Exciteco is a company focused on the development of portable smartphone components and gaming applications for them. The organization’s focus includes continuous innovation, technical development, and an early budgeting process. However, not in all cases does this approach bear fruit, which is confirmed by this case. First, a pre-made budget takes a long time to process information and make a forecast. Second, the agility of the IT sector almost certainly exceeds the pace of planning, also due to the company’s innovation policy. Combined with external factors, which in recent years have also turned against Exciteco, the company has come into a crisis, as a result of which it is necessary to analyze budget planning and external factors that had an impact on this case.
This business practice is used to understand and classify the costs of a company in order to forecast, control, and study the nature of costs. This approach allows calculating various financial indicators that can reflect the sales performance of a particular product or service or dynamics over time (Hilorme et al., 2019). Unlike financial accounting, which is also an essential tool for a business and considers the financial performance of a business as a whole, cost accounting is more focused on the company’s products, which in the case of Exciteco is more critical. Some of the company’s problems stemmed from mispredictions for certain products that had higher sales than expected. The system’s inflexibility created rather complex obstacles that certainly had consequences for planning the budget for the following year.
Costs have their classification in each product taken at cost accounting. These elements include labor, material, and costs, which can be both direct and indirect. The cost of materials is a factor that also depends on external circumstances, in particular in the case of silver. At the same time, Exciteco is not provided with well-established effective communication between the two main divisions, which are not aware of each other’s strategic reserves, resulting from which their purchasing departments work separately. In this regard, both cost accounting and the adequacy of budget planning suffer.
The company has no immediate problems with human resources costs, but the lack of well-established communication creates indirect obstacles to successful functioning. Nevertheless, this expense item is one of the most important since specialists in this field are highly valued in the labor market. Moreover, given the specifics of the rapid dynamics in the field of information technology, all current changes in the field should be taken into account by experts. Maintaining a confident position in the market, for the most part, depends on the diligence of the employees who produce and design the products, which should also be taken into account both when planning the budget and in the analysis of cost and financial accounting.
Other types of expense items and overheads that do not include direct production costs and human resources should be flexible and easily adaptable to different situations. First, during a pandemic, companies that more easily adapt their budgets to external factors are better able to adapt to new conditions (de Amorim and de Andrade, 2020). Secondly, since marketing is included in this type of cost, it is better to advertise more popular and successful products, which often cannot be predicted, especially with long-term planning.
In addition, there are several methods or concepts for maintaining cost accounting. Standard analysis of variance is considered obsolete as it uses only labor as a determinant (Hilorme et al., 2019). Activity-based costing includes calculations per unit of product. Lean Accounting focuses on performance indicators, which have its advantages; for example, it helps speed up business processes (Hilorme et al., 2019). Margin cost is the most promising method for Exciteco alongside business accounting, as it leverages significant production and sales price metrics. These methods also contribute to reasonable pricing, which will be an essential step in Exciteco’s budgeting.
The current budget system has several shortcomings, which, together with unfavorable external factors, negatively affect the company’s activities. First, as mentioned above, this is the lack of effective communication between departments. Considering that at least, according to the case, both divisions need silver, the company’s management needs to consider these factors when planning a budget and organize communication between them to reduce costs. Second, strict adherence to planning makes the company less flexible. This fact is also proved by the case of the popularity of smartphones with a large screen and the lack of changes in the components produced by the company. A more loyal system would make it possible to adapt to new conditions that could not be predicted quickly.
This tight bondage is geared towards stable shareholder returns, which makes the company a significant advantage in terms of reputation. However, in this situation, a compromise is necessary since, in the absence of profit in case of failure, it will be necessary to get into debt to pay dividends to shareholders, as in the case of the Coca-Cola Company. However, Coca-Cola has the capacity and expertise to reallocate costs and profits to offset setbacks and crises. Exciteco’s innovative approach, however, is also constantly associated with significant risks. The predictive function of leadership in budget planning can increase with experience, but it is equally important to work through the moments of not the most favorable situations and always keep its finger on the pulse in order to be ready to reallocate funds.
Moreover, the lack of adaptability led to the loss of a significant client for the company. Flexibility is essential not only in budget planning but also in case of extraordinary situations, like a fire at the customer’s place, which postponed his purchases for a certain period. When the customer was again ready to resume cooperation, the management did not adapt human resources to the increased demand. This fact demonstrates the lack of flexibility in the company’s entire structure and, in particular, in each of its divisions. It is a critical disadvantage that the management should pay attention to first of all.
