The budget relates to the 2015 quarter from July to September. The budget process began with an analysis of the company’s balance sheet as at the end of June 2015. The balance sheet line items for this accounting period were the basis for assumptions made in the budgets. We had relevant budget assumptions for the sales, production, manufacturing, selling, and general and administrative budgets. The budgeting process began with preparing the sales budget using the assumption that sales were 18,000 units in July, 22,000 units in August, and 20,000 units in September. The forecasted unit price was $18 with a total product cost of $14.35. The subsequent budgets were production, manufacturing, selling, and general and administrative budgets. In the manufacturing budgets, we had budgets for raw materials, direct labor, and factory overhead. After the end of the quarter, we carried out a variance analysis to determine the change between actual and budgeted line items of each budget and manufacturing costs.
According to the budget variance report, the company has an unfavorable variance in the direct materials and efficiency. The actual cost of direct materials was more than the budgeted meaning that the firm incurred more in these costs than anticipated. Higher direct material costs have an unfavorable effect on the profit of the firm as well as the efficiency level of the firm. The company should consider negotiating new raw material prices to lower the actual cost of material per product unit. The company can also seek other suppliers that are willing to sell at lower prices. These changes will help have a less actual cost than the anticipated hence increasing the efficiency and profit levels of the firm.
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It is important for the firm to consider equal and fair treatment of suppliers when negotiating new prices. If we decide to cancel contracts with the existing suppliers, it is important to consider just and fair cancellation of the contracts. We can give them a counter offer or cancel the contract after giving a notice for a few months.
Make or Buy Decisions
A firm has the decision to buy or manufacture products or services as a strategy to improve profit margins and increase efficiency by reducing costs. When making the decision to buy or make, it is important to consider cost, benefits, and resources of the firm. The decision to make or buy should increase the efficiency of a firm by reducing costs and increasing benefits like profits. A firm should determine whether to buy or make products or services by carrying out a cost-benefit analysis of each option. A firm should also have the required expertise in making products. We cannot decide to make products if we lack machines or equipment, capital or the required expertise in making the products.
Conflict of interest is a major ethical consideration when making buy or make decisions. It is important for the decision makers to choose the right option based on the interests of the company and its shareholders and not their personal interests. For instance, a manager should consider if they are choosing to buy or make to fulfill their personal interest to increase benefits for their business or family member’s business. Another ethical consideration is the impact of the decision on the core objectives of the firm. Despite looking to increase efficiency and profit margins by selecting either option, we have to uphold the culture and strategy of the firm. Buy or make decisions should increase firm efficiency by reducing costs and increasing profits or benefits like reduced risks.
The impacts that buy or make decisions have on operational efficiency are three-fold, that is, the effect on business strategy, risks, and economic resources. Making decisions will enable a firm to differentiate their products and services and improve their competitive positioning in the market. Making can also increase the internal economies of scale in a firm leading to improved operations. However, making has very high supply market risks and risks on the intellectual property of a firm. These two risk factors can have adverse effects on the operations of a firm – the company can become bankrupt or lose customer base. Buying decisions are less risky because a firm can easily switch to other suppliers or products when the benefits reduce. Switching is very easy in buying decisions. Outsourcing can help a firm take advantage of low costs or high-quality products and services. However, outsourcing is unattractive due to the complex business environment and weak in-house skills or resources of suppliers. These factors can have negative implications on the operational efficiency of a firm in terms of quality, speed, and cost.
Non-financial Performance Measures
The company should consider human resources and supplier relationships measures in their operations. Human resources are the core drivers of a firm as they affect the productivity of the firm. Personnel will provide high productivity when they have a conducive working environment and are motivated. Motivated employees will have the morale to work hard – the result is increased productivity and operational efficiency. The supply chain of a firm is also an important factor influencing the success and efficiency of a firm. Positive supplier relations enable a firm to have the benefit of long-term business relationships – low prices, longer credit periods, discounts and quality products and services. These synergies have a positive impact on the profitability, sustainability, and efficiency of a firm.
It is important for the firm to consider working conditions, labor costs, and opportunity to all employees. It is important to maintain safety and quality health in a workplace according to OSHA provisions. Working conditions that are unsafe and unhealthy can affect the productivity and reputation of a firm. Fair remunerations policies are important especially when a firm is aimed at reducing labor costs. A firm should balance between reducing labor costs and offering competitive wages. Consequently, all employees need to have the same opportunity for training, development, and promotion. Supplier relations should be consistent with the objectives and mission of an organization. The choice of suppliers should be for the good of the company and not for personal gain. An organization is able to achieve its objectives if it has the right supplier chain. It is also easier for the firm to meet their expectations of stakeholders when supply chain decisions are not self-centered.
