Managerial Budgets Control - Assignment Example

Managerial Finance and Accounting Table of Contents Introduction 3 Background of the Company 3 Basic Problem 3 Budgetary Control 4 Basic Concept 4 Drawbacks of Budgetary Control 5 Analysis in Respect to Ferguson & Son Mfg Company 5 Problem in Existing Budgetary Control 5 Affect of the Problem on the Effectiveness of the System 6 Recommendation to Improve Effectiveness 7 Conclusion 7 References 9 Introduction Background of the Company Ferguson manufacturing Company was established in 1907. It was founded by W.E. Debnam and Walter Ferguson. In the field of manufacturing, powered rotary cultivation equipment and peanut equipment, this company has been the leader. This company is currently operated and owned by the Noreita Burton and Emmett. Their mission is to provide quality product to the customers and be the best at what they do. It further aims to be a company that customers can trust and value (Ferguson, n.d.). Basic Problem Basically the problem that has erupted in the company is that of performance evolution pattern. This is completely an internal problem. The employees and especially the supervisor of the various departments in the plant have an issue with the budgetary control system which further leads to performance evolution pattern. Now the problem of this company can be analysed, considering the theoretical aspect and on the basis of such analysis, recommendations can also made. Budgetary Control Basic Concept One of the most important functions of any organisation or management is to control and budget is the most useful tools for controlling the operation. Basically for effective running of any business few things are necessary to consider. Those are the organisational objectives, plan and policy to acquire those, coordination among the individual objective to the organisational objective and control. All this purposes can be better sought off through the budgetary control device (Sweatt, n.d.). It basically exhibits the comparison between the actual and budgeted performance. The case study is all about the production department or of a plant, therefore it is necessary to emphasize on production budget. Production budget refers to the planning of level of production. It provide in depth analysis of what is to be produced along with specifying its time, cost, place and procedure. The production cost budget can be estimated through the following process: (Shirsekar, n.d.). Drawbacks of Budgetary Control An organisation has to face various problems once it has been burdened with the budget. The drawbacks of traditional budget are lack of flexibility, increased focus on strategy, and constraints in responsiveness, wasting of time while preparing budgets instead of adding more value, emphasizing more on vertical command and high cost and time consuming process (CIMA, 2007). In the case study, it has been found that the performance evolution has been done through the budgetary control. It may leads to problem as it is forcing the performance to match with the budget. There is a huge chance of ethical breakdown among the employees. In this case, focus of the employees or labours may shift from the quality towards the quantity. Analysis in Respect to Ferguson & Son Mfg Company It has already been discussed that there is a problem in this company related to the budgetary control, since implementation of the new evolution pattern. From the above discussion, the concept regarding budget and its drawback is pretty clear now and it needs to link with the company to determine the problem and the feasible solution. Problem in Existing Budgetary Control It is analysed that the problem do not lie in the existing budgetary system. The problem is in the tight control of budgetary system and evaluates the performance on the basis of that. Employees are being forced by the management to meet the budget as they have to justify their performance in the Tuesday’s meeting. From the case study, it is evident that previously the department head of equipment maintenance and machine shop use to give more emphasis on the quality. Basically, Michel frazzled the importance of craftsmanship. He always instructs and warns his subordinates that he do not want any slack work from his department. It shows his effort to produce qualitative goods. This is what the department head use to follow but the plant manager, Mr. Robert Ferguson view is different from it. He intended to adopt monthly performance comparisons between the actual and budgeted costs. It will be calculated separately for each department. His view behind this departmental budget is to persuade the supervisors to seek cost reduction opportunities and reduce inefficiencies. Even the controller of the company was also instructed to tighten the budget once it has it has been attained for the particular month. The ultimate intention behind it is to reinforce the plant manager. Mr. Robert stressed the importance of systematic improvement towards the attaining the budget. From this information, the internal situation of the company is revealed. What the plant manager wants and what the departmental heads use to do or are habituated to do is quite different. Affect of the Problem on the Effectiveness of the System Both the party possesses different views to bring improvements in the process. It may lead to the conflict between the plant manager and the department manager. Experienced department manager such as Michael, may have problem to adopt these recent changes made by the young plant manager. And thus, production will be directly affected. Because of the lack of flexibility and the ethical dilemmas within the employees, company may ultimately loose its productivity. What the supervisors are asked that is to reduce the cost but there were no control or instruction on the value creation. Therefore the quality and value of the product might be declined. The most important aspect in this case is that, in Ferguson Manufacturing Company, process based manufacturing technique has been followed. Therefore, product or the process of a particular department plays a significant role in the process and product of the next department. In that case, if one of the departments will not able to meet the expected quality then its effect will be on the entire production system. It also may have indirect affect, such as lack of information sharing and quick response to the market condition. Recommendation to Improve Effectiveness With the implementation of the budgetary control system, the company is amending a fixed target and that shows certain internal problems. Therefore the company can be recommended to go for relative performance evolution. It means that the plant manager may establish a benchmark which also enables the company to vision at goals in the long term. In this case not only the production cost but all other production related factor may be consider, such as quality, internal and external customer satisfaction. This relative target will enable the employees to outdo themselves. Value creation will also be possible through the continuous planning. Another recommendation is that the company should focus on the decentralised decision making procedure. Thus, they will be able to consider market feedback also (Hope & Frazer, 2003). Conclusion The given case study was of the Ferguson Manufacturing Company, where a problem related to the budgetary control came into affect between the supervisor or the departmental management and the plant manager. The basic problem lies in strict focus on the budgeted cost; from the conversation of two departmental heads, it is identified that there is a problem related to maintaining the quality while taking care of the budget also. It is implicated that a future productivity problem may also arise. Even possibility of loosing standard quality and conflict can not be ignored. Therefore it has been suggested to the company to implement a relative performance evolution pattern or benchmarking procedure instead of budgetary control. This method will enable the company to acquire desired level of quality and quantity with employee satisfaction which would further lead to enhanced productivity. References CIMA, 2007. Background. Beyond Budgeting. [Online] Available at: http://www.cimaglobal.com/Documents/ImportedDocuments/cid_tg_beyond_budgeting_oct07.pdf [Accessed August 21, 2010]. Ferguson, No Date. Company Profile. Home. [Online] Available at: http://www.fergusonmfgco.com/ [Accessed August 21, 2010]. Hope, J. & Frazer, R., 2003. Who needs Budgets? MAAW. [Online] Available at: http://maaw.info/ArticleSummaries/ArtSumHopeFrazer2003.htm [Accessed August 21, 2010]. Shirsekar, S. V., No date. Cost of Production Budget. Budget and Budgetary Control. [Online] Available at: http://www.slideshare.net/ashishnangla/budget-and-budgetary-control-presentation [Accessed August 21, 2010]. Sweatt, E., No Date. Budgetary Control. Management Accounting. [Online] Available at: http://www.google.co.in/url?url=http://www.wiley.com/college/weygandt/0471413658/ppt/ch07.ppt&rct=j&sa=U&ei=1H5vTOeUIKHauAOKhPWhDg&ved=0CBQQFjAA&sig2=eyp0VeL9C4Wcoo-8yEsrVQ&q=budgetary+control+ppt&usg=AFQjCNGpWzvei56oAg_onrlt5CT7yaEjaA&cad=rja [Accessed August 21, 2010]. 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