About TownScape Plc
Purpose and Process of Budget
Budgets are usually prepared with the intention of comparing the actual results with the targeted results so as to take the corrective action on timely basis. It helps the managers of the company to plan the future operations considering the actual results received earlier. It helps in making an assessment that the conditions may get changed and managers have to manage all the problems before the time they get arise (Atrill, 2012). It helps the company in encouraging the managers of the company to achieve the budgeted goals for the company. It entails the responsibility and accountability of the managers towards the achievement of the goals on one side and towards the any kind of mistakes on the other side. Last major purpose of the budget is to establish the nature of relationship among different departments of the company (Collis and Hussey, 2015; Kaplan, 2014). For instance in the given case of Town Scape Plc, there may be different departments like accounting and finance, purchase, store, manufacturing and sales, etc. Through budgeting the relationship of the one department can be easily linked with the other department so as to achieve the budgeted goals at par and there shall not be any time of ambiguity in understanding the relationship.
As the company is engaged in the business of manufacturing of Street Furniture, the process of the budget will be as follows:
- At first the managers of the company shall update the budget assumptions that the company has made in the last year. It is because if the same figures are carried then the budget will not serve any purpose as the budget is laid down keeping in view the market conditions and the environment prevailing outside the company.
- Then the company shall make an endeavor towards managing the difficulties that the company has faced in either increasing the revenue of the company or decreasing the cost of the company. It is regarded as the review of the difficulties and taking corrective action in next year (Drury , 2015).
- Then the company shall estimate the funds that the company will be able to generate in the future. It is because it will limit the cost to be incurred for the company.
- After estimating the funds, the forecast for revenue shall be made for every department. Once the revenue forecast is finalized and approved by the chief executive officers of the company then it will distribute the revenue forecasts to the other departments which then in turn will maintain the separate budgets.
- Along with the revenue forecast, the receipts and expenditure of the capital forecast shall be made. The capital forecast shall be sent to the top management so as to get the approval.
- The information so obtained shall be punched in the master budget model and is reviewed and discussed with the top level management team. If it is identified as okay then it will finalized otherwise it will be treated as final with said moderations and alterations.
- Once the budget gets approved, it is distributed to each and every department so that they can plan accordingly.
- Also budget is punched in the accounting as well as management software so as to have the reports containing the budgeted figures as well as actual figures at any point of time.
The above process can further be extended or deleted as per the requirement of the nature of the business of the company changes.
Model means the structure defining the process and business model means the structure that describes the process that the company is require to follow to run. It is to mean that how the information, goods or services will be transferred from one department to another. Budget helps in developing the business model in the sense that all the departments and the functions of the company will be interlinked and their works will be integrated, controlled and monitored in the true and fair manner.
Cost Drivers and Incremental Budgeting
Cost drivers are items which drives the cost from themselves. There are two types of cost drivers namely resource cost driver and activity cost driver. In activity based costing, which is also mentioned as one of the best method of costing, the identification of the cost drivers is considered as the very important part of the costing process. Cost driver is based on the concept which lays down that the products or the items under consideration consumes the activity involved and activity in turn consumes the resources.
Services and Products offered
The company – Townscape Plc has been following the traditional method of budgeting wherein the direct material and direct labor cost has been charged in actual and charges the overheads as per the absorption rate either using the machine hour rate or any other basis. But in actual this estimation is not good and prima facie does not considered many other costs. Therefore, following are the cost drivers which the company shall adopt:
- Number of purchase orders
- Number of set up machine hours
- Number of Machine hours
- Number of inspections done during the year and so on (Ekholm, 2011).
Company under question has been in the process of estimating the cost using the incremental budgeting. Under this form of budgeting, the incremental amounts are added to the previous year budgeted figure or the actual figure and then the budgets are carried on for the next year. For the company under consideration, Budgeted Revenue figure will be $150 million plus $35 million equating to $185 million.
Traditional Budgeting
No, the traditional budgeting as detailed by the company – Town Scape Plc is not appropriate to any of the parts of the business in the future. In the given case, the company has been following the incremental form of budgeting which is regarded as the bad form of budgeting. It is because the company is in the manufacturing of street furniture and there may be many items of cost which goes on changing. In my opinion apart from having the advantages the incremental form of budgeting also has the disadvantages and for the revenue part only we can have the incremental form of budgeting. It is because although the revenue gets changed but it does not change too much as per the future estimation of the revenue by the manager of the company (Horngren, 2012).
