Importance of Budgeting and Management Accounting Techniques in Sunny Horizons Ltd

This report discusses the importance of implementing budgeting process and management accounting techniques in Sunny Horizons Ltd for promoting growth and development. It also explores the advantages and disadvantages of budgeting and the use of management accounting information in decision-making.

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BS1054: Accounting for Managers
Coursework Part 2: 2018/19

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Executive Summary
This report has been undertaken for examination of the importance of implementing
budgeting process and management accounting techniques within Sunny Horizons ltd for
promoting its future growth and development. It has been depicted with analysis of the forma
budgeting process advantages and drawbacks that its adoption would help the company to gain
an estimate of its future income and expenses. However, the company needs to also place
emphasis on reducing its drawbacks that is it can be costly and time-consuming for management.
Also, the use of management accounting information such as cost accounting, pricing decisions
and capital appraisal could help the business managers in improving the decision-making process
within the company.

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Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Role of Budgeting in the organization and implementation of formal budgeting process within
Sunny Horizons Limited..................................................................................................................4
Importance of budgeting process in organization like Sunny Horizons Limited........................4
Some of important benefits of budgets are as follows.................................................................4
Advantages of using the formal budgeting process within the organization...............................5
Disadvantages or limitations of using the budgeting in the organization....................................6
Final Recommendation................................................................................................................6
Use of management accounting information to direct the business activities.................................6
Cost Information..........................................................................................................................6
Pricing Decisions.........................................................................................................................7
Appraising Capital Investment Projects.......................................................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Introduction
The present report is developed for demonstrating the importance of budgeting process
and management accounting techniques for achieving financial control and ensuring accurate
decision-making process within an organization. The overall analysis has been conducted in the
context of given case study that has presented the issue of absence of budgeting process and
management accounting techniques in the company Sunny Horizons Ltd that has been
established within UK involved in selling quality hand-made wooden garden benches. The
business has been established by Graham who emphasized on maintaining quality products and
paid little attention towards cost incurred. The demand for the product is high but the sales are
limited due to number of products that are produced. The company only maintains financial
records on a computer system on annul basis for gaining information about the profits attained.
Graham is reaching the age of retirement and is involving his daughter and son for making
decisions. The business is also seeking to expand the business by enhancing sales within current
market and developing new product lines. Angela, the daughter of Graham, is likely to
implement a budgeting process within the business by addressing its positive as well as negative
aspects. Also, she is also seeking to gain an understanding of the use of management accounting
information in improving the decision-making process within the business.
Role of Budgeting in the organization and implementation of formal budgeting process
within Sunny Horizons Limited
Budget refers to the formal managerial statements that reflect estimates on future sales,
production cost, cash outflow, cash inflows and performance of the organization. Budget is the
most effective tool for the business managers that help them to provide assistance on the ways of
maintaining cash flows within a business (Adler, 2013).
Importance of budgeting process in organization like Sunny Horizons Limited
There are multiple benefits that budgeting process can provide to the organizations such
as Sunny Horizons Ltd as this company is moving ahead to the big corporation and there is
requirement to move business process in systematic manner. The owner of Sunny Horizons Ltd,
Graham, is about to retire and his children need to implement a system that helps to grow the

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business in systematic manner. The most important benefit of budgeting is that it helps in
attaining the formal coordination between all the departments with the organization and aligns
their objectives with strategic plan. Through use of budget, owner can communicate the business
plan in formal manner to the managers of each department. For example, if owner at Sunny
Horizons Ltd (Graham Sun) wish to increase the sales by 20% and profit by 25% then there will
be major changes in the requirement of raw materials, sales units, labor hours and cash
requirements. All these parameters can only be defined and identified if there is presence of
proper budget within the organization. The use of budgeting enables in calculating the breakeven
units required to achieve the respective sales target (Berman, 2015).
Some of important benefits of budgets are as follows:
 It helps in defining goals clearly: Every business needs some target to move in the
future but in case of absence of budget it is not possible to define the business goals
clearly. In case when organization plans to increase its revenue by 10% but in absence of
budget it is impossible to make judge required sales units to be sold and other parameters.
 Effective Communication: Budget helps to improve the communication across the
business departments through making the strategic plans and providing the same to the
departments’ heads to achieve them.
 Actual Performance reporting: Budgeting will help Graham Sun to measure the actual
performance to the company through comparing the actual results with the budgeted
performance. The identification of variances can help to improve the future performance
of the company (Clowes and Scriven, 2015).
Advantages of using the formal budgeting process within the organization
There are numerous advantages that formal budgeting process will generate to Sunny
Horizons Limited after the implementation:
 It aligns all business objectives with the business process: At the time of planning for
next financial year it is essential to align all the business objectives with future business
process. It can be done only when there is presence of effective budget at place for
determining the strategic goals and objectives

