Advantages and Disadvantages of Budgeting Discussion StylPen’s CEO recently attended an IMA seminar and got excited about a workshop entitled “Beyond Budge

Advantages and Disadvantages of Budgeting Discussion StylPen’s CEO recently attended an IMA seminar and got excited about a workshop entitled “Beyond Budgeting” by Jeremy Hope and Robin Fraser who argued that budgets, rather than providing a net benefit for firms, were actually too expensive, time-consuming and ultimately detrimental to the achievement of organizational goals. A quote from the workshop brochure states

Traditional budgeting is counter-productive in today’s fast-paced and highly competitive environment. Instead of tinkering with current budgeting systems, managers would be better off abandoning budgeting altogether – that is, companies should move beyond budgeting.

Write a memorandum (about 3 pages) to the CEO that discusses the strengths and weaknesses of budgeting. Conclude your memo with recommendations concerning the use of budgeting at StylPen.

Please find attached a PowerPoint slides that can help you with this paper. Budgeting
“It’s clearly a budget. It’s got a lot of
numbers in it.”
George W. Bush
Reuters, 5/5/00
What is a Budget?
Definition:
A budget is
? (a) a quantitative expression of a proposed plan of action
by management for a specified time period and
? (b) an aid to coordinate what needs to be done to
implement that plan.
Why is Budgeting Important to You?
1)
Almost all (over 90%) mid to large size companies use
budgeting in some form. This means that you will be involved
with creating and using budgets when you graduate.
2)
If you intern or work permanently with a public accounting
firm, you will be asked to give detailed budgets regarding
how your time is spent on assignments.
3)
Even though you might not put a formal budget on paper, you
use budgeting in your everyday life.
Justifications of Budgeting
Budgeting results in improved…
I.
Planning
II. Communications and Coordination
III. Performance Evaluations and Organizational Learning
IV. Motivating Managers
Justifications of Budgeting
Planning:
? Planning is setting goals and developing strategies to
achieve those goals. Budgets show how resources will
be deployed to implement the strategy. Thus, the master
budget helps managers implement their strategic plan.
• i.e., helps managers….
?
?
?
Identify potential problems and corrective actions.
Anticipate financial performance in revenues and expenses.
Examine non-financial needs like equipment, space,
personnel, and research.
Justifications of Budgeting
Communication and Coordination:
? The master budget helps coordinate the various
business functions (e.g., marketing and manufacturing),
thus forcing managers to think of relationships among
individual operations, departments, and the company as a
whole. For coordination to succeed, communication is
obviously essential.
• All management levels participate in compiling,
reviewing, and revising budget data to fulfill plans
Justifications of Budgeting
Judging Performance and Facilitating Learning:
? Many companies use budgets, which can reflect anticipated changes
and improved efficiency, to assess the performance of managers.
How a manager performs in relation to what is budgeted can
determine job retention, promotion, bonus pay, etc.
• Budgeted to actual variances are meaningful
measures of performance c.f., last years actuals. Can
also use performance relative to peers
? Learn from failures and successes
Motivating Managers and Employees
Where Budgeting Fits In:
Identify organizational objectives
Long term strategy and short term goals
Develop budgets
Measure and assess performance
Re-evaluate objectives, strategy and goals
Costs/Issues Associated With
Budgeting
1)
Managers often spend much time working on
budgets. Studies indicate that about 5% of staff FTE
positions are devoted to budgeting.
2)
Increasing uncertainty in the rapidly changing
business environment makes it difficult to budget.
3)
If the budget is rigidly implemented, employees may
take actions that will help meet the budget, but will
hurt the company in the long run (e.g., deferring
maintenance).
Costs/Issues Con’t…
4) If employees perceive budgets as too difficult to
achieve, they may simply view the budget as
unrealistic and “give up” trying to achieve it.
5) If employees themselves determine the budget, they
often set budgets that are too easily achieved by
building in slack.
Also read up on:
Responsibility Accounting
? Types of responsibility centers
? Information and knowledge vs. Controllability
Budgetary Slack
Kaizen Budgeting
Cash Budgets – in appendix
Revenues Budget (1)
Product A
Selling
price
Units
sold
Total
revenues
$240
1,100
$264,000
Production Budget (2)
Units required for sales
Add ending inventory of FG
Total finished units required
Less beginning inv. of FG
Units to be produced
1,100
80
1,180
100
1,080
Direct Material Usage Budget (3A)
Physical Units Budget
DM required: 1,080 * 2 lbs
Cost Budget
Available from beg. Mats. Inv 330 * $19
To be purchased
1,830 * $20
DM to be used this period:
2,160 lbs
$6,270
36,600
$42,870
Direct Materials Purchases Budget (3B)
Physical Units Budget
Units (pounds) needed for production
Target ending inventory
Total requirements
Less beginning inventory
Units (pounds) to be purchased
Cost Budget
Purchases 2,310 lbs * $20/lb
2,160
480
2,640
330
2,310
$46,200
Direct Manufacturing Labor Budget (4)
Labor Hours Budget
Cost Budget
Manufacturing Overhead Budget (5)
Manufacturing Operations OH
Variable OH
Fixed OH
Total:
Machine Setup OH
Variable OH
Fixed OH
Total:
Total manufacturing OH costs:
Unit Cost of Ending Finished Goods Inventory (6A)
Cost per finished unit:
Materials
Labor
Manuf Ops OH
Mach Setup OH
Total:
Ending Inventories Budget (6B)
Cost per
unit
Direct Materials
Finished Goods
Units
Total
Cost of Goods Sold Budget (7)
Beginning FG inventory
Direct materials used
Direct manufacturing labor
Manufacturing overhead
Cost of Goods Manufactured
Cost of Goods Available for Sale
Deduct ending FG inventory
Cost of Goods Sold
Non-manufacturing Costs Budget (8)
Variable expenses
Fixed expenses
Total:
Budgeted Income Statement (9)
Revenue
Less cost of goods sold
Gross margin
Operating costs
Operating income

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