Budgeting Assignment
Budgeting Assignment
Part One
A budget is a plan for what the management wants to be done within a given period or in the given fiscal year; it is an estimated amount of revenue and expenses expected to be incurred in the future. Budgeting is a process of coming up with a long term plan on how funds are going to be sourced and used in the business. Different activities find their way to the company and thus there is a need to establish a way of dealing with them so that each is achieved without many constraints. Budgeting has a positive impact on the going concern of any business entity. With a well-established budget, it is easy to predict where the organization is at the current moment and where it is going. Budgets are mostly prepared per financial year after which new ones replace the older ones. There are different kinds of budgets prepared for different purposes. The size of the amount budgeted for depends mostly on the volume of operations in a given organization. Small scale organizations usually prepare budgets that call for little amounts of cash compared to the large scale ones. The budget is prepared; we can have traditional budgets as well as modern ones that show many improved and reasonable approaches to budgeting. The kind of budget adopted by the management of the said organization benefit it (the organization) uniquely from the other organizations in the same industry. Thus before the administration can decide which budget to take into consideration, a need is there to analyze the advantages and disadvantages that come with the same.
Budgeting is not just a simple plan that one has to wake up and establish. A committee has to be raised to come up with the plan or even supervise the process. A series of steps need to take place before an efficient budget can get established. These steps will help coordinate the process of budgeting to ensure standardization in the same (Weetman 2010). The steps occur as follows:
Step 1. Updating the Assumptions of the Budget
Here the past assumptions about the state of the environment are reviewed, and changes on the same instituted if any. New assumptions may be included to the existing ones if at all they add meaning to the business model. Unnecessary assumptions get dropped to cater for the room for change or improvement. With this done the budgeting coming is good to go to the next step (Atrill and McLaney, 2015).
The limiting factors that hinder the firm from realizing a high volume of sales must get evaluated and done away with if possible. The impact of the limiting factors needs to be explained in details. The factors for growth get incorporated at this point before proceeding to the next step (Druly 2016).
Step 3. Funds and Cost Determination
The amount of cash available to carry out the budget is determined. This step is crucial because it helps in setting up a budget that is in line with the ability of the firm. If the cash is plenty, then the committee has a good reason to smile knowing that the budget they are to prepare will become implemented The estimation of the costs easily will help recognize the exact amount to allocate in the said process;This will determine the chances of growth of the firm (Druly 2016, p. 233).
Step 4. Creation and Issuance of Budget Package
Instructions, limitations and other issues in the budget should be well forwarded from the budget used in the year before. Also, the current and expected problems need to unfold under this step. The package is issued to the individuals in each department, and the date for coming up with the draft gets communicated (Druly 2016, p. 235).
Step 5. Getting Forecasts and Departmental Budgets
The income expected from the sales in the future should get determined by the management responsible for sales. This forecast is distributed to the different departments which prepare and submit their budgets to the committee. The committee collects the budgets and corrects any errors arising from the same (Atrill and McLaney, 2015, p. 217).
Step 6. Preparation of a Master Budget
Recommendations and requests from the various departments are attended to after which a master budget is established. The master budget encompasses all the crucial points from the departments. The shortcomings that come from these departments get combined into one budget for analysis (Atrill and McLaney, 2015, p. 220).
Step 7. Review, Issue and Controlling the Budget
A standard version of the final copy of the budget gets prepared and issued to the departments for implementation. The copy can get loaded in the system so that the expected performance can from time to time be compared with the real performance; this helps institute control over the budget (Druly 2016, p. 238).
A budget is an excellent tool to plan for future activities in the firm. A well-budgeted process has a high chance of succeeding. The budget helps in ensuring that enough money is kept for the undertakings such that no single moment the organization will experience shortages in the production. It also helps in the maximum utilization of resources to bring about efficiency in management (Weetman 2010, p. 338).
Budgeting is an excellent tool to ensure that the expected volume of sales can be predetermined at present through the estimation of the needed level of sales for the future. Thus it helps in setting up a desired level of revenue for the firm (Weetman 2010, p. 330).
Through a well-established budget, the organization remains focused on the areas in which it put funds; this is to say that money will not get wasted in carrying out unnecessary activities. The cash flow for the organization will thus remain high as no much cash goes out. A focused firm will always be sound in liquidity matters (Weetman 2010, p. 347).
Traditional budget is the one that needs adjustments and the end of each financial year following what transpired in the previous year’s budget. The figures for the revenue can be increased or dropped depending on whether the last year’s budget was overstated or understated. Also, the expenditure gets adjusted to meet the current economic requirements. Traditional budgets are easy to come up with and start operating with then primarily because they involve manipulation of the budget that already exists. This kind of budgeting makes the organization remain stable over the years since the process of establishing the budget does not change as days pass by. Again no need to train people on the applicability of this kind of budget since everybody has been used to it due to the constant repetition of the format of preparing the same. The traditional budgeting is an excellent tool that encourages decentralization from the fact that every employee knows their duties and obligations concerning the budget. With a fixed budget, performance is easily improved through consolidation of activities of the firm. The way the activities get combined gives the management an easy time to monitor and control each process to bring about efficiency (Druly 2016, p. 240).
