This report contain the detail information about company Leeworthy ices. Under this the detail is given on the techniques used by Leeworthy ices for making their budget like zero based budgeting and incremental budgeting. The information on traditional and non traditional methods of budgeting are also given under this with the detail description about their advantages and disadvantages. This report contain or tells about most of the popular techniques or approaches of budget used by most of the enterprises in today's world. In this report various advantages as well as disadvantages of incremental and zero base budgeting and the procedure for using these techniques has been described in it.
I. An understanding of how Leeworthy Ices benefits from having a budget and how the budget process helps development of the business
A budget is an estimate of costs or revenue which reflects the future financial condition of company. It an important tool for the company and it also used as an action of plans to be prepared for targeting the quantified objectives, standard for measuring the actual performance etc. In Leeworthy Ice company, the managers has to properly understand the benefits of budget. Budgeting is that process or tool where the managers prepare the budget for deciding the where to allocate the funds in different activities (Grigg and Votaw, 2011). A common objective of the creating the budget is for judging the employee performance every year with the use of various variance of the budget.
A budgeting process is typically begins with a strategic planning which are made by the senior management. These plans include a sales budget, direct material budget, production budget etc. These all plans should be roll up into master budget which contains the financial statement of the company. A good budget process is always responsible for adhering the budget and proper implementation in organisation objectives for creating the budget. Following are the budget process which help Vinita to prepare proper for the company.
Determining the flow of information –
The company has to gathered all the information or data which should be compile a budget in one or two ways. The senior management has to establish priorities and projection that which has to be achieved first.
Deciding what measures are taken by organisation –
The manager has to decide that what he/she will take measures that whether the information is related with products or project will based on its region of operations.
Gathering historic data –
Once, the company has decide that in which segment they have to perform their functions properly, then they have to gather the historic performance of information (Hansen, 2011). The historic performance of data includes the financial statement of the company. The manager has to use proper tools and techniques which will help them to collect specific data.
Making Projections –
The forth step is to make the projects for coming years. With the help of budgeting process Leeworthy can make good projections. These projection can be simple or complicated.
Determining break-even point -
In last step, the manager has to understood whether the company is earning the profits or not. Break even point are depends upon many ways such as break even in units or sales.
Further, the benefits of budget can be prepared from a range of strengthened management to increase the financial support (Henttu-Aho and Järvinen, 2013). The following are the benefits of budgets.
Budget provides the financial road map -
Budget help the organisation in outlining the resources that how much required by the company. Budgeting process serves a powerful planning tool for the higher authority.
Budget is an effective tool of management -
Through the budget the company can track their goals and make corrections if needed to achieve the goals of the organisation.
Budget provides internal control –
It helps the organisation to effectively monitor the finance. The company has to make budget on regular basis to diversify the financial risk.
ii. The application of traditional budgeting approaches to a business Leeworthy Ices, key areas of the business which the budget process needs to address
In every business traditional budgeting is a important tool. Budget plays a important role of tool for formulating the business strategies planing their implantation allocation of resources monitoring the expenditure improving the performance Traditional budgeting is inflexible and inefficient. In dynamic and demanding business environment traditional budgeting helps in managing the budget process (Hope and Fraser, 2013). Many people give their different strategies and theories for explain the current theory for budgeting.
Advantages of traditional budgeting:
Framework for effective control: for every company budget is a important part of organisation culture. It is a very risky decision and it include the fundamental methods for operating the business activities. it provide a effective framework or controlling the budget actives
Part of business organization culture:
Traditional budgeting effective for coordinate the companies financial activities and it creates references.
Disadvantages of traditional budgeting:
traditional budgeting is a very long processes and it consumes to much time. For implantation of traditional budget it require many management resources. In in traditional budgeting process there is a low percentage of involvement of parties.
Leeworthy ices use the traditional budgeting in their business activities for setting the budget for different departments.
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Master budget include the financial statements, cash forecast and financial plans (Hou and et. al., 2011). The master budget presented in monthly and quarterly format and it cover the companies fiscal years. It assist the company for accomplishing the goals and define the companies strategic direction.
Cash budget use for ascertain the companies operations and other activities which provide a sufficient amount of cash to meet a projected cash requirements. Several other budgets are the inputs of cash budget. It comprise two main area sources of cash and uses of cash.
Tough choices involves in budgeting and it having the goal for start the planning for future. The financial budget refers to projecting the organizations income and expenses for both short term and long term basis the financial budget is related to what is the financial goal of the company .
