1) Using the information above, prepare the master budget for handbags only for
ID: 2519944 • Letter: 1
Question
1) Using the information above, prepare the master budget for handbags only for the quarter ending 30th September 2017.
2) Outline the advantages and disadvantages of traditional budgeting and advise the company on whether they should consider implementing ‘the balanced scorecard’ system.
Financial Information Wallets SAR 1,000.00 SAR 500.00 SAR 1,500.00 Handbags Suitcases Selling Price per unit Direct Materials (leather) cost per meter SAR 430.00 Meters of materials(leather) required per unit 2 Direct Labour hour cost per unit Sales commission per item sold Variable manufacturing overhead per unit SAR 15.00 Number of labour hours per unit Budgeted sales in units SAR 230.00 SAR 500.00 3 SAR 30.00 SAR 10.00 SAR 15.00 SAR 5.00 SAR 10.00 SAR 32.00 SAR 13.00 SAR 17.00 2 240 3 100 270 a) Other costs Production manager annual salary SAR 60,000 Annual marketing costs General Expenses Annual Fixed manufacturing overhead (excluding depreciation) SAR7,000 (20% relates to handbags) SAR 12,000 SAR 5,000 b) The company bought specialised equipment 5 years ago which cost SAR120,000. The useful life of this equipment is 10 years. Depreciation is allocated to manufacturing overhead expenses c) The company had 3 handbags and 10 meters of leather in stock at the end of June d) Company policy is to maintain 25% of the following months sales level as closing inventory for finished goods e) Company policy to maintain 25% of next months production needs as closing inventory for direct materials f) Budgeted sales of handbags for the next six months are as follows July August 20 September October November December 36 60 20 20 20 g) Cash collections on sales are as follows 60% in the month of sale 40% in the month following sale Receivables at the end of June were SAR 3,000 h) Cash payments on purchases are as follows 55% in the month of purchase 45% in the following month Payables at the end of June were SAR 5,000 The closing cash balance in June 2016 was SAR 40,000 and it is company policy to maintain cash at this level at the end of each month. i)Explanation / Answer
Note:in budgeted income statement material cost per unit is taken but in cash budget material cost per meter is taken, you can do the desired method and make changes.
2)traditional budgeting system
Advantages:i)It provides a framework of control to manage activities with stability
ii)It accommodates the need to decentralise andthe use of budget cost centres gives managers the freedom to run their operations as long asthey can meet the set parameters.
iii)It is part of organisational culture and may bea risky decision to abolish this fundamental method of operating.
Disadvantages
i)It consumes too much time and too manymanagement resources. Yet, only a small percentage of the parties involved in the budgeting process think the time spent is worthwhile
ii)Fails to motivate people to act in their company’s interest, as it encourages“gaming” and unprofessional attitudes in budget cost centre managers. It also strengthens bureaucracy and vertical control,making people feel undervalued
iii)As managers are so obsessed with hitting thenumbers right, they often miss the strategic purpose of budgeting. It focuses on cost reduction rather than value creation, which means strategic initiatives are unjustly lower priorities.
Balanced scorecard(BSC) is an integrated strategic management system, which has overcome the limitations of the traditional performance measurement systems. The BSC provides a balanced view of the company’s overall performance by aligning organizational activities with the company's strategy and vision. The main advantage of the balanced scorecard methodology is that it created the basis for forward-thinking performance measurement by linking “what the organizations wants to achieve” (financial and customer objectives) with “ How the organizations can achieve this” (internal process and learning and growth objectives).
In order to successfully execute organization vision and strategy organizations must monitor and control that all business units, functional units, groups and individuals are all pursuing strategic goals. BSC links strategy to operational activities and creates a strategy focused organization. It monitors different business processes to determine which metrics are most effective in measuring performance and provides feedback to internal business & external business process in order to continuously track and improve strategic performance and results.
Performance issues are discovered early, giving managers opportunity to take corrective action, identify the company’s value drivers and ensure correct strategies have been adopted. Thus, the BSC aids managers to shift from a reactive management approach to a proactive management approach. By linking strategy to operational objectives to organization strategy, BSC enforces managers to look at the long-term view of the organization, promoting managers to think about the future and not focus on the past.
This is in contrast to the drawbacks of the traditional performance measurement systems, which are too aggregate, not timely and are backward looking to help managers to root cause performance problem and initiate timely corrective actions.
SUCCESSFUL IMPLEMENTATIONS REQUIRE THAT THE TOP MANAGEMENT BUILDS AN OVERALL CONSENSUS ON THE COMPONENTS AND TARGETS OF BALANCE SCORECARD.NEGOTITATION UNDERMINES THE FUNDAMENTAL PRINCIPLE THAT TH COMPONENTS AND TARGETS SHOULD FLOW FROM STRATEGY.AS A RESULT AN APPROACH TO ESTABLISH TARGETS THROUGH NEGOTIATION DEFEATS THE VERY PURPOSE OF BALANCE SCORECARD THEREFORE, IT IS NOT SUFFICIENT THAT INDIVIDUAL MANAGERS AGREE TO THEIR TARGETS.
THEREFORE IN AN ORGANIZTION TO INTRODUCE BALANCE SCORECARD SYSTEM IT IS NECESSARY TO BUILD CONSENSUS RATHER THAN NEGOTIATE TARGETS
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