In the process of manufacturing,
distribution and selling of fireworks, the management of happy-happy fireworks
company has noted an impending danger of cut throat competition from other
producers. The competitors are producing and selling at favorable prices to
price away and get a share of the company’s market.in the process of management
of this threat, the management of happy-happy fireworks company decided to review
the process of planning, control and cash flows management.
The company also intends to maintain the
relationship it has maintained with large influential retailers. The large
retailers are important and will help the firm to curb the dangers of cash
flows volatility already noted. Happy-happy management has developed a cash
budget to help implement the company’s objectives.
implications of the projected cash budget
Happy-happy Company finds the budget as
an important tool to help it commit to a certain financial action plan. The
firm is able to organize their finances. The budget will help to ensure that
happy-happy company avoids unnecessary expenditures. Before the budgeting decisions
are made, a number of considerations are made. The considerations include the
available funds, business goals and the returns on the investment (Nordmeyer,
The budget will enable the management to
estimate the incomes and expenses of the company. The estimated income account
is developed and the resultant estimated profits will
help to estimate the amount of taxes payable to the relevant authorities.in
cases where the company will be required to borrow in order to finance its
operations, the important documents required by the financers like the pro
forma balance sheet will be easier to prepare using budget figures. Apart from
estimating the figures for incomes and expenses, the budget will ensure that
the two important items of income statement are controlled to reduce variances.
This is done by comparing the actual versus the budgeted for the period. Areas
with adverse variances will be examined and the challenges solved accordingly.
The budget will provide focus, direction to employees of happy-happy fireworks
who are the sole implementer’s of the company’s objectives. The occasional
reviews of the budget performance will help the executive team to focus on the
cash resources of the business.
risks and considerations in terms of cash budgeting and projections
The cash budget for happy-happy
fireworks company includes the review of the anticipated cash receipts and cash
payments for the budget period. Budgeting process will therefore use estimated
figures from the sales and collections received from the debtors. The estimated
figures of revenues and payments may not necessarily be a matter of fact but
may rather depend on the instinct of the management. Due to lack of the
available factual knowledge, the effectiveness of the budget is limited and
this results to adverse variances. Budgets too lack flexibility. The published
budgets are distributed to the management. The management then makes decision
based on the documents provided. Fluctuation of the figures on the initial
budget results to other expenses being incurred by the firm (otley, 1979). Manipulation is
also another risk associated with the projections. Sometimes the figures of
incomes 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 adverse
results to future cash flows.in most cases; most of the budgets will not
include nonfinancial factors. On financial factor affects the performance of
the business. Examples of non-financial factors include the effects of
political activities in the region, unpredictable employee’s behaviors and the
customer services offered by the company.
analysis of the sources of reported variance
The happy-happy company reported an
adverse net variance of £ 475,000.this adverse variance is attributable to
unexpected decline in sales volume, higher material usage levels and prices,
and a higher labor payment rate. However, the selling price, labor efficiency
and fixed expenditure produced favorable variances.
The sales volume variance for
happy-happy fireworks company is the difference between the budgeted sales in units
and the actual quantity of units sold. The resultant figure is then multiplied
by the budgeted price per unit (G.Sohoni, 2010). The sales volume
variance was an adverse of £ 34,000.
The sales volume variance can be
effectively controlled by employing measures aimed at increasing the quantity
of units sold at the same time maintaining competitive prices. A practical
method to increase the units sold can be motivating the sales and advertisement
departments to reach more potential clients (gibson, 1990).
The adverse material price variance
implies that a higher price than the budgeted was paid by happy-happy fireworks
company to acquire material for usage. The material price variance amounted to
£ 308,000.the material price variance is calculated by subtracting the actual
quantity purchases multiplied by standard rate from actual quantity purchased
multiplied by actual rate.
The material price variances are caused by
order size, rises of prices in the industry, urgent needs due to improper
budgeting, quality of material purchased, transportation costs and unreliable suppliers.
The material price variance can be controlled by buying in bulk to get cash
discounts.proper budgeting also help to reduce chances of urgent needs. The
company should also ensure that they only deal with reliable suppliers.
material usage variance of £ 20,000 means
that the happy-happy fireworks company used a large amount of material in the
production process than the budgeted. The production manager is responsible for
controlling the quantity of materials to be used. The material usage variance
could have been caused by wastages during the production process.in cases where
minimal or no wastages are reported, the produced units should be higher than
The material usage variance can be
controlled by using quality materials and being effective and efficient in the
production process. Practically, the company should produce only the products
desired in the market.
labor rate variance is a measure of the
difference between the actual and the budgeted costs of labour.it is calculated
by deducting the standard rate from the actual rate and then multiplying by the
actual number of hours worked (AccountingTools, 2017).an adverse variance
of £ 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 labor
with the unions. The currently set labor rates are not reflected in the
standards and the quality of work done. Increased premium pays have been noted.
