Company background and strategy APP manufactures a variety of own-label Intelligence Sweeper in Wonderland. The strategy of the business has been to be a cost leader in order to win the local business. The sales of APP vary up and down from quarter to quarter depending on the state of the general economy and competitive forces. Variance analysis The chief executive officer (CEO) of APP has asked your firm of consultants to advise him as his finance director(FD) was resigned for personal reason a week ago. As the CEO is preparing for the next board meeting, he has obtained the operating statement and detailed variance analysis from one of the junior accountants (see Appendix 1). The CEO is happy with the operating statement but wants to understand the detailed operational and planning variances, given in Appendix 1, for the board meeting. He needs to know what action should be taken as a result of these specific variances. Budgeting process The FD had been looking at the budgeting process before she resigned. The CEO has decided that you should help him by answering some questions on budgeting at APP. Currently, the budget at APP is set at the start of the year and performance is measured against this. The company uses standard costs for each product and attributes overheads using absorption costing based on machine hours. No variations are allowed to the standard costs during the year. The standard costs and all budget assumptions are discussed with the relevant operational manager before being set. However, these managers grumble that the budget process is very time consuming and that the results are ultimately of limited value from their perspective. Some of them also complain that they must frequently explain that the variances are not their fault. The CEO wants to know your views on whether this way of budgeting is appropriate and whether the managers' complaints are justified. He is satisfied that there is no dysfunctional behaviour at APP which may lead to budget slack or excessive spending and that all managers are working in the best interests of the company. Shortly before she resigned, the FD had suggested that in order to stop managers complaining about having to explain variances that were not their fault, the managers should produce their own draft budgets, which would then be reviewed and consolidated centrally. The CEO is not sure what impact this change could have, and wants you to evaluate it before he makes any changes to APP's current budgeting system. Expanding its business to a new country APP decided to expand its business to a new country. The problem is that the business that APP would like to expand to this new country has already reached its maximum capacity such that there would be fewer opportunities for APP to compete in this market if APP still uses its current price level. In order to motivate the demand for its Intelligence Sweeper, APP has to have some new strategies. It decided to adopt target costing and total quality management. It is believed that setting up a more competitive price in advance is the most important factor to succeed in the new market. Furthermore, total quality management can guarantee a higher quality of production. However, some managers argued that there would be conflicts between a lower price and a higher quality. The CEO wants you to explain the issues in your report as well before he makes the decision. Appendix 1 Read and carefully analyze the case, as the management team, prepare a report for the following questions: 1. Advise the CEO on the implications for performance management at APP of analysing variances into the planning and operational elements as shown in Appendix 1 . 2. Evaluate the budgeting system at APP. 3. Evaluate the FD's proposal to introduce a bottom-up approach to budgeting. 4. Explain the potential benefits of applying target costing and total quality management as APP's new strategies. 5. Discuss the conflicts, if anv, between a lower price and a higher quality