The Advantages And Disadvantages Of Consultants Accounting Essay

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3. Introduction

4. Main body

The main body should address the requirements as stated in Part a, b and c above.

Part A (i)

- Identify the current budgeting approach adopted by United Consultancy

Current approach adopted by United Consultancy is fixed budget. A fixed budget is a budget that is prepared on the basis of specified criteria that does not allow for any changes or variations in the activity that might occur at any time within the period covered by the budget. For United Consultancy, this means that the fixed budget is drafted from a calendar or operational year/months, and is not changed at any time within the year, even when there are changes in the levels of business activities that takes place. There will be no changes even when the company takes a sudden increase in profits or dive in its sales figures.

The fixed budget used is a different budgeting approach compared to a variable or flexible budget, with a flexible budget there are allocations for adjusting specified line of items based on the levels of revenue generated over the duration of the year. In contrast a fixed budget is laid out carefully to be fixed for the entire period. This approach ensures that each department within the company is able to identify how much they have to spend at the start of a period and how much allowances remains after any given point during the budgeting period.

The fixed budget is a financial plan that do not allow the change irrespective of the change from the plan in actual levels of activity that occurs, since United Consultancy experiences does experience a certain variations from their expected activity levels over the period encompassed by the budget, the amount of the budget is very certainly different from the actual results. Points to consider is the situations in which a fixed budget can be likely to track closely to the actual results are when:

Costs are largely fixed, so that expenses do not change as revenues fluctuate

The industry is not subject to much change, so that revenues are reasonably predictable

The company is in a monopoly situation, where customers must accept its pricing

In comparison most companies that uses fixed budgets, which indicates that the routinely deal with large variances between actual and budget results. A possible way for United Consultancy to mitigate the disadvantages of a fixed budget is to combine it with a continuous budget whereby you add a new budget period into the end of the budget as soon as the recent budget period has concluded, by this practice, United Consultancy could gradually incorporate the most actual results of the period into the budget.

Another way to mitigate the effect of a fixed budget is to shorten the time frame it covers. For example, United Consultancy may budget can be made to only encompass a 3 month period, after which management formulates another budget that goes on for the 3 months after that.

- In part a(i), you are required to comment on the advantages and disadvantages of involving the consultants for future budget.

At United Consultancy services employs consultants within part of its budgeting process. A consultant can be an experienced individual that has been trained to analyze and advice a client in order to assist the client in making the best possible choices. Strategic consultants may even help the organization to evaluate and develop a business plan to meet the company's strategic goals.

Peter Block (), Defines a consultant as someone who has influence over an individual, group or an organization, but who has no direct authority to implement changes. He further defines that to contrast a consultant with a surrogate manager or a person who 'acts on behalf of, or in place of a manager'. The major difference that should be identified is that a consultant never makes the decision for the individual or group but a surrogate manager does makes these decisions.

A consultant is usually an expert or a professional the the specified fieldand has a wide knowledge on the subject matter. The role of consultants outside the medical field (where the term is most commonly used) can be classified under two general categories:

Internal Consultant - someone who operates within an organisation but is available to be consulted on areas of specialism by other departments or individuals (acting as clients); or

External Consultant - someone who is employed externally (either by a firm or some other agency) whose expertise is provided on a temporary basis, usually for a fee. As such this type of consultant generally engages with multiple and changing clients.

The overall impact of a consultant is that clients have access to deeper levels of expertise than would be feasible for them to retain in-house, and may purchase only as much service from the outside consultant as desired.

The Advantages and Disadvantages of Consultants

To understand further the impact of consultants in Untied Consultancy, we would need to further understand the pros and cons of having such individuals around:

Advantages to consider:

Additional skills.

The usual reason to hire a consultant is to get access to some of their skills that are scarce or nonexistent in your own company. Beware that the more narrowly a consultant defines himself or herself (e.g. "I develop mail-order catalog website back-ends with Ruby on Rails"), the less helpful they will be. When you hire a button-pusher, don't expect miracles - expect buttons to be pushed.

Advantage: Intelligent advice.

This is the original and best reason to hire a consultant, and where 'miracles' can occur. Real consultants are people you can consult. Sadly, the art of asking good questions, gathering information about problems and giving advice based on experience and observations has almost become a lost art among today's see of 'consultants', who technically should call themselves independent contractors, not consultants.

Advantage: Outsider perspective.

"The imaginative user of "outsiders" can encourage each of the types of mindfulness just mentioned. [...] Just as a traveler to a foreign culture notices what people indigenous to that culture take for granted, an outsider in a company may notice when the corporate natives are following what may now be irrational traditions or destructive myths."

