Topic 1: Ethics and budgeting
Budgeting is generally regarded as an essential technique for planning and controlling an organization’s activities.Budgets are mainly used so as to judge the actual performance of the managers. Sound budgetary system provides or encourages Goal-congruent behaviour. Managers who achieve the budgeted goals or who beat the budgeted goals are awarded with promotions, bonuses, salary increase etc. The effect of budget can be positive or negative which depends on how the budgets are used.
Positive behaviour occurs when the goals of the individual managers and goals of the organizations are aligned together and the manager has the drive to achieve them, this is known as Goal congruence.
Negative behaviour occurs when the goals of the individual managers and goals of the organizations are not aligned together and the manager prefers achievement of individual goal, this is known as Dysfunctional behaviour.Manager’s responsibility is not to engage in those activities which will result into unethical behaviour.
Ethics is the word which is derived from a Greek word “Ethos” the meaning of which is “characters” and also from a Latin word “Mores” the meaning of which is “customs”. Ethics are basically the set of principles within the organization or daily routine of individuals which will guide and help them in establishing behaviour and in decision making.
Business ethics is basically the study of the policies and practices of business regarding the controversial issues like corporate social responsibility, insider trading, bribery, corporate governance etc. Business ethics states that the corporates, employees, managers, executives are not allowed to perform their task which is against the norms of the corporates. The non-fulfillment of the norms set by the corporates will make employees face the punishment and penalties because unethical behaviour is not accepted by society at large. Unethical behaviour is the behaviour which is not beneficial for corporation at whole
Sometimes managers deliberately overestimate costs and underestimate the sales for the purpose of making the budget easier to achieve and thus involved or engaged in an unethical behaviour.
However, budgeting technique or budgeting system can also create incentives for unethical behaviour.Budgets lead to the possibility of unethical action. Budget is basically the financial statement which is used to forecast or plan the income or expense of an organization in future. Many corporates provides incentives in terms of bonus or promotion to the managers who will achieve their targets which are provided to them so as to achieve the budgeted amount. Managers are so influenced with the incentives, bonuses and awards that they tend to indulge themselves in activities which are unethical but will make them achieve the budgeted amount. It is said that the budget is used as the benchmark so as to evaluate the performance of the managers, employees or departments in ...
Topic 1 Ethics and budgetingBudgeting is generally regarded as .docx
1. Topic 1: Ethics and budgeting
Budgeting is generally regarded as an essential technique for
planning and controlling an organization’s activities.Budgets
are mainly used so as to judge the actual performance of the
managers. Sound budgetary system provides or encourages
Goal-congruent behaviour. Managers who achieve the budgeted
goals or who beat the budgeted goals are awarded with
promotions, bonuses, salary increase etc. The effect of budget
can be positive or negative which depends on how the budgets
are used.
Positive behaviour occurs when the goals of the individual
managers and goals of the organizations are aligned together
and the manager has the drive to achieve them, this is known as
Goal congruence.
Negative behaviour occurs when the goals of the individual
managers and goals of the organizations are not aligned together
and the manager prefers achievement of individual goal, this is
known as Dysfunctional behaviour.Manager’s responsibility is
not to engage in those activities which will result into unethical
behaviour.
Ethics is the word which is derived from a Greek word “Ethos”
the meaning of which is “characters” and also from a Latin
word “Mores” the meaning of which is “customs”. Ethics are
basically the set of principles within the organization or daily
routine of individuals which will guide and help them in
establishing behaviour and in decision making.
Business ethics is basically the study of the policies and
practices of business regarding the controversial issues like
corporate social responsibility, insider trading, bribery,
corporate governance etc. Business ethics states that the
corporates, employees, managers, executives are not allowed to
perform their task which is against the norms of the corporates.
The non-fulfillment of the norms set by the corporates will
make employees face the punishment and penalties because
2. unethical behaviour is not accepted by society at large.
Unethical behaviour is the behaviour which is not beneficial for
corporation at whole
Sometimes managers deliberately overestimate costs and
underestimate the sales for the purpose of making the budget
easier to achieve and thus involved or engaged in an unethical
behaviour.
However, budgeting technique or budgeting system can also
create incentives for unethical behaviour.Budgets lead to the
possibility of unethical action. Budget is basically the financial
statement which is used to forecast or plan the income or
expense of an organization in future. Many corporates provides
incentives in terms of bonus or promotion to the managers who
will achieve their targets which are provided to them so as to
achieve the budgeted amount. Managers are so influenced with
the incentives, bonuses and awards that they tend to indulge
themselves in activities which are unethical but will make them
achieve the budgeted amount. It is said that the budget is used
as the benchmark so as to evaluate the performance of the
managers, employees or departments in order to pursue the
objectives and goals (Ibrahim et al., 2008). Whenever there is
any sort of variance, managers try to determine the cause of
such divergence or variance and seek the better solution so as to
improve the performance of the company in order to achieve the
objectives and goals. The bonus awarded by the company to
employees depends on the ability of the employees, managers to
achieve the targets (Drury, 2005). Thus, it can be said that the
budget is quiet useful for the managers who wanted to evaluate
their job performance in meeting the targets (Drury, 2005).
