Comparison of Manufacturing and Purchasing the Product

The analysis concludes that purchasing the product instead of manufacturing it would be more economical for Water World Ltd. The company's employees are not satisfied with their salaries and there is a lack of coordination between workers, which affects productivity. To improve motivation, regular communication and feedback should be shared with employees. Additionally, recognizing employee efforts and providing rewards can encourage them to work efficiently. In the long run, efficient management will lead to better profits.

Management accounting

TABLE OF CONTENTS
Question 1..................................................................................................................................3
Part A.....................................................................................................................................3
Part B......................................................................................................................................3
Part C......................................................................................................................................3
Question 2..................................................................................................................................3
References..................................................................................................................................4

QUESTION 1
Introduction
Present part of the study is based on analysis of case situation of Nestle regarding the
evaluation of budgetary slack. It will include a description of budgetary slack and its
consequence regarding the performance of the business. Further, the recommendation will be
providing regarding the development of effective bonus plan to motivate managers for
providing better performance in an ethical manner.
Part A
Budgetary slack:
It refers to an allowance adjusted deliberately in expectation of future cash flow. It can take
either of two forms:
 Underestimation of income or revenue generated in a certain period.
 Overestimation of expenses to be paid for a certain period.
In other words, it can be said that Budgetary slack is the practice of underestimating
revenues or overestimating expenses while preparing a budget. This helps the managers
mainly in improving their financial performance (Sallis, 2014). For example, this practice is
primarily used in performance appraisals and bonuses which are according to the
achievement of these budgeted numbers.
Consequence:
Employees get a very low incentive for meeting their budgeted goals thus the
performance of the organisation falls or is interfered. Companies having stretch goals
perform much better as compare to the companies having constant budgetary slack for a
number of consecutive years (Kerzner, 2013). Hence, this budgetary slack has a negative
consequence on the business. It also affects the profits and competitive position of the
company for long term.
If the managers of the Nestle who can set expectations very high are allowed input
into the budget model, then the chances of budgetary slack to occur is very low. Further, in
the cited case of Nestle there is no relation in performance, and bonus plans due to which
slack is very less likely to occur (Hill, Jones and Schilling, 2014). In a situation where there is
uncertainty about the results to be expected for a period of time the chances of budgetary

slack increases. As a result, under such conditions managers while creating budgets become
more conservative. If there is no source of reliability, as no historical records for possible
results and the budget are created for new product line then also budgetary slack prevails.
Part B
The organization put a significant level of trust into their management. From CEO to
employees, managers contain the full responsibility to ensure that their behaviours and
attitude is ethical and have the best of interest of primary as well as secondary stakeholders
(Gallani and et al., 2015). Being a manager, it is significant to consider ethical behaviours so
as to experience, company’s desires for conduct, ensuring right behaviours of subordinates,
and to reduce vagueness that mostly arrive while practising ethics.
Thus, it vital to consider codes of conduct and ethics, set of regulations and to achieve
and maintain records of linked documentation placed for the expectations and framework
purposely for ethical behaviour. It is also a responsibility of the manager to certify that those
who are responsible for reporting are required to understand these rules.
A manager working on ethical behaviour is also duty-bound to set the prospect, and
all ethically unsafe practices are disallowed. Any of the members conducting this type act has
the duty to report it to an appropriate channel (Douthit and et al., 2016). Managers that
continuously make use of Code of Conduct of company or any other same program with the
other recognized and expected behaviour offer a base of ethical conduct and belief in their
relationship with the stakeholders.
Part C
Managers have the position in the company to assist the management in
accomplishing its strategic goals and objectives. The major thing to consider is the incentive
plan is the objective to motivate their team members, and this plays a vital role in the success
and growth of the company. There is the existence of a broad range of incentive plans, to
assist managers in being focused on activities and drive great opportunities (Daumoser, Sohn
and Hirsch, 2016). A mix of incentive plans must be taken by Nestle into account to create a
great reward package so it can assist in achievements and retentions. A business entity can
make a reduction in budgeting problem in many ways, primarily, it must prevent dependence
on budgets as an obstructive and evaluative tool. Next, managers must be provided incentives
for attaining their projects on budgets as well as to offer proper and correct projections
through adopting Zero based budgeting and by applying these following tools:

Pay-for-Performance
A knowledgeable management company, APQC made use of researchers in order to
identify that paying according to their performance at all levels is the best way in an entity, as
this tool is unbiased and by this managers and employees stay motivated and will focus on
giving the best performance (Nouri and Kyj, 2014). This model usually includes a paying rate
combined with a variable rate which is particularly knotted to the performance of an
individual. Best performing managers are normally familiar and amendable to this model; it
is because it introduces a precise connection between individual’s performance and
attainment toward company goals.
Stock Options
In 2001, more than 30000 diverse options of stocks were used by firms in and around
the US. Stock options are formerly an incentive provided especially to a company’s best
performers. Stock options are generally provided by an employer as an incentive of employee
retention (De Baerdemaeker and Bruggeman, 2014). This concept for the stock option is to
add value in a specific time period so that employees can be able to sell their stock at
proceeds when the designated period of waiting expires. These incentives can inspire and
motivate managers to surpass their goals along with the expectation to positively drive the
stock value of the company.
Recognition
Business entities who deeply rely on knowing their achievement of leading managers,
often forgot the influences have on impacting performance made by managers. Managers
performing at Mid-level might be particularly ignored, as their performance is not visible to
upper management (Fullerton, Kennedy and Widener, 2014). Every employee in the
management team must be compensated, publicly as well as privately for their performance
that goes beyond the expectations. This incentive plan can also include bonus like gifts,
certificates, additional vacation days and trophies.
Conclusion
By considering above description company is required to develop an effective bonus
plan for managers by including factors such as Pay-for-Performance, stock options and
recognition to motivate them to operate ethically for attaining goals and objectives of
business.

