Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap - Assignment Example

Budgeting Name: Lecturer: Course name: Course code: Date: Part A a) Sales Budget Sales budget Chairs Tables Expected sales in units 172,000 45,000 Selling price per unit $80 $900 $ 13,760,000 $ 40,500,000 b) Production budget c) direct material usage Expected production units 172,500 45,150 Direct material - Wood 1.25 1.75 Total wood used 215,625.00 79,012.50 Cost of wood $6.40 $6.40 $1,380,000 $505,680 Glass - 2 Total glass used 0 90,300 Cost of glass $12.00 total cost 1,083,600 Total cost of material used $1,380,000 $1,589,280 Direct material purchased Total wood used 215,625.00 79,012.50 Total glass used 0 90,300 Total materials used in units 215,625.00 169,312.50 Add Target ending inventory 29,375 9,000 Less opening inventory ($27,300) ($8,750) Total materials purchased 217,700.00 169,562.50 cost per material 6.4 12 Total cost of material purchased 1,393,280 2,034,750 d) Manufacturing labour cost budget Direct manufacturing labour cost budget Chairs Tables Expected production units 172,500 45,150 Direct material hours/unit 4 8 Total hours 690000 361200 Cost per hour 15 15 $ 10,350,000 $ 5,418,000 e) Manufacturing overhead cost budget Manufacturing overhead cost budget Chairs Tables Expected production units 172,500 45,150 Unit per batch 500 50 number of batches 345 903 set up time per batch 3 2 total set-up time 1035 1806 Total set-up 97,000 35338 61662 Processing Expected production units 172,500 45,150 machine hour per unit 3 5 Total budgeted machine hours 517,500 225750 budgeted machine costs 789250 549528 239722 material handling Expected production units 172,500 45,150 Input per unit 1.25 1.75 total board material used 215,625 79012.5 material handling costs 342840 250901 91939 Total manufacturing O/Hs ####### $ 835,767 $ 393,323 f) Unit cost of ending finished goods inventory Unit cost of ending finished goods inventory chairs tables cost per unit input per unit of input of output Total Total $ $ wood 6.4 1.25 8 1.75 11.2 glass 12 0 2 24 direct manufacturing 15 4 60 8 120 labour hours Machine set-up 34.1 2 68.2 2 68.3 Processing 1.06 3 3.2 5 5.3 Material handling 1.16 1.25 1.5 1.75 2.0 TOTAL 72.9 230.8 Ending inventory budget quantity cost per unit total direct materials wood 29,375 6.4 188,000 glass 9,000 12 108,000 Finished goods Chairs 8,500 175.1 1,488,350 Tables 2,250 230.8 519,300 Total ending inventory 2,303,650 g) Non-manufacturing overhead costs budget Non-manufacturing overhead cost marketing cost Chairs Tables Total Expected sales 13760000 40500000 54260000 marketing cost 2011200 510028 1501172 Distribution cost Expected sales in units     172000 45000 Delivery size 500 500 number of deliveries 344 90 434 distribution cost 54000 42802 11198 total 2065200 552830 1512370 cost of goods sold chair tables total opening stock of finished goods 760000 477000 1237000 direct material used 1380000 1589280 2969280 direct labour 10350000 5418000 15768000 manufacturing overheads variable 835767 393323 1229090 fixed 6800740 less; closing stock of finished goods -1488350 -519300 -2007650 cost of goods sold $11,837,417 $7,358,303 $25,996,460 h) Budgeted Income Statement Budgeted Income Statement chair tables Total Revenues 13760000 $40,500,000 $54260000 less ;cost of goods sold ($11,837,417) ($7,358,303) ($19195720) gross margin $1,922,583 $33,141,697 $35,064,280 less ;non-manufacturing costs distribution variable ($42,802) ($11,198) ($54,000) marketing variable -510028 ($1,501,172) ($2011200) distribution fixed ($380000) marketing fixed ($4500000) net profit $ 1,369,753 $ 31,629,327 $ 28,119,080 i) Reasons for the company selling the chairs at $80 The company’s total manufacturing cost per chair is $72.9 where if the company sells the a chair by $80 the company is still making a profit of $7.1 Machine set-up 68.2 Processing 3.2 Material handling 1.5 Total cost 72.9 Part B Budget refers to a predetermined set of interlinked operational plans that quantitatively describes organizational anticipations[Tal12]. Budget is utilized as management benchmark for determining the entities actual result against the budgeted results. The budget is an administrative tool that serve as managerial blueprint of actions in delivering entities objectives as well as the standard for measuring the entities managerial performance efficiency. Budget is managerial control initiatives which conceptualize on different business setup defining the short term and long-term terms. Budgeting profound oriented initiative that enable management to set measures to attain the budgeted business activities[Lim11]. The business firm sets budget on business financial performance over certain duration of time. The business performance from the budgeted period is truck against the budgeted financial information. According to current business setup most of organization has set management accounting department to counter see the business behaviors against the developed budgets. The hypothesis of budget articulates the provisions in considerate that the organizational factors will be kept constant[Lib10]. The organizational budgets is sensible to the economic, environmental, and political constraints. Simultaneous business growth according to the budget outlay is substantiated by the geographical political state where positive political environment enhances business towards achieving the budgeted business performances. The economic and environmental constraints determine the business behavior’s in relation to the predefine budget outlay. Budget is usually one of the most important tool