Budgeting Function: Santos Limited Analysis - Case Study Example

BUDGETING FUNCTION: SANTOS LIMITED CASE ANALYSIS Student’s Name Professor’s Name Course Date Introduction The focus of this paper is on examining how budgeting, as a financial and accounting function, can be successfully applied within the different operations of Santos Limited. It is important to understand that the paper will further ascertain the behavioural implications of this function in relation to how the firm conducts its operations. Budgets affects organisations in a far much equal manner and the function serve three major objectives; that include, planning, coordinating and controlling. These three objectives requires that budgeting and the financial management process be distinctively flexible however; accountable throughout a given fiscal timeframe. In most cases, budgets can be noted to be the common denominator of a given company and remains a constant process in their underlying operations. A. How Budgeting Works in Santos Limited & Behavioural Implications The planning objective of a budgeting process in Santos Limited affects all level of employees from bottom-up and top-down directions. From the top position, it can always be seen that the senior executive managers would focus on communicating company goals of maximising shareholders’ wealth and minimising the degree of costs; and would expect that the lowly-positioned personnel within the organisation to align their duties and objectives to the major expectations. From the bottom-up, all of the personnel are expected to be directly and theoretically involved in overall budget development process and especially those relating to the line item budget development process like in the purchasing of property and equipment needed for operations within a given operational period (Raghunandan, Ramgulam & Raghunandan-Mohammed, 2012). Despite the personnel being allowed to come up with different forms of budget, it is expected by the senior management that the entire budget process represents an imminent time for Santos Limited personnel within the different departments to be fairly-informed and involved with the financial planning of the product exploration processes. In fact, the budget process postulates a means for which a stimulation of purchasing process relating to a planned operation for a given coming financial period. Notably, a budgeting functionality plays a pivotal role in coordinating Santos Limited initiatives within the company’s overall personnel. In examining the behavioural features of any given budgeting process, it is important to note that the degree of participating should clearly reflect the level of job difficulty. Numerous studies have continued to indicate that participation is always considered to be effective whenever job difficulty and participation levels were high but participation was extremely ineffective when the job difficulty was low. This technically means that when a task is considered to be easy, an imposed form of budget would be readily accepted however; this is not the case when there it is highly unlikely when the situation at hand is deemed to be far-much risky and difficult to accomplish. On the contrary, there is a higher chance that the participation link could result to complete acceptance and desirable behavioural response as the cost factor could counter the benefits enjoyed. This is attributed to the fact that senior management might engage in seizing the opportunity to exaggerate on the estimates or even inflate the importance of some departments in order to attract lots of resources. In this regard, it is a fundamental requirement that a company could formulate a cost-benefit analysis and commit on coming up with ways of engaging in clear and concise communication channels while still managing and sustaining a participation mode. Considering the fact that a company would always be composed of a diverse nature of people, in terms of preferences and aspirations, organisations engage in processes that would focus on encouraging a positive behavioural response. For Santos Limited, budgeting is such one process. It is carried out in a sensitive and positive way so that the budget could result to an overall improved motivation and congruence between personnel and broader organisational goals. Poor budget development processes could easily result to processes that are dysfunctional. Participants within a given budgetary process should be subjected to orientation in an effort to determine its overall purpose and benefits in overall sense, while making attempts to erase negative perceptions as well as minimising dysfunctional behaviours. In fact, there is a need to clearly and concisely provide explanations of long-term organisational objectives within which the budgetary process operates and should be communicated to budgetees while making sure to avail feedback on a far-much frequent manner given that it contributes to a higher level of performance. There are always a great deal of mixed perceptions existing between commitment and performance of personnel within the overall budgetary process. There is a view that participation results to improving the overall interaction and by extension group develop and element of cohesiveness among employees (Jensen, 2003). The components of this when positively correlated with incentives results to a higher or even lower level of performance in relation to the nature of environment or prevailing circumstances. Senior management in Santos Limited normally provide a great deal of support by way of adopting budgetary control information as a tool for rewarding and punishing lower level managers that fail to accomplish a target. There are a times when the budget setting and implementation process has resulted to a volatile reaction from different set of people affected (Raghunandan, Ramgulam & Raghunandan-Mohammed, 2012). In this regards, the overseer of the process and in this case being the senior managers of the company would normally be engaged in making efforts to redirect the responses in a much positive manner or even make efforts towards minimising the adverse effects of these possible reactions. It is crucial to comprehend that budgets provide approximates and the longer the time take, the wider the gap developed between expected performance and actualised performance and for this case; budgets would normally need a constant level of modification (Raghunandan, Ramgulam & Raghunandan-Mohammed, 2012). Notably, the overall budgeting process should be fairly-integrated across a given set of elements of an organisation in both vertical and horizontal positions otherwise the specific groups would result to inequities as their behaviors would be altered accordingly. Another point to note is that the budgeting within Santos Limited, Accounting Department, is largely dependent on an enormous measurement of effective interactions with the personnel. The fact that the senior management always opt for a humanitarian and sensitive approach then there is always a great level of benefits accorded altogether. At the senior management level, budgets will mostly portray an