The nature of the budgeting and planning process - Essay Example

?Task Demo Manufacturers Ltd Unit Cost Unit Cost Product A Product B Direct Labor ?90 ?80 Direct Materials ?14 ?18 Total Direct Cost Per Unit ?104 ?98 Fixed Overhead Factory X 596.12 374.70 Fixed Overhead Factory Y 193.44 425.57 Total Unit Cost ?894 ?898 Profit Added ?223 ?314 Selling Price Per Item Excluding Vat ?1,117 ?1,213 Demo Manufacturers Ltd Product A Product B Total Sales ?1,116,950 ?2,425,334 ?3,542,284 Direct Labor Cost ?90,000 ?160,000 ?250,000 Direct Material Cost ?14,000 ?36,000 ?50,000 Total Direct Costs ?104,000 ?196,000 ?300,000 Contribution ?1,012,950 ?2,229,334 ?3,242,284 Fixed Costs ?789,534 ?1,600,560 ?2,390,094 Total Profit for Budget Year ?223,383 ?628,774 ?852,190 Task 2 Purpose, Nature, and Benefits of the Planning and Budgeting Process According to Williamson (1996), the budgeting and planning process refers to the application of budgetary control techniques to forecast receipts and expenses of cash in future fiscal periods. The overall purpose of the budgeting process is to ensure that the organization has enough finances of operations and expenditure. The first purpose of the budgeting process is communication, where each department in the organization communicates the need for resources and how the resources will be used. This is done by explaining the volume of activities that the department will engage in and the amount of resources that will be needed. The budgeting and planning process is also important for coordination of tasks in the organization, since the different departments in the organization perform interrelated task (Hansen and Wim, 2004). Coordination of processes is achieved when the different departments provide a plan for their resource allocation and the relation to the resource allocation from other departments. Budgets are also used for planning the activities of the organization for a specified period. This is achieved by preparing budgets that predict resource usage for forthcoming fiscal periods. When these budgets are prepared, the organization can determine the resource needs and, therefore, prepare the necessary financial resources for acquisition of the planned resources. Budgets are also used for control and motivation, where the budgets act as a measure of performance and improvement. This means that the prepared budget is used as a standard of measurement of performance, and the different departments are motivated to improve their performance according to the budget allocated. The nature of the budgeting and planning process is reflected by the characteristics of the budget prepared by the departments and the organization. The budget can be defined as a plan for the allocation of financial resources to the various processes in the organization, therefore, the budgeting and planning process refers to the steps taken to prepare and measure organizational performance using a budget. The requirements of the budgeting and planning process can then be inferred from the above definition of a budget. The budgeting and planning process requires knowledge of the required resources by each department, the expected usage of resources, the forecast of the cost of resources, and the expected financial inflows and outflows. Types of Budgets According to Sean, Garrison and Noreen (2008), budgets can be classified into many types, including zero-based budgets, incremental budgets, fixed and flexible budgets. These budgets classifications are done according to the basis for budget preparation, whether the budget is prepared according to activity level, fiscal periods, or resource availability. Zero-based budgeting refers to a budgeting method where each department is required to provide a justification of all the expenses presented in the budget statement. Traditional budgeting methods require a manager to add or subtract amounts from the previous fiscal period budget, however, zero-based budgets start from a zero baseline and all expenditures have to be justified. Conversely, incremental budgets are based on the previous period’s budget, where a departmental manager prepares a budget using actual performance figures from the previous period. This approach does not take into account changes in organizational circumstances since resources are allocated in the same way as resources from previous periods. This type of budgeting method is not recommended for profitable organizations since a manger might decide to increase spending in a fiscal year to justify an increase in budgetary allocation in subsequent budget years. A fixed budget is used by organizations that do not want to change budgetary allocations for the whole fiscal year. This type of budget is made by an organization by creating a budget at the beginning of the fiscal year and not changing it even if resource availability is varied. Conversely, flexible budgets are made by an organization with regard to changes in volume of resources. This means that, since expenses change according to volume, the budget allocation for resources also change according to the change in expenditure. Relevance of Budgets to Business Objectives and Strategy The objectives and strategy of an organization are reflected in the mission and vision statement, and the budget tries to achieve these goals in different ways. The budget is used to measure performance targets and important operating indicators. Since the main goal of the business is profitability, the budget tries to achieve it by planning for and reducing expenditure. A budget can be used by management to predict expenditure and eliminate redundant expenses. Redundant expenses refer to the expenses that the business incurs but are not necessary for the operation of the business. The other strategy of a business usually involves planning resource allocation to determine the objectives of the business. Competitive strategy involves the utilization of resources to ensure that the company becomes more competitive. Therefore, budgets are important for an organization’s strategy since it can be sued to limit the allocation of resources and increase the profitability of a business. This means that a budget is important for a company seeking to achieve profitability in accordance to the vision and mission statements. Key or Budget Limiting Factors Every organization that prepares budgets has to have a starting point for the preparation process. Every organizational process is also centered on one factor that influences all of an organization’s activities. This