Experts in this subject field are ready to write an original essay following your instructions to the dot!Hire a Writer
Peyton Approved now prepares its budget, evaluates the buy or make decision. Their management team is interested in figuring out the non-financial features. The discussion section below is aimed at describing the company's budget process, examining the factors and ethical considerations in the buy or make decision, and giving a thorough non-financial performance measures explanation.
Peyton Approved has completed functional quater budgets from July through September, for the year 2015. The functional budget relates the activities of sales and production of this company. The process that concerned the initial budgeting began with the setting of the aims for the next quarter. Those goals represent ed the forecast in sales as Peyton Approved has expectations to sell 60,000 of their units for the next quarter. After setting the goal, the company gathered data on all its costs. There are the variable costs which include the cost of labor, materials and sales commission while the fixed costs were the interest on the loan, administrative salaries, depreciation, and sales manager salary. Also, the budgeting process involved making assumptions on the production limits such as materials. For instance, the policy of Peyton Limited is to maintain a finished goods inventory equal to 70% of the next month’s expected sales. The “operating budget worksheet” contains Peyton’s functional budgets after applying the above steps.
At the end of September, Peyton performed a variance analysis on the materials and labor to compare the actual results and the standards set during the budget preparation. From the “budget variance worksheet,” Peyton has an unfavorable direct material variance. The material price variance is zero because the actual price of the materials is equal to the standard cost. However, the material efficiency variance is unfavorable because the actual quantity of materials used exceeds the budgeted (standard) amount. Peyton direct labor variance is also unfavorable. The labor price variance is favorable ($33000) because the company's actual wage was lower than the standard rate. However, the labor efficiency variance is unfavorable ($48,000) because the actual amount of labor hours used is more than the targeted quantity
The direct materials efficiency variance is unfavorable because of using lower quality materials which necessitate the use of a greater amount to meet the mixing requirements. Other reasons are the use of faulty machines and the improper handling of the direct materials resulting in wastage and losses during production. The causes of the unfavorable labor efficiency variance are the use of faulty machines, inefficiencies caused by the poor scheduling of duties, and the poor selection of employees which has led to less skilled workers.
Peyton Approved should regularly perform maintenance on its employees to correct any faults. Faulty machinery uses more raw materials and requires more time to operate and therefore, regular maintenance to improve efficiency is crucial. Secondly, the company should put greater controls on the purchase of direct materials. The lenient individuals in the purchasing department should be identified and possibly fired for negligence, and such measures will make the employees take their jobs seriously. Also, the company has to train its production employees on the correct handling of materials to eliminate destruction and wastage. Implementation of these changes will require stricter supervision to ensure that employees follow the new standards. Peyton Limited appears to have problems with its labor workforce, and therefore, it should put in place a stricter selection program to identify individuals with the required skills and qualifications. Also, the supervisors have to properly schedule their duties to ensure that the workers understand their roles and perform them according to the standards. The success of these changes is dependent upon the support of the top management who give guidelines and direction.
The first ethical consideration is the social impact of these changes. Letting go of the unskilled employees will render families jobless and reduce the level of community participation in the company affairs. Also, the existing employees will feel demotivated and fearful. The exercise requires the management to communicate the purpose behind the move effectively. Secondly, the remaining employees are subject to stricter rules and controls, and the level of trust within the organization will suffer. In such a case, the management must actively involve all employees in the process, and as pointed out earlier, effective communication is essential.
Make or Buy decisions
The factors to consider in the make or buy decisions are either quantitative or qualitative. Quantitative factors are the cost consideration and the use of the released capacity. Qualitative factors include control over quality and relationships with suppliers. Peyton Limited should consider whether it can utilize the released capacity if they outsource the manufacture of the component. A make or buy decisions involves comparing the cost of making the component and the cost of buying. In arriving at a decision, a company should compare the cost of making and the cost of buying, and the cheaper option should be selected. Weygandt, Kimmel, & Kieso (2009, p.303) note that a company might have no use of the capacity for another purpose making no savings on the fixed costs. The other situation is where the company has alternative use of the capacity expected to be unused, saving both the fixed and variable costs. Weygandt et al. (2009) emphasize that the opportunity cost of excess capacity can significantly shift the final decisions on whether to make or buy.
