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The contemporary business environment can be determined as the surroundings in different autonomous countries with factors of the administration, influencing decision making on resources that are useful ( 2012, IBS Center for Management Research ). The business environment is a natural compound that changes the process constantly. It has both long term and short term impact. Likewise, this course of study analyses factors that affect the scheme and operations of business. It gives a delegation with the opportunity to build up skills of analysis and problem solving for manipulation within their own establishment as it helps out with their evolution of the strategic and operational significances for business constitutions. The coetaneous environment of a business implies the international forces that influence the business decisions which can be forces of economic, political, technological and social factors. The business can do little in order to change them ( University Campus Suffolk, n.d. ). Firms depend on how well they accommodate to the external environment because they have no control over it. A firm is only able to invent its internal variables in order to gain benefits offered by the external environment. It also has the ability to verify threats baffled by the same environment to determine its success ( 2012, IBS Center for Management Research ).
In addition to and in combination with the PEST analysis, the Five Forces model by Michael Porter leaves an analysis tool to distinguish chances and danger when embarking unexploited dominion in any industry or market. This model, illustrates clear action and if these actions that gained from the Five Forces model are contemporized with business requirements, it can become a significant business driver in the war-ridden environment. The character of challenger within the industry would show the factors that would affect the contemporary business environment and the cost information system. Thus, any strategic manager in an organization can implement this model to build up an edge over rival firms to empathize the industry circumstances in which the business firm operates ( Thieme, J., n.d. ).
Challenges among rival companies, forces profits to zero. In an economy scale effect that increases rivalry, the high fixed costs would be affected. When total costs are mostly fixed costs, the lowest cost per unit must be accomplished, which means that the maximum production output must be achieved in order to maximize profit.
On the other hand, high storage costs induce a manufacturer to sell goods as soon as possible. They drive companies to reduce prices to guarantee sales and pressurize competitors and occupy the capability, hence leading to reducing prices when there is redundant capacity ( 2012, cited in Porter, M. 1998 ). Also, Mejia, L.R. & Balkin, D.B. ( 2012, p. 226 ) states that " Firms use price, product differentiation, and product innovation to improve their market positionsâ€¦
Rivalry will increase if the costs of imparting the industry are high. Due to high levels of commitment and investments subsisting companies work arduously to pull through as their resources can't be transferred elsewhere easily. When competition is high within the market, firms are forced to reconsider on their pricing and cost of production. When there are more products and brands available in the market, it means that there are more choices for customers to choose from, lowering profitability for each and every firm as choices are diversified.
The Walt Disney Company is a good example of this force as the entry barriers are comparatively high in the recession. The company has two areas of operation which are the movie business and the Network-television departments which are enormously wild. The company has to meet demand with sufficient supply of commodities and services. Costs in the movie industry increased rapidly as Disney requires another collective policy. In order to cut costs regarded with making and marketing Disney films, movies can be produced inexpensively and more profitably. In comparison with its competitors, Disney made it through to produce less expensive movies by cutting costs by making sure that they enforce tight budgets and expected high returns ( 1996, ReoCities ).
Another example, a company like FedEx must invest in planes, package facilities, delivery trucks and all fixed costs that need substantial capital investments. The company has the rights to cut costs to increase the sales volume to handle fixed costs. When demand is not growing decently and too many firms are engrossed in the same activities, the company would have lesser earnings ( 2010, p. 57 ).
People are getting mightier to enter the market and business environment. Whenever there is inadequate time or money to enter the market to compete, few economies of scale in place, or whenever there's only a short security for your key technologies, then new challengers can quickly enter the market undermine your position.
You can only maintain a golden opportunity to take fair advantage of your position if you have durable barriers to entry. It is not too expensive to enter the industry and besides, the only experience is needed ( 2012, Mind Tools Ltd ). New entrants may not enjoy the cost advantages that help existing firms remain productive. This force affects the cost information system.
For example, one of the largest brewers in the world Heneiken had to portion out the market with other brewers. The barrier in the beer market is incessantly low that caused the threat of more potential new entrants for Heneiken to be high. They had to increase their variable and labor costs in order to increase the quality of their product to surpass their new entrants. They had to fork out money to invest more machines with better technology if they intend to reduce labor costs ( 2003, UK Essays ).
