Budget Reporting System - Essay Example

?Budget Reporting System Introduction For the management to communicate the appropriate organizational goals to the appropriate staff/managers so that they can facilitate, coordinate and control performances in the various sections of the organization in order to meet certain planned organizational goals and objectives, proper budgeting must be put in place. It is for this reason that managers are required to develop attitudes and strategies that would cultivate and maintain supportive and cooperative ways of relating amongst the subordinates (Horngren & Foster, 1991). Several organizations are fond of using budgets as computational tools for controlling costs which should not be the case; instead, the management should also consider behavioral aspect of budgeting so that the employees can be motivated to achieve the organizational budget goals. For this to effectively happen, all the staff should have a sense of ownership of the budget being put into use. In order for the management to efficiently perform the necessary management functions, the use of budgets becomes very fundamental (Hilton, 1994). Therefore, budgets are mostly used in the planning process. It therefore needs to be employed appropriately so as to facilitate communication and act as a motivational factor amongst the employees. In addition, budgets are also used as for control and performance evaluations and measurements. Apart from all that, budgets provide a target for each member to achieve as well as a focus for their efforts (Hopwood, 1974). It therefore calls for participation to be allowed so that those involved in budget setting can be allowed to freely discuss and be more receptive to the decisions made so that they can easily corporate in achieving the budget goals. One very important issue that Charles Ltd. should know is that; the way in which the budgets are administered to the appropriate staff determines their effectiveness to help achieve the organizational goals. Janet was not made part of the group when setting the budget with which she was served, therefore she could less understand the importance of this budget as well as its usefulness. She ought to have been part of this budget from initiation for him to adopt it without any problem (Lamberton & Harvey, 1991). Instead, she was made to adopt a budget of which she did not feel part of its ownership from the start. It is therefore important for Charles Ltd. to recognize that budgets in an organization have two important uses; one, they are used as a forecasting tool to measure the performance of the company in a particular period of time, especially in a year, and the second use is where the budgets are used as a yard stick of the managerial performances. However, it is usually argued that, by using the budget for measuring managerial performance, it can as well be used as a tool for control in the organization (Schiff & Lewin, 1978). The current budgetary reporting system considers variances that evidently show both the efficiencies and inefficiencies of the budget. This is determined by considering whether the variances are either favorable or unfavorable. On several occasions, the variances seem unfavorable as can be explained by the differences between the budgeted and the actual figures in the table. The notes 1 and 2 also indicate that the variances are unfavorable. Considering that the budget report was made by the directors without making Janet and other supervisors and managers part of its setting, it becomes very difficult for these other staffs who were not involved to just accept and adopt it. Instead, the result would be that most of the staff would use the inefficiency side of the budget report to criticize it. Taking an example of Janet, she says she has no time for the paper work, maybe because she might not have been used to the this system of budgetary reporting. By considering the report inaccurate and unfair, she may be feeling that the inefficiencies might have arisen due to the overestimation of the cost or underestimation of the revenues intentionally by the management of their own benefits. For example, if Janet believes that direct labor should cost ?152,000 and the actual expensed amount for the direct labor is ?153,000 she considers ?1,000 to have been built into the slack. This practice is called padding the budget. Therefore, for Janet, there is a lot of budgetary slack brought about by this practice that might mean that there are avenues for misappropriation of funds. In any case, there is no instance where the budgeted figures exactly represented the actual figures that were used. To add on, there are several negative effects arising from imposing budgets without any participation. One, it is not easy for one who never participated in making the budget to just accept the already made budget report. They may consider the report erroneous and refuse to adopt it. They may also refuse to cooperate with the management in achieving the planned goals of the budget. The staff may also consider the inappropriate levels of the budget difficulty. In this case, the budget report presented could be too difficult or easily attainable. In this case, the staff will refuse to adopt the budget report, which will lead to lack of cooperation while trying