Following are the advantages in case the incremental form of budgeting is applied:
- The budget as formed remains stable. It is not affected by the changes in the market conditions.
- The budget is very easy and simple to understand and it will be very easy to operate and managers opined that there will be fewer chances of conflicts as the earlier budgeted figures or the actual results will be added by the incremental figures.
- The managers find no challenge in setting up the coordination between the budgets of the different departments and seem very easier to achieve as the incremental figures are more or less known to the managers of the company.
- If any change happens then it can be easily noticed.
Following are the disadvantages of implementing the incremental budgeting:
- At first this method assumes that the modes of working will always remain as it is. There will be no change in any manner. It means that it does not take into account for the changes made in the internal as well as the external environment.
- There will not be any space for innovative ideas.
- There might be the situation that the budget will go out of date and will not relate to level of operations in the company (Hansen, 2014).
Alternative Budget Methods
Apart from the traditional form of budget like budgets prepared on the basis of the absorption rate and incremental budgets, there are forms of other budgeting also which helps in improving the budgeting process and the actual operations of the company. As already discussed, incremental budgeting is not good for in the given case, but the other forms of budget like rolling budgets, zero based budgets and activity based budgets will prevail in the case of the manufacturing companies.
Following are the other forms of budget which acts as an improvement over the traditional approach and along with the advantages, the disadvantages has also been mentioned.
Company’s Market Capitalisation
Rolling Budget
Rolling budget is also referred to as the Continuous budget. Rolling budget entails the adding of the new budget period immediately when the recent budget period is completed and thus for again making the budget period for the period of twelve months. For instance Town Scape Plc has maintained the budget for January to December. After the completion of month of January, the company prepares the budget for the month of February and now again the budget is taken for twelve months and it gets extended to February to January and in the same manner the budget goes on (Lynn, 2014). The main attempt given by this form of budget is that it provides the system where there will be the constant monitoring of the budget model and the simultaneously revisions in the budgeted figures for the last incremental period. And the major drawback which can affect is that it does not seem to be realistic and achievable as compared to the traditional budgeting (Montgomery, 2002).
Zero Based Budgeting
Under this form of budgeting, the base of preparing the budgets is treated as zero. In other words, at the end of every year new budget will be prepared. It involves the process whereby each item present in the statement of the cash for the reporting period is re evaluated and all the expenditure relating to it are justified by the department. It does not follow the incremental budgeting where the expenses are increased with the specific rate. Following are the advantages associated with the zero based budgeting:
- First advantage is the accuracy. Accuracy is in relation to the actual estimation of costs and revenue. It is because under this method, there is no need to look back to figures of the cost and revenue in the earlier period rather the company has to identify the activities and their resources and accordingly the cost to be incurred is identified and the budgeting is done (Wichowski, 2010).
- Second advantage is the allocation of resources in actual terms as it does not consider the previous numbers.
- It entails the great reduction in the activities which has become redundant. For instance, in the given case there might be the possibility that instead of sending the goods for manufacturing to job work, the company shall manufacture on its own and thus helps in removing the activities which are time consuming and expensive (Wetherbe, 2011).
There are two major disadvantages. One is it is very time consuming to implement such kind of the budgeting and second is the engagement of manpower in great numbers as there will be the preparation of budget from the starting.
Under these forms of the budgets, the cost of the company is associated with the activities run by the company. Also the budgeted expenditures are compiled on the basis of the level which is expected for each and every activity (Cooper, 2012)
It is process whereby the managers of the company could have the idea about the business processes and the measures to remove the activity which is of no use or has become redundant and thus reducing the cost. The main disadvantage is that it can lead to high work load on the part of the employees (Innes, 2015). It is because of the high tracking system whereby the company can have the idea of redundant activities with the high cost.
Company’s Headquarters and Operations
Potential Application
The above three methods can be applied in case of the given company depending upon the nature and size of the business and the management of the company. Following are the ways which can be applied:
- Rolling Budget – The Company has the revenue for the last year 150 million pounds and has expected that the revenue in this year shall be 150 plus 35 million pound. The budget is for the full period of twelve months will be 185 million pounds. Under this case rolling budget the period of twelve months will be the same. The change will be in the specific month. In the given case if the budget is for July 2017 to June 2018 then the rolling budget in the next phase will be from August 2017 to July 2018.
