Budgeting

Question 1

ZBB- Belivat

Answer 1

Report: Budgeting, Costing, and Inventory Management at Belivat Manufacturing

To: The CEO of Belivat Manufacturing (Belivat)
From: An Accountant
Date: September 20X5
Subject: Budgeting, Costing, and Inventory Management at Belivat

This report evaluates the use of zero-based budgeting (ZBB) to control new product development, assesses the implications of changing to a Kaizen costing system for production control, and examines the potential introduction of a radio-frequency identification device (RFID) system in the warehouse.

1. Zero-Based Budgeting (ZBB) for Product Development

Explanation of ZBB:
- ZBB starts from a “zero base,” requiring justification for each budget item.
- Steps:
- Define Decision Packages: Descriptions of all activities to be funded, categorized as incremental or mutually exclusive.
- Cost-Benefit Analysis: Evaluate which packages provide value for money.
- Ranking and Allocation: Rank packages and allocate resources within budget limits.

Comparison with Incremental Budgeting:
- Incremental Budgeting: Uses last year’s figures, adjusted for inflation and activity changes, leading to simplicity but potential stagnation.
- ZBB: Encourages questioning and justification, promoting innovation but is more complex and costly due to retraining requirements.

Fit with Belivat’s Plans:
- Product Development: Belivat’s shift to innovative product development aligns with ZBB’s emphasis on justification and innovation.
- Project-Based Approach: ZBB’s objective focus suits Belivat’s team-based project approach, unlike the top-down nature of incremental budgeting.

2. Kaizen Costing for Production Control

Explanation of Kaizen Costing:
- A control system within lean manufacturing, targeting cost reductions through continuous improvement.
- Process:
- Initial costs derived from product design analysis.
- Subsequent periods set tighter targets based on actual results, promoting continuous improvement by eliminating waste and enhancing quality.

Impact of Moving from Standard Costing:
- Standard Costing: Controls costs but assumes static processes, potentially fostering a blame culture.
- Kaizen Costing: Sets monthly cost reduction targets, empowering employees and fostering a culture of continuous improvement and innovation.

Recommendation:
- Kaizen Costing: Fits Belivat’s goals of cost reduction and innovation. Encourages team collaboration and aligns with Belivat’s culture of seeking improvements from all business layers.

3. Interaction of ZBB and Kaizen Costing

Cultural and Practical Fit:
- ZBB: Suitable for discretionary spending and revolutionary changes in new product development but may clash with the incremental nature of Kaizen costing in production.
- Kaizen Costing: Similar to incremental budgeting but demands cost reductions rather than inflationary increases, fitting better with continuous improvement.

Recommendation:
- Separate Application: ZBB should be used for new product development, while Kaizen costing should be applied to production processes to avoid cultural and practical mismatches.

4. Introduction of RFID System in the Warehouse

Cost-Benefit Analysis:
- Annual Costs:
- Hardware: $90,000
- Tags: $6,250
- Sensors: $3,125
- Other hardware: $11,875
- Software: $15,000
- On-going servicing: $26,250
- Benefits (Cost Savings):
- Staff costs (Warehouse – picking): $61,250
- Obsolete inventory: $78,000
- Net Benefit: $13,000 per annum

Additional Considerations:
- Costs:
- Redundancy/retraining of staff.
- Training costs for new system.
- Benefits:
- Reduced need for inventory counts.
- Improved decision-making with real-time inventory data.
- Potential extension to goods inward, enhancing picking efficiency and reducing obsolescence.

Conclusion:
- The RFID system presents a net financial benefit and additional non-quantifiable advantages. Further cost and benefit analysis should be conducted for a final decision.

Recommendation:
- Implement ZBB for new product development and Kaizen costing for production processes to align with Belivat’s innovative and cost-reduction goals.
- Proceed with the introduction of the RFID system, considering the additional costs and benefits for comprehensive evaluation.