Question

Operating Budgeting(9)

Scenario

Don Flowers, CEO of Burbage Manufacturing looked around the conference room as his management team chatted and settled in for the monthly meeting.

“Let’s get started,” Don said, “we have a lot to cover today, and frankly it’s not all good news.” The room fell quiet. Don continued, “As you know we recently experienced a cash shortage despite last quarter’s record sales. We can’t keep going back to the bank to borrow money to support operations. I am counting on each of you to figure out a way to keep this from happening in the future.”

Brian Mitchell, the newest member of the team raised his hand somewhat sheepishly. “Sir, perhaps if we looked at the Master Budget for last month we could begin to identify areas for improvement.”

Don looked to Alex, his CFO. “Well, Alex that’s your area of expertise and Brian’s suggestion makes sense. Let’s have a look at that Master Budget.”

Alex looked down at the desk and began shuffling through his paperwork. “Well Don, we don’t exactly have a Master Budget per se. I mean we have budgets for different areas within the company, but I really rely on the managers to know what they need to do in their areas.”

Terri, the production manager spoke up, “Hey, wait a minute Alex. You’re the CFO. I’m doing everything I can just to keep up with demand down there on the floor. I don’t have time to worry about that kind of thing. We had a press go down last week and I had an entire shift of down time. Besides, that’s your job, Alex.”

“You know she has a point there Alex. You are the CFO. I need Terri to put all of her time towards keeping the production line running smoothly,” Don said.

“Look, Don, Alex replied, “In January I asked everyone to send me their budgets for the year and the only thing I got was a sales budget from Peter with a note attached that asked for a pay increase for his account managers.”

Brian raised his hand to speak. “Well, I know I’m new here, but at my last company we had budgets for sales, finished goods, cash – pretty much everything was budgeted. It seemed to work pretty well, and everyone had a good grasp of where we were financially.”

Alex, the CFO gave Brian an icy stare.

Don turned to Alex. “Alex, I think this young man has a point. Is there some reason why we aren’t budgeting like he described?”

“Well”, Alex began, “It’s really complicated, Don. Marjorie in materials is short two people and she’s paying overtime to her remaining people just to meet supply requisitions from the shop floor. And then there’s the problem with the corporate office. Every time I turn around I am getting an invoice from them for some piece of office equipment or another. Last week I got a bill from some company that Jessica hired to water the plants. How am I supposed to keep track of all of this? And then ….”

Don raised his hand to cut Alex off. “Look, I know we are a complex organization – but the fact of the matter is that I can’t keep going to the bank every month, borrowing money to pay the suppliers. For heaven’s sake – we are a multi-million-dollar company.” By this time Don was red in the face and everyone around the table was showing an intense interest in the conference table. He continued, “What am I going to tell the shareholders at the annual meeting when we don’t have enough cash to pay a dividend – that Jessica spent their money on potted plants?”

“This is going to end, today. Brian, you seem like a smart young man. You are going to work with Alex and anyone else in this company to get us on board with establishing and using budgets to correct this situation,” Don explained. “Further, as for the rest of you -when Brian comes and asks you for information treat him as if it was me making the request. Understood?”

Everyone nodded their heads in agreement.

“Meeting adjourned,” Don declared.

Questions

1. Identify the problems that appear to exist in Burbage’s budgetary control system and explain how these problems are contributing to the company’s poor cash position.

2. Identify the budgets that Brian and Alex will need to create to resolve these issues, including the information that is needed to construct each budget.

3. Once you have identified the problems and necessary budgets, prepare a report for Don and the rest of the management team outlining your plan for establishing a budgetary control system, making certain to include how each component of the system will benefit the overall financial health of the company.

Answer 1

1) The company is not preparing exactly the whole master budget of the company.

They are perparing budget of different areas of the company without any co ordination.

All the managers of the different departments are not taking any initiative in preparing their budgets or any suggestions,as they have more knowldge than the cfo of their own department.

The first thing for budgeting is to have co ordinating within the company.This suggest different ideas and information of the company and obiously it helps in budgeting .The managers within the department must have some interest to explain their budget information, as they are so close to the department . It can make budget more efficient.Without these co ordination there would have inefficent master budget. Budget is the cental planning tool that direct the activities of management of the company and if the master budget is inefficient it would cause cash flow problem.

2)

They have to collaborate with managers throughout the company to prepare a realistic plan in number for what will happen in next years.Master budgeting count on the understanding of capital budgeting pricing and other managerial accounting in order to meet sales ,profit ,cash flow for the coming year.Identify the areas for improvement from the previous budget.

They have to gain information in preparing sale budget ,production budget, direct material budget,direct labour budget,manufacturing overhead budget,ending invetory budget,selling and administrative budget,cash budget ,budgeted income,budgeted balance sheet.

3)

REPORT

We have prepare the budget by identifying our problems in past month budget.We have taken co ordination from all our department .We included all the spending and income of the company.We beleive it would be a efficient master budget.

A well planned masterbudget will benefited by

It gives the businees owner or company executive an overview of company budget.

It reveals how much company is earning and spending as a whole and shows whether bussiness is in good or negative financial standing.

It has ability to identify plans and problems ahead.

We can identify which department is spending excessively