Feasibility Report on Activity Based Budgeting for Pethe Industrial Marketing Company
Verified
Added on  2023/06/04
|14
|4162
|361
AI Summary
This report analyzes the applicability of activity based budgeting in Pethe Industrial Marketing Company and suggests its adoption. It discusses the features of ABB, differences between ABB and traditional budgeting, and its suitability for the company.
Contribute Materials
Your contribution can guide someone’s learning journey. Share your
documents today.
PHILLIPS CONSULTING LIMITED 4THFLOOR, UBA HOUSE, MARINA , LAGOS Phone : +234 (0) 906 000 0804 A FEASIBILITYREPORT ONTHEIMPLEMENTATIONOFTHE ACTIVITYBASEDBUDGETING PREPAREDFOR PETHE INDUSTRIALMARKETINGCOMPANYPRIVATELIMITED PREPAREDBY STUDENT STUDENTID STUDENT STUDENTID STUDENT STUDENTID CLIENT’SCONTACT: NAME DESIGNATION: CHIEFEXECUTIVEOFFICER PHONE; 022-24223976,FAX: 022-24228998 ADDRESS: 69, S.K. BOLEROAD,DAGDIWADI,NEARPORTEGUESECHURCH XXXX (W), XXXXXX- 900028 1|P a g e
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
EXECUTIVESUMMARY In the given assignment we have analyzed the applicability of the activity based budgeting in a manufacturing concern, Pethe Industrial Marketing Company Limited, and after the overall analysis we suggested that it would be viable for the company to adopt the ABB as it budgeting system within the company. 2|P a g e
TABLEOFCONTENTS Introduction..............................................................................................................................................................................4 Key Points..................................................................................................................................................................................4 a). A brief description of the Client Company.........................................................................................................4 b). Description of ABB and its features......................................................................................................................5 Features of Activity Based Budgeting........................................................................................................................7 c). Difference between ABB and Traditional Budgeting system......................................................................8 Difference between traditional budget and Activity based budgeting.......................................................11 d). Discussion on the Suitability of ABB.................................................................................................................13 Conclusion...............................................................................................................................................................................13 References...............................................................................................................................................................................14 3|P a g e
INTRODUCTION At present, Pethe Industrial Marketing Company Private Limited has been analyzing and reviewing the viability of the system of budgeting being practiced by the company in order to bring about improvement in the budgeting process. For the purpose of implementation of a better budgeting practice the chief executive officer of the company has been looking for prospects(Bennuona, et al., 2010). Through various seminars, the officer came across the benefits of the activity based budgeting and after proper evaluation of this system of budgeting, the company has proposed to adopt this system of budgeting in front of Phillips Consulting. For the purpose of the adoption of this system of budgeting Phillips Consulting is required to submit a report on the feasibility of adopting the activity based budgeting system in the current scenario of the company. KEYPOINTS A). ABRIEFDESCRIPTIONOFTHECLIENTCOMPANY Pethe Industries marketing is a leading manufacturing company since 1965 of electromagnetic brakes, clutches, crane controls and motors of high quality. Pethe industries is also an exporter and supplier of various kinds of material handling equipment’s, industrial brakes industrial clutches, gear boxes, reduction gears, gear cuttings, couplings and electric engine and motors, etc. These involves variety of activities like storage, transmission, transformation, fabrication, etc. for the performance of such activities there are various other activities which are involved like, recruitment of staff and labor, training process, engineering services, documentation, building rent or factory rent, machine on hire, travelling and conveyance and many more. The cost drivers which are related to these activities are machine hours, labor hours, number of machine set up, number of production runs, batch total, number of units produced, etc. (Bromwich & Scapens, 2016).There are various non value added activities with respect of the manufacturing process like waiting time or idle time, transportation, handling (moving things), excess inventory buildup or useless inventory, defects and many other types of non value added activities. For the purpose of carrying out the operations smoothly, our client company has implemented high tech machinery and various amenities, the company has also incurred cost in relation to the recruitment of a team having dexterous professionals. We have observed that during the past few years the profit of the company has remained at edge due to incurrence of cost in various improvements in the production system. Other than the cost incurred by the company as mentioned above there are various other factors which has 4|P a g e