means that all organizations have a factor that determines all other entries in the budget statement. In this case, the limiting or key factor in a budget refers to a factor in the budget around which all other operations are centered. For example, in the task below, all the prepared budgets are centered on the sales of the products. This means that the sales figure is the limiting figure since it determines the amount of products to be produced, the amount of raw materials to be used, the creditors, and the debtors of the organization. The limiting factor in a budget is also called the principal budget factor, and can be any factor in the budget that determines the presence of all other factors in the budget statement. Role of the Budget Manual According to Hope and Fraser (2003), the budgeting process becomes more complicated as an organization grows; therefore, the preparation of the budget becomes harder and requires many individuals to create. As a company grows and creates budgets, the steps that are taken in the preparation process are similar; therefore, the steps are consolidated into one process called the budget manual. The budget manual is, therefore, a set of steps that an organization uses in the budget preparation process, steps that are followed in every fiscal period. The main role of the budget manual is to set out the objectives of the organization and the reasons for the preparation of the budget. This includes the role played by the budget in the strategic plan of the organization. The budget manual includes a detailed explanation of the role of the budget in the strategic mission of the company. The other role of the budget manual is to set out the steps to be followed by every department in the budget preparation process. These include the steps in the budgeting process and the control procedures in the monitoring and control of the budget. The other role of the budget manual is to describe the duties of every member of the budget committee and other individuals involved in the budget preparation process. This duty is important because it helps in the separation of duties and the effective preparation of the budget. Role of Master Budgets The master budget is a budget used by an organization to summarize all the budgets prepared in the organization (Hilton, 1994). The master budget includes all the financial and operating budgets, and all the departmental budgets that are prepared in the organization. The main role of the master budget is to coordinate and integrate all the departmental budgets within the organization. This means that the master budget is used as the main planning deice by the organization; it summarizes all departmental activities, therefore, management can get an overall view of all the needed resources. The second role of the master budget is communication and motivation of employees and departmental individuals. The master budget summarizes all the budgets prepared by the departments, so it can be used to reflect the efforts of each functional area in the organization. The summary of the budgets prepared by all the departments is presented to all other departments as a communication and motivational factor for the departments. The master budget also acts as a performance indicator; therefore, management can use it to determine the performance of the several departments. Behavioral and Creative Aspects of Budgeting The budgeting process can be used by management to motivate employees to work better and efficiently. This is done by using the two behavioral aspects of budgeting as motivational tools. The first behavioral aspect of budgeting is the top-down style of management, where the budget is imposed on the employees by management (Garret, 2011). This behavioral aspect of budgeting, also called the authoritarian approach, determines the level of support that the budget gets from individuals. One of the aims of the budgeting process is to motivate employees to embrace the budget; however, the use of this behavioral aspect of budgeting might result in the employees rejecting the budget. The other behavioral aspect of budgeting is the participative or bottom-up approach to marketing (Garret, 2011), where the budgeting process is done by employees and presented to management. This approach increases employee motivation to the budgeting process and enhances goal attainment because the employees feel that the budget is presented for their benefit. Task 3 Startup Ltd Dec Jan Feb Mar Production Budget(Units) Sales Quantities 0 10000 9000 8000 Add Closing Stock of finished goods required 10000 9000 8000 8000 10000 19000 17000 16000 Deduct opening stock of finished goods 0 (10000) (9000) (8000) Production required 10000 9000 8000 8000 Startup Ltd Dec Jan Feb Mar Raw Materials Budget (Units) Required for Production 10000 9000 8000 8000 Stock of raw materials (units) required at the end of month (1 month) 9000 8000 8000 11000 19000 17000 16000 19000 Deduct Opening stock of raw materials (10000) (9000) (8000) (8000) Purchase (Units) 9000 8000 8000 11000 Raw materials Purchase required ?45,000 ?40,000 ?40,000 ?55,000 Startup Ltd Dec Jan Feb Mar Debtors Budget Opening Balances 0 550000 495000 Sales in Month 550000 495000 440000 550000 1045000 935000 Receipts from debtors in month 0 550000 495000 Closing Balances 550000 495000 440000 Startup Ltd Dec Jan Feb Mar Creditors Budget Opening Balances 0 45000 40000 40000 Raw Materials Purchases in month 45000 40000 40000 55000 45000 85000 80000 95000 Payments to creditors in month 0 (45000) (40000) (40000) Closing balances 45000 40000 40000 55000 Startup Ltd Dec Jan Feb Mar Cash Budget Opening Balances 100000 (100000) (325000) 25000 Receipts From debtors 0 0 550000 495000 100000 (100000) 225000 520000 Payments to creditors 0 (45000) (40000) (40000) Payments for labor (200000) (180000) (160000) (160000) Total Payments (200000) (225000) (200000) (200000) Closing Balances (100000) (325000) 25000 320000 References Garett, K., 2011. Behavioral Aspects of Budgeting. ACCA Manuals Hansen, C., and Wim, A., 2004. Multiple facets of budgeting: An exploratory analysis. Management Accounting Research, 15. pp. 415-439. Hilton, R., Managerial accounting, 1994 2nd ed. New York: McGraw-Hill Book Company. Hope, J., and Fraser, R., 2003. Who needs budgets? Harvard Business Review, 81(2), pp. 108-15. Seal, W., Garrison, H.R., and Noreen, E., 2008. Management accounting. Boston. McGraw Hill Higher Education. Williamson, D., 1996. Cost and management accounting. New York: Prentice Hall. Read More