Feasibility Report on Activity Based Budgeting for Neon Innovative Tech Private Limited
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This report provides a feasibility analysis of implementing Activity Based Budgeting for Neon Innovative Tech Private Limited. It includes a brief description of the client company, features of ABB, and the difference between ABB and traditional budgeting system.
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55 Falcon Street, Crows Nest, N.S.W 2065 Phone : 011-42442685, Fax : 011-42442686 A FEASIBILITYREPORT ONTHEIMPLEMENTATIONOFTHE ACTIVITYBASEDBUDGETING PREPAREDFOR NEON INNOVATIVETECHPRIVATELIMITED PREPAREDBY STUDENT STUDENTID STUDENT STUDENTID STUDENT STUDENTID CLIENT’SCONTACT: NAME DESIGNATION: CHIEFEXECUTIVEOFFICER PHONE; 022-2286523,FAX: 022-2286522 ADDRESS: 24/2, 2NDFLOOR, CORPORATECENTRE XXXXX, XXXXX- 400071 1|P a g e
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TABLEOFCONTENTS Background and Abstract....................................................................................................................................................3 Introduction..............................................................................................................................................................................3 Key Points..................................................................................................................................................................................3 A brief description of the Client Company...............................................................................................................3 Description of ABB and its features............................................................................................................................4 Features of ABB...................................................................................................................................................................6 Difference between ABB and Traditional Budgeting system............................................................................6 Discussion on the Suitability of ABB........................................................................................................................11 Conclusion...............................................................................................................................................................................12 References...............................................................................................................................................................................13 2|P a g e
BACKGROUNDANDABSTRACT Neon Innovations Private Limited has engaged a team of management consultants from the leadership ABC Managements consultants to assist with the feasibility of the implementation of ActivityBasedBudgetingforwhichanin-depthanalysisoftheexistingorganizational environmentalongwiththeprospectivechallengesandopportunitiesassociatedwithits implementation has been carried out by an expert team(Arnott, et al., 2017). Based on the recommendations and guidelines provided in this report, the next step for the Neon Innovative Tech Private Limited is to develop and implement the ABB. INTRODUCTION Neon Innovative Tech Private Limited is presently under the process for evaluation of the feasibilityof the currentbudgetingprocessalong withprospectof thefurther scopeof improvement. During this process the CEO of the company has attended a seminar on Activity Based Budgeting subsequent to which finding it a better option to adopt the same, it has asked the ABC Managements consultants to submit a brief report on the feasibility of transition to ABB for the company in the current scenario(Belton, 2017). KEYPOINTS ABRIEFDESCRIPTIONOFTHECLIENTCOMPANY Neon Innovative Tech Private Limited is a multinational IT company engaged as a service providerprovidingservicesintermsofConsulting,Businessprocessoutsourcing,IT Infrastructureservices,EngineeringandIndustrialservices,Applicationdevelopmentand maintenance, asset leverage solution and assurance services etc., which are preformed through the help of a number of value added activities like Recruitment and training, document creation, Communication, Rent, travelling and Conveyance, functional requirement analysis, marketing support, supervision and administration, services of equipment’s and programmers etc. with the associated cost drivers like programming hours, percentage increase in sales, number of visits and facilities, requirements, number of units, number of calls and space provided etc.(Bromwich & Scapens, 2016). A number of Non- value added activities related drivers of rework and idle time can also be found because of the client delays, resource unavailability, and lack of skills, scope creep or Non conformances to proceed further or any other reason. Our client has mainly incurredcostintermsofresourceinvestmentforenhancedemployeeremunerationand functional requirement analysis together with operational support. During the past few years companycouldearnonlythemarginalprofitsduetotheresourcesallocatedforthe aforementioned activities.But in last few years it has also been noticed that due to the delay in 3|P a g e
