Budgeting Strategies in Economic Uncertainty: A Case Study of MJ Ltd.
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Introduction - Budgeting Strategies for Economic Uncertainty
The Budgeting process of a company helps to anticipate whether they will be profitable or not in the future or the following financial years. This paper aims to identify the budgeted cost of David in the uncertainty of political and economic crisis. This paper will evaluate the functional budget of David for the quarter including August, September, and October. David always uses incremental budgeting and he thinks that it will not be applicable for recent days. Due to this reason, this paper will evaluate the current budgeting process. A few advantages and disadvantages of the beyond budgeting will be presented in this study. A few recommendations are going to be presented in this paper.
Part 1 Preparing functional budget
The calculation of the functional budget of David includes sales budget, production budget, raw material budget, labour budget, production overhead, administration overhead, and selling overhead. As per the case study, David provides services to their customers for 5030 units in August, 6525 units in September, and 6000 units in October. As the selling price stands for £105 therefore, it can be stated that sales budgeted will be £528150, £685125, and £630000 in the month of August, September, and October respectively.
Production budget includes required units for each month, closing stock, and opening stock. The production budget for August stands for £7680, for September it stands for £10500, and for October it stands for £10500. In addition to this, raw material budgets include production units and kgs per unit to determine the quantity of raw material and opening stock, closing stock, to identify budget quantity, and cost per kg to evaluate raw material overhead. Therefore, the total overhead of raw material stands for £550483 after one quarter.
Moreover, labour budgets include production units, hours per unit, budgeted hours, and labour cost per unit as well. Therefore, the labour budget cost for August stands at £2012000 and for September and October, it stands at £261000 and £240000 respectively. Production overhead of this company includes budgeted labour hours and absorption rate. Production overhead for the months of August, September, and October stands at £40240, £52200, and £48000 respectively.
In addition to this, functional budgets include administration overhead and selling overhead as well. Administration overhead stands for £10000, £10300, and £10609 for the months of August, September, and October respectively. Selling overhead includes selling revenue and commission rate of 10% based on the information provided in the case study. Selling overhead for the months of August, September, and October stands at £52815, £68513, £63000 respectively.
Commenting on findings
The research study of Nikulina et al. (2019) shows that sales budget is a measurement of the profitability of an organisation. The total sales budget of David stands at £1843275 which can be considered as an effective sales budget. However, the sales budget for the month of October is less than the sales budget for the month of September. Therefore, it can be stated that this company has less ability to generate income as revenue in October due to the uncertain crisis in politics and the economy. Through this way, it can be stated that there is a need to increase the performance of employees in an efficient way for the purpose of increasing sales revenue.
Production budget helps to identify the ability of a company to produce products or services in a month or in a year (Moody, 2018). The calculation of the functional budget shows that David will be able to produce 7680 units, 10500 units, and 10500 units in the months of August, September, and October respectively. This data represents that this company will be able to maintain the ability to produce production units. However, it can be stated that there is a need to improve the performance of employees to increase production units for the improvement of the financial position of this business in such uncertain crises of politics and economy.
A raw material budget helps to measure the ability of a company to use raw materials for the production of products and services in an efficient way. Similarly, the research study of Kolotzek et al. (2018) shows that the budgeted cost of raw material helps to anticipate the cost of raw material used by a company for building products and services. The functional budget of David shows that the overhead cost of raw material reduced in October as compared to September because of an uncertain crisis. It represents that David might not be able to produce an increased number of units for selling purposes.
Similarly, labour cost, production cost, and selling overhead is anticipated to reduce in the month of October as compared to the month of September as well. However, administration cost increases by 5% in each month as stated in the case study. It represents that there is a need to push development of new production. Through this discussion, it can be stated that the uncertain crisis regarding politics and economy makes a severe implication on the business operation of David.
Part 2 Evaluating the current budget preparation process
According to the case study, David always uses incremental process budgeting which can be considered a traditional approach of budgeting as well. Incremental process of budgeting can be considered as historic-based budgeting as per the viewpoint of Kenno et al. (2021). In addition to this, the author of this study opined that incremental is the least suited approach for the budgeting process. Such an approach includes both advantages and disadvantages, which are presented below:
Advantages
Incremental budgeting helps to produce slack in the budgeting process by which a company becomes able to identify issues in its budgeting process. As David uses incremental budgeting, therefore, it can be stated that this company is able to identify issues in their budgetary method which helps them to identify profitability in the following years in an easier process. According to the research study of Ariffianto and Andhariani (2018), incremental approach is an easier process as well as it helps to avoid conflicts and risks regarding occupation. Therefore, it can be stated that David uses such a budgeting approach as it is easy to implement and through this approach, he becomes able to avoid risks. In addition to this, the research study of Yustanti et al. (2019) shows that incremental budgeting is generally based on the facts and the existing situation as well as it helps to identify less measurable activities. Therefore, it can be stated David is able to use a budgeted approach based on the situation of their organisation. Moreover, it is identified that incremental budgeting provides assurance that the budget will remain consistent and will be stable over a time period. Therefore, it can be stated that David is able to identify that their budget is consistent and stable as well.