In today’s corporate world almost 80% of the corporates are not
satisfied and not happy with their current budgeting. Although
budgeting has brought benefits to the company but still there
are some weaknesses which exists with budgeting and they are
too little Reliable, too long hours to complete it, No valuable
information, Incentives to lie and cheat in order to meet the
targets, Difficulties in obtaining accurate sales forecasts
3. From all the above stated weaknesses, the most important
weakness of budgeting is that budget provides incentives to lie
and cheat so as to meet the targets ( Horngren et al.,2008). The
main purpose of the budget is to provide the targets for the
managers so that they will strive hard in order to reach the
target. Due to the incentives which are offered to employees,
managers, they misuse the budget by creating a budget padding
or budgetary slack by understating or overstating the value
which will help them in playing with the figures around so as to
achieve the targets easily (Horngren et al., 2008). Cooking the
books or reporting wrong values in the budgets by employees or
managers could lead to unethical behaviour (Hope et al., 2003).
The main reason behind cooking the books is only the bonus
and incentives and no other reason.
Enron one of the corporate bought $20 million of National
Westminster Bank shares out of which only paid $1 million to
the Bank and the balance of $19 million to the National
Westminster Bank’ employees, several executives and their
families. Due to this illegal in the year 2001 Enron Corporation
Bankrupt in the year 2001.
Few years back, Federal Housing enterprise Oversight brought a
legal action against the employees of Fannie Mae. The reason of
legal action was that so as trigger the bonus for the senior
executives and so as to achieve the earning targets, they
intentionally understated or overstated the financial reports.
Thus, it be concluded that setting too high targets will bring a
negative effects because then employees will use illegal
methods or techniques in order to achieve the target ( Ibrahim et
al., 2008).
When the incentives are based on sales, purchases, income and
expense; managers, senior executives and employees make
fictitious sales and purchases so that their target amount is
complete and they will get awarded for the competition of
targets.
Strategies which organizations can adopt in order to minimize
4. the risk of their budgeting system leading to unethical
behaviour are:
· Corporates should make or create those budgetary incentives
which do not encourage unethical behaviour.
· Corporates should not set high targets for their managers,
senior executives or employees because it is difficult to achieve
high targets and will force managers, senior executives and
employees to perform unethical behaviour so that targets can be
achieved.
· Corporates should focus on beyond budgeting. Beyond
Budgeting means beyond the control and command towards the
management model which is more adaptive and empowered.
Beyond budgeting is about rethinking how to manage the
organizations in a post- industrial world where the innovation
management model represents only the sustainable competitive
advantage.
· Corporates should set targets in cases where chances of
unethical behaviour are not possible.
· Corporates should not set targets in areas where chances of
unethical behaviour are too high like income, sales, purchases,
expenses.
· Corporates should set penalties, punishments that the manager,
senior executive or employees who will try to achieve target,
goal and objectives based on unethical behaviour will have to
pay for it. The reason behind the penalties and punishments is
to stop unethical behaviour so it needs to be harsh.
· Corporates should mention it in the employment agreement
that there are few codes of ethics which needs to be fulfilled the
failure of which will make the person bound to leave the
organization irrespective of the post he or she is into.
Conclusion:
Thus the corporates should focus on stopping and eradicating
the practice of unethical behaviour in the process of budgeting
so that the company will have bright and fruitful future and the
chances of insolvency and bankruptcy reduces. Corporates
should remove the incentives, the impact of which can result
5. into unethical behaviour.
Topic 2: Accounting for overhead
Modern manufacturing processes are typically characterized by
large-scale automation in which machines are replacing people.
Consequently, manufacturing overhead has often become a
much more significant component of total manufacturing costs
and this presents a particular challenge for cost and
management accountants. Competitive pressures make it
essential that firms have accurate and up-to-date cost data, but
overhead is an indirect cost and allocating it to individual
products and product lines will always involve subjectivity and
estimation.
Overhead is an ongoing business expense which is not included
in the direct material, direct labor etc. and is the combination of
indirect expense, indirect material and indirect labor and will be
allocated or distributed to the products and product lines based
on various classification and they are On the basis of elements,
On the basis of function, On the basis of behaviour, On the
basis of control, On the basis of normality.
Due to the advancement of technological development,
economic situation, social consideration and innovation there is
an increase in the overhead charges due to which there is an
urgent need of controlling the cost. Thus, Overhead cost plays
an important role in controlling the cost and reducing the cost.
