Division of Accounting And Finance - Essay Example

DIVISIОN ОF АССОUNTING АND FINАNСЕ Student’s Name Institution Course Code Date Introduction....................................................................................................................3 Part1..............................................................................................................................4 1.1 Budgeted results.......................................................................................................5 1.2 Actual figures...........................................................................................................5 1.3 Variance Analysis....................................................................................................6 1.4 Statement of Reconciliation.....................................................................................6 Task 2............................................................................................................................7 2.1 Benefits of Budgeting..............................................................................................7 2.3 Drawbacks of budgeting..........................................................................................8 2.4 Weight between budgeting benefits and drawbacks...............................................9 Conclusion....................................................................................................................10 Bibliography...............................................................................................................11 Introduction Budgeting is a very important planning too that different business organization use to ensure that they spend their finances effectively and allocate their scarce resources well. It is usually involves future financial estimates and expenditure that the management expect to use (Hilton & Sainty, 2001). This essay involves explanation of the benefits and drawbacks of the budgeting and provision of the reason as to whether budgeting benefits outweigh its drawbacks. This will therefore helps different forms of business organization to ensure that they prepare budget before allocating their scarce resources and also spends their income. In this essay we also conduct variance analysis so that we can understand what cause the difference between actual results with budgeted figures (Atkinson and Banker, 2001). An effective management ensure that they understand what the variation means to the business and through this the management can understand the critical variance analysis they can do to the business. The result of variances can either be adverse variance or favourable variance and they are used to develop statement of reconciliation. Part 1 1.1 Budgeted results Details £ £ Sales(10,000 X £200 2,000,000 Less variable costs Direct materials 15 X £6 900000 Direct labour (5hrs X £10) 500000 Total variable cost 1400000 Fixed Costs Production overheads £20,000 Non production overheads £12,000. Total cost 1432000 Net Profit 568000 1.2 Actual figures Details £ £ Sales £2,340,000 Less variable costs 150,000 sq. metres at £7 per square metre 1050000 £605,000 in total with the hourly rate being £11 per hour 605000 Total variable cost Fixed Costs Production overheads £25,000 Non production overheads £10,000 Total cost 1690000 Net Profit 650000 1.3 Variance Analysis This is the variation from standard costs, material labour and overheads from actual results (Hilton & Sainty, 2001). This analysis is important in determining the difference and provision of explanation for the cause of the difference between standard costs and actual costs. Direct material price variance Actual quantity (Actual price- Budgeted price) 150000(£7-£6) = £150000 A Direct material usage variance (Actual quantity- standard quantity) standard price (150000 – 10000) 7 =35000F Direct labour rate variance (Actual rate- standard rate) actual quantity (11-10) 150000 = 150000F Direct labour efficiency variance (Actual hours- standard hour) standard rate (55000 -50000) 10 = 50000A Fixed production variance (Actual fixed production- standard fixed production) (£20,000 - £25,000) = £5,000F None fixed production variance (£12,000-£10,000) = £2,000 1.4 Statement of Reconciliation £ £ £ Budgeted profits 568000 Cost variance Adverse Favourable Direct material price 150000 Direct material usage variance (35000) Direct labour rate variance 150000 Direct labour efficiency variance (50000) Fixed production overhead variance 5,000 Non-fixed production overhead variance £2,000 Total (85000) 307000 222000 Actual profit 790000 Part 2 Budgeting is the steps used to create future plan on how the business organization spends and allocate its financial resources (Atkinson and Banker, 2001). This plan is useful in ensuring that the business knows whether it will have enough finances to use in future or financial constraints to meet its financial needs. For a business organization to be effective, it requires the investors to develop a good financial plan and review its finances to see if they are able to meet their demands (Cagwin and Bouwman, 2002). The business organization can utilize some forms of accounting to identify measure, examine and report their financial information. The best or most appropriate tools that can be used include budgeting, forecast and other essential financial management tools (Atkinson and Banker, 2001). It is therefore important for business owners to understand the benefits of budgeting and its drawbacks so that business owners can choose whether to use budgeting or not. 2.1 Benefits of Budgeting There are number of benefits of budgeting than drawbacks. Budgeting is therefore helps the business organization in