task 3

Task 3 of 3 - Management Report (AC 1.1,1.2,1.3,3.1,3.2, 3.3) Scenario: Penco is excited by the results of your previous work and has asked you to review operations at Exciteco where it is an institutional investor. Exciteco manufactures electronic components for export worldwide, from factories in Finland, for use in smartphones and hand-held gaming devices. These two markets are supplied with similar components by two divisions, Phones Division (P) and Gaming Division (G). Each division has its own selling. purchasing. IT and research and development functions, but separate IT systems. Some manufacturing facilities, however, are shared between the two divisions. Exciteco's corporate objective is to maximise sharehoider wealth through innovation and continuous technological improvement in its products. The manufacturers of smartphones and gaming devices, who use Exciteco's components, update their products frequently and constantly compete with each other to launch models which are technically superior. Exciteco has a well-established incremental budgeting process. Divisional managers forecast sales volumes and costs months in advance of the budget year. These divisional budgets are then scrutinised by the main board and revised significantly by them in line with targets they have set for the business. The finalised budgets are often approved after the start of the accounting year. Under pressure to deliver consistent returns to institutional shareholders such as Penco, the board does not tolerate failure by either division to achieve the planned net profit for the year once the budget is approved. Last year's results were poor compared to the annual budget. Divisional managers, who are appraised on the financial performance of their own division, have complained about the length of time that the budgeting process takes and that the performance of their divisions could have been better but was constrained by the budgets which were set for them. In P Division, managers had failed to anticipate the high popularity of a new smartphone model incorporating a large screen designed for playing games and had not made the necessary technical modifications to the division's own components. This was due to the high costs of doing so, which had not been budgeted for. Based on the original sales forecast, P Division had already committed to manufacturing large quantities of the existing version of the component and so had to heavily discount these in order to achieve the planned sales volumes. A critical material in the manufacture of Exciteco's products is silver, which is a commodity which changes materially in price according to worldwide supply and demand. During the year supplies of silver were reduced significantly for a short period of time and G Division paid high prices to ensure continued supply. Managers of G Division were unaware that P Division held large inventories of silver which they had purchased when the price was much lower. Initially. G Division accurately forecasted demand for its components based on the previous years' sales volumes plus the historic annual growth rate of 5%. However, overall sales volumes were much lower than budgeted. This was due to a fire at the factory of their main customer, which was then closed for part of the year. Reacting to this news, managers at G Division took action to reduce costs, including closing one of the three R\&D facilities in the division. However, when the customer's factory reopened, G Division was unwilling to recruit extra staff to cope with increased demand; nor would P Division re-allocate shared manufacturing ASSIGNMENT BRIEFS | SEPTEMBER 2020 20 commodly which changes materialy in price according to worldwite supply and demand. During the year supplies of silver were reduced signicantiy for a short penod of time and G Division paid hight prices to ensure contirued supply. Managers of G Division were unaware that P Division held large inventories of silver ahich they had purchased when the price was much lower, initaly, G Division accurately forecasted demand for its components based on the previous years" sales volumes plus the histonc annual growth. rate of 5%. However, overall sales volumes were much lower han bodgeted. This was due to a fire at the factory of their main eastomer, which was then closed for pat of the year. Reacting to this news, managers at G DWision tock action to reduce oosts, induding closing one of the three RBD facilises in the division. However, when the customer's faciory reopened, G Division was anailing to recrat entra staff to cope with increased demand, nor would P Division re-allocase shared manufacturing ASSICMUENF BAEFS 1 SEPTEMEER ALD 20 tacilites to them, in case demand increased for ta own products later in the year. As a result, Excteco lost the prestigious peeferred supplier states trom their main custorser who was unhappy with G Division's talure to elfectively respond to the additional demand. The customer had been forced to purchase a more expensive, though sechnically superior, component from an alternative manufacturer. Penco's insthubional shareholders' representative, recenfy acpoirted to the board, has asked you as a Performanced Management Expert for your advice: We noed to know whether Excleco's budgeting process in agpropriate for the business, and how this contributed to last year's poor performance." However, the shareholder representative did aks acknowledge that ersemal factors had contrbuled to Exciteco's poor performanoe in the last year and suggested that it would be useful if Exciteco's performance reports distinguished between variances which had resulted from its own operational performance as opposed to external circumstances which could not have been anticipaled when the budgets aere produced. You noted that many organisations address this issue by analysing variances into planning and operational elements. Prepare a report that deals with the following: - Cribicaly discuss key concepts, features and importanse of eost accoorting. - Evaluste the weaknesses in Excileco's current budpeting system and whether it is suitable for the environinent in which Exclieco operases. - Evaluale the extent to which Exciteco's poor performance for the last year can be attribuled to exdernal factors. - Discuss the poseritial benefits to Excheco of analysing wariances into planning and operational elements. Delivery and Submission: - 1x Management Report (2000 words) exduding TOC. dagrams, relerences and appendices Referencing: - Each section must reflect any supporting Harvard style clations. - A comprehensive Harvard style reference list must be included at the end of the work Evidence to be submitted: - Briefing Report - 1000 words - Report - 1500 words - Management Rieport - 2000 words