Question.3129 - Production Budgets" Please respond to the following: •From the first e-Activity, assess the external factors and policy decisions that multinational companies must consider in developing the production budget and determine what factor has the most significant impact on the financial performance of the operation. •Examine some of the alternatives you would use in developing the production budget to neutralize the impact of potential inventory problems. Provide support for your rationale. ...
Answer Below:
Assessment of External factors The three main factors that need proper assessment, by Multinational Corporation, while considering their production budgets are foreign currency exchange rates, rate of interest and inflation figure. Exchange rate of foreign currency: This factor influences the production budget in three manners. Firstly, foreign exchange rate impacts the translation exposure of the firm. Translation exposure refers to the “risk that the international businesses face when translating foreign currency financial statements into currencies of parent companies” (Aswathappa, 2005). Secondly, transaction exposure which is generated from unhedged international cross-currency transactions. This risk gives rise to potential loss in acquiring production goods from international markets which might exceed the budgetary targets. Thirdly, economic exposure is another risk of foreign exchange rate which impacts production budgets. In this step the firm has to assess ways to reduce exposure of the firm to fluctuations in income and ensure long-term growth. Rate of interest: While developing production budgets firms have to closely monitor the interest rates as “they determine the amount of expense a business will incur if it borrows money” (Madura, 2007). The firm needs to thoroughly monitor the interest rates as it is likely to impact its final production costs. Inflation: A company has to factor in the inflation rate while developing the production budget. In times of high inflation cycle, suppliers of a firm are likely to raise the prices which increases the actual costs of the firm vis-à-vis the production budget. If this is not monitored and assessed properly, it might lead to fall in profits of the firm. Most significant factor Among the three factors, the most important factor remains interest rates. Interest rates are likely to impact the borrowing costs of the firm. A company’s cash flow may be strained in case of adverse change in interest rate changes which might increase the credit risk of the firm. Rising interest costs reduces the overall profitability and consumer spending and demand in the economy and is therefore, an important factor. Ways to reduce inventory problems A number of inventory problems may arise while developing production budgets. To minimize the impact of inventory related problems the firm can undertake measures like reduction of inventory size, reducing cost of transportation, customs and other duties. The firm can minimize its inventory related problems through reduction of inventory by implementing systems wherein it carries reduced average inventory. This can be achieved by implementing inventory management systems like Just-In-Time (JIT) approach. The rationale for this strategy is that JIT helps in “significant reduction or elimination of inventories, enhanced product quality, reduction or elimination of rework costs and inventory storage costs, and production cost savings from improved flow of goods through the process”. This way the firm can neutralize its possible inventory problems. (Kimmel, Weygandt & Kieso, 2008) Another way in which the firm can reduce inventory problems is to reduce transportation costs, customs and other duties. This can be achieved significantly by manufacturing products within the host country wherever possible. This reduces transportation and import duties’ costs. These are the manner in which a firm can reduce its inventory problem. References Aswathappa, K. (2005). International Business. Tata McGraw-Hill Education. Kimmel, P., Weygandt, J., & Kieso, D. (2008). Accounting: Tools for Business Decision Making. John Wiley & Sons. Madura, J. (2007). Introduction to Business. Cengage Learning.More Articles From Finance
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