a number of areas. Gives you control over your money Budgeting ensure that the business owner is intentional on the manner in which he intent to use or save income (Atkinson and Banker, 2001). Budgeting therefore makes the business investor to control the way he spends his money but not the money controls the business owner. It also ensure that there is no budget deficit nor surplus since a plan has been drawn on what to but and at what cost hence there is no sudden cash shortages. Keeps you focused on your money goals Budgeting is very important in ensuring that there is no unnecessary expenditure on goods or services which cannot help in the achievement of the financial goals. It only ensures that financial resources are only used on items which are important in achieving the financial goals. Makes you aware what is going on with your money Budgeting ensure that you know the amount of money that is coming into the business and the rate at which it is being spent (Cagwin and Bouwman, 2002). It therefore helps business owners to stop wondering every month due to cash shortages or cash surpluses. It is also important in helping the business owners to know what they have the potential to buy and this help him to take buying advantage and investment opportunities thereby arranging how to reduce the debt level (Atkinson and Banker, 2001). The budget is also able to indicate what is important to the way funds was allocated, how the funds allocated is working and the extent to which you have moved towards achieving your financial goals. Helps you organize your spending and savings Budgeting ensure that funds available is divided into different groups such as expenditure and savings (Cagwin and Bouwman, 2002). Through this you will be able to acknowledge the portion covered by each group of your funding. This makes the investor to make adjustment easily. It also acts as a reference point where you can organize your schedules, receipts and financial statements at the end of the year. It therefore helps the business organization to save on time and effort when every thing is in order for tax and any other business purpose. Makes you decide in advance how your money will work for you Budgeting helps in planning on how the funds will be used in advance (Cagwin and Bouwman, 2002). Through this there is no impulse buying which may involve financial expenditure on things which are unnecessary for the business. It also enables the business owner to know what he can afford and what it cannot hence avoid mismanagement of cash. Enables savings for expected and unexpected costs Budgeting is also important in ensuring that the business organization saves parts of the money for security reasons (Colin, 2007). This will ensure that the business organization is ready to meet its emergency expenses. Enables significant communication with others about money When financial resources are used by different people in the organization, a budget can ensure the way each person spends money is communicated. This is important in encouraging others to work in teams in order to meet financial goals of the organization. It also reduces unnecessary conflicts on how the organization funds are used in the organization (Cagwin and Bouwman, 2002). This is because a budget is responsible in training family members or employees spending responsibility and accountability hence it is important in both the family and organization set up. Provides an early warning for potential problems Budgeting is a very important process which ensures that the business organization identifies and determines warnings that show that there will be a problem in future (Atkinson and Banker, 2001). This enable the business organization to take appropriate action to correct the problem before it occurs. Determines Credit worthiness of the business Budgeting is effective in ensure that you understand the ability of the business to pay the debt (Colin, 2007). It shows the cash movement and liquidity thereby showing the amount of debt that the business can pay without stress. Enables production of extra money Budgeting ensure there is no expenditure on unnecessary items such as payment of interest, penalties and legal fees (Abernethy and Brownell, 2003). This savings can increase the amount of cash that is available for investment. Budgets translate strategic plans into action Budgeting ensures the resources, revenues and activities needed to execute strategic plan are identified and specified. Through this strategic plans can easily be converted into actions that help the business organization to achieve its financial objectives. Provides excellent records It also keeps records of activities, expenditures and income estimates that the business organization expects to use in future (Cagwin and Bouwman, 2002). This helps in ensuring that all the operations that the business organization plans to use are recorded for comparison purposes. Improves Resource Allocation Budgeting is important in resource allocation. It enables the business organization to allocate more resources to projects which are able to yield more returns and where they are mostly needed. Instrument of planning and control Budgeting is a very important tool for planning and control. It is able to identify expenses which the employees are expected to spend on a given business activity (Colin, 2007). Budgetary planning and control involves the use of mechanism that ensures there is no freedom of spending organization finances beyond the requirement of the budget. It also ensures that actual expenditures are monitored against the budget. This reduces unnecessary expenditure which may lead unaccountable cash usage. Provide Decision Making freedom to Managers Budgeting provides