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The Importance of Budgeting - Example

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The paper 'The Importance of Budgeting' is a great example of a finance and accounting report. After conducting in-depth research, it is obvious that budgeting has both negative positive effects on business. In a review by Bradford, budgeting is seen as an important step in controlling, evaluating, planning, communication, and motivation…
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Extract of sample "The Importance of Budgeting"

Preparation of Budgets by: Presented to: Course/ Class: University: City and state: Due date: Part 1 a. Sales Budget Ballarat Furniture Company Sales Budget For the Year Ending 2013 Sales forecast (Units) 52,000 Price Per Units $392.00 Total Sales $20,384,000.00 b. Production budget Ballarat Furniture Company Production Budget For the Year Ending 2013 Planned Sales (Units) 52,000 Add Desired Ending Inventory (Finished goods units) 3,000 Total Needs 55,000 Less Beginning Inventory (Finished goods units) 5,000 Units to be produced 50,000 c. Direct materials usage budget in quantity and dollars Direct material Usage Budget in QTY Particle Board (PB) 9*50000 450,000 bf Red Oak (RO) 10*50000 500,000 bf Total 950,000 bf PR RO Totals Units of direct materials to be used from beginning inventory 20,000 bf 25,000 bf Multiply by cost per unit of beginning inventory $3.90 $5.80 Cost of direct materials to be used from beginning inventory $78,000 $145,000 $223,000 Cost of direct materials to be used from beginning inventory $223,000 Units of direct materials to be used from purchases (50,000*9) -20,000 (50,000*10)-25,000 430,000 475,000 Multiply by cost per unit of purchased materials 430,000*4 475000*6 $1,720,000 $2,850,000 $4,570,000 Total cost of direct materials to be used $8,840,000 d. Direct labour budget Units to be produced 50,000 tables Direct labour time per table in hrs Laminating labour 0.25 hrs/table 0.25*50,000 hrs 12,500 hrs Machining labour 3.75 hrs/table 3.75*50,000 hrs 187,500 hrs cost of lamination labour per hour $25.00 25*12500 $312,500 cost of machining per labour hour $30.00 187500*30 $5,625,000 Total direct labour cost $312,500+$5,625,000 $5,937,500 a. Manufacturing overhead variable manufacturing overhead costs Laminating 0.25*50,000 hrs 12,500 $118,750 Machining 3.75*50,000 hrs 187,500 $1,781,250 Total 200,000 hrs Using allocation base (direct labour hrs ) to allocate cost $1,900,000/200,000 rate $9.5/hr Variable manufacturing overhead costs $1,900,000 Fixed manufacturing overhead costs $1,600,000 Total manufacturing overhead $3,500,000 b. Cost of goods sold Beginning finished goods inventory $275*5,000 $1,375,000 Direct materials used $8,840,000 direct manufacturing labour $5,937,500 manufacturing overhead $3,500,000 cost of goods manufactured $18,277,500 cost of goods available for sale $19,652,500 Deduct ending inventory (finished goods) 3,000 tables * $257 $825,000 Cost of goods sold $18,827,500 c. Budgeted Income statement Sales $20,384,000 Cost of goods sold $18,827,500 Gross margin $1,556,500 Tax 0.4*1,556,500 $622,600 Income after tax $933,900 Operating costs marketing $1,920,720 Distribution $729,600 Administration $440,768 Customer service $504,992 Salaries of sales personnel $555,760 Total operating costs $4,151,840 Operating loss -$3,217,940 Part 2 After conducting an in-depth research, it is obvious that budgeting has both negative positive effects on business. In a review by Bradford (2008), budgeting is seen as an important step in controlling, evaluation, planning, communication, and motivation. First, budgets aid an organization in putting under control its costs i.e. excluding expenses that are not in the budget. As an evaluation tool, budgets play the role of benchmarks to check performance of business units, managers, and departments (Haidner, 2008). However, Bradford (Para. 3) quickly points out that budgeting develops negative feelings amongst employees whose compensation depends on attainment of budgets. The importance of budgeting is also visible in planning since it can predict the future by assessing the present performance of revenue and expenses. In some instances, business units are allowed to construct their own budgets, which are then compiled to form a master plan for the entire organization. Bradford (Para. 5) highlighted the critical role played by budgeting in enhancing communication and motivation. Concisely, budgets creates avenue for communication of goals such that available resources are channelled to a common target. In the case of participative budgets, workers are motivated since their inputs are considered invaluable. Such workers will always strive to attain what they themselves included in the budgets. BBRT (n.d, para. 1) asserts that budgeting was traditionally designed to centrally manage and control an organization. This means that budgeting was a management tool used to operate an organization. BBRT (para. 2) further elaborates that the inability of most managers to exercise change away from the traditional role of budget as instruments for ‘command and control’ presents several problems. One of these problems is high costs associated with detailed budgets and the aspect of rapid response that budgeting lacks. Jensen (2001) supported the view that budgeting was problematic. The writer