Reforming Zylla Company's Budgeting Process

The assignment requires students to analyze the budgeting process of Zylla Company, a multinational firm, and suggest reforms using modern cost accounting methods such as activity-based costing. It also recommends implementing a cost, inventory reporting, and price optimization system to improve financial performance and quality of business decisions.

Management Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
LO 1.................................................................................................................................................1
P1 Explaining management accounting and the essential requirement of different systems......1
P2 Different methods used by managers for managerial reporting.............................................3
LO 2.................................................................................................................................................5
P3 Calculating costs using appropriate methods of cost analysis................................................5
LO 3.................................................................................................................................................7
P4 various advantage and drawbacks of various planning tools in budgetary control................7
LO 4...............................................................................................................................................10
P5 Use of management accounting systems to respond financial difficulties...........................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Everyday, business owners are faced with endless number of decisions for the growth and
long-lasting survival of an enterprise. Managerial accounting plays an inevitable role in this by
supplying data-driven input to the managers for improving its long-term decision making system.
Business managers utilize it as a powerful tool to make countless decisions that assure
competitive success and build a strong reputation. Zylla company is a large-sized multinational
organization that operating all around the world. In the complex environment, organization
undergone with a significant changes following expansion strategy, acquisition plan,
restructuring. However, in an uncertain macro-environment and technological world, managerial
team are looking for revamping its existing systems by adopting newer ones to improve its
analysis and decision-making system. The proposed research emphasizes upon studying new
systems and its integration for better reporting. Moreover, various techniques of cost
determination, forecasting and minimizing financial turbulence will be examined in detail.
LO 1
P1 Explaining management accounting and the essential requirement of different systems
Definition: Management accounting is a process, in which, only top managers are
involved who make plan, prepare reports and analyse past performance of an entity to create
rational policies and decisions.
History: The concept of MA first came in the period of early 19th century, more
importantly, for overseas and large companies, but, over the period, every companies regardless
their sizes and geographical presences use different tools and techniques of it to make better
policy formation, business control and other decisions.
Management accounting Versus Financial accounting
Basis of
differenc
e
Management accounting Financial accounting
Define MA is a procedure wherein top level
executives, business managers and
directors prepare reports and use financial
or statistical information for creating
policies and decisions i.e. risk
It is a method of preparation of
financial statements that present details
about the result of historical trading
function of Zylla Company (Schipper,
Francis and Weil, 2017).
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management, financial management,
competitive strength and others.
Aim Policy formulating
Supervising
Administration
Monitoring and controlling
To measure financial status
To measure operational success by
measurement of profit or loss
To asses cash management policies
Scope It has wide scope including financial
accounting, tax accounting, cost
accounting and others for wealth
maximization.
It has limited scope.
Laws No mandatory principles and rules are
implemented on managers.
Accounting and financial reporting
standards along with accounting
principles are necessary to follow.
Format No pre-decided format Zylla Company needs to prepare their
statements in line with the IFRS
standardized format).
Users Internal users i.e. employees, owners,
managers and others
Suppliers, lenders, governmental
agencies, tax authorities, HMRC,
competitors, public, shareholders,
employees and others (Brooks, 2015)
Time-
bounding
No time bounded P&L can be prepared as per
organizational need like quarterly, bi-
annually or monthly but balance sheet
is prepared at the end of the year.
Systems of management accounting
Cost accounting system: It is of great use for the organizations engaged in production
activities. It is because, such companies spend money to purchase raw material, hire labor and
pay them with wages and also incur other manufacturing expenses, called overheads. Being a
large-scale operations in distinct lands of the world, Zylla Company needs to use such system to
know their total production costs and unit costs as well (Saladrigues and Tena, 2017). Thus, it will
provide information about production input and its analysis facilitate team in putting right
control over manufacturing activities, control wastage of resources and minimize overheads by
shifting resources from unproductive functions to other profitable areas.
Job costing system: It is a part of cost accounting system which specially determines
costs on a particular job. Job can be defined as a production slot which consists of group of
identical units that is going to be produced as per the order of final users (Zahller, 2017). Zylla
Company’s manufacturing divisional head can place such system at their workplace to know
total costs and also track actual production progress on an ongoing basis, so that, necessary
control can be put into place, when actual expenses exceeds expenditures mentioned in consumer
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quotation. Such analysis also helps firm in price decisions in which a price is charged from the
consumer by adding some margin over the costs.
