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U1035522, U1054490 BA HONS ACCOUNTING & FINANCE MANAGEMENT ACCOUNTING FE2021 Group Number
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33 2513

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Student ID No. U1035522, U1054490

Table of Contents
1. Introduction ...2 2. RDBS Corporation cash budget for 2nd quarter...3 3. Analysis of incremental budgeting..5 3.1 Inherent weaknesses of budgeting..5 3.2 Mechanism to overcome budgeting weaknesses.7

4. Recommendation .....11 5. Appendices ..12

6. Bibliography.. 15

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1. Introduction This is a report evaluates cash budget of RDBS Corporation; it covers cash budgeting for the period of April, May and June. Highlighted are the limitations of the annual budgeting used. With this report recommendations are provided. More and more scholars argue how relevant is the use of budget at current economic condition, with more organisations expand overwhelmingly, account information has move up to new level on how it is evaluated. Arguments are provided and it is indicated how the traditional budgeting system can be improved for the benefit of RDBS Corporation and other businesses.

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2. RDBS Corporation cash budget for the month April, 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 100,000.00 100,000.00 100,000.00 100,000.00 1,880,000.00 2,040,000.00 2,380,000.00 6,300,000.00 1,980,000.00 2,140,000.00 2,480,000.00 6,400,000.00 920,000.00 440,000.00 150,000.00 28,000.00 244,800.00 1,782,800.00 197,200.00 (97,200.00) 100,000.00 1,060,000.00 500,000.00 150,000.00 324,000.00 8,000.00 2,034,000.00 106,000.00 (6,000.00) 100,000.00 1,998,000.00 482,000.00 (382,000.00) 100,000.00 1,220,000.00 560,000.00 150,000.00 60,000.00 3,200,000.00 1,500,000.00 450,000.00 60,000.00 352,000.00 8,000.00 244,800.00 5,814,800.00 785,200.00 (485,200.00) 100,000.00

*Calculations are provided in appendix

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3. Analysis of incremental budgeting Corporations from medium to large sizes uses budget to measure their performance, this is used widely as it uses of accounting information in control process clearly. Many organisations regarded incremental budgeting to be inaccurate and incomplete, which resulted in many problems in its preparation. Originally, it simply forecast revenues against expenditure for a specific time frame. But due to complex business structure, the scope of budgeting has demand more values. Price waterhouse regard median for budgeting is $63,000 for every $100 million revenue, this study is conducted in 1995 (Hyperion, 2008), can we imagine how much it will costs as of today year 2012? There are no specific budgeting method used among organisations, it varies from cost center accounting to activity based budgeting. In practice, combination of budgeting technique is applied thoroughly among organisations, which is the reason why it is relevant to conduct analysis on the traditional method of budgeting.

3.1 Inherent weaknesses of annual budgeting approach

There has been major argument on how reliance on annual budgeting is relevant to a company. Budgeting which many considers to be highly anticipated medium of evaluating performance has several inherent weaknesses. One of the main limitations of using annual budgeting approach is time consuming. On average, preparation of budget will take up 4-5 months (Hope & Fraser, 2003), during preparation of a budget employee will focus their working hours to produce budget that is uncertain. With respect to uncertainty of annual budget, time spent by employee can be allocated to calculate investment opportunity, which brings positive net results towards the company. In some companies, 30% of management time annually is allocated to prepare budget (Hope & Fraser, 2003).

As stated budgeting will consume time on the basis of preparing it, this in turn will derive to an expensive process. With employee squander on preparing something uncertain, opportunity cost will occur. Cost of preparing budget is high with employee allocated to prepare budget are at large number. To prepare budgeting it consumes about 30% of managements time (Hope & Fraser, 2003) there are quote given by managers, how long is our budget cycle? Forever!

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Sense of belonging is an essence for employee to feel affluent working in a company; this can be taken away when working to meet budgeting target. As seen in cases, Svenska Handelsbanken (Hope & Fraser, 2003) a Scandinavian bank, sense of ownership is given to employee by giving them opportunity to make decision without relying on traditional budget approach, traditionally employee are requested to perform task to meet budget target and this builds up pressure among employee. This new change has resulted on increase of 33% in shareholders return compare to any competitor. In some case study it is demonstrated, company, which fail to give sense of ownership to employee, are more likely to be less improved, it is agreed by most scholars promoting sense of ownership increase motivation among employee (Michie et al, 2002).

Pain of bottom-up and top-down is a process in preparation of a budget; this pain affects workers who are affected by the budgeting (Nolan, 2007). Bottom-up is a process that initialises budgeting at centre level and require managers to create the budget for the following year, in the other hand top-down, is a process where senior managers set a budgeting target and require the employee to apply the target in their business plan. This process is a pain to employee, 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. A scene shown, 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. Employee who had work hard to prepare the budget will be demotivated, from the amount of effort had been placed, it is still not their plan (Nolan, 2007).