Lee-worthy ices use the production budget for calculate the numbers of units of product to be manufacture. Production budget presented in monthly and quarterly format. The production budget is used in material requirement planing and manufacturing system. It is a combination of sales forecast and planned amount of finished good inventory. Company planes production budget for draw down inventory quantities and termination of production (Lai, 2010).
iii. Traditional budgetary method and its benefits
Traditional budgetary system-
A traditional budgetary system is a plan which indicates the amount of money that has to be allotted in the business. All the financial obligations such as the rent insurance etc. it is a method of managing the cost and the cash flow of the firm. From where the money has to be gathered and what all are the places where it has to be invested. Some steps are to be followed in the traditional budget plan they are as follows-
- Prioritise the objectives of the corporate financial planning.
- Assessing the available resources.
- Identifying all the inputs that are needed to fulfil the objectives.
- Assigning the resources to attain the aims.
Benefits of the traditional budgetary system are as follows-
- Control- It help in providing the controlling of the resources related to the finance. It helps the finance manager to do the monitoring of the actions in an easy manner.
- Part of organisation- It is a very important aspect of the firm as because with this the culture of the firm can be influenced is taken positively the firm can get benefits.
- Principle of communication- Traditional method of budgetary promotes the communication and the coordination.
- It is a guideline for the action that has to be done in the firm in terms of finance.
Traditional budget helps in future:
Traditional budget has many advantages which relates to the future business of an organisation. Some of the benefits of traditional budgeting are as follows-
- Budgeting consists of planning which delivers the future requirement of the business.
- It makes people to future oriented and start to think about the future.
- It communicate financial plan to those who are accountable for this.
- Traditional budgeting gives fair view of the business to the people which motivate individuals to act in the interest of organisation.
- Traditional budgeting defines the future limitation of the expenditure.
- Financial budget plan for the future growth.
- It can be used to identify future considerable saving and the cost.
- It helps to monitor progress of the business and provide database for decision making.
- Budgeting provides specific deadlines to divert the attention from one to another.
- Budgeting provides future work and how to complete the task.
- Traditional budgeting provides actual framework of the organisation which overall help in to take the future decision.
- It provides amount of money that is required to complete over a time.
It helps to send income of the business to execute plan to increase future profitability.
iv. Alternative methods of budgeting and its importance
Alternative budgeting system is used with the purpose from the overcoming from the traditional budgeting approach. It is dynamic and flexible in nature. It also helps in getting the risk control of the organisation. This is one of the best way in this modern world accounting. It shows that in this modern world many expenses are such in nature who arise accidentally and enterprise is not prepared for them properly. So, this modern budgeting approach helps them and force an organisation to use those technique because with the help of this technique it became possible for them to prepare for unforeseen calamities.
So by using this approach it is clearly mention that they have to made a special provision for such type of accidental expenses. This is an important element because it helps in getting overcome from unforeseen crises. Benefits of using this approach are as follow:
- Firstly it is dynamic in nature and flexible because it can be changed at any time with the course of time and by measuring the disasters which take place.
- Another thing which shows the importance of this approach is that it is risk capable in nature. Firms can use this technique from overcome from any situation.
- By reducing the risk it increase the number of chances of for survival and growth of the firm.
- This modern approach is totally based on the activity planning. In this approach a separate provision is made in which all the activities are considered.
- This is based on the activities which are taking place in the organisation. So, this can also be called as the activity based budgeting.
- Rolling forecast is the important term because it is a planning forecasting which may affect the business in near future time. In this method forecast remain constant but the visibility of business does not stop at the end of year.
- Due to activity based budgeting this is flexible mode of preparing budget. Organisation can change their budget according to the need and demand of time. So this is another important tool for the preparing modern budgeting.
This approach is an important term because in this modern world business activities are not certain and fixed. They may get vary with the course of time. So for this concern this type of budgeting is prepared.
V. Traditional approach of budgeting
Traditional approach of budgeting include spent money on the activities of the business according to the given or set plan. Under this method of budgeting first a plan is made by the business firm according to the expenses which can occur in during the specific course of business and according to that a budget is allocated to the all activities of the firm(Bierman Jr, and Smidt). This is an very old and one of the simple method of making a budget for the enterprise.
Advantages of Traditional approach of budgeting
- It provides a framework of control: The traditional approach of budgeting has one one the biggest advantage that is that it provide a control on expenses or on unnecessary expenses.
- It is a part of organisational culture: Budgeting is one of the old method or culture of most of the organisations so it will not create any sense in abolishing the culture(Libby, T. and Lindsay, R. M.).
Drawbacks of traditional approach of budgeting
- Inefficiency: Inefficiency is one of the major drawback of the traditional approach of budgeting. This technique takes a much more time in making budget for the enterprise and also there are many chances of creating errors in this while making the budget.
- Low change responsiveness: Most of the organisations used a year to calculating or for making change so after that time the budget become obsolete and doesn't helps the enterprise to use it for further purposes.
