Budgeting and budgetary control in manufacturing companies

MANUFACTURING BUDGET ANALYSIS 6

Manufacturing Budget Analysis

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Identify the problems that appear to exist in Ferguson & Son Manufacturing Company's budgetary control system and explain how the problems are likely to reduce the effectiveness of the system.

The control system of budgets is usually considered as one of the important tools during planning and control of business activities in a business enterprise. The success or failure of the company will be largely dependent on how effective the planning is made. In gaining control of the budgetary system of the organization, the organization needs to set a comparative analysis of the budgeted figures and the actual figures. However, the company has failed to flex the actual figures with the budgeted figures. This problem has inconvenienced allocation of resources, hence affecting the budgetary control system of the organization (Albright, 2011).

The company has also faced the problem of lack of common goals among all the employees. Based on the case provided, Emory had been meant to believe that provision of high quality goods was the main goal of the company, but a closer analysis of the company revealed that low cost had been the major goal. With this form of confusion, employees do not know what the main goal of the company is; hence, decisions aimed at reaching for the goals cannot be made.

The system of budgetary control for the company does not motivate. The system misses the significant factors needed for evaluating performance. With the absence of these factors, it becomes ineffective to evaluate the performance of employees and device ways through which goals can be attained.

There is a great effect of the unmanageable factors in the budgetary control system. In the company, factors like rush orders and improper maintenance have greatly affected the system. With these factors, the company has been unable to coordinate its departments, leading to ineffectiveness (Albright, 2011).

Explain how Ferguson & Son Manufacturing Company's budgetary control system could be revised to improve its effectiveness.

One of the improvements that should be made in the system is effective planning. In effective planning, there is a high chance that allocation of resources will become more effective. The company will also stand a better chance to flex the budgeted figures with the actual figures. Through flexing, it becomes possible to accommodate any uncertainties that are bound to occur if disparity occurs between actual figures and the budgeted figures.

To bring a positive effect to the company, the company should also outline its attainable objectives to the employees. Through such a course of action, employees will be acquainted with the objectives and goals of the company and they will be in a position to work in accordance with the stated objectives. Additionally, outlining objectives of the company will help develop a system that rightfully accords resources to their respective channels (Shim, 2012).

The company should also be in a position to come up with an effective system that goes in line with the various manageable factors in the company. These factors should be controllable at all levels in order to avoid any inconveniences that are brought about by unmanageable factors within the company`s business operations.

The company should be in a position to accord various budgets that are time bound and do not show a great disparity after a slight change in the performance of the company. The management of the company should also be educated on the various budgetary procedures that are applicable in their areas of duty. Through such information, it will possible for all the individuals involved in management to keenly monitor the performance of the company and make necessary adjustments if need be.

Finally, there is the need for the company to create an effective system that realizes the process for the profit that has been gained. Realization of the process creates a coherent framework of the budgetary control system in the company. Through these recommendations, it will be possible for the company to realize an effective system that caters for all departments within the organization.

Explain how the use of an activity-based costing system could change the results of the budget, if utilized.

It has been noted that the current system of budget encompasses inefficiencies that make the company fail to recognize its business objectives. With the use of an activity-based costing system, the company will see a great change in its business operations, creating a milestone in realization of a profit-oriented business. Firstly, an activity based costing system will create accuracy in costing of the different products offered by the company and create an efficient channel for distribution of the particular products. The accuracy realized in product costing will help the company in setting prices that are customer friendly but still bring profits for the company (Albright, 2011).

Through an activity-based costing system, the company will be in a position to make the right use of the unit costs other than just using the total cost. When the company uses unit cost, it is likely that it will set prices in accordance with the unit cost but not the total cost. The activity-based costing system also supports the management chain and helps in setting attainable goals of the company based on the costs versus profit that are being realized by the company. The activity-based costing system also reflects on the performance of the company. The system helps the company to have an overview of what needs to be done and how it should be done. Therefore, the system acts like a mirror for the company that directs all cost related activities for the company in achieving is short term and long term goals (Shim, 2012).

As stated in the case, many employees have “quit trying” and have altered behavior on the job. Provide specific ways for how you would use a budget to change employee behavior and align goals in the organization. Explain how goal alignment can improve profitability and overall return to the shareholders of the company.

The employees of the company have altered their behavior towards work and seem have different ideas on the budgetary control system of the company. Firstly, I need to get the employees acquainted with the new system of budget in the company. Making the employees realize the new system will make transform their behavior in order to get along with what the new system of budget entails. Additionally, I will need to clearly outline the objectives of the company both short-term and long term. This will be done through notifications of any new ideas and decisions from the management on the budget over the business operations of the company. Through such methods, it will be possible to get the employees working in the same line to achieve the objectives of the company while still maintaining a positive relationship with the management (Albright, 2011).

Goal alignment is one of the significant approaches that the Ferguson & Sins Company should be able to follow in attaining maximum returns for its shareholders. Goal alignment includes communicating effectively the goals and objectives of the company and implementing on various ideas and policies aimed at achieving the goals for the company. Through goal alignment, employees are in a position to align their behaviors in accordance with the expectations of the company and therefore increase the performance of the company. Additionally, goal alignment can have an impact on the output of the company. When employees are working with the specific goals of the company in mind, it is likely that output will increase leading to increased profits that will increase the returns for the shareholders of the company (Gil-Lafuente, 2005).

Synthesize data to explain the concept of ROI and describe how the use of an activity-based costing system can improve the company’s ROI and the potential impact on free cash flow.

Companies and business organizations usually use the ROI concept in determining the profitability of a business. The ROI concept measures the returns of the shareholders in comparison with the capital they invested for the company. The investment is usually referred to as the funds for total shareholders and is composed of the retained earnings and the share capital of the investors. Through this concept, companies are in a position to create a standard that measures the business operations of the firm against other firms, its current performance, and budgets (Crosson, 2011).

Through an activity based costing system, the company stands to have a better ROI and a great impact on free cash flow within the organization. Since the activity-based system offers a guideline for costs and pricing, it will be easy to realize profits whose calculations auger well with the ROI. Additionally, the budget system will increase free cash flow in the company due to the planned expenditure within the company`s operations. Therefore, the new system of budgeting for the company not only increases profitability for the company but also increases efficiency for the realization of the company`s mission (Albright, 2011).

References

Gil-Lafuente, A. M. (2005). Fuzzy logic in financial analysis. Berlin [u.a.: Springer.

Shim, J. K., Siegel, J. G., & Shim, A. I. (2012). Budgeting basics and beyond. Hoboken, N.J: Wiley.

Albright, S. C., Winston, W. L., Zappe, C. J., & Broadie, M. N. (2011). Data analysis and decision making. Mason, Ohio: South-Western/Cengage Learning.

Crosson, S. V., & Needles, B. E. (2011). Managerial accounting. Mason, OH: South-Western Cengage Learning.