Operational Management Accounting

Analyzing the case of General Productions (GP) and proposing solutions for boosting sales and profitability. Discussing the issues and benefits of budget systems and the importance of activity-based costing (ABC) system. Exploring the impact of change in inventory accounting method on gross income.

Running head: OPERATIONAL MANAGEMENT ACCOUNTING
Operational Management Accounting
Name of the Student:
Name of the University:
Author’s Note:
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Table of Contents
Introduction:....................................................................................................................................2
Requirement (a):..............................................................................................................................2
Requirement (b):..............................................................................................................................5
Requirement (c):..............................................................................................................................7
Requirement (d):..............................................................................................................................9
Conclusion:....................................................................................................................................10
References:....................................................................................................................................11

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Introduction:
The current assignment aims to analyse the provided case of General Productions (GP),
which is involved in producing electronic products. For raising its sales and profitability,
different management members have certain views, which are assessed in this paper. After the
identification of the suitable solution, adequate evaluation would be made regarding the benefits
to be received by devising out budget system for the cost management of the firm. In addition,
the significance of activity-based costing (ABC) system is discussed for assuring accurate
product pricing. Finally, the assignment would shed light on detecting the effect of change in the
accounting method of inventory on unfavourable variance in gross income of the firm.
Requirement (a):
It has been identified from the case study that GP is a manufacturer of electronic
products. The electronic components are customised for selling purpose to different customers
including MNCs and SMEs. From the case information, it could be seen that four senior board
members of GP have provided contrasting views for boosting sales and profit and they are
analysed briefly as follows:
Proposal of the Head of Research and Development:
From the perspective of this individual, new features have to be developed in relation to
the new mobile phone lines. The reason is that sound designs would aid in ensuring the success
of these mobile phones. In addition, by including the new features, GP could be able to price its
phones at increased premiums (Abdelmoneim Mohamed & Jones, 2014). On the contrary,
charging higher prices might result in loss of customers, as they would tend to buy similar

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products sold by the competitors of GP in the market at cheaper prices. Hence, this proposal
would have unfavourable impact on sales and profitability of the organisation.
Proposal of the Chief Marketing Officer:
This individual has emphasised on utilising social media in order to market the new
mobile phones of GP. Along with this, the celebrity bloggers and local celebrities could be used
to attract the customers towards its products. In the provided scenario, it is noteworthy to
mention that there has been increase in number of active users in social media such as Twitter,
Facebook, Pinterest and Instagram. Hence, using one or two of these platforms could assist GP in
increasing its exposure to the users. One added benefit of using social media is that GP does not
have to incur any registration fee and hence, investment would be made in the form of time.
Furthermore, majority of these platforms provide the facility of paid advertising options and by
using the same, the organisation could raise its follower base (Ahmad, 2014). Lastly, two-way
communication could be ensured with the help of social media and therefore, GP could form
sound relationships with the meaningful and potential customers.
However, this proposal has certain limitations having the potential to affect the sales and
profitability of GP adversely. The primary limitation includes negative feedbacks of the
unsatisfied customers and even some disgruntled employees could post such feedbacks in the
platforms as well. Owing to such adverse response, it would be difficult for the organisation in
retaining its current customers and as a result, there would be sharp fall in its revenue and profit
margins in the market (Balakrishnan, Labro & Soderstrom, 2014). In addition, GP has to spend
additional effort and time in order to maintain its presence in social media. The reason is that as

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the organisation has restricted amount of resources, it might face issues in deploying its
resources to social media (Banker & Byzalov, 2014).
Proposal of the Production Manager:
From the perspective of this individual, it is necessary to extend the product lines and
minimise the life cycle of the product. The reason is that the exclusion and inclusion of product
costs would raise the total cost of the research. Moreover, it is not possible to enhance the
production facility, since the staffs lack experience and they could not be substituted owing to
the needed niche sets of skills. Due to this, the expected revenue and profitability would be
reduced for GP.
Proposal of the Vice President of Finance:
This individual has stated that GP should not concentrate on aggressive investment for
features and design of the mobile phones. The reason is that risks are inherent in technological
investments, which could be replaced easily by new emerging technologies in the market
(Chenhall & Moers, 2015). With the growing technological advancements, the organisations
could imitate the technologies of their rivals owing to which there has been intense market
rivalry in the recent times. Therefore, if the technology adopted becomes obsolete, it is obvious
that GP would experience additional financial burden.
By considering the above-stated proposals of different personnel of GP, the proposal of
the Chief Marketing Officer is deemed to be the most suitable, which is use of social media for
maximisation of sales and profit margins. By using social media, GP could be able to attract the
attention of the customers. Despite analysing the fact that there might be few customers unhappy
with the mobile phones and they might provide negative responses on the platforms, the

