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BKAM5023 – MANAGEMENT ACCOUNTING AND CONTROL SYSTEMS

A221

INDIVIDUAL ASSIGNMENT

Part B (5 Marks)

TF Sdn Bhd (TF) is a medium-sized manufacturer of children's wear in the state of G. The company produces several lines of clothes for babies, toddlers and small children. TF uses budgetary performance as the basis for evaluating and rewarding its managers. Mr M, the production manager, is rewarded based on the cost-saving recorded by the department. Mr M will be rewarded with a bonus of three months' salary if his department incurs manufacturing costs below the budgeted figure. However, no bonus will be rewarded if the cost exceeds the budgeted figure.

The information below states the production data recently.

Based on the above data, the top management has concluded that the production department is underperforming, where many cost items show unfavourable (UF) variance. Therefore, no three- month bonus will be rewarded to Mr M as the production manager. Mr M is unsatisfied with the top management's decision. He justifies that the sales department had incurred more sales. As a result, the production department had to produce more to fulfill the demand, leading to increased manufacturing costs. However, his explanation is not entertained by the top management.

A few months later, the top management asked all managers, including Mr M, to prepare the following year's budget. Mr M, still unsatisfied with his previous experience, decides to do something to ensure he can secure the bonus.

The sales manager has told him that for next year, unit sales are predicted to increase by 15% from the current year, which means the production department would also need to increase its production unit by 15% to fulfil the demand. Therefore, Mr M plans to budget his production cost by a 30% increase from the current year. In reality, Mr M knows that the production costs do not fluctuate much, more or less only increasing 3% from the current year. However, increasing the budgeted cost at 30% would ensure that the actual production cost would be lower than the budgeted cost. Mr M can later secure the three-months budget.

Mr M is happy. He starts to produce his production budget for the top management.

REQUIRED:

(a) Analyze the fairness of the current budgeting system.

(b) Explain if the act of Mr M to increase the budgeted cost is ethical. Justify your answer.