Principles of Financial Management Theory and Practice

Question: Discuss about the Principles of Financial Management for Theory and Practice. Answer: Introduction: In the given case, Teal has tried to alter the fixed rate plant-wide overhead system to a department linked overhead system which is a significant improvement to the previous system but still has glaring issues which would not be adequately addressed through this system and is also apparent in the various objections raised by the various department heads. The alternative techniques that could have been employed in the given case are highlighted below. Activity Based Costing - It is an effective technique which is widely used to allocate the overhead costs in a manner which is not based on any of the direct costs. Instead, the overhead costs are related to various activities that are involved in the manufacturing costs which are then broken down into collection of smaller activities with an appropriate cost driver allocated for each of the smaller activities. Once the cost related to each of the small activities is determined, the number of repetitions required for the manufacturing of various product lines typically tends to give a realistic and accurate estimation of the overheads cost associated with a particular product (Bhimani et.al., 2008). This approach makes up for the shortcomings of the volume approach in estimation of overheads costs as there are fixed and variable manufacturing overheads and these need to be accounted for in a different manner which is assured in case of ABC costing. Further, the various overheads costs using ABC would not be linked to the departments but rather to the activities that are being conducted and hence would present a more logical and coherent breakup of the overhead cost which can be used to enhance efficiency through process redesigning or other suitable means (Drury, 2008). One of the precautions that need to be taken with regards to implementation of ABC is that the activities should be sub-divided only to a particular level or else the complexity of the system and the underlying cost tends to overweigh the advantages (Seal, Garrison and Noreen, 2012). Additionally, experienced and skilled manpower should be allocated with regards to appropriately identifying the cost drivers of th e activities and appropriate determine the overheads cost associated with each of the product line (Petty et. al., 2015). Usage of ABC at Evergreen Based on the information provided, it is apparent that the current focus is the LMC division which primarily performs the following functions. HC-13 Lawn Mower Spare part for inventory Work for other divisions For all the above three activities performed by the LMC division, the direct costs and material costs need to be allocated to the respective services considering the individuals tasks required and the underlying cost. This information has already been captured in the case study. The core concern of the ABC costing would be with regards to allocation of the fixed and variable overheads cost which are being departmentally allocated and then being levied on the various functions in the LMC division. In this regard, the appropriate cost driver need to be identified for each of the overhead activities and then based on the number of repetition that is involved in a particular overhead activity, the overheads need to be allocated across the three services which are listed below. The various benefits of allocating overheads cost as per ABC in the LMC division are stated below. It would lead to appropriate pricing of the HC-13 Lawn Mower due to correct allocation of the overhead costs and hence would enhance the competitiveness of the product as it seems that the product is overpriced due to higher burden of overhead costs (Parrino and Kidwell, 2011). The ABC costing would also result in accurate costing of the services provided to other divisions along with the spare inventory. This is pivotal so that these services and spares are not provided to the customers at a loss and appropriate profit margins should be kept. The concerns of the various managers would be addressed as the cost would become more transparent and acceptable to the various managers. Further, this would ensure that the departmental compartmentalisation is avoided to represent cost in a more effective and transparent manner which would improve not only decision making with regards to pricing of products and services but also the overall operational efficiency (Brigham and Ehrhardt, 2013). Lean costing methods The lean costing methods in the recent times are gaining popularity as it enables in enhancing the overall efficiency and eliminate the various incremental costs that may not be required (Bhimani et. al., 2008). Unlike the focus of the ABC method, lean costing aims to identify the cost that are not value adding and hence aims to take measures to eliminate the same so that only those costs remain in the value chain which are actually adding some value. This is an advanced concept which is more suitable for new age service based businesses and would not yield much dividend for Evergreen which first needs to make a transition to ABC (Drury, 2008). It is undoubtedly expected that the new system would have resistance from the various stakeholders who are driven by their own vested interests. Some measures to deal with such resistance are highlighted below (Brealey, Myers and Allen, 2008). Consultation with internal stakeholders based on open communication so that the need and necessity of migration to the new costing system can be clearly established. In this regards, reference needs to be on the incremental gains for the company as an identity rather than harping on departmental gains and losses. Appropriate platform must be accorded to the senior managers so as to voice their concerns and the same must be dealt in a transparent but prompt manner. Successful case studies of rivals may also be presented so as to establish the credibility of the new system and the potential shortcomings of the old system. Special focus needs to be given to departments and managers that are likely to be represented under bad light as a result of new systems and assurance must be provided to them with regards to taking appropriate measures for fixing up the issue. Seeking regular feedback from the key stakeholders during the migration process so that their support does not wane away. References Bhimani, A., Horngren, C.T., Datar, S.M. and Foster, G. (2008), Management and Cost Accounting, Harlow: Prentice Hall/Financial Times. Brealey, R., Myers, S. and Allen, F. (2008), Principles of Corporate Finance, New York: McGraw Hill Publications, Brigham, E.F. and Ehrhardt, M.C. (2013). Financial Management: Theory Practice, New York: South-Western College Publications, Drury, C. (2008), Management and Cost Accounting, London: Thomson Learning Parrino, R. and Kidwell, D. (2011), Fundamentals of Corporate Finance, London: Wiley Publications Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin J.D. and Burrow, M. (2015), Financial Management: Principles and Applications, Sydney: Pearson Australia, Seal, W.B., Garrison, R.H. and Noreen, E.W. (2012), Management Accounting, Maidenhead: McGraw -Hill Higher Education.