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 It sets up target and provides the ways to achieve them: Through use of budgets one
can set up the target for achieving the future plans of the company and it also guides the
managers for achieving the set targets.
 Long term planning and business orientation: The process of budget takes the
management from short term goals to long term business planning. Organization such as
Sunny Horizons Ltd is currently plans for their short term period and does not plan for
their future. Thus, it is certain that management will be able to define long-term strategic
plans that have been placed by Sunny Horizons Ltd.
 Plans for funding requirement: Currently Graham Sun make use of bank balance to
finance the business activities and there is no funds planning performed by the owner to
make sure all necessary requirements have been met. In this regards, budgets will make
sure all cash requirements have been fulfilled and if not how much cash need to attain
from the external sources.
 Cash allocation to machinery and equipments: As Sunny Horizons Ltd is medium size
organization and it is moving to bigger organization that requires funds to invest in the
equipments and machines. So, budgeting process will help the management to decide the
fixed assets that company should make investment in (Lalli, 2011).
 Performance Evaluation: As Sunny Horizons Limited is growing and there is need to
reward employees for their outstanding performance and also allow employees that need
training for improving their performance. Budgets help to evaluate the performance of
employees through making comparison between the actual and budgeted values of each
period.
 Assessing the business profitability: Business owner can easily assess the future
profitability position of the company and it can be possible only through development of
budgets (McWatters and Zimmerman, 2015).
Disadvantages or limitations of using the budgeting in the organization
As the budgeting is the complex process which requires the proper planning and
management review before making it implement within the organization. Below are some
limitations that Angela and her dad Graham Sun have to consider before making the budget
implemented within the organization:

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 Process of budgeting involves huge cash outflow: The process of budget is the complex
process and it requires heavy cash investment. As Sunny Horizon Limited make use of
limited resources and have limited capital to run the business, it might be difficult for
such organization to achieve all the advantage of budgeting due to shortage of funds.
 Budget is based on estimation: Budgets are generally based on various assumptions and
there can be huge variance in actual results and budgeted results at the initial years of
implement. So this limitation must be considered before implementing the formal
budgeting process within the organization.
 Support of top management and owner contribution: As the owner at Sunny Horizons
Ltd, Graham Sun is not interested to implement the budgeting process within his
organization, so there is chance and he will not contribute to the development process of
budgets (Moles and Kidwekk, 2011).
 Budget is based on past results: The estimation of data in the budgets make use of past
year trends and other information which can be obsolete if management is planning to
add new products and if there is major change in the business structure of the company.
In case of Sunny Horizon, management will look into adding new products to the product
line and it can also impact the trend in selling units of old products. It means if
management is planning to make use of part trends to develop the budget it can result in
high variation in actual data and budgeted data.
 Budget creates rigidity: After budget is defined and circulated to the department heads,
it is important that it should be followed very strictly without any changes to it. It forces
the managers not to change the consumption pattern and use of various resources as it
will change the actual results. So, it can be said that after budget get defined, company
has to follow it very strictly without making any interference in the budgeted values.
 Budget is financial oriented: When budget is defined through using the financial values
and non-financial factors are ignored. It means budget focuses on the quantitative aspect
of the business and aims to improve the profitability of the company. So, budgets do not
consider the subjective or qualitative aspect of the budgeting. But it is highly important
company should consider qualitative factor as shareholders requires high quality goods
and services.

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Final Recommendation
It is highly recommended to Angela and his dad to implement the formal budgeting
process within the company for promoting its growth and expansion plans. Budgeting process
will surely improve their performance and provide them with all the planning process for future
reference (Rasmussen, 2013).
Use of management accounting information to direct the business activities
The management accounting information deals with presenting an analysis of business activities
and their associated costs to the business managers to be used for taking important decisions.
Angela is seeking to provide an understanding to her father about the use of management
accounting information for promoting business growth and development. In this context,
following are the areas identified within Sunny Horizon Ltd that should adopt the use of
management accounting information and techniques for better decision-making. The areas
identified are discussed as follows:
Cost Information
Cost accounting can be regarded as the major type of information that is used by
managers for making various types of decisions regarding costs of production incurred by a
company. This management accounting information is required for assessing the input costs of
each step of production such as fixed costs. The cost accounting technique measures the costs
related with production activities of a business and then provide a comparison of the input to
actual results. This provides assistance to the business managers in ascertaining the financial
performance of a company (Holtzman, 2013). The most prominent management accounting
technique that can be used by Graham for assessing the cost of the production activities of the
business is Activity Based Costing (ABC). The approach is based on gaining a control over
monitoring the business activities and the identifying the resources consumed in carrying them
for aligning the resources as per the activities. The activities are then assigned to cost objects on
the basis of estimation of resource consumption. The activity costs are attached to outputs and
thus the technique of ABC can be used for maximizing the operational efficiency of business by
elimination of wasteful activities. Thus, the business managers rely largely on the cost
accounting to provide them an estimate of the actual cost involved in carrying out their various

