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.Student ID No. 15 GROUP 33 Page 2 .1 Inherent weaknesses of budgeting…………………….. RDBS Corporation cash budget for 2nd quarter………………………….…………………………………. Bibliography………………………………..3 3..………………………………………………. U1035522.…………..……………7 4.2 Mechanism to overcome budgeting weaknesses………. Analysis of incremental budgeting……………………………….5 3. U1054490 Table of Contents 1.…………. Recommendation . Introduction …………………………………………………………….5 3..…………12 6..……2 2. Appendices ……………………………………………………….11 5.……………….

Introduction This is a report evaluates cash budget of RDBS Corporation. with more organisations expand overwhelmingly. More and more scholars argue how relevant is the use of budget at current economic condition. account information has move up to new level on how it is evaluated. GROUP 33 Page 3 . U1035522. Highlighted are the limitations of the annual budgeting used. U1054490 1. May and June. Arguments are provided and it is indicated how the traditional budgeting system can be improved for the benefit of RDBS Corporation and other businesses. it covers cash budgeting for the period of April.Student ID No. With this report recommendations are provided.

00 5.Student ID No.00 8.000.00 500.000.200.00 (382.000.000. May and June Opening balance Cash sales (1*) Total cash Payment of purchases (2*) Hourly wages (20%) (4*) General & administrative expenses (5*) Property taxes (4Q) (6*) Purchase of equipment Interest expense Corporation tax payment (40%) (7*) Total cash disbursements Net Cash Balance Loan to maintain cash Investment of cash (10*) Net Cash Balance April May June Total 197.00 150.140.800.400.00 1.00 3.480.000.00 244.000.500.300.00 1.980. U1035522.00 440.00 1.00 U1054490 2.040.00 28.000.00 8.00 1.00 450.782.000.00) 100. RDBS Corporation cash budget for the month April.000.00 (485.220.00 150.00 6.00 2.380.998.000.00 *Calculations are provided in appendix GROUP 33 Page 4 .000.00 1.880.00 352.00) 100.00 2.00 1.000.00 324. 785.200.800.00 (6.000.00 100.00 560.000.00 150.000.800.00 60.00 482.00 2.00 2.00 2.000.00 106.00 920.800.00) 100.00 100.00 (97.

As stated budgeting will consume time on the basis of preparing it.1 Inherent weaknesses of annual budgeting approach There has been major argument on how reliance on annual budgeting is relevant to a company. With employee squander on preparing something uncertain. 2003). the scope of budgeting has demand more values. which brings positive net results towards the company. But due to complex business structure. preparation of budget will take up 4-5 months (Hope & Fraser.Student ID No. Price waterhouse regard median for budgeting is $63. 3. On average. 2003) there are quote given by managers. this study is conducted in 1995 (Hyperion. Cost of preparing budget is high with employee allocated to prepare budget are at large number. In practice. time spent by employee can be allocated to calculate investment opportunity. which resulted in many problems in its preparation. 2008). this in turn will derive to an expensive process. Many organisations regarded incremental budgeting to be inaccurate and incomplete. 2003). Originally. can we imagine how much it will costs as of today year 2012? There are no specific budgeting method used among organisations. during preparation of a budget employee will focus their working hours to produce budget that is uncertain. which is the reason why it is relevant to conduct analysis on the traditional method of budgeting. opportunity cost will occur.000 for every $100 million revenue. To prepare budgeting it consumes about 30% of management’s time (Hope & Fraser. U1054490 3. “how long is our budget cycle? Forever!” GROUP 33 Page 5 . this is used widely as it uses of accounting information in control process clearly. combination of budgeting technique is applied thoroughly among organisations. it simply forecast revenues against expenditure for a specific time frame. Analysis of incremental budgeting Corporations from medium to large sizes uses budget to measure their performance. it varies from cost center accounting to activity based budgeting. One of the main limitations of using annual budgeting approach is time consuming. 30% of management time annually is allocated to prepare budget (Hope & Fraser. With respect to uncertainty of annual budget. U1035522. In some companies. Budgeting which many considers to be ‘highly anticipated’ medium of evaluating performance has several inherent weaknesses.

