TOPIC: 1 INTRODUCTION: BUDGETING & ETHICS
The first topic of the research report is Ethics and Budgeting that provides the importance of Budgeting in the businesses practices. Moreover it also represents the budgeting systems can also create incentives for unethical practices, which may give the positive and negative effects. To address this problem, the importance of budget and its effectiveness in the business have been discussed. In addition, it has been described how budgeting can create incentives for unethical behaviour and what are the strategies that can help to minimize unethical behaviour in budget.
WHAT IS BUDGET?
A Budget is playing vital and inevitable role in the businesses. A Budget represents an estimation of the revenue and expenses over a specific future period of time. A budget can be created for a person, families, group of people, business, government, country, multinational organization or anything else that makes and spends money to achieve predetermine objectives (Investopedia, 2014).
EFFECTIVENESS OF BUDGET IN THE BUSINESS
According to Vitez (2014) he believes, Budget describes a comprehensive analysis of how a company expects to use money in future time periods. Many companies create budgets on an annual basis so they can carefully outline the expected needs of each department in the business. Using an annual budget process also limits the amount of time companies spend creating and managing capital resources. As a result, a large scale companies may have appointed accountants or other professionals to create the business budget.
In Addition, it shows that boundary means limit of expenditures, describes the financial path,. Moreover it describes outline of the future growth as a result business can c...
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... to measure and control of overhead costs is difficult. On the other hand, determining direct labor and material expenses is quite easy. For this reason, managers tend to concentrate on these costs
Manager does not consider overhead costs when developing pricing strategies. They should require control of overhead costs and daily attention so that some this could result in some products or activities not fully recovering their overhead costs.
Understanding overhead costs is also important when considering changes in the production process. For example, purchasing a new machine will increase your overhead through interest and depreciation. However, the new machine may reduce direct labor expenses. By understanding how to classify and allocate overhead costs a manager can determine whether the purchase of a new machine will increase the profitability (Kenkel, 2014)
The presentation of the material is in dollars only. Overhead is applied to products as a percent of direct labor dollar cost. Factory profit for each year is found by subtracting direct material, direct labor, and direct overhead costs from total sales. The overhead percentage is calculated at the same time budgeting and is applied as a single overhead pool throughout each model year. The consulting company used 435% of direct labor costs in 1987 for their study; the budgeted was actually 437% (OH/DL=107,954/24,682). A similar percentage applies in the following year (109890/25294=434.5%). However in the next two years, after the outsourcing of oil pans and mufflers was enacted, the allocation of overhead in...
Wilkerson Company is facing fierce competition in the water purification equipment business that could potentially cannibalize their sales. In matching the lower prices set by the competition, Wilkerson’s profits and pre-tax margins have declined as a result. Despite lowering the prices of pumps, which are Wilkerson’s major product line, the product’s gross margin has fallen under 20% - which is 15% below the company’s expectations. In light of these challenges, Wilkerson Company decided to examine their overhead costs.
(Cronkhite, 2013) All organization requires specific planning and a clear understanding of the organization object. (McHatton, Bradshaw, Gallagher, & Reeves, 2011) With the budgeting which ensures that the funds necessary to carry out the organizational activities and once the budget is approve operational activities are conducted within the approved plan. (Cronkhite, 2013) The Capital budget contains large items since as location or a new building. (Cronkhite, 2013) This type of budgeting is done until the organization or project is complete. (Cronkhite, 2013) Line item budget is those items that are needed yearly in order to the organization to operate. (Cronkhite, 2013) This includes employee salaries all the way down to office basic stationery. (Cronkhite, 2013) The budgeting process is not something that is done once a year; it is a continual process of regular review and in some case possible for revision. (Cronkhite, 2013) In some case a zero based budgeting comes into play. This type of budgeting is also known as the “died of its own weight”. (Cronkhite, 2013) This is only done if there is a reduction in the organization by at 5%, 10% or 20% on how the essential programs would continue to function. (Cronkhite,
The budget is a method in which to reign-in discretionary spending, and will likely show variances between what costs have been anticipated and what costs are actually incurred. The Budget Process Budgetary planning may differ between organizations. Single-period budgets and rolling budgets have methodologies that provide advantages and disadvantages that may make one budget time frame better than another. A single period may require less time in planning during a fiscal year, but is less accurate than a rolling budget that is continuously planned on a repetitive basis. In either case, budgets are planned in advance in order for a company to operate profitably, and less so to have "actual results equal budgeted results."
Overhead based on units sold includes only sales and marketing. Sales and marketing will be targeted mostly towards the products that are already on the market, and so units sold is the best way to associate the cost with each product. (Figure A)
Treating overhead costs as "fixed" can cause an unfair and highly misleading distribution of overhead costs which are in fact variable.
