Introduction
Most organizations and businesses have come to accept budgeting as one of the most efficient method for both short-term planning, co-ordination, and control. A budget is defined as a formal quantitative and/or financial statement that describes the organization’s future operations as projected (Warren, Reeve and Fess, 2005). Budgets enable an organization to know clearly what it plans or intends to undertake during a particular accounting year or a part of it. Thus, a budget serves as a yardstick against which the management can measure the actual results (Bamber, Braun and Harrison, 2008). To management accountants, the budgeting technique is an important application in many areas ranging from planning for production, cash budgeting, sales budgeting, administrative expense budgeting etc. A budget is a versatile management accounting tool that has allowed many managers plan a head and prepare contingencies where necessary (Hilton, 1994).
The budgeting process is of importance to organizations for multiple reasons including; first, for planning and orientation purposes, this is because the budgeting process causes management to think of long-term goals of the organization. Thus, even when the management does not achieve the outlined goals in the budget, at least the budgeting process forces them think of the company’s financial and competitive position and how it can be improved. Secondly, the budgeting process allows the organization to review its profitability (Weygandt, Kimmel and Kieso, 2012). It is easy for the management and the employees to lose sight of individual departmental profitability during the day-day management of the organization. However, a well-structured budgeting process will allow the company to review the profitability of the organization as a whole.
Besides, the budgets act as a yardstick upon which performance can be benchmarked hence facilitating organizational improvements. Furthermore, budgets act as a motivating factor to employees when the employees are actively involved (Hoque, 2005). This is because the employees try to strive to achieve the budgeted plans as outlined in the budget. Finally budgeting helps organizations determine its cash allocation.
There budgeting process can either be top-down or bottom-up (Williams, 2012). In top-down budgeting, the budgets are prepared without the involvement of the ultimate budget holders. In this budgeting process the top-management come up with the budgets which are then implemented by the departmental heads (Horngren, 1999). The fact that the ultimate budget holders are not given an opportunity to participate in the preparation of the budgets, the employees lack motivation in the budget implementation. The bottom-up budgeting process on the other hand grants the budgets holders, an opportunity to prepare their own budgets.
The disadvantages of bottom up budgeting process is that; the senior management may feel like they have no control in the budgeting process. Also this approach may result in dysfunctional behavior; i.e. may result in budgets that are not in sync with an organization’s corporate objectives (Curristine, 2006). Besides, this budgeting process may result in slow budgeting and possible disputes. On the other hand, the top-down budgeting process leads to decreased motivation of employees as they do not own the process. The budget is likely to contain less accurate information as the top management may not be conversant with all the departments.
Cash budget
Budgeted income statement
Budgeted statement of financial position
Payback Period
Payback period = 3years + (342041.24/586139) = 3.58 years
Discounted payback period
The discounted payback period = 4+ (104,439.59/430,454) = 4.24 years
Net Present Value
Net Present Value = cumulative present value of benefits – cumulative present value of costs
= 5,875,011 - 3,695,308 = $2,179,703
Appendix
Cash receipt schedule
Labor and overheads cash expenses schedule
Schedule for expected cash disbursements
Calculations of the depreciation and book value of Plant, Plant and Equipment (PPE)
Work Cited
Bamber, L., Braun, K. and Harrison, W. (2008). Managerial accounting. Upper Saddle River, N.J.: Pearson Prentice Hall.
Curristine, T. (2006). Performance Information in the Budget Process. OECD Journal on Budgeting, 5(2), pp.87-131.
Hilton, R. (1994). Managerial accounting. New York: McGraw-Hill.
Horngren, C. (1999). Management and cost accounting. London: Prentice Hall Europe.
Hoque, Z. (2005). Handbook of cost & management accounting. London: Spiramus.
Warren, C., Reeve, J. and Fess, P. (2005). Financial & managerial accounting. Mason, Ohio: Thomson/South-Western.
Williams, J. (2012). Financial & managerial accounting. New York, NY: McGraw-Hill Irwin.
Weygandt, J., Kimmel, P. and Kieso, D. (2012). Financial and managerial accounting. Hoboken NJ: John Wiley & Sons Inc.