Staffing variances and scheduling of employees could also be a major course of
higher labor rates. Changes of benefits related to costs of labor leads to
increase in labor pay.
To control the labor rate variance, the
human resource department is responsible for negotiating the most appropriate
rates with the labor unions to achieve the budgeted figures. Another practical
method of controlling the labor rate method is employee’s motivation. Motivated
employees will do more at a given time period. Individual performance
evaluation on employees tasked with implementation of the budget is necessary.
The underperformance of the employee’s increases the labor pay. The presence of
the dummy workers in the payroll should not be ignored to.
It is important for a company that
produces in large quantity to keep checking and controlling the analyzed
variances. Items portraying adverse variances should be reviewed to determine
the course and get the cure to achieve the projections in the budget.
the budgeting process
Controlling the budgeting standards is
the 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,
The comparison of the actual versus budgeted should be a continuous process and
the results which could either be favorable or unfavorable produces the basis
of revision for the budget figures.
The budget as a formal statement
explaining the resources, cash inflows and outflows has a sole responsibility
for the coordination of activities of the happy- happy fireworks. There should
be budgetary control and responsibility centers. The said centers are
controlled 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 for
comparing the outputs with the assets employed by the firm. The difference
between the income’s and the expenses is tracked by the profit centers.
Expenses centers track the total inputs ignoring the output. Outputs are
tracked by the revenue centers.
Coordination and communication are vital
tools to ensure that budgetary processes are controlled. The management is
responsible for setting out what needs to be done, when and by whom. Effective
communication is necessary to ensure that every department works towards
achieving a certain well known objective. A budgetary control is enhanced by a
clear defined area of responsibility. The department managers are responsible
for achieving certain budgeted targets.
A yardstick for
performance 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 classified
under the controllable and the uncontrollable.
allocation of resources according to the budget should also be enhanced.
Remedial actions should be taken against the emerging variances. Employees
should be motivated.one of the best practices of employees’ motivation is to
include them in a team that sets the budget. The management by exception
principal is enhanced to economize the management time.
is responsible for ensuring that the budget is not a tool for bad labor relation.
Accurate record keeping should be emphasized. Disputes resulting from resource
allocation should be solved amicably.
characteristics of a budget is important to ensure that it is controllable. A
budget should have some certain features.it should be comprehensive to ensure
that a whole organization is embraced. The budget should be flexible due to
uncontrollable changing circumstances. Constant feedback should be obtainable
as the performance is monitored.
methods of controlling future variances
can be controlled by effective preparations during the initial stages of budget
preparation. All the stake holders should be included. The management of the
company can contact the local statistics firm who can produce the desired data
and information on the notable trends in the industry. The data obtained would
help the firm prepare a better budget. The figures of the research by the
statistics firms are more accurate and hence the budget will be a true
reflection of future estimates. On financial factors should also be included in
the budget. The effects of political activities in any given economy cannot be
under estimated. Other economic indicators such as inflation and exchange rates
should be included on budgets too. The economic indicators have a direct effect
on increase or decrease in prices of firm’s inputs. The effects of the weather
patterns in different time periods should be established. This will help the
company to know when to buy in bulk to avoid emergency purchases which can be
too expensive. The experience of the budgetary committee team should be
considered. Predictions and estimates are better if given by individuals who
have a certain experience in certain industries.in short, the information from
the statistics firms, the inclusion of non-financial factors and the experience
of the implementer’s of the budget are factors that needs consideration during
the budgeting for future variances of
It is necessary
for happy-happy company to prepare a budget and continuously compare the actual
performance with the budgeted to identify the possible variances. These
variances could be favorable or unfavorable. The unfavorable or the adverse
variances should be examined and the remedial measures taken to curb the
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gibson, b. (1990). determining meaningful
sales relational(mix)variances. accounting and business research,
Nordmeyer, B. (2017). What Factors Are
Going to Influence Your Budgeting Decisions?
otley, d. (1979). risk distribution in the
budgetary process. accounting and business research, 325-337.