The report highlights the purpose of the budget in controlling and planning of the listed company TownScape Plc, its process and application of budgetary approaches in defining the effects of Brexit and the renewed contracts on the current financials and future projections. The section presents advantages and disadvantages of the traditional budgetary approaches.
1.1 Purpose of Budget Preparation, Budgetary Processes, and Role of Budget Process in Development of Business Model
The purpose of budgeting for the TownScape Plc, a listed company, is to serve the needs of the management, mainly CEO, human resource managers, finance director, operational manager, procurement manager and others, in relation to decision-making and judgment about quantitative and qualitative aspects. CEO needs to be cautious in justifying his actions in front of investors and shareholders because his 25% ownership can motivate him to act in self-interest only during budgetary planning. Hire essay writer online. Budgetary preparation for such international organization is highly necessary to help managers have a base for setting out their planning and controlling functions (Drury, 2016). The budgetary system helps the company is planning the annual operations for the subsequent years while accommodating any changes needed. Budget preparation for an international organization is also important to coordinate and bring in harmony all the components of the business (Drury, 2016; Porter& Norton, 2007). Additionally, TownScape Plc can also use the budget system for communicating with his responsibility is to the centre managers at the headquarters near Watford and in the manufacturing operation in Northampton. Furthermore, it also helps the managers to keep themselves up motivated in dealing with diversified workforce (35 at HQ and 85 at manufacturing unit) and to encourage them towards the accomplishment of the organisational goals and objectives. Moreover, the purpose ofthe preparation of the budget is to evaluate continuously the performance of the managers and simultaneously to justify in front of shareholders about managers’ moves in this listed company (Drury, 2016).
However, the company needs to follow adequate processes considering motivation and communication as important aspects (Atrill&, 2015). The Finance manager responsible for the development of annual budgets is required to take account of the stages involved in the budgetary process. Get help with dissertation by professionals. At the first stage, it is highly necessary that the strategic management communicate all the responsibilities and details to be included in the budget to the Finance Manager. At the second stage, the manager identifies the factors restricting the current business performance, or factors capable of affecting the future performances e.g. Brexit. Example, interest cost on debt may rise after changing regulations, leading to rising expenses(Brown& Atkinson, 2001). At the third stage, managers get involves in the preparation of sales budget, which is highly necessary and essential component of the overall budget system in order to assess the impact of consumers action, economy’s state and competitors’ move (Seal, 2011). The fourth stage relates with the initial preparation of the budgets including sales budget, production budget, direct material purchase budget, direct material usage budget, direct labour usage budget, selling and administrative expense budget, and cash budget (Drury, 2005). Thefifth stage is connected with the negotiation of the budget while at the sixth stage; manager pursues the coordination and review of the budgets. After critical review, the strategic management for implementation accepts the budget. The last stage of the budgeting process highlights the need to review constantly the budgets to ensure the need to ensure any change for the future periods (Drury, 2016).
Similarly, the short-term and long-term planning in the budget process is ultimately helpful for the TownScape Plc in the development of sustainable and competitive business model. Budgeting process would help the management including the effect of Brexit on 2019’s budget. Buy assignment writing service online. The anticipation of the UK leaving the European Union can have significant impacts on the UK sales as well as revenue generated from other European Union countries. Additionally, the budgeting process would help in understanding the effects of diversification in the new geographical markets such as Gulf, North America, Far East countries like China. The company can use its budgets for strategic planning and model the business mission, vision, strategic objectives and overall unit or departmental objectives. Since business model is a long-term process, therefore, the budget system of the TownScape Plc should be aligned with the sustainable business model (Dyckman, et al., 2013).
1.2 Cost Drivers and Cost Budgeting AND Application of Traditional Budgeting approaches for Planning Future Cost Management
From the analysis of the TownScape Plc’s business, it can be determined that there are numerous factors affecting the business activities, known as cost drivers. These can be analysed by associating with the different business components involved in business activities and operations(Rickards, 2008).
