B6021 BLA Manufacturing Budget Analysis

B6021 BLA Managerial Accounting

Manufacturing Budget Analysis

Introduction

This analysis was conducted on Ferguson and Son Manufacturing Company with the purpose of identifying the problems that exist within the company’s budgetary control systems and determine how these problems can damage the effectiveness of the system. This analysis also will justify how the company’s budgetary control system can be studied in order to become more effective. This analysis will also describe how activity-based costing can improve budget results if the company considered that approach. This analysis on Ferguson and Son’s Manufacturing Company will also share personal views on how one would use a budget to change employee behavior in order to align with the goals of Ferguson and Son. Lastly this analysis on Ferguson and Son’s Manufacturing Company will explain concepts of Return on Investment (ROI) and describe how the use of activity based costing system can increase the company’s (ROI) and the potential impact on cash flow.

Budgetary Control System Problems and Improvements

The budgetary control system is a system of management control in which actual income and spending are compared with planned income and spending, so that you can see if plans are being followed and if those plans need to be changed in order to make a profit (Nordmeyer, 2015).Ferguson & Sons Manufacturing Company’s budgetary control system is struggling with being successful due the goals of the company not corresponding with the goals of each department. The company’s system that the president has in place does not motivate their employees, and attributes to employees being overwhelmed with work and not meeting deadlines. This can be hard when there are many uncontrollable factors that can deter efficiency such as rush orders, and maintenance issues that were talked about in the case study.

These problems within Ferguson & Sons Budgetary control system can reduce the effectiveness of the system because if the company is not on the same page with what their goals are the employees cannot be successful at executing goals. The goal of the company in the Presidents eyes aswell as their accountants is to lower costs and in return this is tightening the budget in order to do more with less. The employees did not feel that was communicated with them. The different departments are segregated and they do not work together to meet deadlines. This makes it harder for the departments to improve performance due to uncontrollable factors that they do not have enough manpower to assess adequately. If there was more unification between each department they may be able to increase effectiveness. By tightening the budget for the departments each month that they attained their budget it makes it harder for Emory and Morris to effectively allocate work. This problem can lead to them making wrong decisions for the company and put them at risk of loosing their jobs.

In order for Ferguson & Sons Manufacturing Company to improve their Budgetary control system they need to change from monthly performance evaluations to a three, six, or twelve month performance evaluation system.One month is not enough time to adequately track performance. Also creating budgets that do not change monthly constantly based on the prior months performance would help better the department’s ability to finish projects and maintain quality. The company also needs to have a system that allows managers and accountants to more effectively report controllable factors within the company. The Ferguson & Son Manufacturing Company needs to invest in educating all their employees on the mission, objectives, and goals of the company. This can be obtained by having literature, and training sessions that will enable all employees to fundamentally asses the budgetary control system in the company.

Activity-Based Costing

Activity-Based Costing is defined as a method for more precisely allocating overhead to those items that actually use it. The system can be used for the targeted reduction of overhead costs. ABC works best in complex environments, where there are many machines and products, and tangled processes that are not easy to sort out (Accounting Tools, 2015). Activity-based costing can change the results of Ferguson & Son’s budget if utilized by applying overhead costs in the budget. By doing so they cover miscellaneous fees accumulated by overhead cost off the top. This will allow the budget to assist both departments when they are overwhelmed with work and have pressure to meet deadlines. The two departments, the machine shop and the equipment maintenance department would require the same manufacturing overhead because if a machine goes down in the machine shop the equipment maintenance department fixes the problem. So it would be ideal to include manufacturing overhead in the budget because they require the same labor hours and materials. Having separate budgets and wanting the departments to tighten two different budgets only lengthens the process.

Budget Change

In the case study it was mentioned that many employees have “quit trying” in reference to working faster and maintaining quality. It is becoming overwhelming for the employees to stay within budget and provide efficient products and services. Many of the employees are not exited about working and they do not believe in what they are doing. This can be extremely bad for business because the quality of the product or service can be affected. I would utilize participative budgeting processes, this allows employees to feel more involved with the process. They will be more inclined to follow the budget if they are involved in creating it. In the case of Ferguson & Son Manufacturing Company the managers Emory and Morris would benefit from participative budgeting because they would have say so in creating it and express their views of what will and will not work because they actually work in the operation and know what goes on. They realize it is sometimes impossible to follow the budget when uncontrollable factors occur.

By utilizing participative budgeting it can help align the goals of the company whereas before the goals of the company were uncertain due to change in leadership. Sometimes change is not always better. The new president wanted to stretch the monthly budget in order to save money but in return it is causing the company to be less efficient. By giving away power and letting management control or have input in allocating the budget in a way that aligns with the goals that top management has for the company is necessary. It is necessary because in an operation things can change fast such as system failures, machines being inoperable, and surplus of orders. Managers have to think fast and rationalize a situation to get the job done. Their input is a key component that can improve success and profitability of the company if utilized.

Improvement of Return on Investment (ROI)

Return on investment is a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments. ROI measures the amount of return on an investment relative to the investment (Investopia, 2015). Return on investment can be improved through the use of activity-based costing by allocating investments into the equipment that is used by the company. Through participative budgetingthe company can assess the budget from the stand-point of the workers that actually know what goes on in the operation and know what it takes to get the job done. By applying activity-based costing and distributing the machine hours and cost of labor and materials into the budget it will allow the company to save money overtime. This is due to the overhead being factored into the budget. Once the budget is corrected then Ferguson and Son can measure the efficiency of their investments in the budget. Through this process the company has the ability to improve their ROI and potential impact on free cash flow.

Conclusion

This analysis presented on behalf of Ferguson & Son Manufacturing Company identified the problems that existed in the company’s budgetary control system such as the lack of motivation from the workers and unclear goals of the company. This analysis also explained how these problems damaged the effectiveness of the budgetary control system. This analysis justified how Ferguson & Son’s company could make their budgetary control system more effective. This analysis also explained how activity-based costing could improve the budgets results by adding manufacturing overhead to the budget of the two departments and have the two departments operate under the same budget. This analysis also explained how incorporating a participative budget into Ferguson & Son’s company would benefit the company. Finally the analysis on Ferguson & Son’s Manufacturing Company shared how activity-based costing can increase their return on investment and potential impact on cash flow.

References

Nordmeyer, B.(2015). The Uses of Budgetary Control.Houston Chronicles. Retrieved from http://smallbusiness.chron.com/uses-budgetary-control-31142.html

Accounting Tools.(2015) Activity Based Costing. Accounting Tools. Retrieved from http://www.accountingtools.com/activity-based-costing

Investopia (2015).Return on Investment.Investopia. Retrieved from http://www.investopia.com/terms/r/returnoninvestment.asp