Borealis Case

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Borealis Case
Advanced Managerial Accounting
Universidade Nova de Lisboa

 



Borealis Case

 
 

Introduction Borealis is one of the largest petrochemical companies in the world. Output from its productions can be found in a wide set of everyday products, from diapers, food packaging and house wares to cars and trucks, pipes and power cables. When it was formed in Denmark in 1994 as a joint venture between two Nordic oil companies (Statoil of Norway and Neste of Finland), it inherited most of its processes, systems and people from the various subsidiary companies. Nonetheless, to the new management team, it felt like in the new company a break with the past was not only seen as desirable but also as crucial to its future success. Its new location in modern well-appointed offices in Copenhagen added to the sense of a fresh start with few managerial traditions to restrain its ideas and ambitions, and to spawn motivation and secure accomplishment of goals. Traditional Budgeting When the hectic merger activity in the industry took place, although demand for the products was stable, suppliers increased their production capacity, being this divergence reflected in the prices. In fact, this excess of supply in comparison to demand made prices to drop, and subsequently companies´ margins and profitability to fall as well. In addition, for Borealis, competitors were certainly an issue to be concerned about, as they were more diversified, both geographically and across products. It is in this context that the budgeting technique represents an important role. This process arose in the 1920s as a tool for managing costs and cash flows in large industrial companies such as DuPont, General Motors and Siemens. It was not until the 1960s that it mutated into a fixed performance contract. It was at this time that companies started to use accounting figures not just to keep score but also to dictate the actions of people at all levels of the company. By the early 1970s financial planning had begun to rely on financial targets and incentives to drive performance improvement, becoming since then the traditional and well-known method of planning and controlling operating performances. For most organizations, the traditional process of budgeting starts off four months before the beginning of the fiscal year. In this stage, the company is somehow forecasting the results for the following year, and it takes quite some time to do this job in a rational way. As the budget is an immeasurably detailed activity, each operating division is entitled to prepare the various operational budgets, since they are more comfortable and better prepared to assert such fine points in what concerns its unit. Actually, it starts by forecasting one variable that will drive all the others, sales. Depending on the market, it is particularly hard to be exact, where historical performances must be combined with expected economic behavior. Both PE and PP unit sales are dependent on plastic producers demand, and consequently a very wide type of customers. This dependence on such diversified range of customer makes this task very hard, because demand does not depend on one single type of consumer. However, as it is prepared in monetary figures, the prices of each product are also an important issue to determine, which will depend mainly on the supply-demand combination worldwide and on inflation effects. Once reached a predicted volume of sales for the year ahead, the next step is to estimate production, and if the company has resources - capital, material and workforce - enough to meet the predicted sales. If this turns out to be possible, it should be predicted how many products per day must be produced to fulfill clients’ requirements, without increasing stocking costs. Afterwards, it becomes easier to compute direct materials usage and purchase and other variable costs (as labor costs), for the reason that they are all highly dependent on...
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