Control over quality means that the purchased component is of the same quality as the manufactured one. Peyton Approved should pay particular attention to this factor and be satisfied without reasonable double that the supplier's components are of high quality. The supplier relationship deals with their level of reliability (Burt, Petcavage, & Pinkerton, 2010). Peyton approved should carefully consider whether they suppliers can be trusted to make supply without any interruptions. Also, they must take into account whether the supplier is ethical to the extent that they will adhere to the terms of the contract. For instance, an unethical supplier will increase the price without providing a reason. Examining the supply market to identify the level of competitiveness and risk is essential. Canez, Platts, & Probert (2010) argues that in a hostile and competitive market, it’s hard to form strategic partnerships and this might necessitate the company to make the material.
The buy decision requires the ethical consideration of the social impact, ethical history of the supplier, and association of related-parties. A buy decision would mean that Peyton Approved will close down its manufacturing plants. The effect would be the loss of jobs to the employees, and the entire community would be adversely affected. The public will perceive Peyton as being socially irresponsible if it buys the material. A buy decision involves partnering with a supplier. Peyton Approved would face a dilemma if the cheapest supplier has a history of unethical behavior such as the use of child labor. The implication is that the company risk destroying its reputation by associating with an unethical partner. Warren (2014, p.481) points out that if a company purchases from a related party (Peyton exercises direct or indirect control), the appropriateness of the transaction at risk, and it is an opportunity to disclose material facts about the deal. On the other hand, the make decision requires the ethical consideration of the environmental impact. If the manufacturing process produces hazardous waste, the company might contribute to pollution and environmental degradation. The implication would be destroying its reputation because it does not value environmental sustainability.
The make or buy decision involves comparing the purchase cost and the cost of producing the component. In the make decisions, only the avoidable costs are relevant, and they include raw materials, direct labor, the variable manufacturing overheads, and the supervisor’s salaries. However, the fixed or sunk costs are irrelevant in this decision. If the cost of purchase is lower than the cost of making, then a buy decision will be made. A buy decision means that Peyton can focus on the core business and operations and therefore, the efficiency would significantly improve.
Use of Non-financial performance measures (NFPM)
Ahmad & Zabri (2015, p.476) argue that the commonly used financial performance measures are losing their relevance and can no longer useful. These measures fail to respond to the rapidly changing business environment regarding advancement in technology and increased competitiveness. These traditional measures are misleading because they only give information on past events and little in the future, are vulnerable to manipulation, and they encourage a short-term attitude in a company. The NFPMs address these shortcomings by providing to the stakeholder's information that is relevant and accurate Ahmad & Zabri (2015, p.477). The essential NFPMs that Peyton Approved should adopt are customer satisfaction, quality control, internal efficiency, and the quality of the employees.
Customer satisfaction NFPM indicators include the number of customer complaints received, the average time taken to respond to customer inquiries, customer retention, and customer satisfaction scores with the sales and technical staff. By adopting customer this NPFM measure, Peyton gains an understanding of the popularity or level of awareness of its products among the customers. Also, they gain insights on how its products compare to those of competitors, and such knowledge is crucial for developing effective marketing strategies. Also, the customer retention indicator shows whether Peyton is effective at attracting and retaining its loyal customers. A low retention rate shows that consumers are not satisfied with the product attributes such as taste and with this information, the management will seek to improve and innovate on its products. However, measuring customer retention, satisfaction, and addressing complaints is a time-consuming and expensive exercise, and the costs might even outweigh the benefits. Also, they lack statistical reliability, for instance, results from a survey are not reliable and Peyton cannot use such information to predict future results. Also, Peyton has to establish a link between customer satisfaction and the overall strategy as well as the financial performance. For instance, improving the customer satisfaction is not a guarantee that the companies’ financial performance regarding profits will increase, and the lack of a causal link between the two may render NFPMs not relevant.
Alder (2013, p.103) points out that external, internal, and quality improvement are the categories of quality. External quality focuses on people outside the company such as customers and indicators include the effectiveness of service-calls and warranty reliability rate. Internal quality address Peyton’s operations and processes and examples include percent of scrap, defect rates, rework rates, process capabilities, and the yields. The focus of quality improvement is to enhance the achievement of higher levels of internal and external quality. Adoption of quality as NFPMs by Peyton Approved will improve the efficiency of its internal operations and processes by reducing wastage, defect rates, improve yields, and improve response to customer needs. Such measures will address the unfavorable material usage, and labor efficiency variances make it vital for Peyton Approved to adopt the internal quality measures. However, quality as an NFPMs may have the drawback of increasing the level of stress because the workers are under great pressure to follow standards and rules. Also, the lack of a causal link between quality and the overall profits renders all these efforts and makes it difficult to measure their success. If the management fails to establish how internal quality measures lead to higher margins, there will be wastage of resources.
