Tesla's Non-Financial Performance Measures and Budgetary Control Strategies - Prof. Mesuri, Cheat Sheet of Management Accounting

Download Tesla's Non-Financial Performance Measures and Budgetary Control Strategies - Prof. Mesuri and more Cheat Sheet Management Accounting in PDF only on Docsity! Question 2 Modern business environments are highly competitive and rapidly changing, driven by e- commerce and agile supply chains. Companies need clear strategies and must leverage management accounting tools like non-financial metrics, budgeting, and balanced scorecards. However, before using these tools, companies must first identify their core business - 1 products/services, customers, markets, and channels. With this self-awareness, management accounting tools can enable strategic planning, decision-making, and control. Tesla, Inc. is a leading American multinational corporation that designs, manufactures, and sells electric vehicles (EVs), battery energy storage from home to grid-scale, solar panels and solar roof tiles, and related products and services. Founded in 2003 by engineers Martin Eberhard and Marc Trepanning, the company is named after inventor and electrical engineer Nikola Tesla. Tesla is known for its innovative approach to electric vehicles and its visionary CEO, Elon Musk. They have played a major role in accelerating the adoption of electric vehicles and clean energy solutions worldwide. a. Non-financial performance measures Non-financial performance measures are quantifiable indicators employed to evaluate the performance of a business or organization that are not directly related to financial outcomes. By utilizing non-financial performance measures, businesses can assess their performance in areas that contribute to long-term success and sustainable operations, transcending the mere pursuit of financial profitability (Kaplan and Norton, 1996). Advantages Non-financial performance measures (NFPMs) are a game-changer for businesses seeking a competitive edge. They move beyond the limitations of financial data, providing insights into crucial areas like customer satisfaction and employee engagement (Drury, 2013). By wielding NFPMs strategically, businesses can not only predict future financial performance but also take proactive steps to ensure long-term success. Disadvantages While non-financial performance measures (NFPMs) offer valuable insights into a company's health beyond profits, they come with certain challenges. These challenges include subjectivity in measurement, the potential for inaccurate data, and the risk of misinterpreting the results. However, by carefully choosing relevant NFPMs, ensuring data quality, and interpreting the results in context, companies can still leverage these measures to gain a well-rounded view of their performance and make informed strategic decisions (Ittner and Larcker, 2003). Non-Financial Measures for Tesla: 2 Budgetary controls are the processes and procedures used by organizations for effective financial planning, monitoring, and control (Horngren et al., 2019). Advantages Budgetary control helps in setting clear objectives and targets for different departments or functions within the organization. This ensures that everyone is working towards common goals and facilitates better planning of activities and resource allocation. By establishing budgets, organizations can allocate resources such as finances, manpower, and materials in a way that maximizes their utilization and supports strategic priorities (Drury, 2013). This helps in avoiding over-spending or under-utilization of resources. Budgetary control enables the comparison of actual performance against budgeted targets. This allows managers to identify deviations, analyze the reasons behind them, and take corrective actions as necessary. Budgetary control helps in controlling costs by setting limits or standards for various expenses. It provides a basis for evaluating cost-effectiveness and identifying areas where costs can be reduced or optimized (Hilton et al, 2008). Disadvantages Non-financial measures (NFPMs) like customer satisfaction scores offer valuable insights, but limitations exist. These measures can be subjective and influenced by external factors (Kaplan and Norton, 1996). Additionally, low participation rates or incomplete data analysis can lead to misleading results. High NFPMs don't always guarantee financial success, and require interpretation within the market context. Implementing and analyzing NFPMs requires resources and integration with other metrics to ensure a comprehensive and accurate picture (Ittner and Larcker, 2003). Budgetary Control