to achieve the budgetary goals. The current budgetary reporting system adopts the flexible budgeting principles. It may seem that the management of Charles Ltd. is not used to such kind of budgeting styles. Therefore they might see the variances as the contributions in the inaccuracies and inefficiencies in the budget report. One may argue that if the budgeted amount cannot be achieved, then there is no need for such budgets and variances, the organization should just use the actual or the static budgeting system where one does not have to use the variances. When the first two notes suggested that action should be taken to increase production and sales revenue, and also to improve cost in the department, to Janet, this was unfair since she was not part of the personnel who set the particular budget for her department. At least as the supervisor for the department D, she ought to have been consulted in preparing the budget for her to be blamed for poor results. Changes to the Reporting System To begin with, the team responsible for producing the budgetary reports should be made to consist of all the representation of the staff concerned for each department. It does not only involve representation, but the staff should be made to own the budgets and the budgetary reporting system for them to easily adopt it and cooperate in its implementation to achieve the set goals for the budgets. The departmental staff should, in addition to being given the budgetary reports, be allowed to also develop their own reports. In this case, the managers will be able to make a comparison between the two reporting systems and know where the weaknesses and the strengths are. It has been found that managers are more motivated which makes them to become more productive and more satisfied with their jobs and their colleagues when they use their own reporting systems. It has also been noticed that less time is wasted on competition between the senior staff who plan the reports and the managers who implement their own reports. This should not advocate for the lower level managers to be given authority to make their own budget reports, but it should at least suggest that they should be involved in the budget setting process and their opinions sought and carefully considered to make them feel the ownership of the budget. There are several advantages that arise from involving the participation of the lower level managers in the budget setting process in order to use a reporting system that they would all adopt and support. Firstly, involving the participation of the lower level managers would improve the communication of the staff among themselves. This would ensure that everyone brings their own contribution to the table that would then be harmonized to come up with one reporting system that is agreeable to all. This would then go a long way to be adopted by everyone in an effort to enable them achieve the goals of the budget. Secondly, there would be greater understanding of the factors involved. In this case, the factors would be discussed in detail for everyone to understand one in case of any clarification, this will be done at once. Thirdly, this creates the opportunity to thrash out problems during the budget meetings instead of when the budget is already set. Fourthly, there would be increased acceptance of the budget when all the parties concerned are involved in making it and its reporting system. Lastly, there would also be increased commitment to the budget since it would be a budget for everyone who was involved in its making. Participation would help ease the tension and pressure that would normally arise due to budget reporting systems and adoptions. Another important point to note here by the Charles Ltd. is that, the top management should use participation, but to the true sense of their word. They should avoid any watering down or any form of pretence that would result to distrust by the subordinates (Argyris, 1953). Revised report Revised report for the period ended for the Quarter Ended August. Actual Planning Flexible budget Variance note Units produced 90,000 90,000 - Machine hours 27,200 27,000 200 ? ? ? Sales 922,500 900,000 22,500 1 Raw materials 130,000 126,000 4,000 2 Direct labor 153,000 144,000 11,000 2 Variable production overhead 96,300 95,400 900 2 Fixed production overhead 115,300 118,800 3,500 3 The above revised budget report represents the budget of the Charles Ltd for the month of August. The company has 300 employees and has sales revenue of ?9 million. Variances would be necessary in a flexible budget to cater for changes in prices and different economic conditions in the future. A variance represents the difference between the planned budget and the actual budget. Variances are considered necessary in a budget since there could have arisen some errors during the creation of a budget. The errors may result due to wrong computations, math problem, relying on a wrong data source, failure to consider inflation and other reasons. If maybe conditions by the time the budget was being prepared might change such as economic conditions that impact consumer demands, the cost of materials, as well as competitive pricing of goods, it would be very necessary to consider variances in a budget. Also, variances are normally considered in a budget in