Greater accuracy

Utilising digital technologies, such as big data and machine learning, when collating
our sales budgets may provide us with more accurate forecasts based on the trends
and data patterns that can only really be recognised by computer systems.

With our smart tractor, for example, data patterns such as increased internet traffic
relating to agricultural equipment could give us a sense of potential customer interest
in our products. This information could then be passed along to help the production
and new product development teams when they are making their budgets and plans.

Real-time information

Another benefit of utilising digital technologies in our budgeting system is the real-
time information we would gain that could help us to respond to situations in less
time. Cloud computing, for example, would make the dissemination of information
between teams, departments and regional sales offices much easier. It could also help
us to reduce duplication of work and effort.

For example, if the sales team in our Northern Europe office learns of an issue with a
tractor's specifications, they could immediately share that information and any
solutions with the other regional offices.

Improved understanding

Using data visualisation tools, such as a dashboard, to display budget information

would help our non-financial managers to better understand the purpose and
importance of hitting their targets. Creating a dashboard that displays a range of KPls

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in easily digestible formats, such as tables, graphs and charts, will also help our
operational managers to get a picture of how different datasets relate to one another.

With the development of our E Power tractor, for example, we could make use of a
dashboard to collate all of the most important and relevant project data into one place.

Sub-task (c) - 32%: Key performance indicators

(KPls)
4ci - IT function KPls
We can use KPls to evaluate how well we are performing in certain areas, such as in
relation to our IT team. KPls measure critical success factors (CSFs) which are areas that
we have to do well in if our company is to remain profitable and competitive. In relation
to our internal IT function, this includes identifying and rectifying employee IT
problems in a timely manner, and implementing improvements based on employee
feedback.

The feedback survey initiated by Priya shows that 77% of employees who raised a ticket
with our IT function either felt neutral or dissatisfied with the service they received.
This is a very poor result that indicates our IT function is not hitting its CSFs. Closely
monitoring KPls associated with these CSFs should help in remedying the situation.

Response time

The time it takes for our IT function to respond to employees' tickets initially is a KPI
that we could monitor to ensure that we are hitting our target time of 3 working days.
As the employee feedback suggests, this is not always happening at the moment. If
employees get a timely response to their issue, they will at least know that it is being
investigated and will not feel like they are being ignored. This should also reduce
follow-up emails, whereby employees ask for updates on their queries.

Resolution time

The time taken between raising a ticket and a resolution being found is another KPI
that we could use to measure the performance of our IT function. As indicated by
the employee feedback, it is not just the response time that matters, but the time in
which the problem itself is solved.

The response time will naturally vary depending on the nature of the issue. However,
a benchmark target time could be set, and any major deviances away from this could

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be investigated to understand the root issue causing the delay and whether anything
could be put in place to stop it from happening again in the future.

Number of improvements made

Another KPI we could measure is the number of improvements the IT function is

able to make based on the issues reported by employees. While some tickets might
be resolved without any improvements needed, it would be useful to track the actual
number of changes the IT function is making based on staff feedback.

For example, a common ticket might be related to resetting expired or forgotten

passwords. Individually, IT staff would not need to make any changes to the system for
these tickets and they could be resolved swiftly. However, if a pattern emerged, the IT
staff could implement a new internal password recovery system so that staff could
solve the problem immediately themselves.

If you need anything else, please let me know.

Kind regards,

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Marking Matrix

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Marking guidance

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