Use of Budgetary Control and Economic Order Quantity Model in Business Management

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MAF 605
ACCOUNTING AND FINANCE FOR MANAGERS

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Part A:
Answer 1:
The increasing complexity within the business environment is causing the firms to adopt
better system of cost management for maximizing their operational efficiency. In this context,
the businesses are largely adopting the use of budgetary control for developing a sound financial
plan that helps in attaining the financial as well as operational goals. Budget can be regarded as
the framework that helps in determining the strategic plan of a firm that assists in attaining its
organizational goals and objectives (Shim, 2011). In this context, the application of flexible
budget and the budgetary control for demonstrating their usefulness to the management team of
the telecommunication company ‘Real Madrid Sdn Bhd’ can be discussed as follows:
Flexible Budget
Flexible budget can be described as a budget that can be adjusted as per the fluctuations
in the volume of the activity. The flexible budget provides the major advantage to the
management by taking accurate decisions based on its realistic position. It is associated with the
major benefit of providing adaptability to the businesses as the budget developed is highly
flexible and can be adjusted as per the changes in volume of production based on the
marketplace conditions. The flexible budget provides the major advantage to the management by
identifying the difference between fixed and variable costs on the basis of fluctuations in the
output achieved. It enables in providing different type of budgeted costs on the basis of various
level of activity of production. It enables the management in effectively classifying the expenses
between the variable and fixed expenses that assist the management in reducing the operational
expenses by eliminating the unnecessary activities (Dugdale, 2010).
However, the flexible budgeting method is also criticized by the business managers as it
requires tracking the changes in a continuous manner and as such the process can be time-
consuming. Also, it incurs high amount of cost for monitoring continuously the business changes
and therefore is not feasible method of budgeting for organizations all the time. The authenticity
of the flexible budgeting system is also questioned by the business managers on account of its
authenticity. This is because the outcome determined by the use of flexible budgeting system can
be inaccurate if the information gathered is not reliable.
Budgetary Control
Budgetary control refers to the method adopted by the business managers for monitoring
and controlling costs that helps in determining the financial and performance goals by comparing
the actual results with the budgeted outcomes. The major advantage that the method of budgetary
control provides to the management is finding out the discrepancies that help in taking proper
decisions. The major objective of the budgetary control is to develop future planning by
determining the various budgets and maximize the operational efficiency. The

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telecommunication company involves different types of operational activities that can result in
consuming large amount of resources. Thus, development of budget will help in gaining an
estimate of overall cost to be realized in carrying out different business operations. This will help
in making accurate planning for meeting the expenses and thereby reducing the financial risk.
The major point of criticism for the method of budgetary control is that is lacks reliability as it
adopts the use of various estimates and thus the results can be misleading. The revision of the
budgets again and again can lead in enhancing the business expenses involved in development of
budgets (Weygandt, 2015).
Answer 2:
Economic order quantity (EOQ) model is used by businesses for managing the inventory
level by establishing a tradeoff between the holding and ordering costs of inventory. The model
is sued for reducing the overall inventory costs. The overall inventory cost can be minimized by
reducing both the ordering and holding costs of inventory. Holding cost refers to all the
significant costs that are associated with holding the inventory such as material handling or
logistic costs. On the other hand, ordering costs involves the cost that is associated with ordering
the inventory such as packaging or delivery cost (Choi, 2013). As given in the case scenario,
Tootenhand Berhad management is concerned related for maintaining the stock levels and thus
need to reduce the holding costs associated with inventory. Thus, the management team of the
company is recommended to adopt the use of EOQ model that will help in ordering the right
amount of inventory that help in reducing the costs involved in maintain the stock levels. The
accurate determination of required inventory can be done with the use of EOQ model by
determination of three variables that are, demand, ordering and carrying cost. The economic
ordered quantity is calculated by the use of following formula:
The economic ordered quantity determined will help in keeping the inventory costs as low as
possible. The determination of accurate inventory level will help in maintaining a budgetary
control and maximizing the operational efficiency. However, the method is criticized due to the
assumptions used in the model that are too simplistic. Also, it does not take into account the real
cost of stock in operations and is also regarded to be largely descriptive. In addition to this, the
model cannot be accurately used for the products that have seasonal fluctuations (Muckstadt,
2010).
Answer 3:
(a)The goal of the management as per the agency theory should be to maximize the share process
for creating enhanced value for the shareholders. Thus, it is essential for the management team to

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consider the future growth prospect of the firm before accepting the bid offer. The offer provided
by another company to pay RM40 is not worthy of accepting of the firm value is expected to
increase in the future years. This acceptance of this hostile bid will not prove to be worthy of
accepting as it will act against the interest of the owners by not considering the long-term value
that the firm can provide to them in the future (Ehrhardt & Brigham, 2016).
(b)The continued growth and success of an organization remains on its ability to realize profits
that is necessary for it to remain attractive for its investors. The increasing competition in the
external market is causing the business entities to deliver maximum profits for outperforming
their competitors. The pressure can derive the business managers to adopt the short-term growth
strategies for achieving the determined financial targets. The business companies for delivering
maximum results for its stakeholders tend to adopt the short-term growth strategy rather than
exploring the best long-term strategy. The decisions taken by business executives to drive larger
profits instantly can negatively impact the long-term growth and sustainability of a company.
This is because it can be at the expense of the sustainability of a company that is essential for
deriving its long-term growth. For example, the business managers if chooses to achieve the
short-term results by ignoring the business ethics that it can negatively impact the long-term
growth prospects of an organization. The long-term sustainability of an organization depends on
its ability to create profit and at the same time being ethically and morally responsible to all its
stakeholders. Thus, it involves promoting environmental, economic and social development and
not just placing emphasis on deriving its profitability by ignoring the interests and welfare of its
stakeholders (Eich, 2016).
(c) An agency relationship exists in the corporate form of an organization as it leads to an
establishment of a contract between the owners and the business managers. The contract is
established as a corporate form of an organization makes it legally recognized as a separate
entity. Thus, it requires that all the corporate actions are taken by the business managers, acting
as principal, on the behalf of the owners, who are the agents. This leads to the establishment of
an agency relationship in which the principal provides the decision-making authority to the agent
but the legal control is possesses by the owners that are the shareholders of a firm (Ross, 2014).
Answer 4:
The key financial ratios that can be used by the management team of Everton Sdn Berhad for
evaluating the company’s performance are profitability, solvency, efficiency and market ratios
that help in determining its future growth prospects. These key financial rations can help in
developing a benchmark for measuring the performance of all another players operating within
the same industry. The understanding of the ratios provides larger help to the business managers
and also to the investors for gaining an analysis of the strengths and weakness and thus facilitate
in their decision-making process. The weakness in the performance can help the management
team in developing effective strategies for overcoming it for driving the sustained growth of the
businesses. The ratio analysis can also prove to be useful for management team for acquiring