This paper presents the budgeting systems of the IDEAL Science & Technology Development Company. Budgeting refers to the process of quantifying the plans of a company with a sole reason to enable it achieve its objectives in the stipulated and defined period (Axson, 2010). Basically, the result of the process of budgeting is termed as a budget. A budget is of importance in areas of cost control, performance evaluation as well as for future decision making. Its planning and control is seen as a short term qualification and monitoring of a company’s long term plan. A strategic plan shows the core objectives to be achieved within a stipulated framework of a company’s policy (Axson, 2010).
IDEAL company is a manufacturing company, majorly focusing its operations towards provision of intelligent energy building systems for residential infrastructure. Provision of efficient, comfortable and safe living environment is its core service to the community. Since the company manufactures a wide range of products, it uses hybrid costing method across their manufacturing activities for purposes of budgeting. This is however limited to the nature of the given product line. It employs both job order costing and process costing systems for overhead and labour costs allocation to goods worked on and produced.
The company undertakes the preparation of a master budget. This is however limited to the production budget. Basically, it employs materials budget, labour budgets, overhead budgets, finished goods budget and the sales budget preparation. It utilizes BAAN IV and SSA ERP LN 6.1 for their ERP system.
Essentially, this helps the company forecast products to be manufactured during the budget period. Its preparation is constrained to the available production capacity, the sales forecast and the finished goods stock level policy. It ensures that production is sufficient to met sales demand and that economic stock level is maintained as per the stock policy of the company (Morlidge and Player, 2010).
Direct Material Budget
The IDEAL Company prepares this budget to help show the projected quantities and costs of the raw materials; and the components needed for the output demand by the production budget. Budgeted direct materials costs comprise machine casing, motherboard, electron component and liquid crystal. Secondary materials like filler metal and gasket are besides factored in the computation of material cost. The company forecast these estimates in a direct material usage budget.
Direct Labour Budget
The company undertakes forecast of direct and indirect labour requirements. Basically, it helps buffer the demands of the company in times of budget period (Michael, 2009). Labour costs are referenced to wages and social security of workers; and is computed by multiplying direct labour hours with wage rates of every labour group.
Factory Overhead Budget
The company prepares this budget to forecast all the production fixed overheads and variable and semi-variable overheads it’s likely to incur during the budget period. Fixed overheads include equipment and plant depreciation and mould fees; while variable overheads forecasted comprises wages and social security of workshop managers, electricity, transportation expenses and water.
Sales Budget
The company undertakes its preparation to help visualize volume of sales and sales mix of its current operations. Its preparation is limited to reports from salesmen, market research information and the actual sales in the previous periods.
IDEAL Company undertakes the summation of all budgeted costs, i.e. budgeted material cost, budgeted labour cost and budgeted labour costs to arrive at its production cost budget.
In conclusion, to determine exact cost of each product, IDEAL Company sales department together with the production team develop a customized budget for the ongoing computation of actual product cost. Together with the manufacturing manager, production department make decisions regarding amount of raw materials, labour costs as well as variable manufacturing overhead budgets for the period. This is however constrained to the forecasted sales revenue--as provided by sales department. The company’s use of hybrid costing helps it achieve a required production capacity. In addition to the software developed by the company, hybrid costing help management easily compute product cost of each batch completed to help measure production performance of the company.
References
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Michael C. J. (2009). Corporate Budgeting Is Broken--Let's Fix It. Harvard Business Review.
Morlidge, S., and Player, S. (2010). Future Ready: How to Master Business Forecasting. 1st edition. Wiley.
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The given case study. IDEAL Science & Technology Development Company.