In Porter's model, the threat of substitute lives in the price change of a substitute product when ware's requirement is involved. When more alternatives become available, the demand becomes more flexible as customers would have more choices ( 2010, Internet Center for Management and Business Administration, Inc. ). Besides, bargaining power of providers impacts the price elasticity of the products in one specific industry. The higher the dealing power, the higher is the price of the particular product. That would cause the demand curve to be less elastic.
Beer is a sort of beverage that comprises in alcohol. Even so, people can choose to substitute wine for another alcohol drink. Everyone has their own tastes which are not similar so they definitely have the rights to opt for what they want to enjoy. The beer market would be affected as well as Heineken Company. The threat of substitute for the beer market is high. It is rather tough for clients to switch to substitutes to substitutes.
Switching costs like the cost of purchasing extra equipment, employees grooming costs, and direct labor costs and materials are required to make the transition ( 1998, Barnat, R. ). So, technological changes may extend to the discovery and manufacturing of new products. The higher the quality, lower costs and more features may bring customers to orientate from the old to the new. The cost of direct materials may be high but the demand of the products would increase if customers are filled with satisfaction.
Tesco had faced problems from other supermarkets like Giant Supermarket that can provide substitutes for their commodities. In order to attract more customers and sustain competitive advantages with Giant, Tesco had to reduce its prices of goods compared to its substitutes so that it would have more buyers for the purchase of groceries in its supermarket ( 321 Books, n.d. ).
When the number of substitutes gets higher or alternative choices are available, the number of buyers becomes tremendously high. Buyers are powerful when they buy in a large mass. Items that are bought are adequately standardized among marketers. The bargaining power of buyers increase when they purchase products in large quantities. Not only buyers who can find other sellers, they can also change suppliers without incurring costs ( 1998, Barnat, R. ). Competition in the market would increase, resulting in the decrease in selling price due to the high bargain power of buyers. The profitability of the companies would then be affected as they operate in a specific industry. The industry would lose its attractiveness simultaneously ( Crack MBA, n.d. ).
Raw materials are needed in a producing industry. Suppliers buy raw materials and components which are also known as the cost of items can have a major strike on a company's earnings. This conducts to buyer-supplier relationships between the industry and companies. The higher the bargaining power of suppliers over a company, the less attractive is the company's industry theoretically ( Tutor2u, n.d. ). Furthermore, the cost of inputs can be affected by the suppliers. The higher the bargaining power of the supplier, the higher the price of the cost of goods purchased. It directly affects direct material costs and total production costs. The cost per unit of production increases as well.
Accordingly, this dependence would increase if the purchaser has elite supply sources. Suppliers definitely have many other purchasers so the cost of changing suppliers is substantial ( Mejia, L.R., and Balkin, D. 2012, p. 226 ). The number of suppliers becomes extremely high when the number of substitutes becomes lesser or when different options are useable in the market. The costs of raw materials will increase if the bargaining power of suppliers increases. It leaves a huge impact on the profit ability of the companies that operate in certain industries. It also affects their business in the long run. Ordering large volumes of special products from special suppliers will bring a close relationship to the industry, but will also increase indirect costs of the company ( 1996, ReoCities ).
Political risks are political factors that will impact negatively the attractiveness of a location which the companies or firms are located at. ( McIvor, R., 2010, p. 87 ). Primarily, political risks affect multi-national corporations or companies (MNC) that are operating simultaneously in many countries, or operating in countries other than the company's own country. Several impacts of political risks that happened in politically unstable countries such as capturing of properties without compensation, cancellation or alteration of contracts, asset damages due to social unrest and increased government taxes. ( McIvor, R., 2010, p. 88 ).
Besides that, violence form of political risk can be launched against foreign workers. For example, to demand more oil revenue to be spent locally, local groups often launch violence attacks against other company grounds in Nigeria. Therefore, in order to protect their companies located in the country, oil companies such as Shell Oil are forced to hire security firms to protect their workers. On the other hand, Shell Oil had to negotiate with the locals to create jobs vacancy for the locals, build schools and hospitals and so on to call of the political risks ( 2012, Magloff, L. ). This affects the company's cost management, the company will have to hire direct labour locally, which might result in higher direct labour costs. Besides that, the company is forced to hire security firms to protect their workers, affecting the cost budget and increasing indirect labour costs. The agreement to construct schools and hospitals will affect the cash flows as more cash is needed to construct new buildings, purchase new equipment and long term assets for the buildings.