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
affected the growth of the company like slow decision making process, which is very important, etc.(Choy, 2018). With the increasing development in the manufacturing industry and constantly growing competition, the company has also appointed a special team of professionals who are skillful and experts in this field. This is expected to increase the clientele of the company far and wide. B). DESCRIPTIONOFABBANDITSFEATURES Activity based budgeting is amongst one of the varied types of budgeting. As the name suggests it involves the activity based costing in its approach, that is to say, under this method of budgeting the costs are allocated to those activities with which they are associated and then the budgeted expenses are grouped together on the basis of estimated level of the activity (Dichev, 2017). Since the activity based budgeting involves activity based costing, their concept is also quite similar to each other. For a better understanding of this we have presented an example, which is as follows: Activity-based budget: Research: Salaries$40,000 Internet connection4,860$44,860 Shipping: Salaries$34,800 Telephone4,400 Ship sleepeze940,000 Ship plushette800,000 Ship ultima562,0002,341,200 Jobbers: Salaries$28,600 Telephone5,000 Commissions420,000453,600 Basic ads: Salaries$22,000 Advertising32,00054,000 Digital ads: Salaries$40,450 Advertising860,000900,450 Office management: 5|P a g e
Salaries$52,000 Depreciation32,000 Supplies and Internet18,900102,900 Total$3,897,010 2.From the above data we can clearly see that the activity which is adding most amounts to the cost is shipping. The second most cost intensive activity is the digital advertisements, which is followed by jobbers’ activity(Werner, 2017). Themanagement should look into this matter to identify the reasons behind such high costs and evaluate different ways to reduce the same. For instance, instead of digital advertisement which is quite expensive, they can use broadcasting on radios, written advertisements like pamphlets, print media, etc. however, during the year of initial startup the company has to use advertisement media which reaches to wide range of people. Hence cost reduction in advertisements could be very difficult. There are several points that need to be identified while the development of an activity based budgeting system. These points are as follows: i)What is the relation between the various activity drivers or cost driver and the main source of the activity driver or cost driver in respective cases? ii)The ways in which the source of the activity driver can be changed and the effect it will have on the requirement of the resources for the activity(Timothy, 2004). iii)Analysis of the activities being performed by the organization in order to ensure that the activities are being performed thoroughly and the required quality standards have been met. There are numerous things that are viewed while carrying on the process of activity based budgeting. This involves the identification of the outputs being produced by the organization along with the various resources which are required to perform the activity of production of the output. Since the activity based budgeting is about allocating the cost to the respective activity in relation to a particular goods or services, these allocation of costs to products is determined on the basis of the characteristics of the products or services(Alexander, 2016). As we know the implementation of the activity based budget involves activity based costing, it is highly important for the organization adopting the activity based budget to follow the approach of activity based costing as the system of cost accounting in order to have an effective budgeting base within the organization. 6|P a g e
Before implementing the activity based budgeting, an organization is required to make note of several fundamental principles in relation to the activity based budgeting. These principles are: i)There should be formed proper connection between the organization’s strategy and its activities. ii)For the formation of the connection as stated above, proper gap analysis should be conducted. iii)Ascertainingthemanagementofthecapacityandproperestimationofthe organization’s revenue(Linden & Freeman, 2017). iv)The connection between the organizational strategy and its business. The implementation of the activity based budgeting should be considered where the overheads cost forms significant part of the total operational cost. Since the activity based budgeting is based on allocating the cost to the specific activities, it is most favorable in those undertakings where there are numerous activities involved and not where there is only activity which have highest proportion in total operational cost(Erik & Jan, 2017). FEATURESOFACTIVITYBASEDBUDGETING The main features of Activity Based Budgeting have been discussed in brief hereunder: i)Activity based budgeting is a process of planning which is connected to the strategic objectives of the organization ii)It makes the use of a well proven technique of activity analysis, which is being considered as the heart of all activity based system iii)It involves the identification of those opportunities which improves the cost iv)It identifies the existence of interdependencies amongst the various departments of the organization v)It enables the various departments of the organization in the proper management of various resources and related cost more efficiently vi)It focuses on the achievement of the organizational goals and objectives vii)It enables the management of the organization to have proper control over the budgeting processes viii)It makes use of those assumptions which are more realistic and ensures involvement various employees of the organization in its preparation ix)It involves identification of various cost drivers and activities along with cost pools, which makes it a very complex process(Dumay & Baard, 2017) x)Activity based budgeting is oriented more towards the achievement of short term organizational goals rather than long term goals. 7|P a g e