efficient and effective component of control in a day-to-day business operational terms or even on a long-term scale. In truth, controlling and monitoring are aspects that are adopted interchangeably given that a person would consider them a concept of performance standards, which portray a natural corollary (Raghunandan, Ramgulam & Raghunandan-Mohammed, 2012). Following this line of reasoning, it can be seen that budgets are mostly perceived as being a fundamental performance standard for which Santos Limited oil and gas related products are measured at all times. In the event that budgets results to counter of company’s goals and objectives then the activity related to performance to budget standards is ascertained to be a reasonable component of control. B. Tools of Budgetary Analysis: PNG LNG Project The budgets for the organisation are focused on providing a platform of sharing information that relates to specific project’s mission, development and implementation process. A good example of this aspect of budgeting can be seen in the company’s most notable project; Papua New Guinea (PNG). Santos’ business expectations and mission in Papua New Guinea (PNG) project is focused on PNG LNG Project (Santos Ltd, 2016). After its completion in 2014, PNG LNG generates a substantial volume of LNG for purposes of exporting to global markets as well as gases and gas liquids. To be specific, Santos Limited enjoys at least 13.5% of interest in PNG LNG project. The company provides a budget of its resources towards this project and shows a percentage change on how the amount of money that both sales gas and condensate resources have all consumed in the period between 2014 and 2015 (Santos Ltd, 2016). It is noted that PNG LNG seeks to provide a fundamental level of Santos reserves and resources within PNG. Consequently, as a foundation partner in the project, Santos Limited equity avails an efficient level of strength that it can successfully use to offset the leverage growth opportunities that extends to LNG backfills and expansion initiatives. Just recently, the project underwent a distinct independent contingent resource recertification that focused on an increase in 1C project resources thus enhancing extended generation at the current plateau rates. In addition to this, it can be ascertained that Santos Limited prepares and execute an enormous budget for purposes of exploring and production process in PNG LNG project. Certainly, the company enjoys great interests in a good number of large scale explorations across some of the Project’s notable belts like the PNG Forelands that could avail future backfill, expansion or even standalone opportunities (Santos Ltd, 2016). It can be safely argued that when Santos Limited existing personnel have a clear knowledge on the available resources and commitments of these resources; then the staff members that are responsible for personal initiatives and duties will execute their duties more diligently on a prescient knowledge of Santos limited resources in implementing such ventures. The tools related to forecasting, allocating of funds; monitoring as well as adjusting and reporting were all appropriately adopted. Forecasting techniques were used to come up with estimates for the prediction of financial resources to be used in exploring oil and gases within the project and this was compared against the budgeted financial resources in the course of the 2014 financial period. Allocating of funds technique was adopted in the course of appropriating resources towards accounts of different charts. Notable adjusting tools were adopted for the case of ensuring a higher approval rate as directives from different authorities and in relation to the possible variances that existed between planned and actualised expenditures. In the end, there was the reporting of findings and actions adapted to different set of management authorities within the fiscal year. C. Costing Technique Santos Limited practices the operating costing model where basic costing approaches result to the standardisation of products and services, which comes from a sequence of repetitive as well as less continuous operational method or for process for which costs are directly charged prior to being averages over a given units of oil and gas production within any given period (Cooper& Kaplan, 1988). This costing technique has continued to be used for a long period given that the manufacturing process is considered to be continuous and the level of units is identical in nature. It is greatly relied upon when ascertaining the cost per unit of output in oil and gases as well as provides information on the costs of each item. For this case, the cost accounts is established by way of dividing the expenditure incurred in the course of a given operational period by the number of units generated in the course of that timeframe (Cooper& Kaplan,1988). The company can opt to ABC Costing technique so that administrative, selling and general expenses could be effectively considered as product costs given that they have a direct relationship with costs of the product that relates to exploration process. ABC would ensure that the idle level of costs that are currently being considered as products would be eliminated hence ensure to deal with those costs that matters. Conclusion To sump the discussion above, it can be noted that Santos Limited objective of a budgeting process affects all level of employees from bottom-up and top-down directions. It is carried out in a sensitive and positive way so that the budget could result to an overall improved motivation and congruence between personnel and broader organisational goals. At the senior management level, budgets will mostly portray an efficient and effective component of control in a day-to-day business operational terms or even on a long-term scale. One such project PNG LNG has adopted this finance and accounting function to great strides. Currently, the company practices operating costing model where basic costing approaches result to the standardisation of products and services, which comes from a sequence of repetitive as well as less continuous operational method or for process for which costs are directly charged prior to being averages over a given units of oil and gas production within any given period. However, to make improvements, it can adopt ABC costing system, which focuses on ensuring that the idle level of costs that are currently being considered as products would be eliminated hence ensure to deal with those costs that matters. References List Cooper, R. & Kaplan, R.S., 1988. Measure costs right: make the right decisions. Harvard Business Review, 66(5), pp.96-103 Jensen, M.C., 2003. Paying people to lie: The truth about the budgeting process. European Financial Management, 9(3), pp.379-406 Raghunandan, M, Ramgulam, N & Raghunandan-Mohammed, K. 2012. Examining the behavioural aspects of budgeting with particular emphasis on public sector/service budgets. International Journal of Business and Social Science. 3(14), 110-117 Santos Ltd. 2016 annual report. Accessed from https://www.santos.com/media/3524/final-2016-annual-report.pdf Read More