Employee who had work hard to prepare the budget will be demotivated. GROUP 33 Page 6 . Normally. traditionally employee are requested to perform task to meet budget target and this builds up pressure among employee. is a process where senior managers set a budgeting target and require the employee to apply the target in their business plan. 2007). sense of ownership is given to employee by giving them opportunity to make decision without relying on traditional budget approach. which fail to give sense of ownership to employee. This new change has resulted on increase of 33% in shareholders return compare to any competitor. As seen in cases. employee work hard to summarise plan for company and the CFO (chief financial officer) pushed them back by requesting iteration of plans and deliver more information. 2003) a Scandinavian bank. U1054490 Sense of belonging is an essence for employee to feel affluent working in a company. managers will expect employee to deliver the target plan that has been set but some target might not be able to be delivered due to external factors. Bottom-up is a process that initialises budgeting at centre level and require managers to create the budget for the following year.Student ID No. it is agreed by most scholar’s “promoting sense of ownership increase motivation among employee” (Michie et al. in the other hand top-down. with the increment uncertain. Pain of bottom-up and top-down is a process in preparation of a budget. In some case study it is demonstrated. Problems in the back office are an issue that rose due to lack of integration between back office and profit centre planning. 2007). all to be done is to hope for allocated resources is enough to cover the costs. A scene shown. from the amount of effort had been placed. 2002). “Svenska Handelsbanken” (Hope & Fraser. company. are more likely to be less improved. This process is a pain to employee. this pain affects workers who are affected by the budgeting (Nolan. this can be taken away when working to meet budgeting target. it is seen when operations manager budget direct expense with reference to previous year amount. it is still not their plan (Nolan. U1035522. Normally 5%-10% increment is allocated compared to previous year.

which encourage others in the organisation to get willingly involved. As economy is more dynamic at this era. This approach of forward thinking perspective brings about effective and new solutions. Budgets encourage incremental thinking. managers and other heads of department need to be responsible. because the market is dynamic. Such potential production problem if picked up early enough will give managers rational consideration on the best way of overcoming the problem (Atrill and McLaney. U1054490 The major problem in accounting information is relating to data collection and information disaggregation (Hyperion. It is crucially important that the activities of the various departments and sections of the business are linked so that the activities of one are complementary to those of another (Atrill and McLaney.2 Mechanism to overcome the weaknesses of budgeting The weaknesses of budgets lay mainly with the implementation rather than the budget itself. Therefore. with improved communication and co-ordination this problem can be minimised. Managers need to have a forward thinking perspective due to the fact that it will bring possible identification of short-term problems. 3. reliable and communicate effectively with others. such as “last year plus x percentage” approach in planning a budget. which can affect production. which encourage passive environment. This can inhabit the development of break out strategies that may be necessary in a fast changing environment.Student ID No. 2005). U1035522. 2005). traditional budgeting approach does inhibit this type of error. Co-ordination and communications between various sections of the business can be applied to minimise the weaknesses in budgeting. Budgeting problems may rise due to hierarchical structure of companies. Traditional budgeting approach require large volume and detailed data accuracy. A well-coordinated business will avoid stock black outs. I will suggest ways in which these weaknesses can be overcome. GROUP 33 Page 7 . 2007). This requirement will cost overwhelmingly which relates to the earlier limitation of budgeting.

Poor use manager expertise can be an inclining factor for corporate failure. U1035522. U1054490 Motivation given towards managers and employee can minimise the risk of budgeting problems. a technique where senior managers can spend most of their time dealing with those staff or activities that have failed to achieve the budget (Atrill and McLaney. More managers tend to manage budget problems instead of business problems. giving sense of ownership to employee will give them better motivation (Michie et al. Control is concerned with ensuring that events conform to plans. 2007). Providing a system of authorisation for mangers to spend up to a particular limit is another medium that can be applied to minimise budget problems. Providing a system of control can improve budgeting problems. If there is information available concerning the actual performance for a period. Having a stated task can motivate managers and staff in their performance. It is felt that managers will be better motivated by being able to relate their particular role in the business to the overall objectives of the business (Atrill and McLaney. staff development research expenditure) that are allocated a fixed amount of funds at the discretion of senior management (Atrill and McLaney. It is possible to compare current performance with past performance. Such a basis will enable the use of management by exception. . 2002). 2005).Student ID No. this is why providing system of authorisation can overcome this problem. Goal congruence is important as moving together to achieve the overall objective of the company is vital. as quoted “I’m convinced that our managers spend their entire time worrying about the budgeting. As stated in the problems of budgeting. not our business” (Hyperion. Control will give a level of yardstick against which performance can be measured and assessed. 2005). GROUP 33 Page 8 . Decision making capabilities should be given to employee and not just requesting them to follow guidelines in preparation of budgeting. A good example is where there are certain activities (for example. and this can be compared with the planned performance. 2005).