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
C). DIFFERENCEBETWEENABBANDTRADITIONALBUDGETINGSYSTEM Traditional system of Budgeting Traditional budgeting is the conventional method of budgeting which involves preparing of the budget on the basis of the budgets of previous year. Under this method of budgeting the budget of the current year is prepared by making appropriate changes in budget of the last year by making required adjustment to the expenditures on the basis of the rate of inflation, demand of consumers, circumstances prevailing in the market, etc. the budget of the current year includes the revenues and costs of previous year as well. The traditional budget involves justification of only those items in the current year budget which are over and above the budget of the previous year(Raiborn, et al., 2016). Traditional Budgeting has the following features: i)Traditional budget is prepared on the basis of the budgets being prepared in the previous year. It takes the last year’s budget as base. ii)Justification is done in this budget of only those items which are in excessive of the previous year’s budget. iii)This budget is not totally revised, rather only appropriate changes and adjustment are done to the items of expenses on the basis of current year’s market condition, like inflation, etc.(Jones, 2017). iv)The issues relating to the different departments within the organization are totally ignored by this method of budgeting. The following points are required to be kept in mind while preparing the traditional budget: i)For the hassle free application of the traditional budgets the management of the organization is required to collect all the detail relating to the input to be used in the preparation of the budget. ii)Determining the target for a budget is very important. In order to do so, the managementoftheorganizationshouldmakecomparisonswiththe associate organizations. iii)After the preparation of the budget, the same should be reviewed by the managers and their response on the same, if any should also be considered in the budget. 8|P a g e
The key limitations of the traditional budgeting system are as follows: i)As discussed above, the traditional budget takes the past year’s budgetary data into consideration, it requires analyzing the figures of the last year with great accuracy in order to prepare current year’s budget. ii)The preparation of traditional budget involves great amount of modifications being done by the management due to which the traditional budget fails to reflect the goals and objectives of the organization(Mun & Shin, 2018). We have taken help of the following example in order to understand the concept of traditional budget with more ease: ClassificationLast Fiscal YearCurrent BudgetNext Fiscal Year Personnel Services 1110 Salaries$622,454$730,500$895,625 1120 Wages$95,000$155,000$245,000 1130 Overtime Payments$46,800$50,555$58,400 Subtotal: Personnel Services$764,254$936,055$1,199,025 Contractual Services 1210 General Repairs$498$520$625 1220 Utility Services$1,006$2,200$3,320 1230 Motor Vehicle Repairs$3,250$4,740$5,605 1240 Travel$2,000$3,200$4,800 1250 Professional Services$6,200$7,800$7,920 1260 Communications$845$980$1,060 1270 Printing$2,000$2,400$3,950 1280 Computing Services$6,623$7,900$9,000 1290 Other Contractual Services$3,000$4,010$5,540 Subtotal: Contractual Services$25,422$33,750$41,820 Supplies and Materials 1310 Office Supplies$5,607$6,200$7,840 1320 Fuel Supplies$7,440$8,790$9,905 1330 Operating Supplies$3,367$4,950$5,990 9|P a g e
1340 Maintenance Supplies$2,890$3,670$4,640 1350 Drugs & Chemicals$8,996$9,995$10,675 1360 Food Supplies$4,565$5,800$7,010 1370 Clothing & Linens$9,506$10,600$11,800 1380 Education & Recreation Supplies$5,006$6,200$7,500 1390 Other Supplies$3,000$4,450$5,850 Subtotal: Supplies & Materials$50,377$60,655$71,210 1410 Office Equipment$54,550$61,500$71,000 1420 Electrical Equipment$20,500$26,500$34,480 1430 Motor Vehicles$40,000$55,000$54,000 1440 Highway Equipment000 1450 Medical & Lab Equipment0$200$400 1480 Data Processing Equipment0$4,000$6,500 1490 Other Equipment000 Subtotal: Equipment$165,427$147,200$166,380 Current Obligations 1530 Rental Charges000 1540 Insurance$5,800$6,800$7,500 1550 Dues & Subscriptions$60$85$105 1560 Electrostatic Reproduction$450$7,30$850 1590 Other Obligations$100$150$210 Subtotal: Current Obligations$6,410$7,035$8,665 Employee Benefits 1610 Retirement & Pension Benefits$83,200$98,300$110,450 1620 Social Security Contributions$60,000$75,005$87,500 1640 Group Insurance$24,270$36,000$48,400 1650 Medical/Hospital Insurance$200,520$314,250$417,290 Subtotal: Employee Benefits$367,990$523,555$663,640 TOTALS$1,379,880$1,708,250$2,150,240 The various advantages of the traditional budgeting have been discussed below: 10|P a g e
Paraphrase This Document
Need a fresh take? Get an instant paraphrase of this document with our AI Paraphraser