for Tesla Tesla prioritizes strict budgetary control to ensure financial stability and profitability. This focus is evident in internal communications, like a May 2019 memo from CEO Elon Musk emphasizing the urgency of cost control and achieving profitability. Musk highlights the importance of even small savings, demonstrating Tesla's meticulous financial oversight (Musk, 5 2019). Additionally, the practice of the CFO personally reviewing all global payments further underscores their dedication to financial discipline and achieving a strong financial standing. Tesla prioritizes strict budgetary control across all expenses, with a particular focus on reducing the cost of producing each vehicle (COGS). Their Q4 2023 report reflects ongoing success, with COGS per vehicle dropping below $36,000 (Tesla, 2023).This consistent improvement is achieved through optimizing raw materials, enhancing production efficiency, and managing costs throughout the entire cycle. Notably, Tesla maintains this focus even while scaling up production,demonstrating their disciplined approach. This meticulous cost control ensures high- profit margins and financial stability as they expand their electric vehicle market share. Advantages of Budgetary Control for Tesla: Budgetary control is fundamental to Tesla's financial success, offering key advantages. It enhances financial planning and resource allocation by enabling anticipation of future expenses, strategic distribution of resources across projects, and meticulous tracking of progress towards financial goals. Additionally, budgetary control facilitates performance monitoring and cost control by setting clear spending targets, allowing Tesla to monitor actual expenditures and implement cost-saving measures. Moreover, the budgeting process promotes improved communication and coordination among departments, fostering a collaborative effort towards achieving financial objectives. Disadvantages of Budgetary Control for Tesla: Budgetary control, while advantageous, presents challenges for Tesla. Rigid budgets may constrain spending on crucial areas like research and development (R&D) and innovation, impeding Tesla's ability to adapt and innovate in the fast-evolving electric vehicle industry. The focus on short-term financial targets driven by budget constraints could detract from long-term strategic goals, potentially hindering investments in key areas like R&D and customer satisfaction essential for sustained growth and competitiveness. The dynamic nature of the electric vehicle market poses difficulties in setting accurate budgets well in advance, leading to inefficiencies and limiting Tesla's agility in responding to market changes. 6 c. Balanced Scorecard The Balanced Scorecard is a strategic management tool that provides organizations with a comprehensive view of performance across multiple perspectives: financial, customer, internal processes, and learning and growth. It enables managers to align strategies with objectives, measure progress, and make informed decisions. By integrating financial and non-financial metrics (Kaplan and Norton, 2010) Advantages The Balanced Scorecard offers a significant advantage over traditional, purely financial performance measures. It provides a well-rounded view of a company's health by considering not just the bottom line, but also customer satisfaction, internal processes, and employee learning and growth (Kaplan and Norton,1996). This holistic approach allows businesses to make strategic decisions based on a broader range of factors. By understanding how satisfied customers are, how efficient internal processes are, and how invested employees are in innovation, companies can identify areas for improvement across the organization. This ultimately leads to a more sustainable competitive advantage and long-term success. Disadvantages The Balanced Scorecard provides a well-rounded view of a company's performance, but it's not without drawbacks.Implementing it can be complex, requiring careful planning and potentially a cultural shift within the organization. Additionally, some chosen metrics, like "employee morale," can be subjective and make tracking progress difficult.Despite these limitations, the Balanced Scorecard remains a valuable tool for businesses seeking a more comprehensive performance picture (Kaplan and Norton,1996). Perspectiv e Objectives Measures Targets Initiatives Financial Increase profitability and shareholder - Revenue growth - Net income margin Increase revenue by 20% annually. Achieve a net income margin of - Expand into new markets (e.g., Europe, China) - Develop new products and services (e.g., Model Y SUV, 7 Question 3 1. Budgeted cost Product A (unit) Product B (unit) Product C (unit) Product D (unit) Selling price (£) 28 34 48 46 Direct material costs (£) 5 9 12 8 Direct labor costs (£) 5 5 10 10 Variable overhead (£) 3 3 6 6  Variable costs per unit (£) 5+5+3 = 13 9+5+3 = 17 12+10+6 = 28 10+8+6 = 24  Contribution margin per unit (£) 28 – 13 = 15 34-17 = 17 48-28 = 20 46-24 = 22 Machine hours 4 3 4 5  Contribution margin/machine hour (£) 15/4 = 3.75 17/3 = 5.67 20/4 = 5 22/5 = 4.4 Fixed overhead (£) 8 8 16 16 Profit (£) 7 9 4 6 Labor hours 1 1 2 2 Maximum units demand per week (Quantity demanded) 200 180 250 100 Rank (Contribution per limited factor) 4th 1st 2nd 3rd The cumulative machine hour requirements across all operations amount to 2,840 hours (800 + 540 + 1,000 + 500 = 2,840). These machine hour requirements surpass the available capacity of 2,000 hours at Office Base PLC, thereby indicating that machine hour availability is the constraining factor in this production scenario. 10 Machine hour allocation for products A, B, C, and D will prioritize contribution margin, considering a maximum weekly capacity of 2,000 machine hours and an expected weekly labor capacity of 1,000 hours. As Product B has the highest priority, machine hours should first be allocated to meet its production requirements. To produce the maximum market demand of 180 units for Product B, 540 machine hours are needed (180 units x 3 hours per unit = 540 hours). Therefore, upon allocating the requisite 540 machine hours to facilitate the production of 180 units of Product B, in accordance with the assigned highest priority and market demand, the residual machine hour capacity would be 1,460 hours, derived by deducting the 540 hours from the initial available capacity of 2,000 hours (2,000 - 540 = 1,460 hours). Based on the available machine capacity, allocating the machines to Product D presents the most efficient utilization. With a total of 460 machine hours and a per-unit machine time requirement of 5 hours for Product D, this allocation would enable the production of 92 units. Consequently, due to insufficient machine hour capacity, production of Product A is not feasible within the current allocation. Profit Statement of Venus Plc (Period: a week) Revenue (£) 180*34 + 250*48 + 92*46 = 22,352 Variable costs (£) 180*17 + 250*28 + 92*24 = 3,060 + 7,000 + 2,208 = 12,268 Fixed costs (£) 8 * 1,000 = 8,000 Profit (£) 22,352 – 12,268 – 8,000 = 2,084 2. The critical evaluation of the overtime strategy 11 The fixed cost per unit of product is £8, as the fixed overhead costs are allocated based on labor hours. For instance, Products A and B each require one labor hour, incurring a fixed overhead of £8 per unit, while Products C and D necessitate two labor hours, resulting in a fixed overhead of £16 per unit. Consequently, the fixed overhead attributed to each labor hour is £8. Therefore, for the total of 1,000 labor hours, the corresponding fixed overhead cost amounts to £8,000. a, Implementing the overtime working strategy Incremental revenue is 200 x 28 + (100-92) x 46 = 5,600 + 368= 5,968 Incremental costs : 200 x (5+ 5x1.5 + 3x1.5) + 8x (8 + 10x1.5 + 6x1.5) = 3,656 Incremental profit: 5,968 - 3,656 = 2,312 When overtime pay is factored in, the total compensation an employee receives for one hour of overtime work is 1.5 times their regular hourly rate. This is calculated by adding the standard hourly wage to the overtime premium, which in this case is a 50% increase. A quantitative analysis of profits, revenues, and costs demonstrates that the overtime strategy presents a financially sound decision. b, Recommendation While overtime can address short-term customer demands at Office Base PLC, relying too heavily on it raises concerns about long-term employee burnout, productivity drops, and limited workforce scalability. The company should implement a well-defined overtime policy with clear guidelines in the near-term. However, the long-term focus should shift to building a sustainable staffing strategy through increased recruitment, training, employee engagement initiatives like flexible schedules and professional development, and streamlining processes to reduce workloads. A dual approach utilizing temporary overtime paired with investments in expanding and supporting the core workforce will enable Office Base PLC to meet current needs while ensuring it has the capacity for sustainable future growth without overtaxing employees. This balanced strategy protects employee well-being and the company's longevity. 3. Critically evaluate the use of Activity Based Costing in a Service-based Industry 12