which minimises their reluctance in creating new model. In addition. this conduct will creates forecasts using historical data in convergence with statistical trending packages. Automated system can be utilised to minimise this problem. U1035522. Within the fiscal year. The four perspectives of a BSC are financial. Managers will be applying editing mode instead of creating. therefore provides a feedback for the outcomes of business strategies. We understand. Management will only need to review forecast for the following fiscal year and when they feel complacent with the projected forecast. 2008). Within these perspectives there should be objectives. this is why it is suggested that forecast should be allocated consistently throughout the year and projection of forecast can be pre-made for 18 to 24 months period. causing it to be prepared at least July of the previous year. One method to eliminate annual budgeting process that is painful is through forecasting (Nolan. Research shows. The BSC includes feedbacks around internal process outputs. GROUP 33 Page 9 . Stimulations and sensitivity analysis can be used as feed-forward control where predicated outputs are compared with planned outputs and corrective actions are taken in advance. U1054490 In addition to the above strategies of overcoming weaknesses in budgets. measures.Student ID No. we can use the balanced score card method. this is made when we are able to obtain actual and budgeted profitability figures. the main obstacle in volume planning is reluctance of managers to be engaged with the detail level (Nolan. it is sensible to project future results for years to come. process of evaluating company’s performance for the future can be less agonizing. managers will only need to engage with key volumes. customer. targets and initiatives. The balanced score card (BSC) not only concentrates on financial dimensions of performances but also takes into account of non-financial ones. business process and learning and growth. With this recommendation adopted. all we need is to populate the forecast number with the next fiscal year budget. 2008). The logic in this issue is based on assumptions that when value arise in projecting future result. This creates a double loop feedback process in the balanced score card and therefore limits the number of measures used by identifying only the most critical ones. these budgets are forecasted until the end of the fiscal period. budgets are projected at an average of 15 months period.

In addition. The new approach. This software solution manages reporting. this method offers security control and adjustment through top-down budgeting. U1054490 In this modern era. end users begin to resort this model. provide hierarchical approach of budgeting this allow managers to establish targets and perform bottom-up budgeting. GROUP 33 Page 10 . U1035522.Student ID No. Most companies will use spreadsheet. due to increasing volume data. software solution is widely used to make our life easier and budgeting problems are not excluded. analysing and developing budgets. New solution to improve this budgeting problem is by adaptation of an enterprise-wide software solution (Hyperion. 2007).

Application of annual budgeting method is still applicable with adaptations to the recommendations provided in this report. U1054490 4. We may understand from limitations and benefits of annual budgeting to evaluate future performance of a company. Managers will respond positively to demands for improvement in quality and cost. future of budgeting can still be realised. With the suggested methods to minimise the budgeting issues. U1035522. A right climate may builds the mutual trust needed to share knowledge which can lead RDBS corporation to exchange knowledge with suppliers and contractors.Student ID No. rolling forecast can be helpful to access resources when they are needed. Thus people at the front line must have the authority to make quick decisions. GROUP 33 Page 11 . Placing customers value needs at the centre of their strategy and adopt their processes to satisfy them. the company needs to be strategic by responding to emerging threats and opportunities as they arise rather than being constrained by fixed targets. Thus. Recommendations We recommend that RDBS look at other options available beyond budgeting. We understand budgeting as an integral part that may used to analyse organization’s strategy. Fast response to customers is also important. Only by eradication of the budgeting mentality will managers be encouraged to challenge fixed costs and seek sustainable cost reductions.