making decisions has significantly affected the growth of profit for the company. The other major constituents of the resource allocation for the company are licensing, software, hardware and network connectivity. Because of its huge demand for its outsourcing services, it made the fresh recruitment of around 70000 software professional in its home country alone and is currently in the process to raise the target of new recruitment next year for its offices located in other countries(Cheatham & Cheatham, 1996). DESCRIPTIONOFABBANDITSFEATURES Activity based budgeting is an innovative approach for designing the system of budgeting in a way by allocation of resources amongst the various activities performed by an organization for which various costs are incurred by it. The establishment of relationship between the costs and the various activities are to be established first to initiate the process of ABB(Calvasina & Calvasina, 2017). The Concept of the ABB is those similar to the Activity based costing. It can be understood with the help of following example: Activity-based budget: Research: Salaries$30,000 Internet connection1,920$31,920 Shipping: Salaries$24,500 Telephone2,500 Ship sleepeze750,000 Ship plushette600,000 Ship ultima375,0001,752,000 Jobbers: Salaries$18,750 Telephone2,500 Commissions360,000381,250 Basic ads: Salaries$16,000 Advertising20,00036,000 Ultima ads: Salaries$20,750 Advertising750,000770,750 Office management: Salaries$20,000 4|P a g e
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Depreciation20,000 Supplies and Internet14,08054,080 Total$3,026,000 2.Clearly,shippingisthemostcostlyactivity,followedbyultimaadvertisingand commissions to jobbers. It would be worthwhile to investigate shipping costs to see if those could be reduced, for example, by getting bids from several shippers. It is unlikely that ultima advertising can be reduced the first year(Mock, et al., 2018). It is a very different and expensive model, and consumers may need to be educated as to its benefits. Another method of selling to retail stores might be worth investigating; for example, the use of a salaried sales staff. While developing the system of ABB one needs to identify the following: i)The relationship between the root cause of an activity level volume driver and the activity level volume driver itself ii)How the root cause of an activity level volume driver is changed and can affect the resource requirement for the activity? iii)Whether the activities performed by the organizations are efficiently carried out meeting the required level of quality standards? The process of ABB first identify the output of the organization then go for deciding about the various activities necessary for the creation of that output and finally the resource requirement for carrying out those activities. It aims at assignment of the cost to any specific product or service that is based on the specific feature of that product or service as it is the feature of these products that determined the volume of activities to be performed by that specific organization. It should also be kept in mind that ABB doesn’t prove its worth unless the organization is following the approach of Activity based costing. It is an effective tool for the adoption of Total quality management within an organization(Baker, 1989). The following fundamental principles are required is kept in mind before implementing the concept of ABB: i)Establishing the linkage between the organizational strategy and its activities ii)Conducting the gap analysis for the same iii)Determination of the capacity management and making forecast of the entity’s revenue iv)The linkage between the organizational business process and its strategy. 5|P a g e
Activity based Budgeting attempts to explain the importance of budgeting through the activities not by the elements of cost. It is especially suitable for those organizations having huge amount of overheads representing the operational cost. As the main objective of the organization is the creation of value for which proper understanding of the organizational costs is necessary (Deegan & Shelly, 2014). FEATURESOFABB The key features of ABB are explained hereunder in brief: i)It recognizes the interdependencies of the departments within the organization ii)It primarily aims to focus on the business processes iii)It ensures better control over the process of budgeting. iv)It is aligned with the objectives of the goal congruence. v)It assists the process of being aware about the resources consumed by the specific activities and how the activity driver calls for the change in the resource costs along with providing the insight about managing the both i.e. activity and costs. vi)It ensures a participatory approach with more realistic assumption for the preparation of the budget(Lavassani & Movahedi, 2017). vii)It acts as an incentive for the business units to manage the resources and costs more efficiently and effectively. viii)It is basically very complex procedure that highly demands a deep-rooted research and analysis of various activities, resources critical to the survival of the organization. ix)Activity Based budgeting is short-term goal oriented making it fatal to adopt. x)It is the best approach to identify the value added and non value added activities of