Inventory management system: Inventory is an important aspect of business that needs
to be managed to an adequate level. Over-stocking is not good because it exceeds cost of caring
unnecessarily whereas under-stocking is dangerous which threaten entity’s survival as company
will not be able to serve market demand resultant loss of customers. Although ERP is useful and
used by many establishments to record inventory but it requires entering raw information which
is automatically processed by the system. Unlike it, inventory management system run
automatically because it uses barcode system and radio frequency identification for electronic
content to track stock incoming and outgoing (Saladrigues and Tena, 2017). Zylla Company is a
multi-national enterprise which must use such system to regularly track their available stock and
place order timely to hold required units. It helps to overcome the risk of inventory stocked
below danger or safety stock.
Price optimization system: It is an advanced software which forecasts possible demand
and sales volume at different offering prices. In economy, law of demand shows that at high
price, customer tends to demand less or vice-versa (Schipper, Francis and Weil, 2017). The system
enable Zylla Company in knowing the elasticity of demand as a result of change in prices
keeping other variable constant. Thus, with the help of it, prices can be set at a correct level to
generate a good share in the industry and gain profitable growth.
Essential requirements for MA systems
 Provide relevant and highly useful information
 Easy to update so that predictive models such as trend forecasting can be used.
 Data accuracy and authenticity
 Instant reports
 Confidentiality and data security
P2 Different methods used by managers for managerial reporting
Accounting reports are the main source of collection of needed information by the top
managers. Several important reports which Zylla Company managers and policy formulation
must use and examine to aid in successful policy creation are enumerated underneath:
Job cost reports: Job cost system can be implemented by Zylla Company to get instant
reports about costs incurred on a specific job. Such reports help them to know how much costs
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they paid for acquiring required resources to produce a given number of units. They can also
match their quoted costs with the actual costs and made decisions (Fleischman and Parker,
2017). In addition, it enable establishment in setting an appropriate price by incorporating a
margin to the total costs by covering all fixed and variable costs.
Accounts receivable reports: Zylla Company operates worldwide, many of the business
clients prefer credit transaction, in which, they buy product from the company at credit and then
sell them to the consumers at cash and then make outstanding payment to the organization.
Although, by delivering credit sales, firm take financial risks, but, outstanding amount is paid by
the clients at some extra charges. Besides this, it also increase client base, market share, sales and
income, still, such decisions require careful attention of the team in assessing customer credit
rating, goodwill, ability to pay money and credit decisions (Lynch and Lynch, 2017). Zylla
Company also need regularly tracking their trade receivable to know how much cash is still
stacked and yet to receive. Thus, credit collection divisional managers can use these report for
such purpose and immediately respond and take actions against parties who found in default and
did not pay their debt on due date. It facilitate entity in managing their sources of cash and
minimize possible liquidity crunch in future.
Budget reports: Every-times, budget is prepare to communicate challenging targets to the
departmental heads which they are intended to achieve. Zylla Company’s all the purchase, sales,
production, marketing, research and development and other departments use it to self-evaluate
their progress. It help them to rethink and redesign plans and strategies to minimize costs and
maximize revenues keeping in mind the core focus on goals.
Inventory management reports: The best way of getting instant and quicker inventory
management reports is to use inventory management systems. As the system automatically
adjusts and alter the level of stocked units thus, reports are changed accordingly and alert
manager about possible inventory issues (Xu, 2018). Regular check of it helps to overcome the
risk of inappropriate inventory level by placing order on a right time that avoid under storage and
over storage.
Manufacturing reporting: Zylla Company can use ERP and manufacturing software
system that serves managers with a more real-time reporting beyond production reports.
Enterprise IQ manufacturing reports provide more authentic and sophisticated reporting
including configurable reporting for material, labor and overheads, real time equipment
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effectiveness, easier readability, variance reporting, automatic labelling, automatic bar code
reading and data management (Manufacturing Production Reporting, 2016). It will assist
production head of the company in key areas i.e. stock control, warehouse management, quality
assurance and control, preventive maintenance and Overall Equipment Effectiveness (OEE).
LO 2
P3 Calculating costs using appropriate methods of cost analysis
Cost measurement is an important area of business decisions. It may be of different types such as
fixed and fluctuating, first remains constant at varied level of production and cannot be allocated to each
unit or item manufactured by Zylla Company. Unlike this, later changes in the same direction, means,
with the high level of production, such cost also tends to increase otherwise fall. There are two popular
ways which can be used to determine costs, that are presented here as under:
Marginal costing (MC): It is also called variable costing because, it uses only the variable means
fluctuating costs that changes in the same direction with the change in production (Horngren and et.al.,
2010). However, fixed costs is excluded in measuring production cost and deducted from the contribution
to present the net return.