order to take care of the fact that a manager’s job performance could have been to the extremes. In such cases, favorable variances may not always show good situations. The variances are always identified as favorable or unfavorable. Note 1 represents increased efficiency in the production and sales revenue which was contributed to by the harmonization of the units produced. The estimated units produced are 90,000 which is similar to the actual units produced. This would mean that no extra estimation is considered to be produced. These extra estimations normally have extra costs clamped to their production and such extra costs increase the production cost and most of the time reduces the level of revenue. For the company therefore to increase efficiency in production, it would be better if it produced the exact amount that was estimated in the budget. This would represent the characteristics of a flexible budget that normally is prepared at the end of the financial period once the activity level is vividly known. According to its principles, it should represent the same volume of units produced or sold similar to the number actually achieved. In this case, the company’s sales revenue equals ?9 million, considering that the unit cost of production is ?100, it means 90,000 units were produced and sold. On the units produced, therefore, there is no resulting variance, or the variance is zero. Note 2 represents a considerable inefficiency in the cost of materials and labor (inputs) used in this department. The inefficiency is represented by the resulting variance. If, for instance, the budgeted cost of direct materials was ? 126,000 and the resulting actual cost of direct materials used in the production is ? 130,000, this basically means that the variance is ? 4,000. This is an unfavorable variance since the budgeted cost is less than the cost actually used. The second example is in the labor cost where ? 144,000 was put in the budget to be used but on the contrary, the department ended up using ? 153,000. This results in a ? 9,000 excess that was needed to pay the labor cost in this department. This 9,000 pound difference is an unfavorable variance which should not have been incurred. The third example involves the variable production overhead. In this case, the budgeted cost was ? 95,400 while the actual cost of overhead incurred was ? 96,300, this shows clearly that extra cost was incurred in the variable production overhead as planned. It makes the resulting variance to be ? 900 which is an unfavorable variance. This means that the department had to expense 900 pounds more than the already planned or budgeted amount of 95,300 pounds. This results in an inefficient in production which then leads to the reduction in the sales revenue that would be realized. This would mean that more expense would be incurred by the department. This reduces efficiency in production and makes the resulting revenue to reduce. Such inefficiencies result in such production processes due to the differences in the economic conditions or errors that could have been carried along from the budget preparation time. Suggested remedy to solve such inefficiencies could be that, certain actions should be taken to control costs in the involved departments. The third note represents the efficiency of the fixed production overhead. In this case, standard costing is used and the fixed production overheads are absorbed on the basis of machine hours. The amount of fixed production overhead that was budgeted for to be used during the month was ? 118,800. The resulting amount of fixed production overhead actually used was less than this budgeted amount by ? 3,500. This means the actual amount of fixed production overhead was ? 115,300. The resulting variance in this case is a favorable variance since less was actually used than the amount that had already been budgeted to be used. The reduction in the amount expensed could have resulted due to the fact that the estimated units that to be produced were reduced to the actual amount that was actually achieved. It meant that the fixed production overhead that was to be used in the production of the 90,000 units had to reduce since the units to produce had reduced. In conclusion, the most important fact in the budget setting process with the involvement of all the stakeholders during when the budget is being made. This will make the reporting system be one that all the stakeholders are familiar with so that they do not reject it or refuse to adopt it. It will therefore be very easy for a firm’s objectives to be met easily once its budget goals are achieved by the cooperative staff. Bibliography Argyris, G. (1953). Human Problems with Budgeting. Havard Business Review , 1 (31), 97-110. Hilton, R. (1994). Managerial Accounting (2nd Edition ed.). New York, USA: MacGraw-Hill Book Company. Hopwood, A. (1974). Accounting and Human Behaviour. London, UK: Haymarket Publishing Ltd. Horngren, C., & Foster, G. (1991). Cost Accounting: A Managerial Emphasis (7th Edition ed.). Englewood Cliffs, USA: Prentice Hall Inc. Lamberton, G., & Harvey, D. (1991). Advanced Management Accounting. East Lismore: Southern Cross University. Schiff, M., & Lewin, A. (1978). ‘Where Traditional Budgeting Fails’ (2nd Edition ed.). New York: John Wiley & Sons. Read More