Prepare a one- to two-page written report by addressing the following tasks:
- Discuss if you think ABC Manufacturing is properly using the budget process to plan for next year’s expenses.
- Discuss the comment about the president cutting the budget each year in terms of proper leadership and control?
- Discuss the ethical issues related to inflating the budget
The Budget Cost
A budget is the framework of the financial expenditure of a company. It is the statement of the expected expenses and revenue of the company. Budgeting is very necessary because it provides a plan of action for the organization’s managers. It provides control over the comparison of the performances from the previous year. A budget should be flexible which can be changed in case of any discrepancies or changes in the business environment or any government or political regulations.
1. The manufacturing company ABC is a large manufacturing company as mentioned in the question. For such a big company, focussing and planning for every section of the company is of utmost importance. Here, the company needs to budget for planning every financial decision for the coming year. The company needs to analyze its present financial performance and also concentrate on the revenue figures, capital expenditures, etc. and decide how much it is supposed to increase or decrease the particular expenditures to be incurred in the next year.
In the given situation, the company is not efficiently using the budget plan for managing the expenses of the firm. It has given an overview of the expected change in expenses. Rather it should give a detailed analysis and presentation of the estimated change in revenue or expenses budget of the management (Weigel & Hiebl, 2018). It has shown an inflated budget with an average increase of 28% in its expenditures. However, as it can be observed the company has not considered any capital expenditures or funds to be incurred in purchase or repairs or maintenance of equipment which can be a contingent cost for the company. Somewhere, I felt the budget little inflated in some cases of training/education, phone, and utilities. The manager has forecasted a 100% increase in the training and education part which can be lessened and controlled a bit.
2. For highlighting the financial implications of any plan, budgets are a must. They are also required for defining the resources required for achieving the plans and providing means for measurement and control of the obtained results as compared with the pre-set goals. It helps in highlighting the main issues in the cash flows of the firm to the managers. The efficient managers would try considering the adjustments based on the current market conditions which may alter from the time the budget was formulated. Hence proper interference and control by the management is a must. It helps managers to control the finances of the organization by analyzing the factors where they can limit their spending. Cutting costs should always be the concern of the top management. However, for cutting costs, the management must need to understand which costs are relevant or irrelevant if cost-cutting negatively affects the production, then it should be avoided. Some costs are necessary which must be incurred for the production process to run smoothly (Sahana et al., 2018).
3. The management, due to inflation in the economy presents an inflationary budget to the top management. However, the president needs to interpret the rates at which the managers have inflated the costs in the budget and should try to reduce the expenses which can be controlled by the application of business strategies. Budgeting is said to have ethical considerations in its formulations. The manager who is responsible for formulating the budget has to perform the job ethically, allowing the management to follow the best policies in cases of matters relevant to the organization. A budget is a well-developed format to plan expenditures properly and also manage some employees who might falsify their reports for the purpose of money laundering from the organization (Lepori & Montauti, 2020). This comes as a challenge in front of the management to handle these unethical issues in the management as well as deal with the fact that the said unethical act must not affect the stakeholders of the organization. Hence, they need to be very careful in maintaining ethical practices throughout the budgeting process in the organization.
To draw a fair budget, the management needs to utilize forecasting methods and a system that permits the management to be able to focus on the necessary functions of the organization by removing the unessential functions in the daily processes of the management which hinder the growth and the optimum utilization of the firm’s capital and resources. The positive impact of following this in an organization is that it allows the management to make the best use of its finances and resources with lesser wastage.
Lepori, B., & Montauti, M. (2020). Bringing the organization back in: Flexing structural responses to competing logics in budgeting. Accounting, Organizations and Society, 80, 101075.
Sudip Kumar Sahana, Moumita Khowas, & Keshav Sinha. (2018). Budget Optimization and Allocation: An Evolutionary Computing Based Model. Bentham Science Publishers Ltd.
Weigel, C., & Hiebl, M. R. (2018). Beyond budgeting: review and research agenda. Journal of Accounting & Organizational Change.