Participative Budgeting is the situation in which budgets are designed and set after input from subordinate managers, instead of merely being imposed. The idea behind this sort of budgeting is to assign responsibility to subordinate managers and place a form of personal ownership on the final budget. Nearly two decades of management accounting research has resulted in equivocal findings on the consequences and effects of participative budgeting (Lindquist 1995). Participative budgeting certainly has various advantages, these include the transferral of information from subordinate to superior increased job satisfaction for the subordinate, budgetary responsibility and goal congruence. Its disadvantages include budgetary slack and negative motivation, however it is the conditions in which participative budgeting takes place determines whether the budgeting process is successful. The conditions are dependent on various factors such as the level of participation, level of subordinate influence, the extent to which budgetary slack takes place, volatility, job related information, and the complexity of the budget.
Quantitative plans are called budgets. Budgets are prepared to impose cost controls on the activities of an organization (Chenhall, 1986).Budgets are then used to evaluate the performance of the management and budget itself is considered as a standard to evaluate the performance Solomon, 1956). The purpose of the budget is also to implement the strategy of the organization and communicate it to the employees of the organization Rickards (2006). The change in the external environment has led to the change in the budgeting approaches from the initial cash based budgets to the zerio based budgets (Bovaird, 2007).
Capital budgeting is one of the primary activities of a company. Most of the company uses capital budgeting for decision making process of selecting and evaluating long-term investment. The company have to make a right decision with respect to investment in fixed asset such as purchasing of new equipment and delivery vehicles, constructing additions to buildings and many more. The decision must be right because of the project involve huge amount of cash outflow and it is committed for many years.
The overall purpose of cost accounting is to advise top administration and the management team on the most suitable and cost effective methods and actions to employ based on cost, capability and efficiencies of a given product or service. It can be defined as the method where all the expenditures used during execution of business activities are gathered, categorized, examined and noted down (Horngren & Srikant, 2000). Once these numbers are gathered and recorded the information is used to determine a selling price and/or to identify possible investment opportunities. Although the principal aim or function of cost accounting is to help the business administration with their decision making and business planning process, the cost accounting data
The pros of using ABC is the capacity to estimate the cost of services and individual products. By transferring overhead costs to individual units of products or services, ABC helps identify inefficient or non-profitable products or activities that eat into the profitability of efficient processes or highly profitable products (Nayab, 2011). This will help the company to determine whether to implement processes for improvement or outsource those processes. ABC highlights non-remunerative distribution channels allowing the management to adopt alternative marketing strategies or close down the channel for a more pro...
"Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods" (1) , Now we will discuss why ABC can result in more reliable products costs than conventional labor based product costing system . In recent years, the nature of industrial production has fundamentally altered; we will discuss their characteristics. First we have machine production and capital intensive, Now machines are the main tool and at the heart of production; labors maintain machines and supervise them, and machines are the ones that dictates the pace and rate of production. The second characteristic is high level of overheads relative to direct cost; in modern businesses they tend to use overheads in different ways for example: some products need engineering time and some products require machine time so that products will use overheads differently. The third characteristic is highly competitive international market, transportation including fast freight and relatively cheap; one of the advantages is the use of internet ensures that customers can easily and quickly reach and find products and also cheaply, this environment is highly competitive so companies need to know accurately their range of prices in order to use this information to gain competitive advantage over other
Budget is combining your income and expenses to decide how much money you are going to spend on an item. Budget is an important step to determine your financial health and financial stability. It’s an important financial tool because it can help plan for expenses, cut cost were unneeded, save for future goals, plan for emergencies that occur inexpediently, and list what you are spending and saving.
It requires an adequate and sound organizational structure, that is, there must be a definite assignment of responsibility for each function of the enterprise. Budgeting compels all the members of management, from the top to bottom to participate in the establishment of goals and plans. Budgeting compels departmental managers to make plans in harmony with the other departments and of the entire enterprise. Budgeting helps the management to put down in figures what is necessary for a satisfactory performance. Budgeting helps the management to plan for the most economical use of labor, material and capital. Budgeting tends to remove the cloud of uncertainty that exists in many organizations, especially among lower levels of management, relative to basic policies and objectives. Budgeting promotes an understanding among members of management of their co-workers' problems. Budgeting force management to give adequate attention to the effects of general business conditions. Budgeting aids in obtaining bank credit as banks commonly require a projection of future operations and cash flows to support
The national budget is the main instrument through which governments collect resources from the economy, in a sufficient and appropriate manner; and allocate and use those resources responsively, efficiently and effectively (Todorovic & Djordjevic, 2009). The work of public budget has increased extremely more complicated, abstruse and worrying (Hou, 2006, p.730).