In order to increase competitive advantage in this high competition market place today, every company need a planning and control tool to act faster. Budget is the tool to plan, monitor and control daily activities to meet organisation goal with effectively and efficiently. If we able to be well on the way to manage and draw up company budget, it will be effective toolkit to you to increase ability to survive in the commercial word through foresight and planning.
In this assignment is to introduce what is budget system, purpose of budget, budgeting process and different type of budget system in an organisation. Additionally, how budget play the role as planning and control tool is core of assignment.
We will critically examine the current budget system prepared by Nature Biscuits Sdn Berhad with analysis advantage and disadvantages of budgeting process. Recommendation for improvement of budgeting management will be indicate in this case study as well.
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Natural Biscuits Sdn Berhad is a home grown Malaysian company. Main products are corn base snacks and layer cake. Natural Biscuits product can be found in Malaysia and 38 markets, worldwide. Its main oversea markets are China, Indonesia, Japan, India and Middle East country. As a local company lead the way in the cake products section, Nature Biscuits has fine-tuned the development of making cakes with long shelf life, 9-12 months. Company goal is as worldwide leader of quality cakes and snacks.
What is budget; according to business dictionary define as estimate of cost, revenue and resources over a specified period, reflecting a management's reading of future financial condition.
In other words, budgeting is the process of "translating financial resources into human purposes" (Wildavsky, 1986). Budgeting is also viewed as a process of recognizing, assembly, summarising and communicating financial information of an Organization's future activities. Blumentritt (2006) further explained that budgeting processes include a review and study of the prior period's financial results, projections for sales, operating expenses (fixed, variable, and semi-variable) and financing expenses, examination of proposals for capital expenditures, and means of rolling up and rationalizing figures from different functional departments to ensure they meet company-wide profit expectations. It is managerial control tool to plan and control future expenses, revenue and resources allocation in a certain period normally in 1 year.
In order to have a realistic and good budget, there are few factor need to be considered:
Assign right person to draw up the budget. The person in charge need to heavily involve in the entire exercise. Predictive ability is the must. He or she need to clear about organisation activities as well as possible income and expenditure.
Clear channel of communicate, authority and responsibility.
Goal and procedure or guidelines of budget must be clear can be implemented in the budget.
Accounting generated accurate, consistent and appropriate data.
Compatibility and understandably of information
Support at all levels of the organisation, upper, middle and lower
Budgets consider external factors, such as market trends and economic conditions.
allow for changing conditions
2.1 History of budget
The budget only is used for governmental setting during agriculture ware. In industrial wave, budget had been use in large company as management control tool to plan and control their business. In 1960, budget is recognized as effective way to centralize company operation under top management.
When come into information wave, decentralise the business is one of solution in order for company can react faster. When business management style change from centralize to decentralise, company need to change budget system to meet company objective. Hence, traditional budgeting like incremental budget be replace to zero base budgeting and other modern budgeting is begin implement to follow company direction. Method of budget also change from top down (centralise) to bottom up budgeting (decentralise). The new budgeting system like rolling budget, balance score card, activity base budgeting and beyond budgeting are start implement in some company to improve effective and efficiency of organisation.
2.2 Purpose of budget
As planning tool
Budgeting plan and allocate fund to achieve company goal. Manager need to plan business strategies to achieve company objective with arrange resource allocation such as machinery, fund, people and operating company in advance. Mean that budget use as tool to link company objective with company resource to allow for thinking how to make operations and resource more productive and efficiently. It is a better money management skill by creating structured plan. Budget is able to provide overall picture of status of company resource, expected income and expenses. Thurs, manager can prevent problem before they arise. All financial statements should be written in terms of the budget so that it is easier to be transparent and accountable and to ensure that no money is spent on costs that you have not budgeted for (Hansen,2003). So manager able to establishes guidelines in the form to proceed in the right direction.
Always on Time
Marked to Standard
Budgeting process is involving every department in an organisation. Team work is required to complete a budget. Therefore, budget as toolkit to coordinating between departments to attain efficiency and productivity. Indirectly budgeting process can improves working relationships. It is coordination of top management with middle and lower lever at organisation as well.
Manager need to focus more on what they have plan in the budget. Therefore budget is encourages delegation of responsibility in order to improves managerial decision making because prominence is on future events and associated prospect.
Monitor and control
Budget is allows management to monitor, control, and direct activities within the company. Manager can compare budget plan with actual result and points out deviations. Investigation and corrective action will be taken. Therefore, management can aware of problem faced by lower levels. Action can be taken earlier before result worse.