- Ellen J. Langer, Mindfulness

Easy to hire and fire

Consultants and "temps" can be engaged and dismissed quite easily making them the perfect short-term asset. This allows you to maintain your core group of employees and add additional talent for special projects, vacation fill-in, promotions, seasonal variations, business cycles, and so-forth. When the need subsides, you don't have to go through all the problems and hurt feelings involved in laying off regular employees

Cost avoidance

Using consultants at the beginning of a project or change in business methods can often save hundreds of thousands of dollars down the road. Good consultants have seen what works and what doesn't work. Their experience can steer you away from pitfalls you may not know exist.

Disadvantage:

Cost.

Consultants can be expensive, but usually this is only a problem when you are hiring a consultant to be doing something that an employee should be doing. Most of the value you will get from consultants is from their advice, observations and some focus work, so a couple hours from a consultant could save you months of wasted employee/contractor time.

Quality control.

If you're hiring a stranger, you really know nothing about whether their skills will help or hinder your project. And consultants often work on their own time, in their own way. This lack of visibility, necessary for good consulting (and a legal requirement for independent consultants), can also hide shoddy work. Hire consultants based on referrals and give them smaller initial projects so that you can judge them based on results rather than marketing glitz.

Overseas outsourcing can fail:

Outsourcing to overseas sources often doesn't work out. Time, language difficulties, and cultural differences often kill what should be a mutually profitable relationship.

No knowledge of in-house procedures:

Outside helpers don't know your business or your organization and procedures as well as you do. They have to go through a learning period the first time you engage them.

Costs considerations

What's behind the charges?

Contractors sometimes cost more than in-house employees. This is because the contractor usually can't work a full-time schedule. Between engagements, the average contractor makes no money, but s/he still has to pay the mortgage and put beans on the table. The extra income s/he received during an engagement helps to cover the "dry" periods "on the bench". Also, the organization that employs consultants has to make a profit as well to cover the costs of rent, telephone, in-house employment, etc.

Rates differ by length of engagement

Short-term engagements will usually command a higher hourly rate than long-term work. Long-term work represents less "bench time" and thus lowers the contractor's expenses.

Part A (ii)

- you need to comment on the limitations of the existing operating statements presented

- No calculation required

Part b

- you might want to start with the briefly explanation on the differences between fixed and flexed budget

Why Fixed Budgets Work

One of the best reasons for a company to engage a fixed budget is the variance analysis. The variance analysis will inform the respective individuals on how much the company is over or under its original planned budget; via percentage or dollars. Even for new business, it is easier to plan for years ahead when there is a comparison between what was expected and what actually happened. In the coming years, there can be adjustments in the budget either up or down depending on the variance percentages. Fixed budgets work best when the business owner has a reasonable amount of certainty what profits and expenditures will be like barring extraordinary circumstances.

The Minuses of the Fixed Budget Approach

A fixed budget is planned ahead of time and based upon the business best educated guess about future actual activities. Fixed budgets are normally planned a year in advance and broken into smaller reporting periods such as months or quarters. A huge disadvantages for new business is the lack of data which can be used to build such a budget. If actual data differs a lot from the fixed budget, there is no way to change the budget or to identify the cost to produce the revenue was properly controlled. Instead the decisions must produce a forecast. The forecast is a new document that enables the prediction of the remainder of the reporting periods activity and compares the fixed budgets to the actual results.

Why Flexible Budgets Work

Flexible budgets are changes based upon volume; it provides a greater level of control. New setups need to keep a tight monitoring of cost, limiting certain flexible expenses to a percentage of volume to help accomplish this. A new business can vary a great deal from what was initially forecasted, and flexible budgets offer real-time view if a business expenses and revenues. The savvy business owners may not have time to go the trouble of generating a forecast for the fixed budget. The flexible budget trumps over this by having the forecast in one step.

The Minuses of the Flexible Budget Approach

The flexible budget is more sophisticated method to be used because the new business owner can make changes to the budget in the middle of a reporting period. However, a the business may not have the time, experience of inclination to adjust the budget frequently. Also there maybe unexpected effects from unexpected changes in volume for which the business won't be able to plan for. A flexible budget requires knowing in advance on which cost are fixed or variable and how expenses can be affected by the changes in revenue.

- discuss the limitations of the fixed budget

Limitations of Flexible Budgeting

The usage of a flexible budget is an excellent way to resolve many difficulties that is inherent in a fixed budget. However there are also some numbers of serious issues from using a flexible budget, which are addressed below.

Formulation. Though the flex budget is a good tool, it can be difficult to formulate and administer. One problem with its formulation is that many costs are not fully variable, instead having a fixed cost component that must be calculated and included in the budget formula. Also, a great deal of time can be spent developing cost formulas, which is more time than the typical budgeting staff has available in the midst of the budget process. Consequently, the flexible budget tends to include only a small number of variable cost formulas.