The company is involved in the production of 80 new products in the street furniture category and therefore, the cost drivers in this context would include
- Number of units produced in each products’ category
- Number of direct material used per unit
- Number of order received for the different products periodically
- Number of customers in different geographical regions
- Number of machines and equipment
Additionally, the company needs to implement the cost budgeting for assessment of costs associated with the new projects such as 15 new products planned and the other regular business costs. The cost of implementing additional plants and manufacturing capacity for new plants need to be separated for this work package in order to have an overview of the project. Get thesis writing help by experts. The business needs to understand different types of traditional budgeting methods such as fixed budgets, flexible budgets, capital budgeting and sales budget(Shim, et al., 2011).
Fixed budgets are the type of traditional budget, whichis used for allocating a fixed amount to the business expenditures irrespective of the changes in the level of activity. The disadvantages of the fixed budget include the relevance in the assessment of the overall performance with the change in the activity level of the business. Single-point estimation in the face budgeting is not suitable for the TownScape Plc with changing business activities and projects levels. However, the company can use it for the initial planning purposes only. The fixed budget would be applicable to the headquarters’ financials because these would not change with respect to changes in activity levels(Horngren, et al., 2003).
Flexible budgets are helpful in understanding the cost behaviours in the changes occurring in the cost after events such as Brexit or the start of a new contract. Due to the comparative analysis, flexible budgets allow great comparison of the real performances. Additionally, the use of variances in the flexible budget is helpful for calculation of variances. Buy coursework paper online. However, unlike fixed budgets, TownScape Plc can only use the regular budget for the control purposes and not for the planning.The flexible budget would be helpful in calculating manufacturing operational unit’s operations(Clowes& Scriven, 2015).
Incremental budgeting would help in understanding the changes in the subsequent years based on the previous year’s financial measurements. The benefits of incremental budgeting includethe fast process of budgeting completed in minimum time and obtaining highly accurate figures slight changes in the activity levels(Holtzman, 2013). Get research paper writing help. However, like other budgetary approaches,the incremental approach also has some drawbacks such as the use of historical information is subjected to lead to inaccurate findings, management can easily hide inefficiencies, and there is lack of relationship among funding, cost and actual activity (Gopee& Galloway, 2017). The application of the incremental budget can be traced the example of changes in sales figure in the coming years based on the revenue of the last year i.e.£150 million. It is assumed that due to Brexit effects, the sales of the EU countries would decrease by 15% while sales of UK and other non-EU countries would be increased by 15%.
Table 1: Incremental Sales Budget
From the analysis of the current business, operations and the changes required in terms of business changes and market disruptions after Brexit, sales budget in the traditional budgetary system would be appropriate for forecasting the sales in different regions, segmenting the UK and other EU countries. Sales estimation for the future business development is highly necessary in order to understand the impact of changes in revenue proportion for the current period compared to another period (Bhattacharya, 2012). Since sales budget is an important component of the master budget, therefore, it would be necessary for the business to identify the changes in the per unit sales of the different products to calculate the overall amount of sales budget (Khan, 2008). Get online homework help. It would be necessary to segment the different products and per price of different products to distribute these in different markets. (Perunit, prices are assumed).1.3 Appropriateness of Traditional Budgetary System
Table 2: Application of Sales Budget for TownScape Plc’s Business
This report tends to justify the need to change the budgetary approach in order to accommodate the changes in internal and external business environment of the TownScape Plc, an international street furniture manufacturer. Since the company is listed in the stock exchange and is a large-scale business with£150 million market capitalization, therefore, the shift from traditional budgetary approaches to the alternative budgetary approaches is highly necessary for effective sales, production and expenditure projections for the future periods.Executive Summary
2.1 Alternative Budget Methods
2.1.1 Rolling Budgets
Rolling budgets are recognised as one of the significant alternative budget methods helping the managers to update continuously their projections through the addition of a subsequent period i.e. quarter or month (Iverson, 2013). Rolling budget would be helpful for the townscape plc in dealing with the uncertainties and risks associated with the implementation of Brexit decision and the other contractual agreements (Avis, 2009). The advantages of rolling budget include its ability to accurately project for planning and control purposes; however, such projections are on a short-term basis and with the smaller degree of uncertainty are taken into account. Rolling budgets have also significant disadvantages is that to motivate employees to spend times in setting budgetary targets constantly. Time-consuming and costly nature of the rolling budget also limits its implementation in the international organisations relative to the incremental budgeting methods (Kaplan Financial Knowledge Bank, 2018).
