The Organizational Structure of the Business - Research Paper Example

 Flexible budgeting is used to set financial targets for department and to track progress towards these goals. Crystal clear analysis of operating results, precise determination of operating issues and the ability to quickly put in place optimization strategies are used in flexible budget. It gives instant feedback on a department’s performance in terms of staffing hours. Full co-operation is a key to the success of this system. Financial budget is a set of revenue and sales projection at various production or sales volumes. Cost allowances for each expense vary as sales or production vary. It is a vital management planning and control tool, as it is designed to change as volume of output changes. Hence it is useful in times of fluctuating activity levels. It uses the principle of marginal costing in which cost behavior in past is considered. Flexible budgets are used in variance analysis in which actual results during a control period is compared to the flexible budget. Variances are used in Budgetary control for establishing budgets which identify areas of responsibility for mangers. Flexible budgets are useful in fluctuating activity levels as it shows how costs vary with different rates of output or at different levels of sales volume and projects revenue based on these different output levels. 2. ADVANTAGES AND DIS-ADVANTAGES OF CONTINUOS (ROLLING) BUDGET Advantages 1. Keeps budget more current in a changing environment. 2. Managers react in a more timely manner by better integrating plans and its execution. 3. Competency at bridging the finance operation gap. 4. Effective in reshaping corporate culture. 5. It eliminates “finance department excuse” by giving line managers full ownership of their department’s budgets. 6. Giving front line managers the ability to use rolling budget and planning tools can lead to development of new products and more opportunities. Disadvantages 1. Most companies find it impractical to use them on a full-scale basis to combine real time financial, operational and economic information. 2. It is avoided due to burden of the process that is real and perceived. 3. Cost of software is involved. 4. Integrating these system would mean giving up annual budgets and everything including traditional compensation schemes. 5. Requires fundamental changes to the architecture of the business. 6. It creates tension for line managers as they see the budget as an interruption in their business. It generates confusion lack of focus due to continuous planning and rapid response. 3. INVOLVEMENT OF OPERATIONAL STAFF IN BUDGET SETTING The involvement of operational staff in budget setting will facilitate the budgetary control system and will eliminate variances. The operating staff well knows about the operation costs and thus should be involved in budget setting. Involving staff in budget set is not considered comfortable as it can cause clash between departments but it can be quite helpful in smoother running operations. Budgets, which are kept secretive and made by manager often, fail to implement. The staff often reacts severely against such budgets. It can lead to the feeling of mistrust and frustration. It can lead to misdirection and waste of resources. True integration is lacked in budgets in which staff is not involved. Ambiguous financial data should be converted into meaningful information. Operational staff must be educated about the budget and then involved in decision-making. 4. CONTROL ASPECT OF BUDGET Budget sets guidelines available for each segment. Controlling aspect of budget means to keep in check the controllable costs with budgeted costs. The responsibility for cost control is assigned to the manager of cost department who is responsible for controlling the cost under his control. For controlling the cost accountant must use standard values. This involves creating inventory values for costing and controlling physical quantities and choosing such alternatives, which might increase revenue and decrease costs. It involves executing such budgets for operating under expected competitive and economic conditions. Budget should be set within an overall organizational planning and control framework. It includes strategic planning, management control and operational or task control. Management control assures that the strategies are carried out. Operational or task control assures that tasks are completed effectively and efficiently. Top and middle management is involved in ensuring that all tasks related to cost, revenue, profit and investment are carried out efficiently. Controlling compels management to set out plans for achieving targets for each department and to give purpose and direction to each plan. Actual results are compared with budgets. Any variance is removed by exercising control and revising the original budget. Remedial action is taken in response to variation. It improves allocation of scarce resources. Reporting and analysis is done to ensure control on the budget. It involves multi-purpose management toll supporting plan, control, co-ordination, communication, performance evaluation and motivation. Resources are utilized according to the plan to keep in pace with the budget. Regular reporting system is established to know the extent to which plans have been achieved Co-ordination is done to see that no department is out of line with the action of other department. It aids in clarifying horizontal and vertical communication. Feedback and feed forward are important for controlling the budgetary process. Thus if budget is evaluated at every stage of implementation it can effectively controlled. 