Preparing Budgets And Environmental Cost Essay - Discussion And Analysis.

Discuss about the Preparing Budgets and Environmental Cost Report.

Purpose

Budgeting is considered essential to plan for the resources needed and deploy those resources responsibly (Warren, Reeve, and Duchac, 2008). The primary purpose of this report is to present cash, production, material and labour budget which are crucial for strategic planning for every organization.       

This report covers preparation and presentation of the cash budget for VGL Ltd for four months from January to April and for Milbourn Manufacturers Ltd for four months from December to March. Further, the report also covers presentation of the production, material, and labour budgets for Milbourn Manufacturers Ltd for four months from December to March. Apart from that the report also covers behavioural problems in budgeting, participating budgeting, and cash management. Further, this report also provides guidance on preparation and analysis of the environmental cost report.

Although, budgeting is important for the purpose of strategic and financial planning but it has certain limitations. The most crucial limitation of budgeting is the inability to check the accuracy of the forecast (Warren, Reeve, and Duchac, 2008).

Production Budget

Budgetary Slack

The budgeting process involves estimations and setting the targets, which are based on the future expectations of the managers. Though the estimations are made on the basis of realistic assumptions, but at times it may lead to behavioural problems (Dugdale and Lyne, 2010). The lower level of management and operations department personnel who are responsible to achieve the budget targets may find them rigid and hard to achieve. The rigidity in the budgeting system may lead to dissatisfaction among the personnel who are responsible to achieve the set targets. This problem of dissatisfaction arises in the personnel mainly in the cases where these personnel are not involved in the budgeting process by the top management (Dugdale and Lyne, 2010).

The top management may, becoming overambitious, set such budget targets which the lower level personnel may consider very hard to achieve (Dugdale and Lyne, 2010). It is often seen that the rigid budget targets create chaos among the employees and their efficiency is dampened down. Thus, it is advised to the controller of Milbourn Manufacturers Ltd to consider participation of all the concerned lower level personnel in the budgeting process and setting the targets based on the realistic and achievable measures.       

The participative budgeting implies a process of budgeting in which all the personnel from top to bottom level of management take part and provide their input. This approach of budgeting is often called bottom-up approach because the personnel from supervisory level to the board of directors take part in the budgeting process (Hansen, Mowen, and Guan, 2007). The primary advantage of this approach is that the rigidity in the budgeting process and setting the targets is reduced and satisfaction from all the employees is achieved. Using the participative approach in budgeting relieves the organisation from facing behavioural problems. Further, satisfaction among all the personnel motivates them to increase the productivity and provider excellent quality work. Thus, the organisation is also benefited in terms of reduced cost and increased output by having the participative approach of budgeting within their budgetary system (Hansen, Mowen, and Guan, 2007).

Scope

Although, participative budgeting is immensely advantageous for the organisation but there are certain disadvantages also (Hansen, Mowen, and Guan, 2007). For instance, participative approach requires involvement of all affected personnel, which consumes a lot of time in preparing budgets. Further, due to involvement of the personnel from bottom level to the top level, the daily work may also suffer during the budgeting process.

Strategies to Avoid

In respect of cash budget presented for VGL Ltd, it has been observed that the company faces shortage of cash in the first month of January only. The cash balance is in surplus for the ensuing months. The cash shortage of January month amounts to $12.41 million, which should not be a big problem for the management. It could be observed that the company has receivables worth $89.76 million outstanding. It is advisable to the management of the company to adopt one or more of the following strategies to overcome the shortage of cash of $12.41 million:

Since the company has receivables of $89.76 million, the management could make arrangements for invoice factoring to liquidate the receivables

Alternatively, the management could get temporary loan from bank by keeping the receivables as pledged security (Tennent, 2012).

The management could also negotiate with Milbourn Manufacturers ltd (Supplier) in regard to the payment terms. As of now VGL is paying on 30 days credit terms, they may negotiate to enhance the credit period (Tennent, 2012).

In regard to Milbourn Manufacturers Ltd, it has been observed that the company facing cash shortage in the first production month December. The total shortage of cash amounts to $3.34 million. The primary reason for cash shortage is nil receipts from receivables due to being the first month of operations. In order to overcome this cash shortage, the management is advised to take short term loan from the bank by keeping the inventory as pledge.

The cash is considered to be an essential resource to run the business smoothly on day to day basis. The shortage of cash will have severe impact of the smooth running of daily operations and it may even endanger the very survival of the company. Due to the shortage of cash the liquidity position of the company will be weak and it will not be able to pay off the short term liabilities and daily expenses (Tennent, 2012). The payment of short liabilities and daily expenses such as wages and salaries is crucial to have the business running without chaos. Thus, the management of VGL Ltd as well as Milbourn Manufacturers Ltd is advised to short out the problems of cash shortage as early as possible.       

Limitations

Maintaining an adequate balance between the business needs and availability of cash is essential to perceive positive impact on the financial performance. The way the shortage of cash hampers the business, the excess of cash also reduces the profitability (Chorafas, 2002). Carrying cash more than the requirement, lead to accumulation of idle cash, which remains unused and unproductive. From this situation, the organisation’s financial performance is affected in two ways. In the one way, the organisation pays interest for unused cash that increases the non operating costs and second way, the organisation losses the opportunity to earn additional by investing the idle cash (Chorafas, 2002).      

Table

In order to ensure maximum output with positive results it is very crucial to set priorities before going for actual spending. In regard to the environmental cost categories, it could be observed that there are four major cost categories such as prevention, detection, internal failure, and external failure (Warren, Reeve, and Duchac, 2008). The costs which are incurred on the activities necessary to prevent the environment from potential hazards are clubbed under prevention cost. The costs which are incurred on the activities carried out to detect the causes of environmental hazard or damages are clubbed under detection costs. The internal failure category of the environmental cost covers the costs incurred due to the failure of the internal control system of the company causing damage to the environment. On the other hand, the external failure costs are incurred to rectify the consequences of the damage to the environment that has already happened (Warren, Reeve, and Duchac, 2008).

In the above context, it is advisable to Milbourn Manufacturers Ltd that as part of its strategy, the company should focus more on the prevention and detection cost. At present, the company is incurring more cost on the internal and external failure. The company spends 6.67% and 8.05% of the cost of operations on internal and external failure respectively. On the other hand, the spending on prevention and detection amounts to only 0.27% and 0.68% of the cost of operations. The company should increase the spending on the prevention and detection activities, which will reduce the cost on internal and external failure (Warren, Reeve, and Duchac, 2008).

References

Chorafas, D.N. 2002. Liabilities, Liquidity, and Cash Management: Balancing Financial Risks. John Wiley & Sons.

Dugdale, D. and Lyne, S. 2010. Budgeting Practice and Organisational Structure. Elsevier.

Hansen, D., Mowen, M., and Guan, L. 2007. Cost Management: Accounting and Control. Cengage Learning.

Mowen, M., Hansen, D., and Heitger, D. 2008. Cornerstones of Managerial Accounting. Cengage Learning.

Tennent, J. 2012. Guide to Cash Management: How to Avoid a Business Credit Crunch

Volume 109 of Economist (Hardcover). John Wiley & Sons.

Warren, C., Reeve, J., and Duchac, J. 2008. Managerial Accounting. Cengage Learning.