Operational Reasons to Budget - Essay Example

PART A; Technical a. Sales budget Large Giant total Selling price 3 4 7 Units to be sold 3000 1800 4800 Budgeted sales 9000 7200 16200 b. Production budget in units Production budget in units Large Giant Sales 3000 1800 ADD; Closing inventory 200 150 less: Opening inventory -300 -180 Production budget in units 2900 1770 c. Direct material usage budget and direct material purchases budget Direct material usage budget Large Giant Units produced 2900 1770 Quantity per unit 1.25 1.5 Purchase price per unit 0.8 0.8 Direct material usage budget 2900 2124 direct material purchases budget Large Giant Quantity for budgeted production 2900 2124 ADD; Closing inventory 100 280 less: Opening inventory -64 -105 Budgeted purchase 2936 2299 d. Direct manufacturing labor cost budget Direct manufacturing labor cost budget Large Giant Budged production 2900 1770 Hours per unit 0.2 0.25 Labor rate per hour 8 8 labor cost of budgeted production 4640 3540 e. Manufacturing overhead cost budget Manufacturing overhead cost budget Large Giant Manufacturing: Set-up ($20 per set up) 1.6 1.9 Processing (1.7 per DMLH) 0.34 0.425 Total manufacturing overhead 5626 4938.3 Non-manufacturing Marketing and general administration (0.1 of sales) 237 145.8 Total overhead 5863 5084.1 f. Budgeted unit cost of ending finished goods inventory and ending inventories budget Budgeted unit cost of ending finished goods inventory Large Giant direct material cost per unit 0.8 0.8 Direct labor cost per unit 1.6 2 Manufacturing overhead per unit 1.92 2.34 Total production cost 4.32 5.14 Ending finished goods 608.8 365.25 Ending finished goods inventory 2630.016 1877.385 Budgeted unit cost of finished good 2630/3000= 0.88 1877.4/1800=1.043 g. Budgeted income statement Budgeted income statement DR CR Sales giant large 9000 7200 16200 Opening inventory 300 180 480 Direct material 2900 2124 5024 less; closing inventory -200 -150 -350 Gross profit 6000 5046 11046 Les; Operating expense Direct labor -4640 -3540 -8180 Manufacturing overhead -5863 -4115 -9978 Net loss -4503 -2609 -7112 h. Cash budget. Cash budget November December Opening cash 587 3202.5 Receipt Cash sales 6480 6350.1 Debtors collection 3240 Cash available 7067 12792.6 Payment Purchases -3664.5 -1570.5 income taxes -500 Interest payment (1%20,000) -200 -200 Closing balance 3202.5 10522.1 Sales collection schedule November December Gross sales 16200 Cash sales 0.5 (0.8) 12960 credit sales 0.2 3240 Collection 0.5 6480 0 0.49 0 6350.1 Bad debt (1%) 129.9 Purchase payment schedule November December Cash purchase (0.7*5235) 3664.5 0 30% of purchases 0 1570.5 PART B; Essay An exploratory study of operational reasons to budget 1. Introduction The budget is employed extensively but is has received lot of criticism on its performance assessment. Firms consider the budget as a significant forecasting tool as well as the control tool than appraisal tool hence advocating underlying principle for their existence devoid of assessment on the basis of critics (Bruns 2005). The research is important since many budget study centers on assessment, suggesting a significant disconnect between the study and the reality of the finance. 2. Literature review and proposition development 2.1. Evaluation focus The basic performance assessment employed in financial forecasting is the use of budget importance, budget involvement and the use of the budget. This basic budget study is deeming broadly as well as the participative financial forecasting and reliance on accounting performance appraisal study. The budget focus takes into consideration the specified by the firm to the budget. Budget estimate proxies the extent to which a firm centres on financial forecast as management control tool. High budget concern means strong commitment. The assessment of the items employed to appraise the construct depict that they inhibit a strong employee assessment and commitment (Drury 2006). The perceptive budgeting takes into consideration the setting of financial forecast for the justification of comprehending its impact on employee assessment, budget involvement appraises the very standard employed. 2.2. Operational budget reasons 2.2.1. Evaluation reasons The performance assessment may be decomposed into the employee’s assessment as well a business unit assessment. The staff assessment financial forecast has broadly researched. The firm assessment justification of the employees as well as firms units within similar framework unreservedly presuming similarity in reality. They may be different as well as their impact on financial forecast is dissimilar 2.2.2. Planning reasons Operational planning budget entail the harmonization of resource, preparation of action pan as well as control of production capability, assessment of necessary skills, and provision of information to external parties. This justification is obtained from the research of present academic material as well as expert study. Harmonization of resource is a major operational planning justification that is discussed frequently as participative budget study. Firms come with budget so as to update the division as well s other section of the business concerning their financing limits before the period start (Hopwood 2002). The division requests a financial forecast as well as budgeted committee entailing top executive discuss a value with division. The outcome of the financial forecasting ought to be complied with by division. As a result, harmonization