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representatives of GP have to address these comments suitably by putting forward strong
evidences (Christ & Burritt, 2015). Even though it could negatively affect the brand image of a
company, social media has the potential of enhancing the same as well by drawing the attention
of the potential customers. By generating additional customers, the sales margin of GP could be
increased and hence, GP would be able to achieve increase in its profitability level.
Requirement (b):
Various issues are evident in the method of devising budget systems and these are
analysed briefly as follows:
Inaccuracy:
Budgets are formulated by making certain assumptions, which are close to the operating
conditions under which they are established. If the business environment changes, the effect is
likely to be inherent on the cost structure or revenue of the organisation as well (Fullerton,
Kennedy & Widener, 2014). Due to this, variations could be identified between the actual
outcomes and the estimated budget outcomes as well. This would lead to issues at times of
inflation, since the budgets provide authority to a particular level of spending, which GP could
not support anymore under reduced revenue level.
Inflexible decision-making:
The budget process lays stress on the management of GP to create strategies at the time
of preparing budgets, generally at the end of the accounting period. However, in the remaining
period, there is no procedural commitment that would revisit strategy (Kamal, 2015). Therefore,
if there is fundamental in market after the budget completion, no system would be in place for

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formal review of a system in order to undertake changes. As a result, GP might lose its position
compared to the competitors in the market.
Required time:
For preparing budgets, time is needed due to a number of budget iterations. The budget
process is effectively designed; in case, the employees are familiar with the process by having
complete knowledge of using the budgeting software (Klychova, Faskhutdinova & Sadrieva,
2014). For GP, there is need for highly extensive work, as the varying business conditions call
for repeated iterations of the budget model.
Gaming the system:
As commented by Kokubu and Kitada (2015), an efficient manager would undertake
efforts of starting budgetary slack that considers deliberate reduction of revenue projections
along with enhancing expense projections in order to achieve favourable variances opposed to
the budget system. This might pose problem and thus, it needs considerable oversight on
identification and elimination. Moreover, by using this system, the managers of GP could
involve in unethical practices that might aggravate additional issues within the organisation.
However, budgets are expected to provide certain benefits in the cost management
system of GP and they are enumerated briefly as follows:
Principles of coordination and communication:
By using budgeting, it is possible to promote the main principles of coordination and
communication (Laitinen, 2014). This might be seen as applicable in the case of GP. However,

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the formal procedure might make the sales function to be communicated to the operation
function and/or customer service.
Compelling planning:
By using formal budgeting procedure with specific guidelines, the operations manager of
GP needs to modify the attention along with budget completion.
Basis for evaluation of performance:
Budgets are an important component of control and the budget procedure is reviewed in
the sense that they devise agreed targets to be achieved and performance to be observed (Lavia
López & Hiebl, 2014). Hence, with the assistance of budgeting, it is possible for GP to carry out
performance evaluation. This is the main reason behind the increased budget participation in GP,
as the operations manager is to be questioned to meet the desired objectives within the stipulated
parameters. Therefore, with the help of budget systems, GP would be able to control cost
activities that would result in increased revenue generation.
Requirement (c):
From the provided information, it has been identified that GP uses the traditional costing
system, in which overhead costs are allocated to products based on predetermined overhead rate.
However, this system could result in considerable under-costing or over-costing of products
owing to wrong apportionment of different activities that are not taken into account (Parker &
Fleischman, 2017). Therefore, by using this system, GP has used aggressive price quote for
which it needs to ABC system owing to the following benefits in terms of appropriate pricing:

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 ABC system considers the activities only and thus, the management of GP could make
important decisions by understanding the nature of each activity.
 The system classifies activities into value-adding and non-value adding activities.
Therefore, by using this system, GP would be able to concentrate on those activities
adding value to the organisation by removing those activities failing to add value.
 GP has to incur different non-manufacturing costs like advertisement. It is noteworthy to
mention that advertisement includes a considerable portion of the total product cost. By
using the ABC system, GP could assign non-manufacturing costs appropriately, since it is
possible to understand the relationship between costs and causes.
 By allocating cost accurately to different products, the management of GP could
formulate sound pricing policy.
 The preparation of expense statement is made based on activity and the cost of each
activity would be compared with each other in order to determine the activities to be
removed or enhanced for better performance (Otley, 2016).
 By using correct cost information, GP could implement productivity enhancement
approaches like business process reengineering and total quality management.
 GP could undertake make-or-buy decision more easily, as it could consider the
production cost of any product or if it is subcontracted with any outside agency.
 If the existing resources could be used properly even after subcontracting with outside
agency, the manufacturing activity could be conducted internally within the organisation.
 It is assumed that GP has Department A and Department B. Therefore, when the finished
goods of Department A are transferred to Department B, it becomes easier to show the
product. This would assist the management in fixation of transfer pricing.