Problems in the back office are an issue that rose due to lack of integration between back office and profit centre planning. Normally, it is seen when operations manager budget direct expense with reference to previous year amount. Normally 5%-10% increment is allocated compared to previous year, with the increment uncertain, all to be done is to hope for allocated resources is enough to cover the costs.

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The major problem in accounting information is relating to data collection and information disaggregation (Hyperion, 2007). Traditional budgeting approach require large volume and detailed data accuracy. This requirement will cost overwhelmingly which relates to the earlier limitation of budgeting.

Budgets encourage incremental thinking, such as last year plus x percentage approach in planning a budget. This can inhabit the development of break out strategies that may be necessary in a fast changing environment. As economy is more dynamic at this era, traditional budgeting approach does inhibit this type of error, which encourage passive environment.

3.2 Mechanism to overcome the weaknesses of budgeting

The weaknesses of budgets lay mainly with the implementation rather than the budget itself. I will suggest ways in which these weaknesses can be overcome. Managers need to have a forward thinking perspective due to the fact that it will bring possible identification of short-term problems. 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, 2005). This approach of forward thinking perspective brings about effective and new solutions, which encourage others in the organisation to get willingly involved. Co-ordination and communications between various sections of the business can be applied to minimise the weaknesses in budgeting. 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, 2005). A well-coordinated business will avoid stock black outs, which can affect production. Therefore, because the market is dynamic, managers and other heads of department need to be responsible, reliable and communicate effectively with others. Budgeting problems may rise due to hierarchical structure of companies, with improved communication and co-ordination this problem can be minimised.
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Motivation given towards managers and employee can minimise the risk of budgeting problems. 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, 2005). Goal congruence is important as moving together to achieve the overall objective of the company is vital. As stated in the problems of budgeting, giving sense of ownership to employee will give them better motivation (Michie et al, 2002). Decision making capabilities should be given to employee and not just requesting them to follow guidelines in preparation of budgeting. . Providing a system of control can improve budgeting problems. Control is concerned with ensuring that events conform to plans. Control will give a level of yardstick against which performance can be measured and assessed. It is possible to compare current performance with past performance. If there is information available concerning the actual performance for a period, and this can be compared with the planned performance. Such a basis will enable the use of management by exception, 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, 2005). 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. A good example is where there are certain activities (for example, staff development research expenditure) that are allocated a fixed amount of funds at the discretion of senior management (Atrill and McLaney, 2005). More managers tend to manage budget problems instead of business problems; this is why providing system of authorisation can overcome this problem. Poor use manager expertise can be an inclining factor for corporate failure, as quoted Im convinced that our managers spend their entire time worrying about the budgeting, not our business (Hyperion, 2007).

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In addition to the above strategies of overcoming weaknesses in budgets, we can use the balanced score card method. The balanced score card (BSC) not only concentrates on financial dimensions of performances but also takes into account of non-financial ones. 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. The four perspectives of a BSC are financial, customer, business process and learning and growth. Within these perspectives there should be objectives, measures, targets and initiatives. The BSC includes feedbacks around internal process outputs, therefore provides a feedback for the outcomes of business strategies. 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.

One method to eliminate annual budgeting process that is painful is through forecasting (Nolan, 2008), this is made when we are able to obtain actual and budgeted profitability figures. The logic in this issue is based on assumptions that when value arise in projecting future result, it is sensible to project future results for years to come. We understand, budgets are projected at an average of 15 months period, causing it to be prepared at least July of the previous year. Within the fiscal year, these budgets are forecasted until the end of the fiscal period, 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. With this recommendation adopted, process of evaluating companys performance for the future can be less agonizing.

Research shows, the main obstacle in volume planning is reluctance of managers to be engaged with the detail level (Nolan, 2008). Automated system can be utilised to minimise this problem, this conduct will creates forecasts using historical data in convergence with statistical trending packages. Managers will be applying editing mode instead of creating, which minimises their reluctance in creating new model. In addition, managers will only need to engage with key volumes. Management will only need to review forecast for the following fiscal year and when they feel complacent with the projected forecast, all we need is to populate the forecast number with the next fiscal year budget.

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In this modern era, software solution is widely used to make our life easier and budgeting problems are not excluded. Most companies will use spreadsheet, due to increasing volume data, end users begin to resort this model. New solution to improve this budgeting problem is by adaptation of an enterprise-wide software solution (Hyperion, 2007). This software solution manages reporting, analysing and developing budgets. The new approach, provide hierarchical approach of budgeting this allow managers to establish targets and perform bottom-up budgeting. In addition, this method offers security control and adjustment through top-down budgeting.

