Budgeting process at Forgt Furniture

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LIST OF FIGURES AND TABLES

INTRODUCTION

3.1: THE PURPOSE AND NATURE OF THE BUDGETING PROCESS WHICH SHOULD NORMALLY BE TAKEN IN THE PREPARATION OF BUDGETS FORGT FURNITURE

3.1.1: The purposes of the budgeting process

Budgeting process is ways which an organisation builds a budgeting. An effective budgeting process is built and controlled by those who have responsibility to abide by the budget and practice the organization's objectives in creating the budget (Elizabeth Foley, 2014). Nowadays, the budgeting process has become a very important step in every business. There are six main purposes that can be served by implementing a budget system including aiding the planning, communication, coordination, motivation of resources, controlling and evaluation.

The first purpose of using a budget is to aid the planning of actual operations. The budgeting process allows an organisation to determine its revenues and expenses from a previous time period and then make forecast of where the business could be at in the future. It could also help the businesses to know that they should add or remove goods and services to meet the anticipated demand of the businesses for the period (Elizabeth Foley, 2014). Through the budgeting process, Glentruan Furniture Ltd can determine that nowadays, customer love high quality and skillful furniture. Therefore, recently Glentruan Company developed new product line using of latest technology.

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Secondly, the budgeting process can communicate plans to various responsibility center managers. Both staff and managers of the organization will be aware of their responsibilities and obligations, helps them know what they must do to achieve the effective budgeting process. (Elizabeth Foley, 2014). In Glentruan, with the budgeting process, market research department and production department know that they need to communicate to create good budgeting process. Market research department have to provide information about how many people who need buy furniture and how are now furniture’s trend, then, production department can set up effective production plan.

Thirdly, the budgeting process can co-ordinate activities of an organisation. Because the process of budget means that managers at all levels and in different departments have many opportunities to meet, exchange, discuss and link their goals together. Enterprise will achieve great success if all members co-ordinate for general purposes rather than each department operate partially (365ngay, 2014). In Glentruan, it will be irrational if business chief plans to increase sales by 15 % but the director of Glentruan plans to reduce 10% of yield. Therefore, Glentruan need build the budgeting process to co-ordinate closely activities with each other.

Fourthly, budgeting process can motivate managers to strive to achieve the budget goals. If managers at every level participate more in building and controlling budget, they all the more understand and support the goals of the business. To be taken part in planning and controlling budget, this is really an important motivation for managers (365ngay, 2014). In Glentruan, if effect of budget is bad, managers of Glentruan will effort, strive more to restore budget of the company. If effect of budget is great, managers will feel very elated and have strong motivation to try continuously.

The next purpose of budgeting process is also to establish a system of controlling activities of an organisation. Control over actual performance means that compare of actual results and the budget plan. It is necessary to investigate why the budget is not effective and find methods to improve situation (365ngay, 2014). In Glentruan Company, budget system will help managers to have the whole picture about things which will happen and make everyone in Glentruan are responsible for managing spending in their department. Thus, the strength of each department in Glentruan can be specified and Glentruan Company will learn ways to overcome any difficulties.

Finally, budgeting process can evaluate the performance of managers. Budgets provide useful information for superiors to assess the performance of managers and can be used to reward good results (Dimmies, 2014). In Glentruan, through budgets, Glentruan can know managers work very well because orders of customer increase and customer assesses Glentruan with superior grades. Thus, Glentruan need have policies to rewards managers.

In summary, all the purposes mentioned above are important. A good planning process will help Glentruan to control the company. Glentruan can only conclude business or employees as good or if not can compare their results with actual forecast figures given (365ngay, 2014).

3.1.2: The nature of the budgeting process

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Identify objectives

Setting goals for financial year of an organisation is the first step in building and developing a budget. Identify objectives will create motivation for members in the organisation to promote fiscal situation. There are three typical objectives for the preparation of budget, including maximizing profits, increasing market share and manufacturing product have the best quality.

