Critical Analysis of RDBS Budgeting - Case Study Example

Critical Analysis of RDBS Budgeting Name Course Name and Code Instructor’s Name Date Table of Contents Table of Contents 2 Introduction 3 Benefits of a budgetary control system 3 Five inherent weaknesses of annual budgeting model applied in RDBS 5 How budgeting process employed by RDBS contributes to the failure to achieve managing director’s sales and profit targets 6 How RDBS’ budgeting process can be improved 9 References 10 Introduction Budgeting is a method used by businesses to financially plan for future (Riahi-Belkaoui, 2002). Main areas of the business usually have budgets prepared for them. A budget is a formal statement that sets aside financial resources for undertaking specified activities in a specified period of time. it is essential for coordinating the firm’s activities. Such areas include sales, purchases, labor, production, creditors, cash and debtors (Bowhill, 2008). These budgets provide detailed plans of the business for the next twelve, six or three months. Large businesses often have formal budgets (Jones and Merricks, 1994). Budgets are usually classified as short term (1 year), medium term (1 to 3 years), and long term. Short term budgets are more detailed that long and medium term budgets. The type of budget employed in RDBS is short term since it extends for one year (Drury, 2008). A budgetary control is a technique that compares the budget with actual results. Any variations noted are made the responsibility of main players who can either exercise control action or revise the original budgets. Benefits of a budgetary control system Budgetary control has several advantages to the firm in question. First, it allows profit maximization. This is attained via good planning and coordination of different functional departments in the firm. Profit maximization is also attained via appropriate controlling of various capital and revenue expenditures (Riahi-Belkaoui, 2002). Thus, the scarce resources of the firm are placed to the best possible use. Budgetary control enhances coordination in a firm. This is because various working departments and sectors are properly coordinated when resources are being allocated via budgeting (Bowhill, 2008). Since budgeting of each section impacts on one another, budgeted targets can only be attained via coordination of different executives and subordinates. Budgetary control also enables a firm to have specific aims. This is because the goals, plans and policies are made by the top management. Thus, all efforts are synchronized to realize the firm’s goals. To attain this, each department is given a specified target to attain (Jones and Merricks, 1994). Thus, the efforts of each department are directed toward attaining a specified target to reduce scenarios where efforts are wasted through pursuance of various aims. Moreover, budgetary control acts as a performance measurement tool. It provides targets to different departments and hence acts as a tool for performance measurement of managers (Walker, 2009). It allows comparison to be made between these targets and actual results to determine any deviations (Riahi-Belkaoui, 2002). Thus, the top management gets a report on the performance of each department. Therefore, this budgetary control system allows introduction of management by exception principle (Bowhill, 2008). Furthermore, the system is essential for economical expenditure. This is because expenditure is planned systematically. As such the benefits realized from this can extend to the entire industry and then to national economy. Thus, there is elimination of wastage and hence national resources are utilized economically. In addition, the system is essential in the determination of weak spots of the firm (Bowhill, 2008). This is attained via establishing differences in anticipated targets and actual performance (Collier and Agyei-Ampomah, 2007). Once such weak spots are established, the firm can concentrate on areas where performance deviates significantly from actual targets (Banerjee, 2006). The system also allows corrective measures to be undertaken. Any discrepancy in performance enables the management to take corrective measure (Riahi-Belkaoui, 2002). The system allows regular reporting of any deviations from the target and prompt action to undertaken. Without budgetary control system, such discrepancies can only be reported at the end of trading year. Moreover, budgetary control system allows employees to be conscious about the budget (Bowhill, 2008). The employees become conscious of their responsibility when their targets are fixed (Scarlett and Scarlett, 2007). Thus, each employee is aware of what is expected of him/her and hence carries out his/her duties uninterrupted. Budgetary control system also reduces costs (Jones and Merricks, 1994). The system enables a firm to reduce costs of production while increasing sales. This is attained via combination of [products that results in profit maximization. Finally, the system allows introduction of incentive schemes for remuneration. This introduction is enabled by the comparison that is made between the anticipated targets and the actual performance. Five inherent weaknesses of annual budgeting model applied in RDBS One inherent weakness of such budgeting model is that it is based on estimates that may or may not true. The model assumes future events which might or might not happen in reality (Collier and Agyei-Ampomah, 2007). For instance, RDBS might have failed to meet its target because of unforeseen strike. Another weakness of this model is that it is rigid. The model employed emphasizes the budget and as such it has impacted on daily operations of the firm and as such it has ignored the dynamic state of functioning of a firm (Riahi-Belkaoui, 2002). For instance, the targets set out by managing director at RDBS are rigid. Moreover, the model provides false sense of security. It is apparent that budgeting alone can not lead a firm to profitability (Jones and Merricks, 1994). It is impossible to execute such budgets automatically. Thus, a false sense of security might be created indicating that everything has been considered in the budget. In addition, the model lacks coordination. This is because there is not staff cooperation during the budgeting exercise (Bowhill, 2008). Finally, the introduction and implementation of the system may be expensive. Although different managers meet to deliberate the budget, most decisions are imposed on them by the managing director at RDBS. How budgeting process employed by RDBS contributes to the failure to achieve managing director’s sales and profit targets One of the reasons these targets are not realized is that they are set solely by the managing director and are fixed. The director does not allow these targets to be adjusted to align with available resources (Riahi-Belkaoui, 2002). Different departmental managers are