the organization. DIFFERENCEBETWEENABBANDTRADITIONALBUDGETINGSYSTEM Traditional system of Budgeting It is the approach of budget preparation for the estimation of the operational revenue and cost for the future in which historical data of the previous period is used as a basis for the development of the budget for the forthcoming year. It can be suitable for the small or medium sized organization. Under this method the Top-down approach is being followed for the development of the budget(Mun, 2018). It has the following features: i)It is based on the corporate functional approach rather than the divisional approach ii)Budget represents the aggressive mindset of the organization. iii)This results into the fast development of the budget as interdepartmental issues are completely ignored under this process. 6|P a g e
While applying this methodology for the development of budget following thins are to be kept in mind: i)Management should take an input from the managers during the early stages of the development of the budget in order to ensure its smooth implementation (Sirois, et al., 2018). ii)Management should also make some sorts of comparison with their peer organizations to justify the targets to be set through their budget. iii)Post finalization of the budget should again be placed before the managers to have their valuable feedback so that necessary modification can be made if required. The major limitations of the traditional budgeting are as follows: i)It does not accurately represent the organizational goals as it involves huge manipulations done by the managers in the projections made by them. ii)It demands huge analysis of past year’s figure to justify the projections to be made for the future years. The concept of the traditional budget can be well understood with the help of the following example: ClassificationLast Fiscal Year Current Budget Next Fiscal Year Personnel Services 1110 Salaries$737,223$802,975$945,140 1120 Wages000 1130 Overtime Payments$36,861$40,150$47,260 Subtotal: Personnel Services$774,084$843,125$992,400 Contractual Services 1210 General Repairs$398$440$505 1220 Utility Services$996$1,100$1,265 1230 Motor Vehicle Repairs$2,520$2,750$3,165 1240 Travel$1,000$1,100$1,210 1250 Professional Services$4,408$6,600$7,920 1260 Communications$795$880$1,010 1270 Printing1,000$1,100$1,210 7|P a g e
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1280 Computing Services$3,523$3,900$4,540 1290 Other Contractual Services000 Subtotal: Contractual Services$14,640$17,870$20,825 Supplies and Materials 1310 Office Supplies$4,806$5,290$5,820 1320 Fuel Supplies$6,540$7,195$7,915 1330 Operating Supplies$2,667$2,935$3,230 1340 Maintenance Supplies$1,988$2,190$2,410 1350 Drugs & Chemicals$7,896$8,685$9,555 1360 Food Supplies000 1370 Clothing & Linens$8,012$8,815$9,700 1380 Education & Recreation Supplies000 1390 Other Supplies000 Subtotal: Supplies & Materials$31,909$35,110$36,630 1410 Office Equipment$0$1,500$3,000 1420 Electrical Equipment000 1430 Motor Vehicles$30,000$45,000$40,000 1440 Highway Equipment000 1450 Medical & Lab Equipment0$400$800 1480 Data Processing Equipment0$5,000$8,500 1490 Other Equipment000 Subtotal: Equipment$30,000$51,900$52,300 Current Obligations 1530 Rental Charges000 1540 Insurance$3,700$4,000$4,500 1550 Dues & Subscriptions$30$40$50 1560 Electrostatic Reproduction$500$1,000$1,150 1590 Other Obligations000 Subtotal: Current Obligations$4,230$5,040$5,700 Employee Benefits 1610 Retirement & Pension Benefits$73,722$88,325$118,140 1620 Social Security Contributions$50,500$55,005$67,575 8|P a g e
1640 Group Insurance$14,744$16,060$18,905 1650 Medical/Hospital Insurance$103,211$114,825$137,990 Subtotal: Employee Benefits$242,178$274,215$342,610 TOTALS$1,097,040$1,227,260$1,452,465 The corresponding benefits of the traditional budget are as follows: i)It encourages the decentralization within the organization because of the visibility of the preceding years’ figure by everyone on the basis of which future projections are going to be made. ii)The organization can easily adopt it without much thinking about its implementation strategy. iii)It becomes easy to control and execute the traditional budget prepared by the organization(Werner, 2017). At the same time the following disadvantages cannot be ignored too. i)The probability of errors in the projections becomes much higher in this case ii)It has been often noticed that lack of alignment is found between the spending of the organization and its strategy iii)It does not provide a sort of incentives to its employees to boost up their behavioral skill. iv)It is basically a quantitative statement nothing more than that. v)Inmostofthecasesitsimplementationinrealsensebecomesquite unrealistic. vi)It focuses on cost reduction but not on value creation vii)These types of budget cannot call for a creative thinking but completely based on conventional thinking(Erik & Jan, 2017). viii)In this case basically guesswork is done. In order to eliminate the limitations of the traditional based budgeting the two important approaches are constantly being suggested as better budgeting and beyond budgeting. While the better budgeting focuses on problem solving, beyond budgeting talks about performance measurement problems. Difference between traditional budget and Activity based budgeting The Following table summarizes the differences between ABB and Traditional Budgeting system. 9|P a g e