necessary in an organization for both objectives and goals derivation. Budget monitors both the performance and the firm’s progress in an environment. Manager’s incentives in preparing the organizational budget is witnessed when the forecasted information may be falsified, distorted or manipulated to be used by the target group. Budget gamesmanship is considered as a form of dysfunctional activities that limits the process of planning and the business accuracy in manager’s evaluations[Lib10]. The findings from the research conducted in some of the firms with the budget games that product managers play in the firms. Managers use budgets as a motivational tool to substantiate employee motivational aspects towards the organizational objectives, Budget outlay defines and motivates staffs by tying rewards to one index of performance[Bie121]. Employees who perform better in the organization are subsequently rewarded hefty as a mode of motivation by their immediate bosses. Some Budgeting methods fails because once the rewards runs out, many people regress to their old behaviors. However budgeting sometimes helps the employee but they never see it as a motivation to the best work done. The failure of Budgeting are also caused by employees negative attitudes towards Budgeting, employees see Budgeting as a pay but not as a motivational factor towards work[Tal12]. They assume that the rewards accrued due to the best work done is a payment that they deserved, employees assumes money heads the list other than reward. Budgeting or rewards a times are taken by managers as a punishment. Managers use budget as a motivational tool to substantiate the rewards aspect towards the organizational performance, the panic of punishment or the expectations of reward, which induces action or motivates effort towards a high productivity. Manager’s use of budgeting ruins employee’s relationships because many of them will often be involve in hatred as a result of rewards scrambles[Hop13]. Most of the employees will concentrate will pressure the organizational systems for their individual gain instead of improving the systems for effectiveness which will lead to system crash. Cooperation in the organization is destroyed once the core objective is to force or make employees compete for rewards or management recognition where they are ranked with one another. Budgeting makes some of the winners of this awards known by all other employees by posting of the organizational newsletter, websites or through the memos. This creates enormity between the employees and either subordinates’ or their immediate supervisors and this may make it collapse in the name of applying incentives or rewards The research findings were categorized as firms with games and firms with no budgeting games. Product managers referred all this budget games played as secret reserve towards budget preparation and forecast. The responses provided by the product managers showed the existence of budget games in budget estimates[Lim11]. The exhibits from product Managers Budget Games table portrays that understating the products volume estimates was ranked top with higher frequency of mention compared to overstated expenses, market research ranked last with lower frequency of budget games. Several factors constrains appeared to detect the budget games the product managers. Time constraints that is imposed on senior managers was another condition identified as facilitating budget games during plan review period because some of the senior management don’t have enough time to check every number put in the plans[Hop13]. Historical method of promotion which is used as spending pattern for the products is calculated as a percentage of sales which would clearly portrays all the errors and games done on budgeting by the product managers. Another factor that helps detect budget games is that senior managers were responsible of giving assignments to junior ones which helped eliminate budgeting errors. Main reason that motivates product managers play games was majorly to achieve their ultimate product targets as it’s the core main reason of business. Budgeting is pragmatic incentives that involve predetermine measures expressing the understanding of the objective as well as influencing one’s actions in meeting the objectives. Budgeting embraces ideal mechanism that asserts people towards the specific goals hence improves their operational efficiency in meeting the predetermine goals[Lim11]. Budgeting stipulates the managerial theory of evaluating one's satisfaction and commitment in realizing the predetermine goals. The budgeting is dignified by the orientation to the goals setup where extent of commitment in the budgeted procedures accentuates the assertion of the meeting the oriented goals. The Budgeting theory substantiates the managerial incentives of enhancing different competencies alongside related workload in enhancing efficiency and effectiveness towards budgeted goals[Lib10]. Consequently, the theory embraces a wide range of ideas and mechanism through with the people’s performance level is enhanced towards the predetermine goals and objectives. Budgeting is effective casual mechanism which appropriately conceptualize on the relevant goals incentives from the irrelevant activities. The sensible overview describes centered performance initiatives that articulates on measures of attaining the goals within the time schedule. The orientation towards intellectualizing the management predetermine objectives and organizational goals accentuates exploration of new ideas that promote managerial efficiencies. The