Employees participate in the budgeting process able to motivating them to perform in line with the company goal. They feel they are involvement in the process and enhance motivation. Additionally, expected profit or cost reduction planned in the budget may motivate manager to achieve. And those meeting budget targets, incentive will given as motivational device.
The budgeting process
Budgeting planning process
Strategic goal & business
The budget process used by a company should suit its needs, be consistent with its organisation structure and take into account human resource. The budgetary process establishes goal ad policies, formulate, limits, enumerate resource need, examines specific requirements provide flexibility, incorporates and consider constraints. (Horgren, 1999) Thurs, budget process is starts from the company goal with decide the overall or strategic goals and strategic of business, which are then translated into specific long term goals, annual budgets, and operation plans. Setting financial goals is the starting point in the budgeting process. Examples: earnings growth, cost minimization, sales, production volume and return investment.
Once short term goal of company had been set, manager need analysing available resources, forecasting profit and expected cost and translate into budget plan. Manager can base on history or past experience to estimate cost like capital cost, staffing cost, operation cost and organisation cost. How manager plan the budget is related to what kind of budget system use by company. For example, if budgetary system of company is zero bases budgeting, manager needs to start plan budget base of zero instead of base in past year figure. Estimate revenue usually is generating from sales income. Therefore, sales budget is first budget to be plan then following with cost budget. Those estimate figure will be put in the budget format according to company needed. First draft of budget wills submits to top management to obtain approval. Top management will evaluate the budget with company objective. If budget is realistic and meet the company goal or target. It will be implemented, distributed and coordinated among different functional department. If budget is rejected, necessary adjustments to the budget, check of calculations once again and resubmit for approval again. Finally compare revenue and expense projections.
2.4 Budget control
The budget is the most important tool you have for monitoring the finances of your organisation, project or department. You use the budget to monitor income and expenditure to see whether or not you are on target; report how you are doing financially to your staff, and board; do cash flow projections and make financial decisions(Gosellin, 1997 ) Comparisons of actual income and expenditure against the budgeted income and expenditure need to be done regularly. Variance report need to be prepare if any. There are 2 variance result:
Favourable = actual is better than planned then it is a positive variance
Adverse= actual is worse than planned then it is a negative variance Investigate and corrective action need to be taken.
2.5 Budget planning process in Natural Biscuit ( NB)
NB top management group will start to plan the next year budget on every year end. Top management group of NB are CEO, COO and sales director. They will have the pre budget meeting with department head to set the next year target or short term objective need to meet by next year. Target and short term objective are link to company goal. For example, LB company goal is as worldwide leader of cake and snack. They develop and expand their market to other country as strategy to meet the company goal. So short term objective will be expand their market to certain area like USA market. Therefore, company may decide to spend more money to invest at R&D and having market survey for USA food market. Budget will be affected of this kind of company objective or decision.
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Top Management will only set the target to organisation, and let staffs collect relevant information which influence next year target. Therefore, method of budget in LB is bottom up budgeting. Feedback and information from subordinates will take into consideration to plan budget.
Finance department is needs to lead and compile budget to master budget. As regular practice, first budget to draw up is sales budget. Sales team start with constructing prognoses and environment analysis. They need to include the objective or target had been set by top management. For example they may need to achieve 10% of total sales growth on next year. Therefore, they need to consider this and plan budget accordingly. Sales department at NB is delegate base on area sales. Each area sales manager need to contribute in the budgeting process. Account dept will help to provide sales history for past few years to predict future sales performance. Statistical analysis will be performed by each area sales managers. Statistical analysis can be averages based on past sales to identify trends that can be extrapolated into the future. This is call incremental budgeting. In this case, top management is set yearly target for sales dept is 10% of increment of total sales. Hence, managers will base on past year record and forecasting 10% increase sales figure.
Sales department in NB
After sales budget be approved by sales director, it will be distribute to related department to continue plan the expenses to procure estimate sales figure. There are 2 types of main organisation expense; operation cost and administration cost. In NB there are few dept in charge of operation cost: Production, engineering, QA and QC and purchasing departments.
Production budget included unit of product need to be produced to meet sales target qty. Example: budgeted sales volume on Jan 2011 is 10,000 carton of pie cake, production manager need to base on this figure to estimate how many direct labour, machinery cost, utilises cost, maintenance cost and so on.