Absorption costing (AC): Unlike MC, this method absorbed fixed overhead also using an
overhead absorption rate taking into account machinery hours and direct labor hours as a basis of
allocation. Although, it is used by companies, still, it is not a better way because allocating overhead
taking any aspect as base is not appropriate and thereby display misleading results (Macintosh and
Quattrone, 2010).
Example:
Costs: Material: GBP6, direct labor: GBP 5, production overheads (Variable): GBP2
Sales information: 600 units at the rate of GBP 35/each
Beginning stock: Nil
Budgeted overheads: Fixed manufacturing: GBP 2100
Administration: GBP 700
Sales overheads: GBP 1 on each unit
Income Statement according to variable costing method
Particulars Amount Amount
Revenue for the current year (600U0*@GBP 35 each unit ) 21000
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Less
Beginning stock available
Production costs (700U @GBP13/each)
Ending inventory at the closure of the year (100U@GBP13)
Cost of goods sold by the company
Total contribution for the current year
Less: Fixed costs
Fixed manufacturing cost
Administration cost
Sales overheads
Total fixed costs paid during the year
Net Profit received in the year
0
9,100
(1,300)
2000
700
600
(7,800)
13,200
(3,300)
9,900
Working note: Unit cost = Direct material + direct labor + direct overheads
= GBP 6 +GBP 5 + GBP 2 = GBP 13
Income statement as per absorption costing method
Particulars Amount Amount
Revenue for the current year (600U0*@GBP 35 each unit )
Less
Beginning stock available
Production costs (700U @GBP16/each)
Ending inventory at the closure of the year (100U@GBP16)
Cost of goods sold by the company
Less: Fixed overheads over-absorbed
Costs of goods sold
Gross profit for the current year
Less: Fixed costs
Administration cost
Sales overheads
Total fixed costs paid during the year
0
11,200
(1,600)
700
600
21000
(9,600)
100
9,500
11,500
(1,300)
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Net Profit received in the year 10,200
Working note: Unit cost = Direct material + direct labor + direct overheads + Fixed production
overheads
Fixed production overheads = budgeted overheads/Number of units
= GBP2,100/700 = GBP 3
= GBP 6 +GBP 5 + GBP 2 + GBP 3 = GBP 16
Working note: Over-absorption: Actual overheads- budgeted overheads
= GBP 2,000 – GBP 2,100
= GBP 100
Reconciling the profit of both the method
Particulars Amount
Net profit as per variable costing 9,900
Less: Fixed production cost on closing stock (100U*GBP3) 300
Cost as per absorption costing method 10,200
Above result determined that cost each unit is lower in variable method because fixed costs is not
being considered. However, absorption costing method has fully charged all the costs, due to this, unit
cost is comparatively greater to GBP 16.
LO 3
P4 various advantage and drawbacks of various planning tools in budgetary control
Budget is a statement that summarizes all the cost and revenue projections for the future
period. Being a multinational establishment Zylla Company needs to prepare different kind of
budgets llike sales, marketing, production, labor wages and others. All the budget needs to be
administrated properly so as to get the desired outcome. Budgetary controlling is a method
whereby company’s managers keep their control over daily functions so as to restrict their
spending and generate target revenues. Some of the important ways whereby firms can control
their spending level are enumerated below:
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Standard costing & Variance analysis: In this method of budgetary control, initially,
before running the actual operations, Zylla Company’s mangers forecasts and anticipate possible
future occurrence that will either result in income generation and outgoings to pay material, staff
wages, overhead and others. Thereafter, when period for which budget is prepared completed,
then actual results are matched and compared with forecasts to know deviations (Brooks, 2015)).
For instance, actual purchase price of material may be higher due to limited supply with high
demand, labor rate variance may be negative due to high wages demanded by competent
workforce and others. Through such analysis, Zylla’s departments can explore the reasons
behind unfavourable results that brought financial trouble. This in turn, corrective measures are
undertaken by the managerial team to reduce such occurrence.
Advantages:
 In current times, activity based budgeting can be used for setting standards and helps in
accurate prediction.
 Comparative analysis of actual and standard helps in finding deviation along with its
causes and impact, thus, managers can design suitable plans accordingly to restrict it. For
instance, adverse price variance can be reduce through finding supplier overseas to get it
at cheaper rate, bargain with existing suppliers etc, overheads can be controlled through
tighten monitoring practices and others (Schipper, Francis and Weil, 2017).