conditions are underlining the budget prescribes performance profile which move people towards specific performance outcome[Bie121]. The measures encapsulated within the predetermine goals promote anxiety of meeting comprehensive goals outlay. Budgeting is substantiated by sensible commitment by predetermine objectives and mechanism. The publication of goals incentive pushes one towards attaining the set goals. Leadership roles towards organizational goals express the leader’s confidence in attaining the goals by galvanizing and inspiring people to realize the visionary goals[Hop13]. Monetary measures dependently promote goals achievement though induced dedications towards goals attainment. The pragmatic complex jobs need a well-structured goal mechanisms to outweigh the complexity of the employment. The goal setting embraces ideals initiatives that define tremendous efforts towards realizing the goals. The goal-setup provides motivational aspects that efficiency in meeting the organization predetermine activities. Budgeting substantiates managerial motivation behaviors that enhance one’s self-management in meeting operational initiatives[Lim11]. Gary Latham’s describes the goal setting as managerial initiatives of enhancing high innovations that eases decision-making process. Budgeting perhaps is in appropriate with the strategic plans whereas the traditional budgeting mostly emphasizes on the financial performance over the anticipated strategy which focuses on the management next year end attention over than supporting the medium term strategies. Budgeting as it was first developed over a long time ago, it has several traditional roles which includes; The budgeting has a role in coordinating the financial activities of the organization; budget helps to allocate resources so that the resources allocated can be used by senior managers about savings and some of the revenue objectives. Advanced budgeting system has several guiding principles that support strategic execution. Budgeting systems will align budget to strategy. Budgeting systems will integrate the planning process[Tal12]. Budgeting is used as strategic performance tool by managers to keep track of the execution of activities by the staff within their control and to monitor the consequence arising from these actions. Budgeting aligns the organization supplemental reward that management use as an incentive to motivates workers or staffs in an organization towards predetermined results. The problem with budgeting as a performance tool involves According to statistics done in the recent past; as much as the directors, finance officers, and operations managers support the use of budgets in their organizations, they have their reservations about it. The directors are usually uncertain about the reliability of assumptions used in budget preparation and are never sure whether the firm is dynamic enough to embrace changes in the economic world[Lib10]. The finance officers understand that the budget process is lengthy and at the same time not as profitable as expected. The operating managers complain about the time wasted during budget preparation and knew that budgets lead to slow decision making. As observed in many business circles, budgeting is not as good as expected. The process of budgeting has own drawbacks which include: i. The business environment has become overly competitive hence the budget is not helping the top management achieve their targets in any way. ii. The whole process of budgeting is tiresome and costly. This is because it entails the pulling of additional resources in order to accurately make estimates. iii. Lastly the practice of gaming numbers has reason beyond the acceptable limits. The shortcomings attached to the use of budget systems is describe as follows Budgeting may fails because management uses one system to keep track and the activities conducted by the staffs. Budgeting is inefficient in that the traditional budgeting process takes a lot of time and consumes a lot of management resources[Hop13]. The conducted research showed that many senior managers spend at least 10% to 20% of their time making reliable budgets whereas finance planning department spend more than 50% of their management time which makes some groups regards the process of budgeting as valuable use of management time. Other budgeting performance problem is that it limits and fails to motivate correct behaviors, generally managers usually request funds they will need to make sure the allocated amount will reduce to deliberately make most of their targets performance look better, continuous use of budgeting as a management tool become outdated once they are implemented which makes it more obsolete to be used. Due to the disadvantages which accrue to the budgeting process, organizations view budgeting as an annual performance trap. These organizations have come up with alternative methods to replace the budgeting process while achieving the same goals. One of the methods adapted is the use of performance management circles[Bie121]. The circles include a strategic and operational view which not only looks at performances in short term but in medium term between 3 to 5 years. The second method used to replace budgets is the radical decentralization method which involves the transfer of power from top management of the company to the operating management, this will motivate low-level staff and promote good performance. References Tal12: , (Talpin, 2012), Lim11: , (Lim, 2011), Lib10: , (Libby, 2010), Bie121: , (Bierman Jr, 2012), Hop13: , (Hope J & Fraser, 2013), Read More