- Zero Base Budget – Under this method the company can start from the fresh year without any base prices. If the company follows this form of budgeting then the revenue figure shall be 35 million pounds rater than 185 million pounds because the base year price will be zero. Similarly for the cost also and the percentage of sales that the company will make across the globe (McMillan, 2015; Pyhrr, 2013).
- Activity Based Budget – Company will identify the activities and allocates the cost and revenue. In the given case, the set up cost, machine running cost, sales and marketing costs and accordingly the cost drivers will be identified as number of machine hours and number of sale orders respectively.
Appropriateness
If single method is to be suggested then the activity based budgeting shall be employed by the company. It is because the company is engaged in the business of manufacturing of street furniture which usually involves the number of activities associated with the manufacturing process. These activities includes set up cost, machine running cost, production cost, labeling cost, packing cost, marketing cost and etc. After identifying the cost, the element will be identified which in fact drives each of the cost which is known as the cost driver. Once the cost drivers are obtained then the cost can be easily allocated. Apart from identifying the cost driver, the major part is that it helps in eradicating those activities which at present have been nullified and are of no use and still under the tradition method of budgeting takes into consideration the amount of such activities as overhead. It helps in having those activities which in actual supports the manufacturing process of company. If in the given company, the activity of making the dies or moulds have been discontinued or is not useful for the future year then only through activity based budgeting the same can be achieved.
In case combination of the method is required to be adopted then zero based budgeting along with the activity based costing shall be applied. It is because earlier the company has been adopting the traditional method of budgeting under which the incremental budgeting has been applied. It includes increasing the revenue or the cost by the fixed percentage and preparing the budget accordingly. But it cannot make the company to survive in the future. Therefore, the zero based budgeting will help in assessing the figures of costs and revenue without reference to the previous year base prices and activity based budgeting will then help in defining the activities for each of the process and accordingly allocating the costs.
Thus, in this manner if one method is to be employed then activity based budgeting is best and in case combination is required then zero based budgeting coupled with activity based budgeting shall be employed.
Conclusion
Budgeting has the significant role in the functioning of the company. If the budgets are not there then the actual performance can never be checked. Townscape Plc is the manufacturer of street manufacture and the report has laid down the ways in which the different methods of budgeting can be employed either in single or in combination with another. To conclude, all the three methods of budgeting as mentioned in the report is relevant and appropriate for the case study.
It is to recommend that the activity based budgeting shall be employed by all the companies across the whole globe.
References
Atrill, (2012), “Management Accounting for Decision Makers”, 7th Ed. Harlow: Pearson Education Limited.
Collis and Hussey, (2015), “Business Research: A Practical Guide for Undergraduate and Postgraduate Students”, Hongkong: Palgrave Macmillan.
Cooper, R, (2012), “Activity-based systems: Measuring the costs of resource usage” Accounting horizons, 6(3), p.1.
Drury C, (2015), “Cost and Management Accounting”, 6th Ed. London: Thomson Learning.
Ekholm, B.G., (2011), “Is the annual budget really dead?” European Accounting Review, 9(4), pp.519-539.
Hansen, S.C., (2014),. “Multiple facets of budgeting: an exploratory analysis” Management accounting research, 15(4), pp.415-439.
Horngren, C.T., (2012), “Management and cost accounting” Harlow: Financial Times/Prentice Hall.
Innes, J, (2015), “A survey of activity-based costing in the UK’s largest companies” Management accounting research, 6(2), pp.137-153.
Kaplan, (2014), “Strategy maps: converting intangible assets into tangible outcomes” Massachusetts: Harvard Business School.
Lynn, (2014), “A closer look at rolling budgets” Management Accounting Quarterly, 6(1), p.60
McMillan, E.J., (2015), “Zero?Based Budgeting” Not-for-Profit Budgeting and Financial Management, Fourth Edition, pp.183-184
Montgomery, P., (2002),, “Effective rolling forecasts” Strategic finance, 83(8), p.41.
Pyhrr, P.A., (2013), Zero?Based Budgeting” Handbook of Budgeting, Sixth Edition, pp.677-696
Wichowski, C., (2010), “Zero-Based Budgeting” Florida Vocational Journal, 39(8), pp.101-122.
Wetherbe, J.C., (2011), “Zero based budgeting in the planning process” Strategic Management Journal, 2(1), pp.1-14.
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