However, the company’s failures were due not only to errors in budget planning but also to external factors beyond Exciteco’s control. Firstly, it is a fire at one of the company’s main customers, because of which G Division could not reach the planned sales growth. If, for the customer, this can become an insured event and partially offset the costs, then for Exciteco, these losses are irreplaceable. The company’s reaction hit one of three R&D divisions, which had to shut down to balance the unexpected costs. This approach gives the possible absence of additional costs in the short term, but in the long term, it can fundamentally harm the company. First, because of the cuts in investment in science, the company may not be able to keep up with the rapid pace of technological development in our time. The innovative approach suffers the most, and in turn, is the basis of the company’s vision and strategy, which supports stable high payments to shareholders. Secondly, the precedent for the loss of a client, which the competitors got, was already in Exciteco’s case; therefore, it is imprudent to sacrifice possible advantages in quality products in the future.
External factors also include the popularity of large-screen smartphones for gaming, which is an unregulated purchasing preference. If it is impossible to predict such a trend, the company should be able to quickly and adequately respond to it. Failures that have arisen with this factor include both external circumstances and imperfection of the organization’s internal system. Nevertheless, in this case, probably only a tiny part of all external factors that impact the enterprise are presented. For a more detailed analysis, it is necessary to conduct a PESTLE analysis to classify these factors. Ideally, in conjunction with the SWOT tool, one will get a complete picture of Exciteco’s strengths, weaknesses, opportunities, and threats, based on which it will be possible to draw up a more thoughtful recommendation to address these problems.
A possible way out of this situation is to analyze the deviations, showing the degree of actual deviation from the forecast in the budget allocation. The above planning inaccuracies and external factors led to negative consequences, increasing the degree of deviation to a critical one, and therefore requires changes both for short-term recovery and without significant losses over a long distance. The reasons for the primary deviations are defined above – the same work must be done with each case. As a result, ANOVA will show which sector has the most variance: materials, labor, or overhead. Moreover, several reasons are highlighted, the influence of which can be taken into account in each of the identified problems. For example, changes in market conditions may be relevant in a company buying silver for components; there may also be some unrealistic idealization in budget planning, which can be avoided with deep PESTLE analysis.
Therefore, the result can be used to improve productivity as follows. First, given some specific reasons identified for each case, a clearer understanding of the market and a set of external factors appear, depending on which it is possible to control budget planning better, avoiding unnecessary restrictions. Secondly, the analysis may reveal some operational issues within the business processes of each of the two divisions, which can contribute to the initiation of positive change on the part of management. Finally, establishing communication between the production of a component for smartphones and games will allow the exchange of helpful experience, marketing research, materials, which can shorten the productivity time, keeping pace with the development of information technology in the world.
Exciteco found itself in a predicament formed by a combination of external factors and inaccuracies in budget planning. Nevertheless, for this situation, there are several methods for assessing and solving this problem, including cost accounting and variance analysis. These approaches allow identifying specific causes of failure in order to work on errors in budget planning. The company’s main guideline for solving problems is adaptability and flexibility, making it challenging to overcome obstacles. Management also needs to focus on human resources as the most valuable to the company and consider finding other means to offset the loss of customer funding. The closure of the R&D division may have negative consequences in the future, contrary to the company’s strategy and vision for sustainable growth. Excite maintains a commitment to shareholders, which contributes to a good reputation and attractiveness to new investors. After a detailed analysis, management needs to make immediate decisions to recover the company from failures as soon as possible and regain a confident position in the market. Otherwise, the delay could cost the company other critical customers, gain time for their competitors, and lag on innovation due to the closure of the R&D division. In order to avoid hasty decisions, and it is recommended to first conduct more thorough analyzes, a review of which has been presented in this paper.
de Amorim, W. S., & de Andrade, J. B. S. O. (2020) “Pandemics, global risks and adaptation: challenges for a changing world”, Research in Globalization, 2, pp. 1-7.
Hilorme, T., et al. (2019) “Human capital cost accounting in the company management system”, Academy of Accounting and Financial Studies Journal, 23, pp. 1-6.