Disadvantages
The research study of Ariffianto and Andhariani (2018) shows that incremental budgeting is no longer consistent with the development of a budget. Therefore, it can be stated that this company might not be able to develop a consistent budget. In addition to this, it is identified that incremental budgeting discourages innovation. Through this discussion, it can be stated that this company cannot invest in any organisations or any assets in case of implementing incremental budgeting. The research study of Pohribna and Yuvzhenko (2018) represents that incremental budgeting anticipates that the company will generate increased profit in the next year. This data represents that a company might face risks regarding profit generated in the following years.
Through this discussion, it can be stated that MJ ltd. can face several issues in case they use an incremental budgeting approach in the following years when an uncertain political and economic crisis makes an implication on this company.
Advantages and disadvantages of beyond budgeting
As per the case study, David wants to change budgeting approach from incremental to beyond budget. This is because he thought that incremental budgeting methods will not show an appropriate result in the crisis. In this regard, the concept of beyond budgeting needs to be understood. Such a method encourages the company to abandon traditional approaches like incremental methods and for focusing on management process. Moreover, it provides suggestions to the company to stop the use of annual budgeting and focuses on organisational performance which is highly decentralised. With the use of beyond budgeting, this company will be able to improve the activity of management with the increase of wealth of the stakeholders. Therefore, it can be stated that beyond budgeting is an effective approach for determining budget. Due to this reason, there is a need to identify advantages and disadvantages of ‘beyond budgeting’ to identify whether this method will be effective for this company or not. Both the advantages and disadvantages of beyond budgeting are as follows:
Advantages
The research study of Olaf et al. (2019) represents that Beyond budgeting helps to evaluate the performance of a company. It represents that this company will be able to evaluate the performance of their business operations in this crisis situation in an effective way. Based on the analysis of performance, this company can implement a few strategies that will be helpful to increase performance ability of this organisation in case of a decline in performance skills of employees. Furthermore, the research study of Aksom (2019) implies that beyond budgeting include a few tools such as planning, allocation of resources, and set of goals or targets. Therefore, it can be stated that MJ ltd. Will be able to make effective planning, allocate important and sufficient resources, and can set goals for their organisation.
Beyond budgeting, shift the focus from beating other managers to beating the competitors. It can be used in a private sector like MJ Ltd. as this company will be able to beat its competitors of them through this budgeting approach. Moreover, it eliminates behavioural issues for the purpose of increasing performance through providing continuous rewards to the employees. It increases the performance of managers to reduce the constraints included in resources. Through this discussion, it can be stated that this company will be able to increase the performance of employees and reduce resource constraints in an efficient way.
Disadvantages
Beyond budgeting is an effective process for preparing a budget however, it includes a few drawbacks. The research study of Aksom (2019) shows that beyond budgeting is a time-consuming process as well as it links implementation of strategy in a weak way. It is a time-consuming process because the implementation process of this method includes 12 principles such as six processes and six leadership. Through this data, it can be stated that this company might not be able to implement this process of budgeting as it is a time-consuming process as well as it is a cost-effective process. This type of budget is primarily when companies become too late to take action. In addition to this, beyond budgeting do not encourage the innovation of product and strategy. The research study of Aksom (2017) also implies that beyond budgeting leads to an overall decline in innovativeness. Therefore, it can be stated that this company might not be able to innovate its strategy and products as well. It might have negative implications on organisational performance.
Providing recommendation
The discussion of both advantages and disadvantages of both incremental and beyond budgeting helps to identify whether incremental budgeting methods will be appropriate or beyond budgeting. The disadvantages of both approaches show that both are time-consuming as well as cost-effective (Aksom, 2019). Therefore, it can be stated that this company has to be responsible to bear costs for implementing an appropriate approach to the budget. Moreover, they have to provide excess time to properly implement an approach. This study provides recommendations to MJ Ltd. to implement beyond budgeting after considering both approaches of budgeting. This is because beyond budgeting will help this company to beat their competitors which are required in this uncertain crisis of politics and economy. Through the implementation of beyond budgeting, this company will be able to increase the performance of employees which helps them to increase performance of the company (Olaf et al. 2019). In this way, this company can beat the performance of their competitors by generating increased profit compared to tier competitors.
Furthermore, as beyond budgeting provide a continuous reward to increase the performance of employees, therefore, it can be stated that this company can implement such a method for increasing the skills of performance of their employees (Aksom, 2019)). It will help them to improve the financial position in their organisation to achieve success. In addition to this, with the help of beyond budgeting, this company will be able to reduce the conflicts in resources. In this way, this company will be able to allocate its resources in an effective way. Through this discussion, it can be identified that beyond budgeting will be beneficial for this company although it includes a few disadvantages.
Conclusion
Several approaches are included in the process of budgeting that helps to evaluate the budgeted cost of a company for the following months. This paper aims to identify the budgeted costs of MJ Ltd. to determine the financial performance from the month of August to October. This study identifies that this company generates decreased income through sales in the month of October due to decreased ability or performance of their employees. Moreover, it is found that this company uses incremental budgeting which is time as well as cost-effective. Due to this reason, this study recommends implementing beyond budgeting although it is also time and cost budgeting. However, this company will benefit from this method regarding the increase of employees' performance and proper allocation of resources.
Reference list
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