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After consideration of the above analysis, it is apparent that increased competition has
mandated the need for all business organisations in streamlining their cost structures. Therefore,
GP could develop the mobile phones by suiting its manufacturing and organisational set-up.
Requirement (d):
The adverse variance in gross profit of GP has taken place owing to the following reasons
including change in inventory accounting method:
Supplier contract or supply changes:
When there is change in inventory type or sources of supply, the effect would be on
direct costs. Moreover, by working with new suppliers, there might be no volume discounts that
an organisation uses to receive in the past (Schaltegger & Zvezdov, 2015). If the situation is
applied in case of GP, there would be weaker negotiation power in the contracts. On the
contrary, it could be said that new suppliers often result in lower product costs and better quality
products attracting the attention of the customers towards the products. Therefore; in case, GP
changes the inventory type, there would effect on the cost of inventory, as new products
represent new cost structures. As a result, there would be impact in gross income by assuming no
change in prices.
Change in method of inventory:
From the case study, it could be seen that the Vice President of Finance of GP has
detected the change in inventory accounting system from FIFO to weighted average method. For
FIFO, the opening inventory is sold first, while the latter method considers the average costs of

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all inventories held for sale (Shields, 2015). Thus, this change in inventory system could increase
the cost of sales for GP resulting in lower gross income for the organisation.
Conclusion:
From the above discussion, it has been analysed that GP has to utilise social media for
maximising its revenue and profit levels. By using social media, the management of the
organisation could be able to draw the attention of the customers along with conducting
performance evaluation. Finally, it has been found that GP needs to use activity-based costing
system for product pricing for better cost allocation.

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References:
Abdelmoneim Mohamed, A., & Jones, T. (2014). Relationship between strategic management
accounting techniques and profitability–a proposed model. Measuring Business
Excellence, 18(3), 1-22.
Ahmad, K. (2014). The adoption of management accounting practices in malaysian small and
medium-sized enterprises. Asian Social Science, 10(2), 236.
Balakrishnan, R., Labro, E., & Soderstrom, N. S. (2014). Cost structure and sticky costs. Journal
of management accounting research, 26(2), 91-116.
Banker, R. D., & Byzalov, D. (2014). Asymmetric cost behavior. Journal of Management
Accounting Research, 26(2), 43-79.
Chenhall, R. H., & Moers, F. (2015). The role of innovation in the evolution of management
accounting and its integration into management control. Accounting, organizations and
society, 47, 1-13.
Christ, K. L., & Burritt, R. L. (2015). Material flow cost accounting: a review and agenda for
future research. Journal of Cleaner Production, 108, 1378-1389.
Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2014). Lean manufacturing and firm
performance: The incremental contribution of lean management accounting
practices. Journal of Operations Management, 32(7-8), 414-428.
Kamal, S. (2015). Historical evolution of management accounting. The cost and
management, 43(4), 12-19.

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Klychova, G. S., Faskhutdinova, М. S., & Sadrieva, E. R. (2014). Budget efficiency for cost
control purposes in management accounting system. Mediterranean journal of social
sciences, 5(24), 79.
Kokubu, K., & Kitada, H. (2015). Material flow cost accounting and existing management
perspectives. Journal of Cleaner Production, 108, 1279-1288.
Laitinen, E. K. (2014). Influence of cost accounting change on performance of manufacturing
firms. Advances in accounting, 30(1), 230-240.
Lavia López, O., & Hiebl, M. R. (2014). Management accounting in small and medium-sized
enterprises: current knowledge and avenues for further research. Journal of Management
Accounting Research, 27(1), 81-119.
Otley, D. (2016). The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, 45-62.
Parker, L. D., & Fleischman, R. K. (2017). What is Past is Prologue: Cost Accounting in the
British Industrial Revolution, 1760-1850. Routledge.
Schaltegger, S., & Zvezdov, D. (2015). Expanding material flow cost accounting. Framework,
review and potentials. Journal of Cleaner Production, 108, 1333-1341.
Shields, M. D. (2015). Established management accounting knowledge. Journal of Management
Accounting Research, 27(1), 123-132.