Budgetingfor business Name: Course: Tutor: Institution: Date: IntroductionIn the process of manufacturing,distribution and selling of fireworks, the management of happy-happy fireworkscompany has noted an impending danger of cut throat competition from otherproducers.
The competitors are producing and selling at favorable prices toprice away and get a share of the company’s market.in the process of managementof this threat, the management of happy-happy fireworks company decided to reviewthe process of planning, control and cash flows management. The company also intends to maintain therelationship it has maintained with large influential retailers. The largeretailers are important and will help the firm to curb the dangers of cashflows volatility already noted.
Happy-happy management has developed a cashbudget to help implement the company’s objectives.Theimplications of the projected cash budgetHappy-happy Company finds the budget asan important tool to help it commit to a certain financial action plan. Thefirm is able to organize their finances. The budget will help to ensure thathappy-happy company avoids unnecessary expenditures. Before the budgeting decisionsare made, a number of considerations are made.
The considerations include theavailable funds, business goals and the returns on the investment (Nordmeyer, 2017).The budget will enable the management toestimate the incomes and expenses of the company. The estimated income accountis developed and the resultant estimated profits willhelp to estimate the amount of taxes payable to the relevant authorities.incases where the company will be required to borrow in order to finance itsoperations, the important documents required by the financers like the proforma balance sheet will be easier to prepare using budget figures. Apart fromestimating the figures for incomes and expenses, the budget will ensure thatthe two important items of income statement are controlled to reduce variances.
This is done by comparing the actual versus the budgeted for the period. Areaswith adverse variances will be examined and the challenges solved accordingly.The budget will provide focus, direction to employees of happy-happy fireworkswho are the sole implementer’s of the company’s objectives. The occasionalreviews of the budget performance will help the executive team to focus on thecash resources of the business.Possiblerisks and considerations in terms of cash budgeting and projectionsThe cash budget for happy-happyfireworks company includes the review of the anticipated cash receipts and cashpayments for the budget period. Budgeting process will therefore use estimatedfigures from the sales and collections received from the debtors. The estimatedfigures of revenues and payments may not necessarily be a matter of fact butmay rather depend on the instinct of the management. Due to lack of theavailable factual knowledge, the effectiveness of the budget is limited andthis results to adverse variances.
Budgets too lack flexibility. The publishedbudgets are distributed to the management. The management then makes decisionbased on the documents provided. Fluctuation of the figures on the initialbudget results to other expenses being incurred by the firm (otley, 1979). Manipulation isalso another risk associated with the projections.
Sometimes the figures ofincomes are inflated while those of expenses are depleted by the management.This is done to create ulterior motives that reflect well on their performance.Inflated figures result to cash variances. The variances will have adverseresults to future cash flows.in most cases; most of the budgets will notinclude nonfinancial factors.
On financial factor affects the performance ofthe business. Examples of non-financial factors include the effects ofpolitical activities in the region, unpredictable employee’s behaviors and thecustomer services offered by the company.Ananalysis of the sources of reported varianceThe happy-happy company reported anadverse net variance of £ 475,000.this adverse variance is attributable tounexpected decline in sales volume, higher material usage levels and prices,and a higher labor payment rate. However, the selling price, labor efficiencyand fixed expenditure produced favorable variances.Salesvolume varianceThe sales volume variance forhappy-happy fireworks company is the difference between the budgeted sales in unitsand the actual quantity of units sold.
The resultant figure is then multipliedby the budgeted price per unit (G.Sohoni, 2010). The sales volumevariance was an adverse of £ 34,000.The sales volume variance can beeffectively controlled by employing measures aimed at increasing the quantityof units sold at the same time maintaining competitive prices. A practicalmethod to increase the units sold can be motivating the sales and advertisementdepartments to reach more potential clients (gibson, 1990).Materialprice varianceThe adverse material price varianceimplies that a higher price than the budgeted was paid by happy-happy fireworkscompany to acquire material for usage.
The material price variance amounted to£ 308,000.the material price variance is calculated by subtracting the actualquantity purchases multiplied by standard rate from actual quantity purchasedmultiplied by actual rate. The material price variances are caused byorder size, rises of prices in the industry, urgent needs due to improperbudgeting, quality of material purchased, transportation costs and unreliable suppliers.The material price variance can be controlled by buying in bulk to get cashdiscounts.proper budgeting also help to reduce chances of urgent needs. Thecompany should also ensure that they only deal with reliable suppliers.Materialusage varianceThematerial usage variance of £ 20,000 meansthat the happy-happy fireworks company used a large amount of material in theproduction process than the budgeted.
The production manager is responsible forcontrolling the quantity of materials to be used. The material usage variancecould have been caused by wastages during the production process.in cases whereminimal or no wastages are reported, the produced units should be higher thanthe budgeted.The material usage variance can becontrolled by using quality materials and being effective and efficient in theproduction process. Practically, the company should produce only the productsdesired in the market.Laborrate varianceThelabor rate variance is a measure of thedifference between the actual and the budgeted costs of labour.it is calculatedby deducting the standard rate from the actual rate and then multiplying by theactual number of hours worked (AccountingTools, 2017).an adverse varianceof £ 327,000 implies that the cost of labor was higher than the anticipated or budgeted.