5. CONGRUENCE BETWEEN STRATEGIC AND OPERATIONAL PLANS Operational plan translate the broad direction of strategic plan into more immediate strategies and targets. The operational plan needs to be finalized closely to its actual implementation. An operational plan is an annual work plan, which describes short-term business strategies, and it involves how strategic plan will be put into operation during a certain period (fiscal year). It is the basis for annual operating budget request. It deals with the internal operations and equipment necessary to produce product or service. Strategic process is the process of defining objective and development of strategies to reach the objective. Strategic plan is not the same as an operational plan. Strategic plan is visionary, conceptual and direct in contrast to an operational plan, which is of shorter term, tactical, focuses on implementation and is measurable. Strategic plan should be realistic and attainable. It is the path towards the operational plan. The operational plan should be developed keeping in view the strategic plan. Operational plan is the practical implementation of strategic plan. 6. (a) . FIXED AND VARIABLE COSTS Fixed Cost Fixed cost remains same in total whether activity increases or decreases. The cost will remain fixed within a limited range of activity. This range is known as relevant range. Outside this range the total fixed cost will change. Fixed cost includes factory overheads (such as supervision, depreciation, property insurance, rent, property taxes, etc). If activity is expected to increase in the long run beyond the capacity of current facilities, fixed cost must be increased to handle the expected excess volume. Some expenditure also acquired the fixed cost characteristics due to management policy such as advertising expenditure and charitable contribution which re not directly related to sales or production. These expenses are called programmed fixed expenses. Expenditures that are paid over a long-term period are called committed fixed expenditure. e.g: Long term debt payments, long term lease payments, etc. Variable Cost Variable cost increases with the increase in activity and decreases with the decrease in activity. Examples includes direct material, direct labor, indirect labor, perishable tools, rework, normal spoilage, etc. Total variable cost increases by a constant amount for each unit increase in activity. Addition of new machinery may increase production thereby increasing cost per unit of activity. So, cost per unit of activity varies widely at varied levels of activity. (b) COST, REVENUE AND PROFIT CENTRES Cost Centres A cost centre is a location function or items of equipment in respect of which costs may be ascertained and related to cost units for control purposes. They are part of the organizational structure of the business. Costs are related to the department or section of the organization that incurs them. A machine is a cost center in a printing firm. Make up, programs, advertising and public relations are cost centres in a television company. Cost per unit of production or sales can be determined using cost centres. When cost cannot be allocated to a specific period they are charged to cost centres. Revenue Centres Organizational units in which outputs are measured in monetary terms but are not directly compared to input costs. It is a department within a firm where sales are made. Profit Centres In profit centres performance is measured by the difference between the revenues (output and inputs such as expenditures). It makes possible to identify which part of the organization generates profit. Interdepartmental sales are often made using “transfer prices”. Profits achieved by each department or section helps to achieve financial control, organizes the business, gives it structure and motivates staff in each centre. Profit is obtained by subtracting revenue obtained from the cost of running the centre. (c) COST POOLS AND COST DRIVERS Cost Pools Grouping of cost before their attributes s is called cost pools. Cost pools are the defined categories of costs, which contain costs to be allocated, based on the actual use of resources. A cost pool nay relate to an activity or a support cost. An indirect cost pool is a logical grouping of indirect costs with a similar relationship to the cost objective. The indirect cost pools used to make the final allocation of indirect costs to cost objective are known as primary cost pools. Primary cost pools includes material overhead, operations overhead, general and admin expense. A secondary indirect cost pool is used to allocate costs to primary pools. e.g: Facility expense/building depreciation, utilities and maintenance. Cost Drivers They are used at various stages of the cost attribution process and are used for costs, which cannot be directly allocated. It is a measure of the quality of resources consumed by an activity. Cost drivers are actually the factors responsible for variation in the cost of an activity. It is a measure of the benefits received. Example of activity drivers is number of students or staff. Activity driver is a measure of how activities are performed and the efforts involved in carrying them out. Read More