of resource is important since it’s the process of requri9ng as well as conferring finance available as well as help in formulating an action plan since, it might help the firm to plan for cost ranging of other best alternative to be taken into consideration. Budget is as well as important in managing the production capacity by way of standard costing variables in order to portray on the extent of activity as well as the extent to which the capitalize their operating capability. The anticipated expenses established in a budget might be employed based on the assessment of the required unit selling price. Standard costing system commands the completion of the predicted number to cost product which is proportionately affect the establishment of the selling price. Financial forecast might be created for the motivation of innovative attitude by way of planning organizing and controlling. 2.2.3. Control reasons The two distinct reasons for preparing the budget is that budget act as a monitoring tool for the firm as well as it is control tool. These two are related to the administration of the firm employing the financial forecast at the specific time. Budget frequently employed as monitoring tool by way of anticipated budget spending with frequent review of the performance against the budgets. Budget is a key financial control tool provided to directors as well as depict financial forecast communicated to top executive. From the operational point of view, directors might employ the financial forecast monitor the firm’s improvement in the period taking into consideration any variation (Ekholm 2000). The budget permits the cost control by controlling their spending limits. Given the budget implanted knowledge of spending anticipation, firms are improved and can centre on ensuring the cost is kept low to budget during the time and actively participate effort to manage the expense 2.3. Budget criticisms The main theme of assessment linked budget critics profound that the firm employs the budget as a tool for encouraging employees. This exists where employees perceive the budget and job related tension as hard to attain. The existence of job related tension makes worked to change their attitude in suboptimal approach. To attain the financial forecast target. Workers do so since they believe that the –reassure of adhering to the budget as well as they change the operation situation on their environment. The link between financial forecast and the outcome acknowledges the damaging impact of budget when employed as an assessment tool in consideration of budget based target for performance assessment. The use of financial forecast for planning as well as controlling might as well be difficult due to use of the budget an assessment tool. Planning and controlling intricacy emanate from the budget for assessment. Due to assessment related problem in financial forecasting, firms must dump the financial forecasting as well as assume more activity base approach to budgeting that is cross-departmental as well as less probable to create administrate gaming (Jensen 2003). Where the majority of the budget critics relate to financial forecast as an assessment tool as well as firms proceed to employ the budget, it might be explained that firm considers the significance of budget as a planning and controlling tool, it unrealistic to declare that entire planning and control justifications will be more significant gen the investigative state of the research. Nevertheless, at least a separation of planning and control justification ought to be more significant given the critics presented. Why the employment of the financial forecast for planning and controlling might be difficult, the intricacy might be from the use of budget for assessment. where the company employ budget to appraise the workers performance , employees may involve in game playing at the time of the planning stage and this it frustrate the planning and control procedures concerning the budget since ht development of budget is not accurate and thus less considered as important by employees (Röhm 2007). As a result, planning and controlling intricacy consequential from the employment of financial forecast for assessment as a result, the assessment linked intricacy in financial forecasting must be dumped. 2.4. Rolling forecasts Firms are increasingly employing other option such as the rolling forecast for control; a rolling forecast is normally produced every quarter and consequently permits firms to frequently adjust its anticipated number within a yearly period to portray the existing market realities experienced by firms. The present research provides that the employment of rolling forecast tom anticipate more regular than once every year, firms are capable of minimizing the damping impact of unknown on the financial forecast. The existing research provides a hypothetical insight to inform the critics on whether the roiling forecast are an alternate for compliment to the yearly financial forecast. The research as well as take onto consideration the justification for employing the rolling forecast as well as makes comparison to the justification for employing yearly budget (Ekholm 2000). By anticipating for a short period, rolling forecast minimizes the time between the panning and the business actuality. This ought to make firms more competitive as well as sensitive to change specifically when economic situation change significantly. Rolling forecast provides a precise judgment and