Difficulties associated with the allocation of overhead costs in
the contemporary manufacturing environment are:
Complexity
Direct cost is directly associated with the cost object i.e. the
relationship between cost object and direct cost is apparent, a
worker is paid to produce goods. However, apart from direct
cost, business also involves indirect cost which contributes less
directly to cost object resulting into complex array of costs to
estimate. It is difficult to determine all the indirect costs
involved in the production because of the fact that the cost
object and indirect cost does not share an apparent relationship.
6. Difficultly Estimating
It is difficult to trace the cost when cost is related to the
production of multiple goods or services. It is a biggest
challenge to estimate how much percentage of given utility goes
towards the production of a particular product.
Time
Tracing and assigning the cost effectively is very crucial task.
An accountant will be considered as useless and not financially
beneficial to firm when he spends countless hours in tracing
every cost. In such cases accountants rather than tracing just
allocate the cost with an estimated guess. Allocation is done
when it is impossible to have accurate tracing of the cost
without spending a considerable time or funds or without
studying the relationship between cost and cost object which
will not provide the correct solution.
Inaccuracies:
Inaccurate estimates of the costs which are associated with the
cost object results into incorrect determination of whether the
cost object is profitable or not. Thus, an organization must
make a balance between spending too much or too little efforts
on the tracing and allocation of costs.
The major difficulty arises in the allotment of factory overheads
cost to the production cost centers.
Full allocated cost methodologies do not yield reliable
information about whether it is worthwhile for a business and
society to produce another unit of output given the prevailing
price for that output.
Basis
Traditional
Costing System
Activity based costing
Starting Point
In traditional costing the starting point is the identification of
cost and then production.
In activity based costing the starting point is the identification
of activities and then production.
7. Focus
The main focus in Traditional costing method is the
ascertainment of costs.
The main focus of Activity based costing method is on the
activities performed.
Factors affecting cost
In traditional costing method the main factor which affects the
cost is the cost unit.
In Activity Based Costing method the main factor which affects
the cost is the cost drivers
Assignment of overheads
In Traditional Costing method the overheads is assigned to
production or service department.
In activity based costing the overheads is assigned to cost pools
or cost center.
Allocation of Overheads
In Traditional Costing System the allocation of overheads is
done on the basis of departmental allocation rate.
In Activity Based Costing System the allocation is done on the
basis of cost driver rates
Fixed Overheads
In Traditional Costing System the fixed overheads are assumed
to be fixed irrespective of the volume.
In Activity Based Costing System, the fixed overheads are
assumed to change in accordance to the change in volume.
Strategies that a firm can adopt so as to help them in allocation
of the overheads in an accurate and reliable way are:
Adoption of Activity Based costing because this method will
help in the identification of the activities which are involved in
the manufacturing process and then allocation of the cost to
each of the individual activities according to the actual
consumption of each product.
In the conventional or traditional costing method, cost is
allocated to each product based on the rate which is determined
by dividing the total overheads with one cost object irrespective
8. of the fact whether the particular activity is consumed by the
particular product or not. But in Absorption costing method of a
particular product, if that product does not consume any activity
then cost of that particular activity will not be added while
estimating the cost of that product.
Estimating the cost based on the percentage of the activity or
cost driver used. There are few cost drivers like design,
engineering, packing charges, store, inspection, number of
orders, number of delivery, number of requisition, number of
set up etc. which are to be used by cost driver in estimating the
cost incurred in the production of particular product.
Let’s take an example
Traditional costing method
B21P
O11L
Direct material
$ 949,500
$ 473,000
Direct labor
$ 756,000
$ 378,000
Overheads
$ 1,913,400
$ 956,700
Total cost
9. $ 3,618,900
$ 1,807,700
Number of units
45000
10000
Per unit Cost
$ 80.42
$ 180.77
B21P
O11L
Overheads*
$2,870,100
Number of labor hours
36000
18000
54000
$1,913,400
$956,700
10. Activity based costing method
B21P
O11L
Direct material
$ 949,500
$ 473,000
Direct labor
$ 756,000
$ 378,000
Overheads
$ 1,773,000
$ 1,097,100
Total cost
$ 3,478,500
$ 1,948,100
Number of units
45000
10000
Per unit Cost
$ 77.30
12. $1,773,000
$1,097,100
Conclusion:
Thus, corporates should focus on allocating the indirect cost or
overheads cost based on the cost driver because this method
provides the report on effective and efficient utilization of
resources.The proper allocation of expenses brings competitive
advantage to any firm or company.
13. Reference:
Essays, UK. (November 2013). Many Companies Use Budgets
As A Profit Plan Accounting Essay.
Retrieved from
http://www.ukessays.com/essays/accounting/many-companies-
use-budgets-as-a-profit-plan-accounting-essay.php?cref=1
Ibrahim et al., (20080.Budgeting. 4thed.
Drury, (2005).Budgeting. 3rded.
Horngren et al.,(2008). Budgeting. 4thed.
Andreas Leitner, (2007). Activity Based Costing. 3rd ed.
Patrick Zeuner, (2007). Activity Based Costing. 3rd ed.