Sl No.BasisABBTraditional Budgeting System 1.OrientationItisactivityand process oriented It is result oriented 2NatureIt is dynamicIt is static in nature 3GoalIt focuses attention towards short term goals It focuses attention towards long term goal 4ApproachIt adopts the participatory approach for the process of budgeting. It doesn’t follow the participatory approach. 5ControlIt has more control over the system of budgeting It has less control over the system of budgeting 6ComplexityThis is much more a complex process It is based on a very simplistic approach 7AccuracyThe budget prepared under this approach provides a broader picture with much accuracy It gives a conservative approach with less accuracy 8SupportIt receives higher support from Lower management level It receives higher support from higher level of management. 9ImplementationIt is difficult to implement It is easier to implement 10Wasteful Expenditure The areas of wasteful expenditure can easily be identified under ABB It fails to identify the wasteful expenditure associated with the product 11TimeIt is rather a time consuming process It is not a time consuming process 12Volume of overheadThis is suggested when the volume of overhead is very high This is suggested when the volume of overhead is very low DISCUSSIONONTHESUITABILITYOFABB Our detailed study tried to address the following issues: i)How does the implementation of ABB affect the overall performance of the Neon Innovative Tech private Limited? 10|P a g e
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ii)Whether improvement in the allocation of institutional resources can be achieved through the correct estimation of costs associated with the company? iii)What is the procedure to be applied for the effective implementation of ABB in case of our client company? iv)Whether in case of our client company as the sufficient information about its costs were not collected due to which it failed to make appropriate decision in appropriate cases? v)Does the company have sufficient time and resources available to implement the system of ABB? vi)Whether the organization has the sufficient resources to meet the cost requirement for the implementation of the ABB? As it is clear that our Client, being an IT company for whom ascertainment of the accurate figures for the costs associated with its services are difficult to figure as the services provided are mostly intangible ones, that is the first step towards implementation of the Activity based budgeting(Delone & Mclean, 2004). In our case the major challenges faced by us during conducting the detailed survey on the feasibility of implementing the Activity based budgeting for Neon Innovative Tech private limited was because of the frequent technological changes in the IT environment of the Company the collection of the relevant information became a limitation for us. Still based on our study we can recommend the following for the evaluation of the suitability for the implementation of the ABB within the Company. 1.In order to ensure the ABB in the current scenario, the support and acceptance of the senior management is demanded first along with the creation of awareness amongst the employeeaboutitsimpactonoverallorganizationalgoals.Forwhichadetailed discussion on this issue is being suggested as employees of the Neon Innovative Tech private limited have been found not adequately equipped with the implementation of the ABB(Das, 2017). 2.ABB can be of great help to our company while conducting a comparative analysis of the various IT services provided by it through which the return on investment from its various projects can be more accurately calculated. 3.As the company has incurred huge expenditure in terms of salary and remuneration to its workforce because of which it failed to make required investments in other relevant area like network connectivity, software and hardware, hence ABB can assist it to achieve this objective. 4.In case of our company, the determination of the correct size of the cost driver has found to be highly time consuming, hence it seems that its implementation can take long period (Grenier, 2017). 11|P a g e
5.We have conducted an interview of around 51% of the employees at different level associated with the company out of which 61% employees have expressed that senior management’sapproachtowardsimplementationofABBisdemocraticinnature, whereas rest of the 39% termed it as autocratic in nature. CONCLUSION Based on the overall analysis of the current IT environment of the Neon Innovative Tech Private Limited, it is being suggested to implement the ABB system in order to capitalize its tentative benefits associated with the IT Company. It is a new cost technique which will help the company in the long run in minimizing the overall costs and increasing the efficiency. Furthermore, since the company being discussed here is a big company by volume, so Activity Based Budgeting would fit into the schemes as the cost benefit analysis is in favor of the organization. REFERENCES Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in organizations.Decision Support Systems,Volume 97, pp. 58-68. 12|P a g e