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processes or creation of different products or services. The attainment of such type of
information would help business managers take decisions regarding cutting costs and increasing
the profits realized (Vanderbeck and Mitchell, 2015).
Pricing Decisions
The management accounting techniques helps in gaining an insight into the costs
associated with different business activities involved in development of various products of the
business. Therefore, Graham by the use of management accounting techniques can gather
information about the fixed and variable costs of production that is realized for creation of its
high quality products. As stated within the give case study, Graham does not place large
attention of its cost information and this is negatively impacting the business pricing decisions.
However, accurate determination of the cost involved in production process of the business
would help the managers to determine the prices on the basis of overall costs incurred (Meehan,
Simonetto, Montan and Goodin, 2011).
The determination of the price for a product is a complex process and is also regarded as
major decisions to be taken by the management for meeting its break-even point and attaining
profits. The setting of an accurate price by the business would have a direct impact on the
revenue realized and this should be understood by Graham in a proper manner (Abdel, 2011).
The business manager’s largely adopt the use of management accounting technique of cost
volume profit analysis (CVP) that ahs regarded that price of a product can be base on its cost in
addition with a reasonable markup. The analysis is used for examining the relation between a
product and its sales price on the basis of volume of sales, amount produced, expenses, cost and
profits. The analysis can help the management in examining the reduction in fixed and variable
expenses incurred by the company Sunny Horizons Ltd for declining the sales price and thus
selling more units (Bazley, Hancock and Robinson, 2014).
Appraising Capital Investment Projects
The decisions regarding the capital investment can be ascertained by the business
managers with the use of management techniques such as Net Present Value (NPV) and Internal
Rate of Return (IRR). NPV is an effective technique that is used by business managers for
determining the potential worth of an investment. The method calculates the difference between
the present value of cash inflows and outflows over a period of time by incorporating the concept

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of time value of money. The projects having positive NPV are accepted by the business
managers for potential investment. On the other hand, the method of IRR that is a discount rate
at which NPV of all the cash flows to be realized form a project equal to zero. The projects
having positive and higher IRR are accepted for potential investment by business managers.
Sunny Horizons Ltd is planning to gain expansion and invest in development of new product
lines and therefore the use of capital appraising techniques such as NPV or IRR can provide
large help to the business managers for selecting a right project for capital investment (Röhrich,
2014).
Conclusion
On the basis of importance, advantage and few limitations of budgeting process it can be
said that Graham Sun should make use of budgeting process to provide his business with formal
future target so that each department heads needs their exact target. So, budgeting process will
improve the management performance and also helps to achieve the future business objectives.
It has been analyzed that management accounting information could help the business
managers in improving the decision-making process. The management accounting techniques
such as cost accounting, cost-volume profit analysis for providing decisions and NPV or IRR for
determining the potential worth of a capital investment would facilitate the business managers in
making accurate decisions. This type of information should be used Graham for promoting the
growth and development of its company.

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References
Abdel, M. 2011. Review of Management Accounting Research. UK: Palgrave Macmillan.
Adler, R. 2013. Management Accounting. UK: Routledge.
Bazley, M., Hancock, P. and Robinson, P. 2014. Contemporary Accounting PDF. Australia:
Cengage Learning Australia.
Berman, K. 2015. Financial Planning, Budgeting, and Forecasting: Financial Intelligence
Collection. UK: Harvard Business Review Press.
Clowes, R. and Scriven, V. 2015. Budgeting: A Practical Approach. Pearson Higher Education
AU.
Holtzman, M.P. 2013. Managerial Accounting for Dummies. US: John Wiley & Sons.
Lalli, W. 2011. Handbook of Budgeting. US: John Wiley & Sons.
McWatters, C., and Zimmerman, J. 2015. Management Accounting in a Dynamic Environment.
UK: Routledge.
Meehan, J., Simonetto, M., Montan, L. and Goodin, C. 2011. Pricing and Profitability
Management: A Practical Guide for Business Leaders. US: John Wiley & Sons.
Moles, P. and Kidwekk, D. 2011. Corporate finance. US: John Wiley &sons.
Rasmussen, N. et al. 2013. Process Improvement for Effective Budgeting and Financial
Reporting. US: John Wiley & Sons.
Röhrich, M. 2014. Fundamentals of Investment Appraisal: An Illustration based on a Case
Study. Boston: Walter de Gruyter GmbH & Co KG.
Vanderbeck, E. and Mitchell, M. 2015. Principles of Cost Accounting. Australia: Cengage
Learning.