Internal efficiency seeks to enhance the performance of internal tasks by reducing the cost as well as the operating time. The most important factor is the lead time, and others include inventory turnover and the utilization of capacity. Lead time is the time that Peyton takes to produce finished goods from its raw materials, and it involves aspects such as process layout, set-up times, and equipment repair time. A leading cause of the unfavorable variance was defective machinery and adoption of this measure will ensure that the company can fix faults as soon as they appear. Internal efficiency measures will help Peyton focus on the value-added services and less on the non-value adding facilities. For instance, activities whose lead time is greater than 0 are time-wasters. Secondly, Peyton will get an accurate measure of its flexibility; a crucial factor in today’s highly competitive and dynamic business environment. Improving internal efficiency improves the company’s response to changing customer tastes and increasing competitive pressures.
Employee quality measures seek to maintain, develop, and fairly reward Peyton’s employee, an issue that should feature prominently in the management’s plan given the unfavorable labor efficiency variance. Examples include staff turnover, absenteeism, number of skills acquired by employees, and level of motivation and satisfaction with the job. Adoption of these measures has the benefit of ensuring that the employee has the necessary support and guidance they need. Also, Peyton Approved identifies the deficiencies in worker skills and train them to improve their capacity of its people. Also, it provides an opportunity to communicate the link between individual, department, and overall organizational goals. However, the main drawback is the time and the cost; employee initiatives are for the long-term and Peyton will have to incur more costs in the training and compensation. Also, there is the risk of using too many employee measures resulting in measure disintegration and the achievement of little gains.
The first ethical consideration is the misuse of these NFPMs by the top management. There is a risk that managers will manipulate these measures to earn more performance bonuses and to appear good. For instance, Peyton will recognize the managers based on their customer satisfaction scores. An individual will engage in unethical practices such as coaxing the customers to give good scores to the offering of gifts. Also, as the manager in charge of production, there is a motivation to falsify information on the defect rate. The managers will neglect the needs of the external stakeholders such as customers since personal interest is the primary motivator.
Black (2016) also points out that there no standards exist for reporting the NFPM to the external stakeholders such as investors, lenders, the public, and employees. The market analysts do not even pay attention to these measures, and consequently, the company can influence stakeholder perception. In such an environment, Peyton Limited might manage the NFPM figures to hide any financial underperformance. Also, too much focus on internal efficiency might contribute to an adverse social impact. Peyton Approved might decide to downsize on its workforce to reduce costs. The implication is that people and communities will be left jobless.
The successful implementation of NFPMs requires the involvement of all individuals in the organization. The management has to stretch the circle of responsibility to all the employees as well as build trust. The management faces a dilemma; can they trust the employees with the company’s secrets? What will be the impact of trust? Managers have to show vulnerability and have the willingness to listen to the employee contributions. Such questions and issues may make the Peyton’s Approved top management reluctant to adopt the NFPMs.
In conclusion, Peyton Approved needs to regularly carry out maintenance on its employees, improve the employee selection process, and increase inspection in the purchasing and production department. In the make or buy decision, company must consider the cost of the two alternatives, the excess or unused capacity, the relationship with the suppliers, and quality of the component. The company can adopt customer satisfaction, internal efficiency, employee quality, and quality as its non-financial performance measures.
Adler, R. W. (2013). Management Accounting: Making it world class
Black, E. L. (2016). The Ethical Reporting of Non-GAAP Performance Measures. Revista Contabilidade & Finanças, 27(70), 7-11
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2009). Managerial accounting: Tools for business decision making. John Wiley & Sons
Ahmad, K., & Zabri, S. M. (2016). The application of non-financial performance measurement in Malaysian manufacturing firms. Procedia Economics and Finance, 35, 476-484
Burt, D. N., Petcavage, S. D., & Pinkerton, R. L. (2010). Supply management, 8. Aufl., New York et al
Cánez, L. E., Platts, K. W., & Probert, D. R. (2000). Developing a framework for make-or-buy decisions. International Journal of Operations & Production Management, 20(11), 1313-1330
Warren, C. (2014). Survey of accounting
This sample could have been used by your fellow student... Get your own unique essay on any topic and submit it by the deadline.
Hire one of our experts to create a completely original paper even in 3 hours!