This can be a measure of company’s ability to bargain for a cheap quality laborwith the unions. The currently set labor rates are not reflected in thestandards and the quality of work done. Increased premium pays have been noted.Staffing variances and scheduling of employees could also be a major course ofhigher labor rates.
Changes of benefits related to costs of labor leads toincrease in labor pay.To control the labor rate variance, thehuman resource department is responsible for negotiating the most appropriaterates with the labor unions to achieve the budgeted figures. Another practicalmethod of controlling the labor rate method is employee’s motivation. Motivatedemployees will do more at a given time period. Individual performanceevaluation on employees tasked with implementation of the budget is necessary.The underperformance of the employee’s increases the labor pay. The presence ofthe dummy workers in the payroll should not be ignored to.
It is important for a company thatproduces in large quantity to keep checking and controlling the analyzedvariances. Items portraying adverse variances should be reviewed to determinethe course and get the cure to achieve the projections in the budget.Controllingthe budgeting processControlling the budgeting standards isthe process of setting the standards, analyzing data on the actuals versus the standards,noting the variances and employing corrective measures to curb the variances (ASHE-ERIC, 2009).The comparison of the actual versus budgeted should be a continuous process andthe results which could either be favorable or unfavorable produces the basisof revision for the budget figures.The budget as a formal statementexplaining the resources, cash inflows and outflows has a sole responsibilityfor the coordination of activities of the happy- happy fireworks.
There shouldbe budgetary control and responsibility centers. The said centers arecontrolled by the management who monitors the various functions of the firm.Responsibility centers constitute functional units and include revenue,expense, profit and investment centers. Investment centers are responsible forcomparing the outputs with the assets employed by the firm.
The differencebetween the income’s and the expenses is tracked by the profit centers.Expenses centers track the total inputs ignoring the output. Outputs aretracked by the revenue centers.
Coordination and communication are vitaltools to ensure that budgetary processes are controlled. The management isresponsible for setting out what needs to be done, when and by whom. Effectivecommunication is necessary to ensure that every department works towardsachieving a certain well known objective. A budgetary control is enhanced by aclear defined area of responsibility. The department managers are responsiblefor achieving certain budgeted targets.A yardstick forperformance appraisal and variance analysis is set by the budgetary control team.Actual results compared by the budget plan provides the basis for performance appraisal.
Investigations on variances must conducted and the resultant factors classifiedunder the controllable and the uncontrollable.Properallocation of resources according to the budget should also be enhanced.Remedial actions should be taken against the emerging variances.
Employeesshould be motivated.one of the best practices of employees’ motivation is toinclude them in a team that sets the budget. The management by exceptionprincipal is enhanced to economize the management time.
The managementis responsible for ensuring that the budget is not a tool for bad labor relation.Accurate record keeping should be emphasized. Disputes resulting from resourceallocation should be solved amicably.
Designingcharacteristics of a budget is important to ensure that it is controllable. Abudget should have some certain features.it should be comprehensive to ensurethat a whole organization is embraced. The budget should be flexible due touncontrollable changing circumstances. Constant feedback should be obtainableas the performance is monitored.Alternativemethods of controlling future variancesFuture variancescan be controlled by effective preparations during the initial stages of budgetpreparation. All the stake holders should be included.
The management of thecompany can contact the local statistics firm who can produce the desired dataand information on the notable trends in the industry. The data obtained wouldhelp the firm prepare a better budget. The figures of the research by thestatistics firms are more accurate and hence the budget will be a truereflection of future estimates. On financial factors should also be included inthe budget. The effects of political activities in any given economy cannot beunder estimated. Other economic indicators such as inflation and exchange ratesshould be included on budgets too.
The economic indicators have a direct effecton increase or decrease in prices of firm’s inputs. The effects of the weatherpatterns in different time periods should be established. This will help thecompany to know when to buy in bulk to avoid emergency purchases which can betoo expensive. The experience of the budgetary committee team should beconsidered. Predictions and estimates are better if given by individuals whohave a certain experience in certain industries.in short, the information fromthe statistics firms, the inclusion of non-financial factors and the experienceof the implementer’s of the budget are factors that needs consideration duringthe budgeting for future variances of cash flows.
ConclusionIt is necessaryfor happy-happy company to prepare a budget and continuously compare the actualperformance with the budgeted to identify the possible variances. Thesevariances could be favorable or unfavorable. The unfavorable or the adversevariances should be examined and the remedial measures taken to curb theadverse effects. Bibliography AccountingTools. (2017). Labor rate variance.
ASHE-ERIC. (2009). the budgetary process. ASHER-ERIC higher education report, 43-52.
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