 Various budgets are prepared and communicated to all the divisions of Zylla Company
and in order to perform best, everyone put hard work and dedication resultant higher
productivity.
Disadvantages:
 The main downfall side associated with the method is actual outcome is compared at the
end and its analysis takes time. Thus, the process of actual corrective decision and its
sound implementation may delay (Mauro and Cinquini 2016).
 In case, if budget is prepared through traditional methods like incremental and others,
then it is not found appropriate because targets are not challenging and competition.
 It does not help entities in motivating their employees, because, managers are concerned
about adverse results and does not pay attention to the areas where targets have
successful reached.
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Responsibility budgeting: This method assigns responsibility to different centres who are
allocated with different duties and accountability for varied aspects. The method is so useful to
reduce or minimize such cost elements that are controllable for enterprise. The key centres to
whom responsibility is allocated are as follows:
Cost centres: This centre holds a single authority as well as accountability to control all the
cost incurring elements like material, supplies, manufacturing overheads, staff wages, admin
overheads, research and develop and others (Parmenter, 2015). Such centre head must follow
proper precautions to not exceed their actual spending beyond the target set by Zylla Company’s
executives and top-level policy formulators.
Revenue centre: The key responsibility of revenue centre is to ensure that company generates
expected revenues or more. Although, such centre have no authority to control any kind of costs,
still, it has certain control over Zylla Company’s marketing division. They continuously matches
their revenues with the forecasts to know that what decisions they must undertook to maximize
their revenues such as increase in selling price, using new channels of marketing like social
media, website marketing and others, open more branch, expand its presence and others ((Lynch
and Lynch, 2017).
Profit centre: This particular centre keep focus on both the costs and revenue elements
because higher the costs reduce profit whereas high income resultant greater yield. Thus, the
centre focuses on maximizing their total profit through tight control on the spending level and
assuring generating target revenues.
Advantages:
 It helps Zylla Company in minimizing their excessive costs through better control, cost-
cutting plans, elimination of unproductive activities and many others that improve saving.
 This budgetary controlling method assists in key decisions like setting a correct selling
price, cost-cutting measurement, set an appropriate mark-up by balancing their own profit
desires and consumer willingness to pay.
 It also may assist firm in work specification through hiring people in different centres as
per their excellency and proficiency.
Disadvantages:
 The method just pay attention to the costs which are under control of the organization.
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 Its sound and successful implement is based on internal business organizational structure,
a structured system to delegate responsibility, an appropriate method of reporting and
others
LO 4
P5 Use of management accounting systems to respond financial difficulties
Key performance indicators: It is a performance measurement tool that assess firm
success on a particular project, process or activity. Choosing a right KPI is a key decision for the
organization that depends upon the type of operation, targets and key activities. For instance,
Zylla Company can use defect rates, consumer satisfaction score, turnover by segments, product
quality, rejection rate, cycle time ratio, average delivery time and others as their important KPIs
to know their progress (Parmenter, 2015). Growth in favourable aspects such as quality, user
satisfaction, profitability, turnover and decrease waiting time, rejection rate and others indicates
strong performance. It aware Zylla Company’s team to detect that in which of the key areas,
company yet need to improve itself and attain financial success. It is a better way over ratio
analysis because it only analyse accounting information, however, KPIs uses both financial and
non-financial information i.e. rejection rate, employee productivity, consumer satisfaction and
others and thereby assist entity in resolving such issues.
Benchmarking: In traditional times, managers prefer ratio analysis to measure, evaluate
and analyse their financial results. Moreover, current year’s ratios are compared against previous
year to assess that whether business had improved their financial position or not. Although, the
method is still used in current corporate world, still, it does not take into account competitors
actions. Therefore, benchmarking is found much better wherein external analysis is undertaken
through matching Zylla Company’s performance with the industry’s best player. It is a method
wherein an entity’s own processes is compared with the standard taking into account industry’s
best performer. Thus, it begins with identifying the best market player with similar processes and
thereafter, results are studied against own performance (Bligaard and et.al., 2016). It helps to
know that how well Zylla Company attained goals and inform managers that why benchmarked
company is more successful. It is use to assess performance taking into account specific
indicators like cycle time, count of flaws, productivity, cost per unit and others and thereby allow
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firm to develop distinctive plans how to improve performance and adapt the best practices
without any financial threaten.