2.1.2 Zero Budgets
Additionally, zero budgets can also be used by the townscape plc for dealing with the limitations of the incremental budgeting as,under this approach; projections for the subsequent years are based on the base zero rather than on the previous year’s figures(Wilson& Gilligan, 2012; Magad, 2013). In this context, the managers are responsible to justify the overall budget rather than only justify the changes in the current year compared to the previous figures (Delaney& Whittington, 2011). The key advantages of the zero-based budgeting include the preparation of realistic and achievable budget with a forward-looking approach. Zero-based budgeting also allows transparency in the relationship between cause and activities associated with the products. In contrary to these benefits, zero-based budgeting is very time consuming and would require clear objectives to implement effectively (Bisschoff& Raj Mestry, 2003).
2.1.3 Activity-based Budgets
The traditional budget allows an organisation to list their income and expenditures associated with a specific period, and such static and lack of flexible nature of the traditional budgetary approaches have given rise to the activity-based budgets (Jackson, et al., 2007). Such projects are based on the team to avoid unnecessary supply of resources by authorising the supply of those resources, which are needed to carry out activities for meeting the budgeted production and sales volume. Additionally, the benefits of the activity-based budget are associated with the simplicity of measurements due to unknown and proven base for the projections (Hill& Power, 2013). This approach is also flexible and helpful in making adjustments related to the emerging changes in the activity levels of the business. However, as a disadvantage of the activity based budgeting townscape plc should understand that under this approach management might face difficulty in allocating resources shared by different activities. The approach also does not recognise the changes to the standard costs (Walshe& Smith, 2011).
2.2 Application of Alternative Budget Methods
Rolling budget would be helpful in making adjustments according to 5 quarters’ periods for production budget in additional contracts of 35 million. The application of rolling budget in renewed contracts would assist the company in planning the production budget in 5quarters in one budget to allocate the renewed contracts’ financials in the actual budget of the company.Since it is an automated manufacturing facility, therefore no direct labour hours expected to be incurred while the production of new products.
It can be seen from the rolling budget that TownScape Plc does not allocate the entire amount of the renewed contracts in planning and make around 19% profit in 5 quarters. In other words, the company’s management can save some money from the contract price.
In contrary, in zero-based budgeting, the company allocates the entire amount in planning the direct and indirect expenses for the company. By keeping the amount in hand after allocation as‘zero’, TownScape Plc would be able to increase their production n units and labour hours needed for such production.
By using the activity-based budgeting, townscape plc would be able to protect the product sales volume of the existing products and customers as well as the new 15 products and customers in different geographical locations (Hansen, et al., 2007). Activity-based would also help in determining the additional resources needed to carry out the business. Hence, using this approach townscape plc would be able to adjust the existing resources according to the projected supply.
2.3 Appropriateness of Activity-Based Budgeting Methods for the Business
Activity-based budgeting would be an appropriate method for the TownScape Plc because it can help the company listed on the stock exchange to responsive to the stakeholders(Capusneanu, et al., 2013).This budgeting approach is useful for the company in setting out the work volume and the cost of the process aligned together. It can also help the company in assessing the unused capacity and guide about the ways to save such unused capacity(Briciu, et al., 2010). Unused capacity is highly critical for the listed company as shareholders are much concerned about the efficient and cost-effective use of the available resources before approving the additional expenditures for the equipment and machinery. The activity-based budget would further help in assessing how the different business units such as headquarter and manufacturing units are adding to the business cost i.e. fixed costs and variable costs. As an example, it can be examined that activity-based costing has helped the company in allocating its direct material cost for different product categories based on the cost drivers. The number of direct material used in producing different products is multiplied with the per unit costs (assumed as the varying cost of direct material for different products) as some of the products can be manufactured using plastic and wood, while some required the combination of steel, iron, wood and plastic each.
Hence, the change needed in budgetary approach is thoroughly justified from the explanation and critical analysis.