QUESTION 2
Introduction
Water World is a manufacturing company which is engaged in manufacturing of
valves. The company has been manufacturing valve of a particular type since its
incorporation. However, now the company has grown the sales to the extent of 50000 valves
per month, and they want to expand and manufacture a different variety of valves of water.
The present report deals with the issues faced by Water World Company relating to taking a
decision regarding a product that whether it should be brought from the market or should
proceed for in house production. Management accounting assists in an appropriate manner in
applying accounting information for informing themselves in a better manner regarding the
decision that they are going to take for the organization (Liu and Kuang, 2014). The same aid
them in managing as well as in improving the performance of control function.
Issues faced by Water World Company
Water World Company manufactures one kind of water valves till date. However, as
the company has achieved major growth, so it wants to manufacture a different kind of water
valves. As the workers of the company are not satisfied with their salaries; they kept
complaining regarding same and does not perform their operation with efficiency (DRURY,
2013). Marketing manager of the company has expressed bullish prospects towards future,
and even finance manager has expressed that the expansion will result in economy of scale
and will increase the profitability of products in future. Now, the company wants to ascertain
whether it is economical for Water World to buy the product or to manufacture in house.
Comparison of both the options
Cost in case product is manufactured in-house
(Amount in $)
Year 1 2 3 4 5
Sales Quantity 300000 500000 700000 900000 1000000
Direct Wages (per
unit) 4 3.60 3.6 3.96 4.356
Total Wages
120000
0 1800000 2520000 3564000 4356000

Material Cost 15.4 16.8 18.34 20.034 21.8974
Total Material Cost
462000
0 8400000
1283800
0
1803060
0
2189740
0
Power and fuel Cost 2.2 2.42 2.662 2.9282 3.22102
Total Cost 660000 1210000 1863400 2635380 3221020
Indirect Labour
(50% of direct
labour) 600000 900000 1260000 1782000 2178000
Supervision Salary 55000 60500 66550 73205 80525.5
Total variable cost
713500
0
1237050
0
1854795
0
2608518
5
3173294
6 95871580.5
Machine Cost 500000
96371580.5
Cost in case product is purchased
(Amount in $)
Year 1 2 3 4 5
Sales Quantity 300000 500000 700000 900000 1000000
Component price
from supplier 20 20 22 24.2 26.62
Transportation Cost 2 2.02 2.04 2.06 2.08
Inventory Cost 1 1 1.1 1.21 1.331
Total cost per unit 23 23.02 25.14 27.47 30.031
Total cost 6900000 11510000 17598000 24723000 30031000 90762000
From above analysis, it can be concluded that if the company purchases the product
rather than manufacturing the product; it would be more economical for the company. Thus,
the company will have to expend less if the IInd option opts, i.e. the product is purchased.

Other factors to be considered
In a situation where a company wants to make a profit for the long term than it is
necessary that efficient management should exist in the company. In the present case of
Water World Ltd; the employees are not satisfied with the salaries which have been provided
to them and no appropriate management among workers regarding the time they spent on
working exist. In these situations, it is impossible to attain predetermined goals. It is
necessary that company manager should make efforts to maintain coordination between
employees and higher authority (Shields, 2015).
Employee motivation is considered to be the constant challenge on the workplace
been faced by company. Especially at a workplace where there is no emphasizing of
employee satisfaction, and not considering it as a part of a cling and supported business
strategy as whole (Liu and Kuang, 2014). On the other hand, they make out their authority in
drawing on the best employees have to offer; however, they experience themselves as
unsupported, satisfied or familiar on their work to develop motivation further to contributee
employees.
Regular communication with employees by scheduling staff meeting in order to
update them any of the information of company that can influence their work. Feedbacks and
reviews of customers, changing of due dates, improvements in commodities, guidance and
training and updates on divisions reporting on communicating structures are the significant
factors that must be shared with employees (Douthit and et.al. 2016). Communicating and
meeting is most significant aspect in any business management.
Regular communication with each and every employee is important as it develops
more motivation in them, even though a polite good morning can allow the employee to
engage with them. Ensuring that the employees are clear about their job, objectives time,
efforts and decisions. Organization must pause or stop in those areas which are specially
impacted by changes.
Further, they should be encouraged for making an efficient effort and should assure
that they will be awarded appropriately for the same. In situation where company wants that
employees work hard than it is necessary that appropriate award should be rewarded to them
in return. By making small changes in organization and payment methods, the company will
be able to satisfy employees as well as earn more profits.

Conclusion and recommendations
Cited part of study shows that in decision making process it is important for managers
to consider financial as well as non-financial factors to ensure its viability and impact on
business activities. With this approach sound decisions can be taken by managerial
authorities through which better opportunities for growth and high profitability can be
attained. Further, human resources is the most crucial asset for business thus managers should
be focused to create better work environment for them to keep them motivated so they can
contribute for value creation.

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