Global Designs & Computing (GDC) is a software developer. It customizes software for sale to its customers, ranging from SMEs (Small Medium Enterprises) to MNCs (Multi-National Companies). As part of its strategy, the company plans to expand into offering mobile games on mobile phones and tablets. Being a traditional software developer, it has limited experience in the use of social media platforms to reach out to consumers, though it has been very successful in selling to SMEs and MNCs.

In terms of its sales strategy, the company had always practiced a bottom up approach, by relying on its sales managers. Due to the sales managers’ commission and bonus being related to budget targets, the sales budget figures tend to be understated, while entertainment budgets tend to be overstated. This ensured that the respective sales managers could hit the targets they set for themselves.

During the year end management retreat, the chief executive officer sought the views of management staff on how best to bring the company’s profitability up for the next fiscal year. In the same conversation, the group marketing officer proposed the use of social media platforms to reach out to its end customers for the upcoming mobile games that are due to be launched soon.

The group marketing officer had concurred with the group strategy committee that launching the new mobile games to reach end consumers will be critical to improving the company’s profits and revenues. This is even more important considering that the traditional software development business has been badly impacted by the new low cost freelance programmers who operate off the internet. These freelancers are very aggressive in pricing.

The finance director disagreed with the group marketing officer and cited that these efforts will be costly. Considering the tight cash flow position, the finance director proposed more prudence in expenditures, especially those arising from efforts to diversify the company’s operations.

At the same time, the operations director worries over the likelihood that the efforts to diversify the company’s revenue streams would end up cannibalizing the existing resources from software development. The software development division had lost a number of experienced staff and there is significant difficulty in identifying replacements to take over their roles.

Required:

(a) Discuss the views proposed by each of the directors and propose how the company should move forward to grow its revenues and profits

(b) Comment on the issues on the use of zero based budget and discuss whether it would be helpful in cost management for the Company. Justify your answers based on the facts provided in the case study. Use the financial data below to support your answer.

(c) The freelance programmers have entered the market aggressively and targeted the company’s pool of clients. Costing is a determinant in deciding pricing to be quoted. One commonly applied costing method is the Activity based costing (ABC). Discuss why the ABC costing methodology should be adopted.

(d) The managing director was surprised by the fluctuation in the cost of sales which can caused the gross profit to have an adverse variance between the actual and budget figures. He questioned whether this was arising out of the change of inventory costing method from the first-in-first-out (FIFO) basis to the weighted average basis. Discuss the effects of a change of inventory measurement basis from FIFO to weighted average basis.

Financial Data Budget Actual

Sales 451,234 449,988

Less: Cost of Sales 362,211 328,200

Gross profit 89,023 67,788

General Expense (42,114) (59,200)

Selling Expense (8,220) (14,998)

Finance Cost (11,220) (14,288)

Profit before Tax 27,469 (20,698)