Management Controls

Task 1

The main advantage of a fixed budget is cutting down the cost of doing business. It is well known that a fixed budget aids the management of a business in terms of maintain strict controls on the developed budget. This implies that the management does not have to worry about the outlook of the company in future. It has become problematic for many businesses to get their act together in terms of maintaining a specified budget.

The disadvantage of fixed budgets is that the business cannot make adjustments when the market changes. The problem with a fixed budget is that no adjustments can be made until the end objective has been attained. This means that a business with a fixed budget system cannot make good progress in terms of dealing with market changes. The business has to be in a good position in terms of countering changes in the market.

The first merit of a variable budget is that the business can effect changes within the course of doing business. It is evident that the modern business platform keeps on changing. The changes seen in the market system are reflective of choices made by stakeholders in the market. The good aspect with a variable budget is that changes can be made from time to time when there is need.

The main disadvantage of a variable budget is execution of policies. When it comes to the variable budget, the mode of implementation is considered challenging. This is because various issues have to be integrated in terms of making the latter work. For example, the management of the business ought to understand how to use all controls in implementation.

Task 2

City On time Deliver Performance

Quarter 1 (Ending march 31st) Quarter 2 (Ending June 30th) Quarter 3 (Ending September 30th) Quarter 4 (Ending December 31st)

Luton 10,000 10,000 0 0

Glassgow 0 0 0 10,000

Table 2.1

Legends:

Bonus of 10,000/quarter will only be paid to employees if and only if the Deliver Performance will be 98% or more then that

City Profitability Bonus Per Month

Bonus for Moths of Jan, Feb and March Bonus for Month of April, May and June Bonus for Month of July, Aug and Sep Bonus for Month of Oct, Nov and Dec

Luton 5333.33/ Month 5,666.66/Month 4,666.66/Month 6,000/Month

Glassgow 10,666.66/Month 10,000/Month 12,000/Month 12,666.66/Month

Table 2.2

Legend

The formula for calculating month bonus is [(quarterly profit * 0.02) / 3] Where 3 represent number of months in one quarter.

City Total Deduction from Bonus per Quarter

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Luton 9,000/Quarter 13,000/Quarter 5,000/Quarter 12,500/Quarter

Glasgow 17,500/Quarter 17,000/Quarter 14,000/Quarter 11,000/Quarter

Table 2.3

Legend

The formula for the deduction is [(total cost of return from sales * 0.5)]

City Bonus after Deduction

Quarter 1 Quarter 2 Quarter 3 Quarter 4

Luton 2,333.33/Month 1,333.33/Month 3,000/Month 1,833.33/Month

Glasgow 4,833.33/Month 4,333.33/Month 7,333.33/Month 9,000/Month

Table 2.4

Legend

The formula for total bonus per month after deduction is {[(Total Bonus per Month before Deduction * 3) – (Total Deduction per Quarter)] / 3} Where 3 represent number of months in one Quarter.

Description

As seen from the above calculations, the need for subtracting total bonus from the quarterly income is to gain a net value of total business. This is normally done in order to get an overview of the financial system of the business. The financial system ought to be in a good position in terms of indicating all calculations.

The bonus scheme operated by Quality Tyres has been instrumental in terms of affecting the behavior of managers positively. A bonus scheme improves the output of the manager by motivating the manager to work hard in terms of meeting objectives. Every company has its own mechanism of motivating managers. Despite of the approach used in terms of motivating employees, the objective of a bonus scheme should be improving the output of employees. The percentage bonus scheme aids managers in terms of getting focused about reaching the required targets. The other positive aspect associated with the bonus scheme approach is the idea of making management effective and easy. As long employees are treated well, they tend to respond by being part of running the organization. This provides an ample time for the management in terms of rolling out management policies. A good bonus scheme ensures that employees are rewarded on the basis of their hard work. This implies that a situation where some employees who underperform gain more than others. In other words, the bonus scheme strategy creates a level playing field for all stakeholders in the organization.

Task 3

The best strategy of improving traditional budgeting is through incorporating the latest trends in terms of budgeting and cost controls. It is evident that businesses are skeptical about the relevance of traditional budgeting mechanism in terms of implementing their cost control objectives. This is an indication that traditional budgeting requires further additions in relation to making it better. The approach of using traditional budgeting hit a snag after it became apparent those poor and outdated budgeting tools cannot counter changes experienced in the market system. The current challenges facing the industry are a manifestation of the need to incorporate new measures in terms of budgeting and cost controls.

The first benefit of using return on capital employed as a performance measure is to understand the growth path of the business. Return on capital employed aids the business in quantifying various components of the business such as revenues and cost components. The use of return on capital employed in terms of tracking the movement of the business has become instrumental in terms of bolstering the efforts of the business in terms of understanding the dynamics of the business. Return on capital employed plays a role in relation to guiding the management of the business in terms of making good decisions. Prudent decision-making is an aspect of building a good business and should not be underestimated.

The first non-financial measure that can be taken by the company is changing the budgeting approach in the long term. In a bid to make the right projection, the company has to keep on introducing the new principles of budgeting in phases. This ensures that the right transition is made in terms of having good cost control measures. The second non-financial measure that can be used in terms of budgeting is to understand short and long-term market needs.