Identify potential strategies

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3.2, 3.3, 3.4: SELECT APPROPRIATE BUDGETING METHODS FOR THE NEW PRODUCT LINE AND ITS NEEDS. PREPARE BUDGETS ACCORDING TO THE CHOSEN BUDGETING METHOD BASED ON THE GIVEN INFORMATION IN THE SCENARIO AND ALSO PREPARE A CASH BUDGET

Incremental budgeting

Jim Riley written: "Incremental budgeting is a budget prepared using a previous period's budget or actual performance as a basis with incremental amounts added for the new budget period." This method is popular in organisations where budget is not built carefully or where do not have any significant demand to practice a thorough re-evaluation of the organization (Jim Riley, 2014). The advantages of this method are that this method is easy, quick, cheap and suitable for preparing budgets for what may be many cost centres in a large organisation; or this method ensures that departments are operated in a consistent and stable manner for long periods of time. However, incremental budgeting also causes some drawbacks that this budget may become out of date and no longer relate to the level of activity being carried out; this method is also inefficient because it encourages slack and wasteful spending or (Proactiveresolution, 2014).

Zero base budgeting

Accountingtools written: “A zero-base budget (ZBB) requires managers to justify all of their budgeted expenditures, rather than the more common approach of only requiring justification for incremental changes to the budget or the actual results from the preceding year.” Zero based budgeting is used to prevent budgets creeping up each year with inflation. Besides, ZBB helps to eliminate inefficient or obsolete operations. Furthermore, it provides a budgeting and planning tool to respond to changes in the business environment. However, zero base budgeting also cause some disadvantages, for example, this method is a complex time consuming process. It needs more time span as well as employees for the preparation and management; this increases the cost for setting up ZBB. Moreover, manager who prepares budget require training in the ZBB process, this also increases the time (Jim Riley, 2012).

Fixed budgeting

A fixed budget is a financial plan that does not change in any the budget period, irrespective of any changes from the plan in actual activity levels experienced. The advantage of fixed budgeting is that it keeps costs down providing that the businesses obey the strict financial limits. Moreover, a fixed budget provides a level of stability and control that cannot be found in a flexible budget, so it is an optimal choice for small business owners and individuals. On the other hand, the biggest disadvantage of fixed budgeting is that it does not allow to adjust based on a change in situation. Therefore, it is hard to react to the unexpected changes that typically occur in the business (David Montoya, 2014).

Flexible budgeting

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A flexible budget is a budget that is adjusted or flexes to depend on changes in the volume of activity. This method is very suitable and useful in businesses where have variable cost environment. Besides, the flexible budget also provides a correct basis to compare between actual results and the relevant activity level in the flexible budget as a control procedure at the end of each month or each year. In the other hand, there are some drawbacks for apply this method. A flexible budget requires extra time to build, delays the release of financial reports, does not measure variances of revenue, and may not be applicable under certain budget models (Accountingtools, 2014).

REFERENCES

Elizabeth Foley (2014) Budgeting process [online] available from <http://www.nonprofitaccountingbasics.org/reporting-operations/budgeting-process> [30 April 2014]

365ngay (2014) Nhung loi ich cua ngan sach [online] available from <http://www.365ngay.com.vn/index.php?option=com_content&task=view&id=764&Itemid=14> [30 April 2014]

Dummies (2014) Benefits of budgeting [online] available from <http://www.dummies.com/how-to/content/benefits-of-budgeting-that-relate-to-business-mana.html> [30 April 2014]

Amsolutions (2014) Guide creating your company budget [online] available from <http://www.amsolutions.net/articles/guide-creating-your-company-budget> [1 May 2014]

Jim Riley (2014) Incremental budget [online] available from <http://www.tutor2u.net/business/accounts/incremental-budgeting.htm> [1 May 2014]

Proactiveresolution (2014) Incremental budget [online] available from <http://www.proactiveresolutions.com/learners-zone/cost-and-management-accounting/planning-and-control/incremental-budgeting/> [1 May 2014]

Accountingtools (2014) Zero base budgeting [online] available from <http://www.accountingtools.com/zero-based-budgeting> [1 May 2014]

Jim Riley (2012) Zero base budgeting [online] available from <http://www.tutor2u.net/business/accounts/zero-based-budgeting.htm> [1 May 2014]

David Montoya (2014) Advantages using fixed budget [online] available from <http://smallbusiness.chron.com/advantages-using-fixed-budget-43537.html> [1 May 2014]

Accountingtools (2014) Flexible budget [online] available from <http://www.accountingtools.com/flexible-budget> [1 May 2014]

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