Balance scorecard: In complex and tough market era, measuring only the financial
performance through performance metrics is not enough and sufficient and companies need to
undertake much more detailed analysis using both the financial as well as non-financial basis. In
order to meet such requirement, now-a-days, there are many companies who had designed their
own balance scorecard (BSC) which provide a comprehensive and detailed framework to the
managers (Nørreklit and Mitchell, 2014). Referring the cited venture, it can use BSC to gauge
their performance in several key areas like product innovation, internal business efficiency,
consumer perspective, learning & growth. This provides a detailed set of information to the firm
managerial team and helps to devise smarter plans with respect to all the areas by conducting
training and development and other initiatives like reward and incentive for workers, optimum
utilization of fund and other resources, quality management techniques like Total quality
Management (TQM), six sigma, Pareto Analysis and others to maximize customer satisfaction.
All these automatically result in driving larger return for the enterprise and respond to the
financial turbulence.
Financial governance: Finance serves as a lifeblood of all the enterprises however,
collection of fund either by equity and/or borrowing and other sources results in cost. Therefore,
it is important for the managers to design a highly acceptable and appropriate financial
governance system including decisions for mix of capital composition, effective use of financial
resources, strong control and supervision and others (Brooks, 2015). A sound system for
governing finance helps enterprise in meeting-out financial targets.
Activity-based budgeting: This is the best way of budgeting in modern uncertain market
and helps in setting a realistic budget. This method first identifies cost driver for every cost
element and then targets are set (Mauro and Cinquini 2016). Referring Zylla Company, it is a
multinational firm which must use it to make their budgets and do not use traditional method of
budget formulation like incremental budgeting which unnecessarily add some gradual increase in
all the past year’s budget element regardless that whether they will be carry out in future or not.
The method helps to determine the associated cost driver and helps in correct cost computation,
so that, business can clearly determine areas where cost exceeds the set targets and accordingly,
cost-curtailment decisions are made.
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CONCLUSION
The findings of the study reveals that in Zylla Company must revamp its systems by
placing cost, inventory reporting and price optimization system that will also enable them in
getting instant reports. Besides this, in order to track their progress, company must use standard
costing, variance analysis and assign responsibility to all the centres. However, lastly, it is likely
to suggest that firm managers should create its own BSC and use benchmarking and KPIs for
assessing their financial performance and improve quality of business decisions.
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REFERENCES
Books and Journals
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challenges, and opportunities. ACS Catalysis. 6(4). pp.2590-2602.
Brooks, R., 2015. Financial management: core concepts. Pearson.
Fleischman, R.K. and Parker, L.D., 2017. What is Past is Prologue: Cost Accounting in the
British Industrial Revolution, 1760-1850. Routledge. 6(3). Pp.16-39.
Horngren, C.T. and et.al., 2010. Cost accounting: A managerial emphasis. Issues in Accounting
Education. 25(4). pp.789-790.
Lynch, L.J. and Lynch, L.J., 2017. MGM Mirage—Accounts Receivable. Darden Business
Publishing Cases. 1(1). pp.1-6.
Macintosh, N.B. and Quattrone, P., 2010. Management accounting and control systems: An
organizational and sociological approach. John Wiley & Sons.
Mauro, S.G. and Cinquini, L. 2016. Insights into performance-based budgeting in the public
sector: a literature review and a research agenda. Public Management Review. 10(2).
pp.1-21.
Nørreklit, H. and Mitchell, F., 2014. Contemporary issues on the balance scorecard. Journal of
Accounting & Organizational Change. 10(4).
Parmenter, D., 2015. Key performance indicators: developing, implementing, and using winning
KPIs. John Wiley & Sons.
Saladrigues, R. and Tena, A., 2017. Cost accounting in Spanish and Catalan universities: Its
current status of implementation. Intangible Capital. 13(1). pp.117-146.
Schipper, K., Francis, J. and Weil, R., 2017. Financial Accounting: Introduction to Concepts,
Methods and Uses. Cengage Learning.
Xu, G.F., 2018. A Best Practice of Book Inventory Project at a Medium-Sized Academic Library:
How to Choose Hand-Held Inventory Devices and Handle Inventory
Exceptions. Technical Services Quarterly. 35(1). pp.42-67.
Zahller, K.A., 2017. Truffle in paradise: Job costing for a small business. Journal of Accounting
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Education. 15(3). Pp.16-39.
Online
Manufacturing Production Reporting. 2016. [Online]. Available through: <
https://www.iqms.com/manufacturing-software/production_reporting.html>.
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