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4. Recommendations

We recommend that RDBS look at other options available beyond budgeting, the company needs to be strategic by responding to emerging threats and opportunities as they arise rather than being constrained by fixed targets. Thus, rolling forecast can be helpful to access resources when they are needed. A right climate may builds the mutual trust needed to share knowledge which can lead RDBS corporation to exchange knowledge with suppliers and contractors. Managers will respond positively to demands for improvement in quality and cost. Only by eradication of the budgeting mentality will managers be encouraged to challenge fixed costs and seek sustainable cost reductions. Placing customers value needs at the centre of their strategy and adopt their processes to satisfy them. Fast response to customers is also important. Thus people at the front line must have the authority to make quick decisions. We may understand from limitations and benefits of annual budgeting to evaluate future performance of a company. We understand budgeting as an integral part that may used to analyse organizations strategy. With the suggested methods to minimise the budgeting issues, future of budgeting can still be realised. Application of annual budgeting method is still applicable with adaptations to the recommendations provided in this report.

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5. APPENDICES Workings 1. Opening balance of 100,000 (given in question) 2. Schedule of cash collections (sales) as far April, May and June March 2,000,000 * 60% = 1,200,000 April 2,000,000 * 40% = 800,000 1,800,000 * 60% = 1,080,000 May June

February sales = 2,000,000 March sales = 2,200,000 April sales = 2,200,000 May sales = 2,500,000 June sales = 2,800,000 Total

1,800,000 * 40% = 720,000 2,200,000 * 60% = 1,320,000

2,200,000 * 40% = 880,000 2,500,000 * 60% = 1,500,000

1,880,000

2,040,000

2,380,000

3. Purchases payments schedule April 1,000,000 * 20% = 200,000 May June

February purchases 2,000,000 * 50% = 900,000 March purchases 900,000 * 80% 1,800,000 * =720,000 50% =1,100,000

900,000 * 20% =180,000

April purchases = 2,200,000 * 50% =1,100,000 May purchases = 2,500,000 * 50% =1,250,000 Total payments 920,000

1,100,000 * 80% = 880,000

1,100,000 * 20% = 220,000

1,250,000 * 80% =100,000

1,060,000

1,220,000

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4. Wages: 20% of sales April 2,200,000 440,000 May 2,500,000 500,000 June 2,800,000 560,000

Total Sales 20% of sales represent the wages to be paid in the same month 5. 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. 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, thus in June for the 2nd quarter 7. Corporation tax Total taxable income Tax rate Tax to be paid in the first month of each quarter, thus in April, for the 2nd quarter

2,640,000 (240,000) (600,000) 1,800,000 /12months 150,000

240,000 /4 60,000

612,000 40% 244,800

8. Equipment and warehouse facilities, given in the question (28,000 & 324,000) 9. Interest expense, given in the question (8,000)

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10. Investment / Borrowing Decision April 1,980,000 1,882,800 + 197,200 100,000 In April, the company exceeded the 100,000 required, the company would need to invest a total of 97,200 May 2,140,000 2,034,000 +106,000 100,000 In May, the company exceeded the 100,000 required, the company would need to invest a total of 6,000 June 2,480,000 1,998,000 +482,000 100,000 In June, the company exceeded the 100,000 required, therefore it would need to invest the difference 382,000

Inflow Outflow Net flow Maintained closing balance Comment

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6. References

1. Atrill, P. and McLaney, E. (2005) Management accounting for decision makers. 4th ed. Essex: Person Education Limited. 2. Hope, J. and Fraser, R. (2003) Who needs budget? [Online]. Available at: http://hbr.org/product/who-needs-budgets/an/R0302J-PDF-ENG (Accessed: 20 February 2012)

3. Nolan, G. (2008) The End of Traditional Budgeting [Online]. Available at: http://www.gjnolanco.com/End%20Tradl%20Bud.pdf (Accessed: 20 February 2012).

4. Hyperion (2007) Does Budgeting Have to Be So Painful? [Online]. Available at: http://www.exinfm.com/pdffiles/hyperion.pdf (Accessed:1 March 2012)

5. Bhimani, A., Hoengren, C., Datar, S., Foster, G. (1999) Management and Cost Accounting. 4th edn. London: Pearson. 6. Beyond budgeting (Fraser, Hope) http://www.12manage.com/methods_fraser_beyond_budgeting.html (Accessed:2 March 2012)

7. Michie, J. Oughton, C., Bennion, Y. (2002) Employee ownership, motivation and productivity. Birkbeck University of London. [Online]. Available at: http://www.efesonline.org/LIBRARY/Employees%20Dirct%20Report.qxd.pdf (Accessed: 2 March 2012)

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