000 Total £1.000 * =£720.500.000 * 60% = £1. U1035522.000 * 60% = £1.000.000 * 20% = £220.220.000 GROUP 33 Page 12 .000 * 50% =£ June sales = £2.000 £1.000 May sales = £2. APPENDICES Workings 1. U1054490 5.000 April purchases = £2.200. May and June March £2.100.000 * 40% = £880.100.000 £2.500.000 £2.000 £1.000 March purchases £900.800. Purchases payments schedule April £1.500.000 April sales = £2. Schedule of cash collections (sales) as far April.200.880.000 * 80% = £880.800.200.000 * 50% =£1.000.000 £2.000 3.000 £900.000 * 80% =£100.200.000 £1.040.000 * 60% = £1.000 April £2.500.000 £ £1.380.000 * 80% £ £1.000 * 20% = £200.800.200.Student ID No.000 * 40% = £800.000 * 20% =£ £1.000 * 40% = £720.000 Total payments £920.000 * 50% = £900.000 May June February purchases £2.800.000 March sales = £ May purchases = £2.000 May June February sales = £2. Opening balance of £100.000 £2.000 * 60% = £1.000 50% =£1.000 £2.000 (given in question) 2.

000 £240. Wages: 20% of sales April £2.000 40% £244.000 £560. U1054490 4. U1035522.640. Property taxes Total property taxes This amount is for the year and to be paid in 4 instalments To be paid in the last month of each quarter. Interest expense.000 /12months £150.000 & £324.000 /4 £60. given in the question (£8.800.000) £1.Student ID No.000 June £2. Equipment and warehouse facilities.800.000 (£240.200. for the 2nd quarter £2.000 £612.000) GROUP 33 Page 13 .500.000 £500.000) (£600.800 8.000 £440. given in the question (£28.000 Total Sales 20% of sales represent the wages to be paid in the same month 5. thus in April. Corporation tax Total taxable income Tax rate Tax to be paid in the first month of each quarter. General expenses Total general expenses Exclude property taxes from that amount Exclude depreciation (non-Cash item) Remaining amount for the year to be spread evenly throughout the year To be paid in each month 6.000) 9. thus in June for the 2nd quarter 7.000 May £2.

the company exceeded the £100. therefore it would need to invest the difference £382.000 Inflow Outflow Net flow Maintained closing balance Comment GROUP 33 Page 14 . the company would need to invest a total of £97. Investment / Borrowing Decision April £1.882.998.034.000 £2.000 £100.Student ID No.000 £1.000 In June. the company would need to invest a total of £6. U1035522.200 May £2.140.000 £100.000 In April. the company exceeded the £100.000 required.000 +£106.000 required. U1054490 10.200 £100.000 June £2.980.480.000 £1.000 In May.000 +£482. the company exceeded the £100.800 + £197.000 required.

gjnolanco. Bennion. C.12manage. (2002) Employee ownership.. U1054490 6.html (Accessed:2 March 2012) 4. (1999) Management and Cost Accounting. Y. Hyperion (2007) ‘Does Budgeting Have to Be So Painful?’ [Online]. (Accessed: 20 February 2012) 3. C. 6. Atrill. Available at: http://www. J. G.Student ID Hope) http://www. Hope. Birkbeck University of London.exinfm. Oughton. Essex: Person Education Limited. and Fraser.. P. 4th ed. E. References 1. J.pdf (Accessed: 2 March 2012) GROUP 33 Page 15 . Available at: http://www. motivation and productivity. Datar. (2005) Management accounting for decision makers. [Online]. S. R. Nolan. (2008) ‘The End of Traditional Budgeting’ [Online]. U1035522. and McLaney. A. 4th edn.. Foster. Michie. Beyond budgeting ( Available at: http://hbr. 2.qxd. (2003) ‘Who needs budget?’ [Online]. London: Pearson. Bhimani. Available at: http://www.pdf (Accessed:1 March 2012) 5.pdf (Accessed: 20 February 2012).