QA & QC need budgeting how many instruments to support estimated production output in order to ensure product quality. Common instrument in the NB's QA & QC is pass sticker, scale and manpower needed as well.
Purchasing manager need to budgeting direct material cost base on budgeted sales target.
Are non-operational costs and will include things such as marketing, human resources, rents and vehicle costs as well as general administration.
HR & admin manager in LB prepare the indirect labour budgeting. It includes training cost estimation, general overhead, office maintenance cost, and stationary and so on.
Account manager budgeting the general office cost like staffing cost.
IT is one of supported dept in the LB. IT manage handle the entire IT instrument. He needs to budget those equipment like computer, printer or other related need.
After all the departmental budget and sales budget is done, finance dept is accountable to compile these budgets into master budget. Finance controller will compare revenue and expense projections and verify budgeted result in line with the NB short term objective.
In some cases, finance controller found that any contingency budgeted result, department manager is request to revise and submit budget again. Else, master budget will submit to CEO and COO for final approval. Once Master budget is approved, it will distribute, communicate and implemented in NB. Each department manager need to explain detail to subordinates and monitor the result from time to time.
2.6 Budget control in LB
Finance department and department managers take important role in controlling parts. Each department managers are assigning as budget committee. Quarterly management meeting will be held in NB for follow up and monitor budgeting purpose. Finance controller is core person in the budgeting control as he have to provide training to budget committee, ensure budget dateline is meet and dealing with budget problem.
Master budget in Lb is break into monthly report. They call it as Monthly Budget value report. This report includes all budgeted and actual income and expenses in a month. Comparison of actual and budgeted figure will be shown in the standard format by month by month, where you are over-spending, under-spending or on target.
For that variance more than RM5000, explanation and variance report needed. This report outline the cause of significant variance, propose corrective action and any other major matter. An analysing report provided finance controller base on variance report to analysing and foresee what impact for master budgets is.
Current financial status
Analysis of budget changes
Financial position to date
In month financial position
Trend analysis by month
Main cause of variance
Estimate end of year position
Suggestion action or corrective action
In some cases that prove the budgeted figure is unrealistic, budget is request to revise.
Format of monthly budget report in NB
Interest from investment
If department budget with significant deviation will be issue warning letter and variance report from finance department by acknowledge by top management. They need to follow the action plan and act accordingly. Audit will be held from time to time from finance dept to ensure they are complying accordingly.
2.7 Advantage of LB budgeting process
Currently Natural Biscuit is practice bottom up budget system where are supervisor and department manager drawing up the budget base on company goal and objective and submit to top management for approval.
Normally this kind of budget method tends to be more accurate and realistic because head of department plan and estimate of own department expenses and requirement as they are direct contact with company activity. This budgeting method can provide the opportunity for employees get involved in setting their goals and expectations for a given financial period. In other way, employees feel sense of ownership in such budgets, they attempt to meet or exceed those expectations. Employee job satisfaction is increase. Thurs, bottom up budgeting is good motivation tool. By the way, budget planning process can force manager to plan ahead. Hence, they can realise any potential problem in advance
NB budgeting (Bottom up) involve every department. Therefore, they are force to communicate between each department to complete the budget. Opportunity is given for subordinates to discuss budget issue with superior. Through communication of exchange information can help to solve the problem more effectively. Relation between of employees can be improving as well.
Budget system is incremental budgeting. Incremental Budgeting uses a budget prepared using a previous period's budget or actual performance as a base, with incremental amounts added for the new budget period (Hansen, 2003). Advantage of this system is stable and change is steady. It is base on company target to plan and increase the estimated figure. Managers can operate their departments on a consistent basis, so this is quite simple to operate and easy to understand. Therefore, employees are easy to practice and follow this budgeting system.
2.8 Disadvantage of NB budgeting process
Bottom up budgeting need cooperation from each department in NB. There are involving too many employees cause take too long time to prepare and completed. From below time table we note that from start to complete a budget, they taken 46 days. Human behaviour is one of factor will affected realistic of budget. For example waste may arise as managers adopt the view, "we had better spend it or we will lose it". This is often coupled with "empire building" in order to enhance the status of a department. Furthermore, if on certain group might further emphasize his opinion. Master budget is tend be inaccurate. Departmental conflict arises with blaming each other if targets are not attained.
Time table to complete budgetary in NB
Estimated Number of day
Top management decision of yearly target
Manager start draw up budget
For top management approval
Budget negotiation ( top management with budget committees) and budget revise.