Advantages of Traditional Budgeting
Some of the disadvantages with this kind of budget are that the budget is always rigid in that it does not allow for changes that may occur over the trading periods. Since the top level managers prepare the budget, it turns out to be a less motivating tool; what the lower management does is to implement the budget without much questioning the procedures that led to the looks of the budget. This type of budgeting relies much on what the items in the year before show and thus if the items from the previous year carried a misleading figure, the same pass on over to the following year; this may in most cases turn into embarrassing mistakes. Justification of the statistics included in the budget may not take place, and this may bring forth embezzlement of funds by the few individuals who are involved in the budgeting. Incremental budget is a child of the traditional budgets (Atrill and McLaney, 2015, p. 242).
Application of the Traditional Budgeting in the Snappy Drinks Ltd.
Snappy drinks, by using the incremental budgeting would increase its products from 60 to 75.the new budget would mean that the firm will have grown by the time the budget comes into an application. The cost of coming up with a new machine and manufacturing plant will get added to the existing ones making an incremental budget in the current year; This means that amount stated in the previous budget will not go down but increase. The sales personnel will increase, and this leads to an increment in the amounts set aside for the campaign. At the long run, the company will have spent a lot in the budget unlike if it used other kinds of a budget (Druly 2016, p. 260).
Part Two
Other Types of Budgets
A rolling budget involves updates at the end of each year. It is somehow similar to the incremental one since it allows the extension of the budget that existed previously. However, this budget stands out in that it just picks some items that seems fundamental to the firm and that is found in the previous year’s budget. New things come in as a new year sets in. Management has to remain alert in this type of budget as compared to the traditional one since the items are not static (Weetman 2010, p. 350).
Merits and Demerits of Rolling Budgets
The benefit with the rolling budget is that someone keeps watch of what happens over the year and thus enabling revision on the same. On the side of demerit, the figures for the budget in the years before the current year may not get revised, and this makes it less reliable. Thus rolling budget could at sometimes be reasonable but at the other times turn out undesirable (Druly 2016, p. 262).
From the term zero-based, this type of budget is prepared afresh at the start of each financial year. It thus does not consider the figures from the previous budgets. The justification for the expenses in each new year must come in place for the zero-based budget to prevail. Whether larger than or smaller than the previous budget, this does not matter. What matters is the actual cost revenue and costs expected in the current year (Druly 2016, p. 265).
Advantages and Disadvantages of Zero-Based Budget
Zero-based budgets limit the excessive spending in unnecessary activities since for the budget to be implemented, and justification must exist. This budget can help reduce the cost since every activity has to get evaluated for the actual cost involved in it. The downside of this budget is that calculating the costs involved in different phases of operation is tedious and sometimes wrong figures may come to exist (Druly 2016, p. 267).
Activity-based budgets take into consideration the overhead costs. The different activities in the business get, and the expected costs on such activities get computed to develop a reasonable budget. This budget is good for the companies that have experienced some losses and need to correct the chances of getting more losses. The cost drivers are thus the main factors that must be considered when preparing this kind of budget (Druly 2016, p. 269).
Pros and Cons of Activity-Based Budgets
On the upward side, the activity based budgets can be used as a tool to evaluate the activities carried out in each department; This leads to efficiency in the daily work. Through excellent analysis, the activity-based budget helps in weeding out unnecessary costs or expenditures that would strike down the growth of the firm. Since the activities from every department are well monitored, the firm operates in unison making it look organized; The firm becomes more efficient because the events are completed with agreement from the top management to the bottom management. The issue of bottlenecks is done away with by the firm that embraces this form of budget, and therefore the procedures of operations get executed without delays. The relations with the clients find favor in the organization that uses this type of budgetinghe day the company grows faster (Atrill and McLaney, 2015, p. 243).
On the downside, these budgets call in for the management to know about all the activities of the firm. Since it is not possible for the top managers to have every activity in their fingertips, coming up with a budget of this kind is a challenge. The process of developing this budget is complicated and tedious for the workers to implement and this leads to the business incurring costs. The method also consumes resources especially time which is limited in supply. The budget is short-sighted and will only focus on the activities that are for the current period not putting into consideration the ones that are long-term in nature (Atrill and McLaney, 2015, p. 245).
Applicability of Zero-Based and the Activity –Based Budgets
Zero-based budget and the activity based budget are worthy of applying in the snaps drink ltd company. On one side the zero-based budget, if used will enable the organization to avoid embezzlement of funds through the allocation of the amounts necessary to meet the processes that exist. On the other hand, the activity-based budget will be reasonable since it supports the zero-based one in that the costs of every process is well analyzed before money can get allocated to them. The incremental budget alone is not reasonable because it has severe drawbacks as explained; these drawbacks can get minimized through combining the zero-based and the activity based budgets (Atrill and McLaney, 2015, p. 246).
To sum it up, budgeting is a very critical thing to develop in business for the betterment of the going concern. It helps in many ways like planning, forecasting and enabling the management remain in focus on the way cash is used. Considering the alternative advantages and disadvantages of the different approaches, zero-based and activity-based stand out as the two main approaches the snappy drinks ltd company should use in its planning. Together with the other method, it has used over time these two can help steer the organization to better levels of return. The above two approaches do complement each other in terms of advantages and disadvantages, and therefore there is a possibility of increasing the efficiency in operations when the two are applied in the organization.
Atrill, P. and McLaney, E. (2015). Management Accounting for Decision Makers. 8th ed. London: London Pearson, pp.188-246
Druly (2016). Management Accounting for Business. 6th ed. London: London Cengage, pp. 232-269.
Weetman (2010). Management Accounting. 2nd ed. London: London FT Prentice Hall, pp.316-351.