- Failure to motivate desirable changes: The old method of budgeting has lack of effectiveness and is unable to motivate the employees in doing a act in the interests of the business. The old method of budgeting includes gaming and corruption and this technique fails to help the enterprise in achieving its objectives.
- Disconnection from strategic plan: The traditional approach of budgeting include or give focuses on cost reduction of products and services rather than creating value for the customer(Bennouna, K., Meredith, G. G. and Marchant). So this objective of traditional approach of budgeting gives lower priorities on objectives of strategic plan.
Non traditional approach of budgeting
The non traditional approach of budgeting follow the new concept for making budget for the enterprise. This technique of budget says that the world is emotional not logical or in the organisations there are many unthinkable expenses which can occurred in the organisation(Aminbakhsh, S., Gunduz, M. and Sonmez, R.). So there should be a provision in the budget to meet the expenses of the other expenses which can occur in the organisation. The non traditional budget is much more flexible than the traditional budget.
Advantages of non traditional approach of budgeting
The non traditional approach of budgeting is much more flexible and useful than the traditional approach of budgeting(Rubin, I. Ss). It help the business firms in making a provision for situational or unexpected expense and make enterprise able to meet that expenses.
Disadvantages of Non traditional approach of budgeting
This technique require much more changes in the budget from time to time which required a specialised task force for doing this(King, R., Clarkson, P. M. and Wallace). Many changes in the budget from time to time make it more complex activity.
VI. Analysis over the methods (or a combination) would be more appropriate to Leeworthy Ices
Budget-Collection of data in a single year is known as budget. It calculates the overall budget in one financial year
The process of making increment to the current budget allowance is known as incremental budgeting. The previous year budget is carried forward to the next financial year it is adjusted for new factors like additional services, resources, inflation, legislative requirements etc. Incremental budgeting is based on fundamentally different view of decision making than rational approaches(Wampler, B.). Because there is negotiation settlement between interested parties require a willingness to compromise.
Key stages of incremental budgeting:
- Establishing the base: Full year effects of staff appointment , Full year effects of capital programme,salary increment, non-recurring items etc.
- Adding to the implications of developmental budget.
- Aggregation and producing the new budget.
Advantages of Incremental Budgeting:
- Stable and thus changes are gradual: Incremental budget are not fluctuating they are stable and thus the changes can be implemented gradually.
- Straightforward decisions are made-Decisions are taken at the same time and thus it is a cheaper method as compared to others
- Useful tool where output are difficult to define- It act as a powerful tool where the results are difficult to obtain
- Alloys policy to concentrate on areas of change implementation.- It allows policy to concentrate on those areas where the changes are to be implemented and elected representatives are not required to read detailed budgetary documents.
Disadvantages of incremental budgeting
- Backward looking- It focus more on the previous year budget than the financial year budget.
- It does not allow the managers for overall performance overview.
Zero Base Budgeting
- It indicates that the budget line should not be carried forward from one year to another because they occurred previously.
- Zero base budgeting implies that all the transitions will be carried out on a fresh and new planning period. It requires that all the budgetary objectives should be clearly stated and thus a different way of delivering these objectives before budget is allocated.
- This process require minimum level of service specification the current level and the incremental level.
Advantages of zero base budgeting
- It allows challenges to status quo and questioning about the position of the budget.
- It focuses on the overall objectives of the budget and how to achieve these objectives efficiently so that outcomes can be achieved.
- Zero base budgeting can adapt according to the changes in circumstances and situations.
- It helps in effective and efficiently utilization of resources in preparation of the overall budget.
- It actively involves the operational manager to handle the budget rather than handling them from down to above
Disadvantages of Zero base budgeting
- It is more time consuming as compared to incremental budgeting because the budgets are prepared from a new financial year.
- It needs specific skill and training to calculate this budget.
- Difficulties can arrive in the identification of suitable performance measures and decisions.
- The specification of minimum level of service provision may demotivate the managers in performing their task.
It has been concluded from the above report that the Lee worth ices company is using both traditional and non traditional. there are certain advantages and disadvantages of both traditional and non traditional approaches. hence cited entity should consider these before making any decisions through optimizing these approaches and the techniques under these approaches. Incremental and zero base budgeting also analysed because it helps the company to prepare a an appropriate budget for every year. So it is the responsibility of higher authority to make proper action plans.
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- Henttu-Aho, T. and Järvinen, J., 2013. A field study of the emerging practice of beyond budgeting in industrial companies: an institutional perspective. European Accounting Review. 22(4). pp.765-785.
- Hope, J. and Fraser, R., 2013. Beyond budgeting: how managers can break free from the annual performance trap. Harvard Business Press.
- Hou, Y., and et. al., 2011. State Performance‐Based Budgeting in Boom and Bust Years: An Analytical Framework and Survey of the States. Public Administration Review. 71(3). pp.370-388.