The complexity of political forces will be compounded when independent governments overseas introduce regulatory changes. ( Mejia, L.R. & Balkin, D.B. 2012, p. 223 ). For example, when the United States decided to impose a tariff on imported steel by 30%, foreign countries swiftly respond with their own tariffs by selecting American products. Due to the political pressure claiming that Mexican trucks are insecure, Mexican truck drivers are unable to take part in the transportation market of The United States. Such tariff imposed has caused a lot of firms to switch to obtain supplies from the United States, resulting in higher direct material costs. When the direct material costs increases, budgeted firms will have no choice but to cut down on production and therefore, affecting and decreasing their profitability for the year.
Due to continuous changes in political risks, firms using functional-based product costing might have to choose a different unit-level activity driver to assign overhead costs to products. Hansen & Mowen states that functional-based product costing assigns direct materials and direct labor costs to products using direct tracing, while overhead costs are assigned using driver tracing and allocation. ( 2007, p. 119 ). The political risks might force the firms to reselect the activity capacity that the driver measures. Theoretical activity capacity is the absolute maximum activity output assuming perfect operations while practical activity capacity is the maximum output assuming efficient operations. ( Hansen, D.R. & Mowen, M.M., 2007. p. 119 ). Usually recommended theoretical and practical activity capacity, under the political risks, may be switched to using the expected activity capacity which is the activity output the firm anticipates for the upcoming year.
Technology advances through the years and has created a new revolution to the world of business, affecting all sectors, including the costing and information sectors. Businessmen can communicate with each other from any part of the world as soon as required with all sorts of electronic devices in this modern era. This phenomenon has caused the cost to become increasingly irrelevant as businessmen or employees do not have to be physically present to meet their clients or co-workers ( 2007, OPPapers.com ).
Besides that, when there is a new form of technology discovered that will bring beneficial effects to a company, all companies will want to possess the technology. This changes costs of production and all other costing information ( 2010, Business Knowledge Source ). With all companies trying to own possession over the new technology, first to purchase the technology gets the initial advantages over other firms, and with all firms wanting to own the technology ahead of other firms, demand increases and therefore, increases the price of the product. As stated by Parkin in 2012, the increase in demand creates a shortage and the price must rise in order to eliminate the shortage. ( 2012, p. 68 ). This will affect the cost budget as well as the entire budgeting system of a company if the company is in the race to own the latest technology.
Ups and downs in an economy sector at any part of the world will most likely have a ripple effect on other sectors ( Mejia, L.R. & Balkin, D.B., 2012. p. 222 ).
Some parts of the economic changes can also be known as a form of political risk to firms. For example, the United States government may decide to increase government service taxes or increase tariffs on a particular product such as steel imported from other countries or for a certain industry or firm. When government taxes increase, interest rates go down. ( Daly, H.E. & Farley, J., 2004. p. 334 ). When interest rates are low, firms may choose to borrow more funds from banks as the required interest payment will be lower. When the firm has more funds, the production of the firm will increase. When production increases, the fixed cost per unit of a product decreases. Fixed cost is a cost that remains the same even if the output changes. ( Hansen, D.R. & Mowen, M.M., 2007. p. 72 ). Fixed cost per unit is the total fixed cost divided by the total production of a product to determine how much fixed cost is allocated to a single unit of production.
Inflation might increase the cost of information. Besides that, the inflation rate increases the transactions and future economy predictions. Inflation may lead to higher misallocation of direct labor and material costs although taking the increase in future price into consideration. Inflation might cause firms to impose other types of costs which were not taken into consideration beforehand. This may cause the projects and productions that will increase profitability to be delayed and the efficiency of production will be decreased because resources and materials cannot be maximized into productions. ( Denison, E.F., 1985. p. 56 ).
On the other hand, changes to the currency of a country or economic downturn may affect a company's profit for the year ( 2012, Magloff, L. ).
Every country has its own society and culture. Although they are not a part of business, social and culture conducts business in a way, deciding from what goods to be produced and also how product are sold. ( Ajabi et al., 2006. p. 202 ).
For example, India is the only country in the world that McDonalds there does not sell beef or pork. This is due to the culture and religion in India, which most of their people believes in Hinduism, believes that cows are sacred and holy, harming cows or eating beef are known as graved sins. Besides that, a large portion of Indians are Muslims, which according to their religion, are forbidden from consuming pork. Therefore, McDonalds in India, according to the country's religion and believes, does not offer pork and beef burgers in their menu ( 2012, Indiamarks ). This affects McDonalds costing in India, as direct materials such as beef and pork patties are not used, switching it to chicken and fish patties. Inputs such as materials, energy, labour and capital changes the activity as well as the activity output, which will affect the cost behaviour. ( Hansen, D.R. & Mowen, M.M., 2007. p. 77 ).