posited that budgeting consumes time and might compromise integrity since it encourages managers to lie. Specifically, Jensen (p. 96) discussed the traditional incentive approach where a manager would be given incentive after reaching the target. In such a scenario, a manager would resort to manipulate company accounts if targets were not attained. This ultimately culminates into integrity issues and eventually damages reputation of an organization. If a scenario of modern competitive environment is considered, then the traditional budgeting process is bound to face solid challenges. To begin with, traditional budgeting required managers and financial controllers to maintain budgets targets and limits that had been planned. This is not applicable in the present dynamic environment where managers and companies are required to adapt to changing operational plans and measures with a view of moving with the changing market situation. It is imperative to note that the current business environment is marked by information explosion where intangible assets and soft success factors play a critical role (Goodwin, 2003). Complexity in company activities have also increased. Traditionally, companies were only required to compete in sellers market. This has however changed as companies are forced to compete in buyers market by frequently bringing new products to market, develop relationship with customer and business partners, meet investor expectation, and develop human capital (Van Horne, 2001). This confirms the increasing role of business, which calls for constant internal reconciliations. Merging internal environment with the constantly changing external environment is a requisite in the present business world. This cannot be attained in the traditional budgeting, which proofed to be inflexible. Daum (2002) brought to light new approaches in management including the balance scorecard approach that concentrates on improved coordination and attainment of strategic targets. The second approach as discussed by Daum is value-based management, whose central focus is inclination of the company to investor expectation. Both approaches are more flexible and focus on strategic goal, which are the critical success factors in a highly volatile business environment. To understand the need to change to new management approaches, it is necessary to assess Svenska Handelsbanken, Swedish bank, which has been operating without budgets since 1970s (Stokdyk, 2007). Even though the bank does not perform budgets, it has managed to consistently register success with respect to crucial indicators i.e. customer satisfaction and return to equity. This achievement is a result of employee participation in constant examination of all costs. Moreover, loss of receivables is low given that the company gives credits to known customers. It is therefore obvious that contrary to traditional approach where budgets are constructed by senior personnel for purposes of command and control, the new approach at the Swedish bank takes the form of control placed in the hands of managers and employees themselves. Managers and employees are empowered. To add on this, authority is decentralized allowing managers at individual units to make decisions that outwit immediate competitors. The control centre only have a task of checking some few indicators of performance but does not control how units conducts its measures. The case study of Swedish bank leads to identification of two essential management styles: management culture that empowers employees and managers and the use of information system to conduct adaptive performance management processes. Apparently, besides empowering junior staff, modern business world campaign for deployment of IT in all areas of the business. To support operation of the ‘new budgeting model’, information technology occupies the top priority. The IT system will be deployed in collecting, analyzing, and communicating or rather sharing data and information to facilitate fast response to changes in the environment. Reference List BBRT n.d., Beyond Budgeting Roundtable, viewed 21 September 2012, http://www.bbrt.org/beyond-budgeting/bb-problem.html. Bradford, T 2008, The Purpose of a Business Budget. Suite101, Jan 28, viewed 25 September 2012, http://suite101.com/article/the-purpose-of-a-business- budget-a43137. Daum, JH. 2002, ‘Beyond Budgeting: A Model for Performance Management and Controlling in the 21st Century?’ Controlling & Finance, July, viewed 21 September 2012, http://www.juergendaum.de/articles/beyond_budgeting.en.pdf. Goodwin, P & George, W 2003, Decision Analysis for Management Judgment, 3rd ed, Chichester, UK, Wiley. Haidner, J 2008, Business Budgeting – Why and What, suite101, Oct 28, viewed 25 Sept, 2012, http://suite101.com/article/business-budgeting-why-and- what-a75439. Jensen, MC 2001, ‘Corporate Budgeting Is Broken, Let's Fix It’, Harvard Business Review, November, p. 94-101, viewed 21 September 2012, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=321520. Stokdyk, J 2007, ‘Traditional budgeting under the microscope’ AccountingWEB, 16 Jan,viewed 24 September, 2012, http://www.accountingweb.co.uk/topic/financial- reporting/traditional-budgeting-under-microscope-john- stokdyk. Van Horne, J C., & John M W 2001, Fundamentals of Financial Management, New Work, Prentice Hall. Read More
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