Closing delay. You cannot pre-load a flexible budget into the accounting software for comparison to the financial statements. Instead, you must wait until a financial reporting period has been completed, then input revenue and other activity measures into the budget model, extract the results from the model, and load them into the accounting software. Only then can you issue financial statements that contain budget versus actual information, with variances between the two. These extra steps will delay the issuance of financial statements.

Revenue comparison. In a flexible budget, there is no comparison of budgeted to actual revenues, since the two numbers are the same. The model is designed to match actual expenses to expected expenses, not to compare revenue levels. There is no way to highlight whether actual revenues are above or below expectations.

Applicability. Some companies have so few variable costs of any kind that there is little point in constructing a flexible budget. Instead, they have a massive amount of fixed overhead that does not vary in response to any type of activity. For example, consider a web store that downloads software to its customers; a certain amount of expenditure is required to maintain the store, and there is essentially no cost of goods sold, other than credit card fees. In this situation, there is no point in constructing a flexible budget, since it will not vary from a static budget.

In brief is that a flexible budget requires additional time to construct, slows down the issuance of financial statements, does not measures revenue variences and may not be applicable under certain type of budget models. These are serious issues that tend to limit its usages.

- discuss why flexed budget is useful

(http://www2.accaglobal.com/archive/sa_oldarticles/studentaccountant1/43925)

The functionality of a flexible budget is designed to change in response to the changes of the output levels or on circumstances changes in other relevant factors. Flexible budgets can be used to compliment the use of a fixed budget, they have a part to play and can be applied in more than one context. In the planning process, it is a significant tool that can be used to produce a range of estimates for different planning scenarios of sales, cost, market prices and etc.

The equal appropriate use of flexible budgeting is primarily for the purpose of control. When preparing a performance report it is important to take account of the difference of some cost with variable levels of output. The actual level of output can be different from those that have been planned in a fixed budget and the cost targets use for all the variable and semi variable cost should be adjusted accordingly.

Flexible budgeting takes into account how comparing the actual cost incurred for a certain output level with the budget developed. At a basic level, all budget variable and semi variable cost should be adjusted accordingly to take account of the actual output level. Fixed cost would not be expected to change in spite of the changing output. Flexible budget enables the changes to be captured accordingly and the variance depending on the output can be tailored accordingly to reflect the exact changes that is required at the particular point of time, though there can be a point of confusion for the operations as the target set for the year would appear to be a moving target.

- discuss the step by step on how the spreadsheet software can be used to setup the flexed budget

A flexible budget calculates different expenditure levels for variable costs, depending upon changes in the amount of actual revenue or other activity measures. You input the actual revenues or other activity measures into the flexible budget once an accounting period has been completed, and it generates a budget that is specific to the inputs. You then compare the budget versus actual information for control purposes. The steps needed to construct a flexible budget are:

Identify all fixed costs and segregate them in the budget model.

Determine the extent to which all variable costs change as activity measures change.

Create the budget model, where fixed costs are "hard coded" into the model, and variable costs are stated as a percentage of the relevant activity measures or as a cost per unit of activity measure.

Enter actual activity measures into the model after an accounting period has been completed. This updates the variable costs in the flexible budget.

Enter the resulting flexible budget for the completed period into the accounting system for comparison to actual expenses.

You can create a flexible budget that ranges in level of sophistication. Here are several variations on the concept:

Basic flexible budget. At its simplest, the flexible budget alters those expenses that vary directly with revenues. There is typically a percentage built into the model that is multiplied by actual revenues to arrive at what expenses should be at a stated revenue level. In the case of the cost of goods sold, a cost per unit may be used, rather than a percentage of sales.

Intermediate flexible budget. Some expenditures vary with other activity measures than revenue. For example, telephone expenses may vary with changes in headcount. If so, you can integrate these other activity measures into the flexible budget model.

Advanced flexible budget. Expenditures may only vary within certain ranges of revenue or other activities; outside of those ranges, a different proportion of expenditures may apply. A sophisticated flexible budget will change the proportions for these expenditures if the measurements they are based on exceed their target ranges.

In short, a flexible budget gives a company a tool for comparing actual to budgeted performance at many levels of activity.

- in the step by step, you need to clearly identify the format required and the formula need to be included so that the user to key in the budget, and actual and the system will automatically calculate the flexed budget and the variance.

- Remember in flexed budget: only the variable cost need to be recalculated.

Part C

- You need to explain clearly whether the zero based budgeting is suitable for United Consultancy (for each justification, the example should be provided)

Zero Based Budgeting

Zero based budgeting (ZBB) was developed in the United States in the early 1960s by Peter Pyrrh working at Texas Instruments in an attempt to overcome the limitations of incremental techniques. It presumes that budgets can be recompiled from first principles i.e. from a zero base and focuses on programs and activities rather than departments or units.