As materials changes, cost changes. This means that there are different direct material costs of McDonalds in India as compared to other McDonalds from other countries around the world. Variable cost changes as the energy and method used to produce different patties are distinguishable. Total variable cost is calculated by using the variable cost for a unit multiply by total units produced. ( Hansen, D.R. & Mowen, M.M., 2007. p. 83 ). As total variable costs differ, the total production cost also changes accordingly.
Topic 2- 7-32
In Emma's position, I agree with her because of the responsibilities she did as a division manager. She knows how to limit resources in order to make the profit for the organization as much as possible. In this essay, it indicates the actual profit is 25 percent of the maintenance cost. The more the manufacturing cost, the higher is the sales volume of the company. We assume that the maintenance cost is $100000. Traditionally, 60 percent of maintenance costs will allocate to Grinding on a maintenance hour basis. After allocating it, the company maintenance cost would be $60000 and the customer would have to pay 60000 and include the 25-percent as well. Therefore, the final revenue is $75000 ($7.50 per unit of the job) and profit is $15000. Emma's plan is to change the allocation base. Then, her company can allocate the maintenance cost to the machine which will increase from 60 to 80 percent. If the company follows Emma's plan, the maintenance cost is still $100000 . After the allocation and 25-percent mark up, the company gains $100000 revenue but the company's actual cost is still $60000. It simply implies that the company can get $25000 extra profit compared to the traditional method. As a role of a division manager, Emma should engage a plan to ensure the division goal and objectives are being met, whether by implementing process improvements or by taking corrective action, as long as the company makes profit.
Division controllers are people who help to provide the financial information that their companies need to analyze their business operation. They basically endeavour to protect their organizations' assets and help function the establishment successfully ( 2003, King, Y. ). If I was a division controller, I will try to think through Emma's plan to determine the feasibility of the project and whether it is profitable for the company compared to previous plans. After collecting data and determining, I will prepare a report about my proposal for this project. The report should include how substantial it is if the company implements the plan; the legality and profitable maximization for the company; analysis the advantage and disadvantage of the company by comparing the original plan. Lastly, I will send the final report to Bob Johnson, who is Emma's supervisor.
The ten core values of ethical conducts are significant to the controller. They should behave properly to stop violating the ethical conducts and should not condone those corporate officers who do such acts. The objective of profit maximization should be constrained by the requirement that profits will be achieved through legal and ethical means. The ethical behavior involves choosing actions that are "right," "proper," and "just." ( 2007, p. 17 ). Emma's plan is not ideal enough for the company. The principles of the ethical behavior require sacrificing individual profit, performing professional responsibility and taking corrective action. Instead, Emma had the opposite appraises.
Lenny had already talked to Bob Johnson and made an appointment with him. Nevertheless, Bob advised Lenny to do what Emma had requested. In Lenny's perspective, he should do what is Emma required as Bob should be responsible since he is Emma's supervisor and customer's friend. For the business' significance, the main point is how to make money for the company. Money is the main ingredient for success. Emma's plan is probably for her own benefit. However, it is a good financial decision for the company as it can make higher profits compared to the old method. Another part of business sense would be insight and response capacity. Lenny should know Emma's flaws. He should make the plan better increase the quality of the goods. Lenny can change the plan based on historical experience to meet customer needs.
Lenny called the new customer and told him that Emma's plan has increased the job's costs. The customer had no choice but to cancel her order. She suffered a loss and her company's reputation. However, Lenny's actions had violated the value "fidelity.
The Lenny actions had violated "fidelity" which is one of the standard ethical conduct for a controller. A controller is responsible for the company's trade secrets. Every employee has the rights to not expose confidential information acquired in the processes of the daily work. Trade secret implies information, including a formula, pattern, program, product, method, technique or process that is used in business that infers independent economic value from not being known to the public, or to other persons ( Duhaime, L., n.d. ). Therefore, the trade secrets are related to the competitiveness of enterprises and affects the survival of the enterprise. Lenny's actions are indeed illegal regarding Emma's actions.
In today's manufacturing environment organizations today have strategies based on objectives such as improving quality, increasing flexibility to meet customers' individual requirements, reducing manufacturing lead times and delivery times, reducing inventories and unit costs. ( Kaplan et al. 1987 ) argued that standard costing is counter-productive in such environments.
