Costs are expensive. But what is even more expensive and unnecessary is the inability to accurately measure and represent your costs. The misrepresentation of actual cost is greatly influenced by the allocation of overhead. When an organization finds it very expensive or impossible to convert overheads to direct cost. They may be forced to make a decision between the traditional costing methods (TCM)and activity-based costing (ABC) methods of cost allocation.
According to Kaplan, The use of TCM would be more practical with the organizations that were running decades ago, where companies manufactured a narrow range of products, so their cost's were easily traceable and a grossly misrepresented overhead had very little impact on the final, total cost of operations . As today's organization have expanded, the proportion of indirect cost far exceeded direct costs therefore, it is no longer justifiable to use TCM as a method of allocating overheads , especially as the cost of information technology has decreased and the global market competitiveness has intensified.
The first and vital step to enforcing an effective ABC system is accuracy. While very similar to TCM, ABC endeavors to allocate overheads more proportionally to cost objects, based on activities required, cost drivers for these activities and resources demands for each cost object. ABC is however difficult to implement and not effective in large-scale operations or operations with many resources of equal per unit cost as the cost of implementation usually by far exceeds the reward. In such a scenario, it would be usually more effective to implement traditional costing methods.
Monday, January 19, 2015
Review of the Balanced Scorecard
The balance scorecard, pioneered by Robert S. Kaplan of Harvard Business School, is a form of report-based performance measurement that focuses on four perspectives namely financial, customers, internal process and knowledge and growth. It was brought upon by the rising critic of the use strictly financial measures to evaluate and run processes in the majority of traditional organizations.
The proposition of the balance scorecard entails that an organization would reach its goals as long as the four essential perspectives are optimized. The financial perspective focuses on the financial goals of the organization ,the customer perspective focuses on the market for the organizations commodities, the internal processes focus on the operational aspects of the organization and the knowledge and growth perspective focuses on improvements within the organization.
For each perspective, the organization would have to would have to define its corresponding objective , measure, targets and initiatives. For example,within the financial perspective an exemplary objective could be to increase shareholder's wealth, a measure could be earnings-per-share(EPS), and target could be to increase EPS by 20% and the initiatives could be to increase net income or buy-back shares.
It is important to clearly define objectives with measures that are as directly linked to the objective as possible and targets that are realistic and achievable. It is also important that the measures chosen does not simply correlate with the desired objective but can be casually connected. Scenarios in which these are not carefully considered can seriously undermine the benefits of the balance scorecard to the point of absolute irrelevance. Therefore, more time and effort should be spent in realizing the link between each card than just merely establishing goals.
The balance scorecard like most performance measures is not a 'one size fits all' tool. Therefore, organizations should always customize their balance scorecard with careful consideration of its limitation. For example, the balance scorecard template assumes equal importance of the four perspective, however, organizations would find that certain perspectives supersede all other perspective at varying degrees depending on the time period and holistic goals of the organizations. Some organizations may find that an additional perspective ,such as the 'Social and Environmental' perspective in the case of Tesco,plc, is a necessary introduction to their balance scorecard and that some perspectives are not important to the advancement of the organization, such as the 'Financial perspective' to a typical non-governmental organization(NGO).
I , personally, feel that the balance scorecard is a bit too generic for the dynamic, fast-paced environment that most organizations today operate in. However, it should not be ignored as it has been proven functional in a number of organizations.
The proposition of the balance scorecard entails that an organization would reach its goals as long as the four essential perspectives are optimized. The financial perspective focuses on the financial goals of the organization ,the customer perspective focuses on the market for the organizations commodities, the internal processes focus on the operational aspects of the organization and the knowledge and growth perspective focuses on improvements within the organization.
For each perspective, the organization would have to would have to define its corresponding objective , measure, targets and initiatives. For example,within the financial perspective an exemplary objective could be to increase shareholder's wealth, a measure could be earnings-per-share(EPS), and target could be to increase EPS by 20% and the initiatives could be to increase net income or buy-back shares.
It is important to clearly define objectives with measures that are as directly linked to the objective as possible and targets that are realistic and achievable. It is also important that the measures chosen does not simply correlate with the desired objective but can be casually connected. Scenarios in which these are not carefully considered can seriously undermine the benefits of the balance scorecard to the point of absolute irrelevance. Therefore, more time and effort should be spent in realizing the link between each card than just merely establishing goals.
The balance scorecard like most performance measures is not a 'one size fits all' tool. Therefore, organizations should always customize their balance scorecard with careful consideration of its limitation. For example, the balance scorecard template assumes equal importance of the four perspective, however, organizations would find that certain perspectives supersede all other perspective at varying degrees depending on the time period and holistic goals of the organizations. Some organizations may find that an additional perspective ,such as the 'Social and Environmental' perspective in the case of Tesco,plc, is a necessary introduction to their balance scorecard and that some perspectives are not important to the advancement of the organization, such as the 'Financial perspective' to a typical non-governmental organization(NGO).
I , personally, feel that the balance scorecard is a bit too generic for the dynamic, fast-paced environment that most organizations today operate in. However, it should not be ignored as it has been proven functional in a number of organizations.
Saturday, January 17, 2015
Implications of De Beers' Transfer Pricing Strategy
In the global market today, several key elements of an organisation's processes such as services , intermediate products and finished goods are constantly moved across one or more of its subunits and subsidiaries. The negotiation and establishment of the price of the transaction is known as transfer pricing . The process has historically and mostly been used as one of the many methods that companies' 'cheat the system' by taking advantage of lower tax rates in their subsidiary's geographical location, thereby increasing balance sheet profits. In this article, I explore how De Beer's used transfer pricing conjointly with volume manipulation, strategic marketing and anti-competitive practices to increase future profits.