Jones and Pendlebury have defined it as follows:

'Zero based budgeting in its purest form is precisely what its name implies; the preparation of operating budgets from a zero base even though the organization might be operating more or less as in previous years the budgetary process assumes that it is starting anew'.

The process is usually applied to new services which, genuinely, are being built up from a zero base. In addition, zero-based budgeting can be applied to subjective heads such as repairs, maintenance, equipment where service priorities can be established corporately without reference to previous years' budgets. The budget holders should present their requirements for resources in such a fashion that all funds can be allocated on the basis of cost benefit or similar evaluative analyses. The cost benefit approach is an attempt to ensure value for money; it questions long-standing assumptions and serves as a tool for systematically examining and perhaps abandoning any unproductive projects.

The principle characteristics of ZBB are:

the involvement of all executive managers in the budgeting process;

the justification of resources for current and proposed activities;

the determination of objectives;

the assessment of alternative ways of achieving these objectives;

no costs or activities should be factored into plans just because they featured in current or previous ones.

ZBB is best suited to discretionary and support services and thus has extensive potential application to the public sector. With discretionary costs such as advertising or training managers have some discretion as to the amount they will budget for the activity in question. There is no optimum relationship between inputs (as measured by the costs) and outputs (measured by the revenues generated). Furthermore they are not predetermined by previous commitments. In effect managers are free to determine what quantity of service they are willing to provide and there is no established method for determining the appropriate amount to be spent in particular periods.

The key stages are to:

define the scope of implementation;

identify decision units;

prepare decision packages (an analysis of a discrete area of activity);

rank packages;

prepare budget;

implement budget.

In the case of United Consultancy stand point, the usage of ZBB would be favorable as the focus on the budget will constitute more towards the evaluation of services rendered from the total outcome of the budget.

- you need to discuss the advantages and disadvantages of zero based budgeting

Advantages of Zero-Base Budgeting

There are a number of advantages to zero-base budgeting, which include:

Alternatives analysis. Zero-base budgeting requires that managers identify alternative ways to perform each activity (such as keeping it in-house or outsourcing it), as well as the effects of different levels of spending. By forcing the development of these alternatives, the process makes managers consider other ways to run the business.

Budget inflation. Since managers must tie expenditures to activities, it becomes less likely that they can artificially inflate their budgets - the change is too easy to spot.

Communication. The zero-base budget should spark a significant debate among the management team about the corporate mission and how it is to be achieved.

Eliminate non-key activities. A zero-base budget review forces managers to decide which activities are most critical to the company. By doing so, they can target non-key activities for elimination or outsourcing.

Mission focus. Since the zero-base budgeting concept requires managers to link expenditures to activities, they are forced to define the various missions of their departments - which might otherwise be poorly defined.

Redundancy identification. The review may reveal that the same activities are being conducted by multiple departments, leading to the elimination of the activity outside of the area where management wants it to be centered.

Required review. Using zero-base budgeting on a regular basis makes it more likely that all aspects of a company will be examined periodically.

Resource allocation. If the process is conducted with the overall corporate mission and objectives in mind, an organization should end up with strong targeting of funds in those areas where they are most needed.

In short, many of the advantages of zero-base budgeting focus on a strong, introspective look at the mission of a business and exactly how the business is allocating its resources in order to achieve that mission.

Disadvantages of Zero-Base Budgeting

The main downside of zero-base budgeting is the exceptionally high level of effort required to investigate and document department activities; this is a difficult task even once a year, which causes some entities to only use the procedure once every few years, or when there are significant changes within the organization. Another alternative is to require the use of zero-base budgeting on a rolling basis through different parts of a company over several years, so that management can deal with fewer such reviews per year. Other drawbacks are:

Bureaucracy. Creating a zero-base budget from the ground up on a continuing basis calls for an enormous amount of analysis, meetings, and reports, all of which requires additional staff to manage the process.

Gamesmanship. Some managers may attempt to skew their budget reports to concentrate expenditures under the most vital activities, thereby ensuring that their budgets will not be reduced.

Intangible justifications. It can be difficult to determine or justify expenditure levels for areas of a business that do not produce "concrete," tangible results. For example, what is the correct amount of marketing expense, and how much should be invested in research and development activities?

Managerial time. The operational review mandated by zero-base budgeting requires a significant amount of management time.

Training. Managers require significant training in the zero-base budgeting process, which further increases the time required each year.

Update speed. The extra effort required to create a zero-base budget makes it even less likely that the management team will revise the budget on a continuous basis to make it more relevant to the competitive situation.

- for each of the advantage and disadvantage, you need to provide example.

5. Conclusion

6. References: you are required to reference / research books and journals, apart from online sites.

Remember: Harvard referencing format with both in-text and summary of references must be provided.

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