One of the major criticisms of standard costing variance analysis is measuring standard costing in a just-in-time environment ( Lucas, M., 1997 ). In a JIT environment, measuring standard costing variances for performance evaluation actually encourages inefficient and sloppy work. Apart from price variances, standard costing also make use of volume variance to determine unutilized capacity for enlarging inventories. This results in consequences such as over purchases that require more storage spaces, lower quality of goods, differences in the timing of deliveries and too many incoming suppliers.
In the modern competitive manufacturing environment, businesses operate is leading to greater effort in trying to manage costs. It was claimed that traditional systems not only provide distorted cost information, they also fail to control the increasingly significant amount of overhead cost which are incurred in the industry. Overhead cost is the most common occurred cost compared to direct material and direct labor cost. The objective of standard costing is to control direct and variable costs instead of the indirect and fixed cost. Johnson and Loewe ( 1987, p. 26 ) argued that existing management accounting procedures fail to control overhead creep in part because they address symptoms, not causes. They direct managers' attention toward cost numbers rather than toward resource-consuming activities that eventually cause costs, these procedures do not help managers control activities that consume resources. Therefore, in a manufacturing environment, standard costing variances have at best a minor role to play, and worst being unproductive as it forces managers to focus on wrong issues, compared to activity based costing (ABC) that seems more appropriate due to the system emphasizing more on manufacturing overheads.
Despite all those critiques by many, standard costing will not disappear because it still plays a major role in controlling costs of unit-level activities. Controlling costs is an essential component in the standard costing system. Controlling cost is to benchmark a required operating budget which the financial results can be compared. Standard costing allows management to make an appropriate evaluation through the measurement of the actual performance in comparison to the standard performance, then controlling the activities that drives costs. It also helps by collecting historical cost data and analysis, then enhances performance controlling by using the system due to the consistency in units for measurement. Standard costing aids in comparing the performance of individuals through standards used to determine different output factors such as salary increases, promotions or bonuses thus influencing behavior.
The traditional standard costing model has been in use for almost a century and encountered many critiques due to the modern in the contemporary business environment like, for example, the variances were too aggregated and concentrate on the consequences rather than the causes of the problem, over emphasis on the cost and efficiency labor, impact of the changing cost structure. So despite all the critiques, standard costing is still commonly adopted in modern companies, many companies still have a preference on using standard costs and variances in valuing inventory, management reporting and performance measurement. In today's context, the standard costing system is already more improved towards planning. The old practical standards eventually faced changes. But still the standard costing system was developed through the revolutionary era when the cost was just used to control production; therefore, there are still flaws and limitations for the business environments today. In the future, companies may just move on and adopt new costing systems.
According to ( Cheatham and Cheatham 1996 ) the redesigned standard costing system provides useful information required. Those commonly used has always been engineering standards, but in my point of view, we can also adopt the Japanese 'Kaizen Costing' to redesign the standard costing system in the most efficient way as used in the Toyota plants. Essentially, the purpose of standard costing prevailing is controlling unit product cost, the only difference between these two costing is that Kaizen costing focuses more of the cost reduction efforts driven by its incremental improvements to the current production process, therefore in short is the process itself not the product. This modification to the traditional standard costing will depend on circumstances whether it is suitable to adopt. To put emphasis on ongoing improvements, Kaizen costing is then used for cost reductions, by concentrating on reducing the current unit costs and then comparing actual reductions.
It is generally believed that the principals and practices of conventional costing systems were developed by the mid-1920s ( Kaplan, 1990 ). However, this system has also been widely criticized for failing to provide accurate product costs to inform management decisions. Activity Based Costing (ABC) system was developed when manufacturing environment started to constitute a higher percentage of the cost on overheads to direct costs. The purpose of the ABC system was to improve internal decision making. Today, most companies are adopting both the standard costing system and ABC. For better cost allocation, ABC has been stated to be better than to the standard costing system. When both systems are used, standard costing system can be used for direct cost and ABC system for the indirect cost.
Due to competition in today's manufacturing environment, an introduction of new management accounting systems to support management initiatives (JIT, TQM, ABC) give opportunities to discover those factors that impact on successful organizational change and the diffusion of accounting innovations. Instead of cutting cost under the standards of standard costing, many organizations now direct their attention to quality and customer satisfaction. Toyota, Japanese top car manufacturer, is an example of Just-in-Time and Total Quality Management approach created by Japanese. These approaches are more efficient and effective for the organization's objective.
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