In an effort to control prices buy manipulating supply De Beers created distribution arms through "The Diamond Syndicate," including "The Diamond Trading Company" in London and "The Syndicate" in Israel. The polished diamond market is a free, competitive market with multiple sellers and buyers. Economic factors such as economic growth rates in consuming nations, employment, disposable income and foreign currency rates have a much greater influence on polished diamond prices than does the DTC.The major difference between rough and polished diamond prices is that the latter are more dependent on supply and demand. If the demand is high and supply is limited, buyers will be forced to purchase rough diamonds to generate new supplies of polished stones. (Department of Mineral Resources 2012:27).
The De Beers group opposed all cutting of diamonds in Namibia and structured itself to avoid tax and move minerals though a worldwide web of companies each of which added costs and subtracted profits in order to maximise De Beers returns abroad. The company had so effectively colonised the government mining department supposedly responsible for regulating it, that the top government mining officials didn't even know the name, never mind the detailed terms of the law they were supposed to enforce. This put De Beers in prime position to abuse the mine, overexploit the diamonds by grade and stone size for many years while the cartel's friends in politics in Britain, America and South Africa delayed independence for Africa's last colony. In this way De Beers shortened the life of the mine and took away an extra billion pounds worth of diamonds ahead of Namibian independence. With working costs at 25% of revenue this means that the company plundered £750 million in excess profit and unjust enrichment from a poor country heading for independence.
In order for corporations to avoid legal consequences and prosecution from illegal transfer pricing, such as for tax evasion purposes, corporations would often have to verify that the transaction was an 'arms-length transaction'. This means that they would have to provide substantial evidence to prove that the set prices would remain the same had the transaction involved unrelated entities. The inability of De Beers group to provide such evidence, in addition to other legal issues has led to the decline of the company's role in the supply of the rough diamond market due to several sanctions and requirement imposed on the company.
*Note: This is study material for my upcoming exam in my master's program, proper citation and referencing would be provided as soon as my availability permits.
In an effort to control prices buy manipulating supply De Beers created distribution arms through "The Diamond Syndicate," including "The Diamond Trading Company" in London and "The Syndicate" in Israel. The polished diamond market is a free, competitive market with multiple sellers and buyers. Economic factors such as economic growth rates in consuming nations, employment, disposable income and foreign currency rates have a much greater influence on polished diamond prices than does the DTC.The major difference between rough and polished diamond prices is that the latter are more dependent on supply and demand. If the demand is high and supply is limited, buyers will be forced to purchase rough diamonds to generate new supplies of polished stones. (Department of Mineral Resources 2012:27).
The De Beers group opposed all cutting of diamonds in Namibia and structured itself to avoid tax and move minerals though a worldwide web of companies each of which added costs and subtracted profits in order to maximise De Beers returns abroad. The company had so effectively colonised the government mining department supposedly responsible for regulating it, that the top government mining officials didn't even know the name, never mind the detailed terms of the law they were supposed to enforce. This put De Beers in prime position to abuse the mine, overexploit the diamonds by grade and stone size for many years while the cartel's friends in politics in Britain, America and South Africa delayed independence for Africa's last colony. In this way De Beers shortened the life of the mine and took away an extra billion pounds worth of diamonds ahead of Namibian independence. With working costs at 25% of revenue this means that the company plundered £750 million in excess profit and unjust enrichment from a poor country heading for independence.
In order for corporations to avoid legal consequences and prosecution from illegal transfer pricing, such as for tax evasion purposes, corporations would often have to verify that the transaction was an 'arms-length transaction'. This means that they would have to provide substantial evidence to prove that the set prices would remain the same had the transaction involved unrelated entities. The inability of De Beers group to provide such evidence, in addition to other legal issues has led to the decline of the company's role in the supply of the rough diamond market due to several sanctions and requirement imposed on the company.
*Note: This is study material for my upcoming exam in my master's program, proper citation and referencing would be provided as soon as my availability permits.
Academic Defeat
I'm feeling so defeated by school right now. The other day, I had an exam that I did really badly in and it multiplied my exhaustion with school by a number so large I cannot conceptualize. I spent the rest of the day just upset and mad about how terribly the exam went.
I'm currently three months into a one-year masters program and I am at the very end of my interest in academics and being a student to any academic institution, at this point in my life. The main reason for that is the COST of academia. Academia, why you so expensive ? WHY ??!!
The rising prices of tuition fee is just half of it. I am mostly perplexed by the amount of time it takes and the opportunities you give up just by being here , for example, I have a lot of plans right now, more than I have ever had at any specific time in my life and I feel like I have to put even the mere thoughts of these plans on hold because I have exams coming up and I have to prepare for that . Being a student ,basically, means that you give your undervalued life to an organization, adhere to random code of conducts framed loosely around the pretence of education and throw everything you have and you could have, all for a very miniscule reward at the end of the road.
But middle class is cool though. Education is great. I am very privileged to be here and I realize the number of people that dream of being in my shoes right now is large and growing. Just knowing that is enough reason for me keep pushing on, no matter how many times I get smacked in the face by academia. For the time being, I have to put my plans on hold and enjoy this bumpy ride to middle-class, however, once it lands I'd be hopping on a connecting flight to 1%.
*Note the destination "1%" in this post does not necessarily relate to the group of people at the top 1% of the wealth scale, although that of course would be nice, very nice.
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