facilitates the firms learning as well as provides directors with more confidence in the financial planning employed for short term operational planning. From the performance assessment perspective, proof on the effect of rolling forecast is fixed. Employee might find that it is very hard to assume free rides when their yearly target is met well before the end of the year. This is because, under the rolling forecast, updates to numbers exist every month as result, rolling forecast minimize free rides period as well as provides more significant accounting numbers for performance assessment. Nevertheless, rolling forecast can negatively impact the performance assessment since appraising individual for a short period creates a much higher administrative workloads and the performance assessment progression turns out to be stressful since financial forecast are susceptible to change. It is hard to provide workers with performance assessment target using the rolling forecast. The target will frequently change as financial forecast change. Rolling forecast minimize the goal equivalent as they constantly change financial target for employees when employed for assessment. Where the rolling forecast is introduced majorly for make sure that there is improved quality short term anticipation as well as yearly financial forecast is less capable of generating a precise standard, then planning and controlling justification must be more significant fro rolling forecast than the yearly financial forecast. Financial forecast is considered as more significant for firm’s assessment unlike employee’s assessment. The conclusion is significant since the employees assessment justification is based on the definition and hypothesizing association between important financial forecast changes. The conclusion provides that the research might deem the business until assessment in defining and hypothesizing these changes. The critics point out that support for the role of rolling forecast in helping yearly financial forecast in the firm. Contrasting the claims of expert studies nevertheless, rolling forecast has no proxies for the budget. They are employed in addition to financial forecast as well as for the similar operational justification as the yearly financial budget. Research depict that the rolling forecast might provides objective predisposition intricacy if employed for assessment but were an efficient source of firm’s planning and control (Jensen 2003). As result, rolling forecast had been criticized to be more significant fro panning and controlling budget justification and the yearly financial forecast for assessment budget justification. The resemblances in the significance of the financial planning justification found in the research might point out that firms employs both financial forecast forms to attain similar sorts of result but for differing time. The firm might budget for the intention other than those taken into consideration by the critics of the financial forecast. Many of the budget study as well as expert judgment centers on the employment of financial forecast for justification of assessment. Nevertheless, standard budget control like the yearly financial forecast may be employed for planning as well as controlling reasons. Consequently numerous financial forecast judgment may no longer be significant and thus explaining a firm frequent employment of the financial forecast. Moreover, rolling forecast is profound by expert to be an alternate for the yearly financial forecast. Rolling forecast engage frequently anticipating by firms so as to create more precise financial anticipation. As a result they overcome numerous intricacies claimed for the yearly financial forecast which have been the centre of the critics. The employment of enhanced financial forecast practices might expound the reason for budget persistence regardless of the important judgment in the literature. The research provides an insight into frequently employment of the financial forecast by firms despite the critics. The planning and controlling justification is considered as significant unlike the assessment justification for the financial forecast. Moreover, rolling forecast seems to be employed as an alternative to financial forecast. Financial forecast and rolling forecast are employed for same justification which is somehow astonishing since it is anticipated the two form of budgeting might be employed for diverse reasons. The research therefore provides a significant hypothetical evidence for the higher significance of the wide planning and controlling function operational justification in the firm, in relation to assessment justification. This is important since the present contingency relation between firm traits as well as budgetary traits like the financial importance; budget involvement as well as the use of budget assumes the assessment justification when conceptualizing these variables. Reference list Bruns, W. J. (2005). Budgetary control and organisation structure. Journal of Accounting Research , 13, 177-203. Drury, C. (2006). Cost and Management Accounting: An Introduction. New York. Ekholm, B. J. (2000). Is the annual budget really dead. In review, European Accounting. Hopwood, A. (2002). An empirical study of the role of accounting data in performance evaluation. Jensen, M. C. (2003). the truth about the budgeting process. European Financial Management , 406, 9. Röhm, S. (2007). Are Traditional Budgeting Practices Out of Kilter. London. Read More