Finalise and implement budget
Total days: 46 days
Of course, certain budget committee is unfamiliar with the operation being budgeted. They may lack of training of budgeting process. Such as IT department is expert in their operation area where is ensure system are in line and operate well in the company. They maybe lack of idea how to draw up budget.
In NB, flexed budget is not applied in the budgeting control. Component of Master Budget is fix budget mean that data will not be revise base on activity achieved in the budgetary period. Finance department of NB is only comparing the actual figure with expected figure. In fact to have better comparison result and realistic outcome, flexed budget need to be including for control process. Flexed budget is based on actual activity of company. In NB should base on unit of actual output. From below table, we can notice that more realistic variance figure we can get if actual figure minus flexed budget. As any variance figure is more than RM5000, variance report needed and warning letter will be issue to related department. But due to unrealistic comparison in NB, this is unfair to that department since production output is increase. Morale of employee will be affected and bad labour relation due to unfair comparison of budgeting control.
Variance ( MB- Actual)
Variance ( FB- Actual)
Units output of pie cake
RM 40 ( U)
RM 10 (U)
RM 20 ( U)
RM10 ( F)
Indirect labour salary
RM 20 ( U)
RM 20 (U)
Additionally, quality and customer service issue are not included in the NB's budget. And adding value of product totally not be plan and allocate resource of this area. In fact, these are potential problem will affected budget seriously. Any unsatisfactory of customer incur, target or expected sales figure will be effected. Whole budget need to be revised.
In other hand, variance report of NB is too complicated. There are too many matter or issue need to be explain due to deviation of budget. This is taken time to complete and reporting the deviation. Staff of NB may find other alternative way to skip this report. End last, unrealistic report may be submitted to finance department.
Lead time of budget planning need to be shorted by less involve number of employee. Manager of NB will consider opinion and information from all of subordinate. But actually they can just appoint few person of employee which job function more related to budget process. For example, in the production budget, only involve production executive and above to join the pre budget meeting but not only budget committee (Manager) can join the meeting. This can shorter lead time of planning, manager not need to explain more further since they are obtain necessary information in the meeting.
Finance department suppose is department more expert in the budgetary matter. Therefore, finance controller has to provide more training to other department. He needs to explain further how to plan, why we need and what is budget. Additionally, factors will be effected budget need to emphasise in the training. In NB, no budget guidance or procedure in writing provided. What they have is only simple excel budget format. So finance controller need to have writing procedure and guidance with clearly defines areas of responsibility and provide during pre budget meeting. In order to ensure budget can be completed on time, miles stone is good monitor tool for finance controller. He needs to be very strict to the time which indicates in the miles stone. And monitor the budget process from time to time.
A better computer program need to replace excel format to make quick and accurate calculations, keep track of projects instantly, and make proper comparisons. In case that variance more than RM5000, warning letter given to HOD which need to be replacing with appraisal system. Award or incentive should be given for those meet the budget target. Therefore, management of NB should establish a appraise system to motivate and encourage employees.
Sometimes it is necessary to have two different budgets for NB. One as the ideal budget that we would like to have and a second one as a minimum budget of the money that is completely necessary for your company to survive. When we draw up the ideal budget, profit is only estimated so we not sure will get all the money for company need and a minimum budget will help you to decide which costs can be cut, if we don't manage to raise the necessary funds.
Budget system is control and planning tool for Natural Biscuit to plan and monitor their organisation activity in advance. NB is practice Bottom up budgeting with involved suggestion and information from their employee in budgeting process. Therefore NB's budget is more accurate and realistic. Communication between departments will be improved during budgeting process. But NB's budgeting process to take too long time to complete and some of staff are lack of budget training.
Incremental budget is budgeting method of NB. It is easy and steady method, so employees are easy to understand and draw up the budget. But NB do not have good budgeting format to plan and control their budgeting process. Hence, a good budgeting program needed. Additionally, NB need to shorter lead time of budgeting with reduce people involving in the process. Systematic appraise system also needed to motivate employee in the way to improve budgeting system in NB.
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Gosselin, M., 1997a. The Effect of Strategy and Organisational Structure on the Adoption and Implementation of Activity-based Costing, Accounting, Organizations and Society, 22, 105-122.
Dyson, J. R., 1997. Accounting for Non-Accounting Students. 4th ed. London: Pearson Professional Limited.