Purpose of the assessment
The purpose of this assignment is to assess the following Learning Outcomes:
Produce business reports which present critical analysis and evaluation of financial solutions to management issues in writing.
Apply knowledge to review and analyse problems and generate adaptable, flexible, and ethical approaches to problem solving and decision making.
Task 1
Read the following scenario and write a report to make recommendations for improving the budgeting process of Nestle ´ Australia.
Nestle ´ Australia has State sales offices in New South Wales, Victoria, Queensland, South Australia and Western Australia, as well as nine factories for its food and beverage products in New South Wales, Victoria and Queensland, one factory for pet care products in New South Wales and a Performance Nutrition department and a Health Sciences department in Victoria. Each sales office and factory is given a budget for the coming financial year.
The budgeting process begins with the target budget, which is set globally by Head Office in Switzerland for a financial year from 1 January to 31 December. The dynamic sales forecast is prepared quarterly and reviewed annually by the business executive managers of Nestle Australia. Each sales branch is given a percentage of sales as its budget. The amount ultimately decided upon during the year is not simply a top-down decision because sales branch managers submit a quarterly sales forecast towards the budget quarterly update. Negotiation takes place between the sales branch managers and the finance director (CFO). Whether or not the desired levels are provided depends on how well the branch manager can justify the expenditures. An important criterion is the notion that resources are expended to make profits.
At Nestle ´ budgets are often used to judge the performance of branch managers. Bonuses, salary increases and promotions are all affected by a manager's ability to achieve or beat budgeted goals. Since a manager's financial status and career can be affected, budgets can have a significant behavioural effect. Whether that effect is positive or negative depends in large part on how budgets are used. Goals of each manager are aligned with the goals of the organisation and each manager has the drive to achieve them.
The management team of Nestle ´ Australia have noticed that branch managers overestimate expenses and underestimate revenues. This approach facilitates the ability of the branch managers to attain budgeted profits. Your consulting firm has been hired by the Nestle Australia to make recommendations for improving the budgeting process.
Required
To achieve this task, you are required to write a report to the senior management of Nestle ´
Australia indicating:
1. meaning of budgetary slack, consequences of the budgetary slack for the operations of Nestle ´ Australia.
2. ethics of branch managers' behaviour.
3. how the bonus program may encourage budgetary slack? Suggest solutions to overcome such issues.
Task 2
Water World Ltd is a manufacturing company engaged in the manufacturing of valves. They have been in the business for last 3 years and have been manufacturing only one type of valves. Water World Ltd. started their business initially with sales of 10,000 valves per month and now they have grown the volume to about 50,000 valves per month. Water World Ltd has been buying all the raw material for the valve and were doing all the manufacturing in house. Now Water World Ltd. has established themselves in the market and are planning to expand and produce different varieties of valves. Water World Ltd has their plant in the main city and the total area of the plant is 50,000 sq. ft. Now if they want to expand and continue doing all the activities of manufacturing of all the varieties in house, they would need another 50,000 sq.ft. of the area. In the recent times, the land prices in the area have more than doubled in the last 3 years and still land is available with great difficulty. Michael is the production head of Water World Ltd and has been successful with the production and the level is continuously increasing. But in recent times, he is facing the problem of quality complaints which have gone up from average 0.2 % in previous 2 years to 0.5 % this year. Also, he is finding that there is a high level of dissatisfaction among the workers regarding workload as well as salary levels. The workers are regularly complaining about the over work.
Although, Michael has found that the workers have been spending lot of time on tea breaks, lunch breaks and even in between the production spending lot of time talking to each other. But, due to insufficient workers and staff, he is unable to take strict action and the workers are taking advantage of this situation. For completing the work and delivering the products timely, he has to employ workers on overtime and his overtime cost has also increased 3 times. Michael is worried about the new expansion plan of the management and is worried where the new workers would come from as he is already finding shortage of workers for the existing job. He has requested the management not to go for expansion immediately and look at improving and consolidating the existing set up. He has sent his request to Peter Director - Operations.
Peter has gone through the request of Michael and called a meeting of all the department heads and explained the situation to all concerned. The marketing manager has expressed very bullish prospect about the company's growth and said that the company should take advantage of growing economy and established brand image of the company and definitely go for expansion. The finance manager also expressed that this will result in economy of scale for the products and will further increase the profitability of the products. Michael again expressed his problems regarding availability of manpower as well as production control and effect on quality and productivity. The Marketing manager asked the Production manager about the option of outsourcing. Michael is skeptical about the outsourcing option as he felt that the outside agency will always charge more as he will try to make his profit as well and also is worried about the possible problems of deliveries. Peter asked the Nelson who is the Purchase manager about his views. He said that since the suppliers would also be interested in doing the business, they would not like to delay as with delay they also incur loss. The Finance manager said that we can look at cost comparison for buying against in house manufacturing.
After listening to all the views, Peter told Michael to work out the cost of production for future sales as per the forecast given by the Marketing department. He also told Nelson to collect the details of the future requirements to get the purchase cost details for few components of the valve.
Michael and Nelson have collected their data and they have presented the data in the meeting called by Peter to review the plan. First the marketing head Simon presented his market forecast and then Michael presented his report and explained the details as follows.
- Supervisor's monthly salary $50000 is expected increase by 10% per year.
- Direct wages $4 per unit. With 10% reduction in second year, no change in 3rd year and increase of 10% every subsequent year.
- Material cost $14 per unit is expected to increase by 10% every year.
- Power and fuel cost of $2 per unit with increase of 10% every year.
- Indirect labour cost is 50% of direct labour.
- Water World Ltd will have to buy a new machine with a cost of $500000, with expected useful life of 5 years.
Nelson explained his details as follows:
- Component price from supplier at $20 for the first 2 years with an increase of 10 % every subsequent year.
- Transportation cost of $2 per unit for the first year with increase of 0.20c every subsequent year.
- Inventory cost (storage cost) as 5% per year of the basic material cost.
- The Marketing manager has given the sales forecast for next 5 years as follows:
|
Year
|
1
|
2
|
3
|
4
|
5
|
|
Sales quantity
|
300000
|
500000
|
700000
|
900000
|
1000000
|
Required
1. Based on above data, is it economical for Water World Ltd to buy the product from market or manufacturing in house. Justify your answer, show all calculations.
2. What other factors should Water World Ltd consider for making this decision?