forced to adjust their budgets downward but the targets are not changed. The production department gets an increase in resource allocation to match the anticipated production but other departments are forced to reduce their expenses. As such there are no enough resources for marketing and selling the produced products. Thus, the target profits and sales are not realized. The sales and profit targets are also not attained because the resources required to meet such targets are not available (Jones and Merricks, 1994). The resources allocated for marketing and corporate office expense budgets are not in line with manufacturing costs. This results in more production than what the available resources can market and sale. It is also likely that departmental managers such as operations manager, marketing manager and the production manager are not motivated to carry out their duties and hence failure of attaining the set targets. This is because the sales and profit targets are forced on them notwithstanding inadequate resources (Bowhill, 2008). Although the managing director expects the set sales and profit targets to be attained, he expects other managers to attain these targets with limited resources. The budget requirements of most departments are reduced at the expense of increasing production (Collier and Agyei-Ampomah, 2007). Moreover, departments which excel in their responsibilities are never commented for the good work done as asserted by the purchasing manager conversation with the purchasing supervisor. Moreover, it is likely that the targets are not realized because much time is spend by managers to review monthly reports and preparing explanation for the discrepancies noted in the evaluation of targets against actual performance (Bowhill, 2008). From the conversation of the manufacturing supervisor and the purchasing manager it seems that top management values review of these reports at the expense of actual duties of these managers (Riahi-Belkaoui, 2002). Moreover, the reviews are often outdated and as such they are unlikely to impact on future production as noted in the conversation. It seems also that failure to meet the targets is not under the control of the managers as noted from the conversation (Jones and Merricks, 1994). For instance, the manufacturing supervisor notes that the plant was shut down for three days owing to workers strike that delayed ingredient delivery. Thus, time loss due to unavoidable circumstances could be one of the reasons why the firm is unable to meet its sales and profit targets. Moreover, poor management of inventory at the firm could be one of contributing factors to failure of the firm to meet its sales and profit targets (Bowhill, 2008). For instance, it is reported that the firm had exhausted basic ingredient during the strike that forced it to acquire supplies from other suppliers at a higher price. If budgeting is well controlled then a month’s raw materials could be estimated and acquired in advance to reduce such unforeseeable circumstance Thus such unavoidable or unanticipated costs may be contributing to inability of RDBS to meet its target sales and profits since cost of production is higher than anticipated. Lack of coordination in budget evaluation reports could be another contributing factor for the firm not to realize sales and profit targets (Bowhill, 2008). The purchasing manager asserts that he does not receive reports send to manufacturing supervisor and vice versa and yet their functions are related. Thus the managers are often unable to take any corrective measures. This could explain the discrepancy in sales and profit targets and the actual sales and profits realized. How RDBS’ budgeting process can be improved It has been argued that a firm’s ability to plan from bottom up and to attain top down objectives is an important step toward successful budgeting and forecasting (Riahi-Belkaoui, 2002). Thus, in order for RDBS to improve its budgeting process, the top management should provide guidance in relation to strategic goals, objectives and expectations and let the department managers build a plan from the bottom up. The managers’ plan should outline how they intend to accomplish those goals. The process should allow frequent iteration (should be flexible) and not fixed in the case of RDBS that has fixed targets. This will allow the budget to be acceptable to department managers since they participated in its creation and will be rewarded for attaining it (Collier and Agyei-Ampomah, 2007). It will also be supported by top management since operational goals are in line with strategic goals. To improve the process, there should be an increased collaboration between functions (Jones and Merricks, 1994). This can involve provision of necessary information to different managers based on the relation between different departments including evaluation reports to enable them take corrective measures to improve their performance. Different managers should be allowed share different scenarios with each other and have collaborative planning. RDBS can also improve its budgeting process by adopting performance based budgeting by use of the corporate performance management (CPM) framework. This will require that the goals and objectives of RDBS are first set, measurement tools are developed and reporting is done last. This will also require definition of key performance indicators from the beginning. This is followed by constant linking of these indicators to resources throughout the budgeting process. This method is a kind of a balanced scorecard approach that requires definition of key performance indicators and building linkages between causes and effects in a tree model on top of budgeting system that will need to be integrated with transactional system. The transactional system will allow tracking of transactions such as procurement, sales and financial. References Banerjee, B. 2006. Cost Accounting Theory And Practice, 12th Ed. London: PHI Learning Pvt. Ltd. Bowhill, B. 2008. Business Planning and Control: Integrating Accounting, Strategy, and People. New York: John Wiley and Sons Collier, P., and Agyei-Ampomah, S. 2007. CIMA Official Learning System Management Accounting Risk and Control Strategy, 4th Ed. New York: Butterworth-Heinemann Debarshi, B. 2011. Management Accounting. Jakarta: Pearson Education India Drury, C. 2008. Management and cost accounting: student's manual, 7th Ed. London: Cengage Learning EMEA Jones, P., and Merricks, P. 1994. The management of foodservice operations. London: Cengage Learning EMEA Riahi-Belkaoui, A. 2002. Behavioral management accounting. London: Greenwood Publishing Group. Scarlett, R., and Scarlett, B. 2007. CIMA Learning System Management Accounting - Performance Evaluation, 4th Ed. London: Butterworth-Heinemann Walker, J. 2009. CIMA Official Learning System Fundamentals of Management Accounting, 4th Ed. London: Butterworth-Heinemann Read More