managers with the opportunity to make their decision so long as their decision is below the budget (Cagwin and Bouwman, 2002). It also ensures that the business organization formulate performance standards and level of activities which each department is expected to do. This enable different department to operate within the framework of the overall plan. Improves Coordination of the business organization During budgeting, every department is required to participate in the budget preparation. This ensures each and every department work closely with each other to come up with a good budget that reflects the needs and requirement of the entire organization (Colin, 2007). Coordination is also achieved when every department try to achieve a common goal of the budget. For this to be achieved, business departments must work in collaboration to meet the financial goal of the business. Evaluate the Performance of different Functions and managers Budgeting is important in evaluating the performance of different functions and managers. This is done by comparing budgeted results and actual results (Abernethy and Brownell, 2003). Through this it can be known that the business organization has performed well or bad by determining different variances. 2.2 Drawbacks of budgeting Budgeting also has some disadvantages which makes it inappropriate for business organization. De-motivate employees Budget makes the employees to develop negative attitude towards work as they pay perceive the information in the budget as too high to achieve (Cagwin and Bouwman, 2002). The employee may also see the budget as a document of the management which is meant to intimidate them hence they may not have a positive feeling to implement it. Rigidity A budget is very rigid; it does not allow employees to introduce a new thing which is not part of the budget even if it is very important. This inflexibility makes it not to be very effective in some instance where change is needed in the organization. Emphasize more on results A budget only put more emphasis on the result than the reason for achieving the results (Cagwin and Bouwman, 2002). This makes it to fail to portray the ability of the business organization. It does not also show the way the organization can achieve the expected results. This makes the budget to ignore important issues which can make the organization achieve budget results. Can lead to Detrimental Decision When managers makes unrealistic budget, managers can make decisions that may harm the business organization. This include overambitious sales may lead to steep discount. A budget does not reflect true picture of the business organization A budget can be very good but it may fail to reflect the true picture of the company. It is therefore not able to deal with the problems which the company is facing (Abernethy and Brownell, 2003). It will therefore make the employees to struggle to adjust the budget to meet the needs of the business organization. There is other limitation of budgeting such as paying more attention on expenses but concentrating little on the results received due to those expenses incurred. This makes the business organization to only control expenditure but not to look at the results obtained from expenses incurred. Budgeting is also made on the basis of past performance but not on the future requirement. This makes it not to reflect true status of the economy (Cagwin and Bouwman, 2002). It also ensures there is false impression of planned working but reality the business organization is drifting along the past trend. Because of these limitations, there has been attempts to eliminate all these problems by introducing flexible budget, zero based budgeting and performance budgeting. These innovations ensure that the budget reflects true condition of the business. 2.4 Weight between budgeting benefits and drawbacks There are more benefits of budgeting than drawbacks. This is because most of the limitations have been eliminated by the introduction of zero based budgeting, flexible budgeting and performance budgeting. The advantages of budgeting ensure that there is no mismanagement of funds and also there is coordination, control and effective planning in the organization (Abernethy and Brownell, 2003). I therefore recommend that business organization should prepare a budget so that it can benefit from the advantages of budgeting indicated above. Conclusion Budgeting is a process which involves estimation of income and expenditure of the business organization. Budgeting is very important in ensuring there is financial control and effective coordination of the activities of the business. Without budgeting, the business organization cannot determine its performance level since budget is compared with actual results to know the difference between budgeted results and actual results. With the help of a budget, the business organization is able control its expenditure since the management is not allowed to operate above the budget. Bibliography Abernethy, M.and Brownell, P.2003. The Role of Budgets in Organizations Facing Strategic Change: An Exploratory Study, in: Accounting, Organizations and Society, Volume 24, pp. 189-204. Atkinson, A. and Banker, R. 2001. Management Accounting, 3rd edition, Uppler Saddle River, New Jersey. Cagwin, D.and Bouwman, M. 2002. The Association between Activity-Based Costing and Im-provement in Financial Performance, in: Management Accounting Research, Volume 13, pp. 1-39. Colin, D. 2007. Differences between management accounting and financial accounting, Management and Cost Accounting, p. 7, ISBN 9781844805662 Hilton, R. & Sainty, G. 2001. Cost Management:Strategies for Business Decisions, 1st Canadian Edition, McGraw-Hill.Vol 2 pp456. Read More