i)The traditional budgeting makes the management of activities with stability and ease, it thus provides a framework of control ii)Decentralization within an organization becomes easier with the help of traditional budgeting, there are many organizations which recognizes the advantagesof decentralization like banks, etc.(Messinger, et al., 2017) iii)Traditionalbudgetsareeasytounderstandandcontrol.Thepreparationof traditional budget is also not difficult. iv)Traditional budgeting has become a part of the organizational culture of many organizations which makes its abolition quite difficult as a fundamental method of operating. Although traditional budgeting has several advantages, it also has the following disadvantages as well: i)In the preparation of traditional budget, the chances of human error are very high, since it involves study of a lot of spreadsheets, so mistakes are bound to be committed ii)The preparation of traditional budget requires analyzing the past year’s budgets, which tends to be very time consuming process iii)It fails to increase the employee morale and in providing incentives to them. iv)The traditional budgets only take into consideration the quantitative aspects while it ignores the qualitative aspects. v)The traditional budgeting does not provide any alignment between the organizational spending and strategy. vi)The assumptions on which it is based are not scientific and more or less are guess work. Witnessingthevariouslimitationsanddrawbacksofthetraditionalbudgeting,two approaches have been introduced. These are beyond budgeting and better budgeting. While the former focuses on the solutions of various problems, the latter is concerned about the evaluation of performance. DIFFERENCEBETWEENTRADITIONALBUDGETANDACTIVITYBASEDBUDGETING We have summarized the major differences between the activity based budgeting and traditional budgeting in the statement being presented below. Sl No.BasisABBTraditional Budgeting System 11|P a g e
1.OrientationTheorientationof thissystemof budgeting is towards activity and process The orientation of this system of budgeting is towards outcome. 2NatureIt is of dynamic nature It is of static nature 3GoalThe main focus of this system of budgeting is short term goals The focus of this budgeting system is on long term goals 4ApproachThe approach adopted by this budgeting system is participative approach. This system of budgeting does not follow participative approach. 5ControlThe level of control over the system is more The level of control over the system is less 6ComplexityThis system of budgeting is more complex This system of budgeting is quite simple 7AccuracyThis system of budgeting provides a more accurate result The level of accuracy in this budgeting system is less 8SupportThe support of the lower management is more in this case The support of the higher management is more in this case 9ImplementationThe implementation process is quite difficult No such difficulty is involved 10Wasteful Expenditure Under this budgeting system it is easy to identify the wasteful expenditure It does not help in identifying wasteful expenditure 11TimeThis budgeting system is more time consuming This is less time consuming 12Volume of overheadThis should be adopted where the overhead costs are high This should be adopted where the overhead costs are low 12|P a g e
D). DISCUSSIONONTHESUITABILITYOFABB From the above detailed discussion there are various points we need to discuss before deciding the adoption of activity based budgeting in our client company, these are: i)The impact that the activity based budgeting will have on the performance and profit of Pethe Industrial Marketing Company Limited? ii)Will the implementation of this system of budgeting bring about any improvement in the cost allocation system of the organization? iii)The steps which are required to be followed by our client company for an effective implementation of the activity based budgeting? iv)The availability of ample amount of resources as well as time with the client company for the implementation of activity based budgeting. As we know, that our client is a manufacturing concern, which involves various types of activities in the manufacturing process(Marques, 2018). The operational cost is high and the company is keen in knowing the activities which consumes the maximum portion of cost. The activity based budgeting involves identifying the cost drivers and allocating the cost associated with each activity. This might help the company in getting the desired results. In our opinion and from the analysis of various aspects of the activity based budgeting being done above, we could advice Pethe Industrial Marketing Company Limited to adopt activity based budgeting practice within its organization. However, the company must be able to implement the budgeting practices properly without any compromise. Once implemented in an organization the activity based budgeting tends to bring about various improvements in the business processes(Goldmann, 2016). CONCLUSION On the basis of the overall analysis of the activity based budgeting in this report, we would like to suggest Pethe Industrial Marketing Company Limited to implement the activity based budgeting in its company in order to bring about improvements in its cost allocation system and identification of various cost activities. REFERENCES Alexander, F., 2016. The Changing Face of Accountability.The Journal of Higher Education,71(4), pp. 411-431. 13|P a g e
Secure Best Marks with AI Grader
Need help grading? Try our AI Grader for instant feedback on your assignments.
Bennuona, K., Meredith, G. & Marchant, T., 2010. Improved capital budgeting decision making: Evidence from Canada.Emerald Management Division,48(2), pp. 225-247. Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on.Management Accounting Research,Volume 31, pp. 1-9. Choy, Y. K., 2018. Cost-benefit Analysis, Values, Wellbeing and Ethics: An Indigenous Worldview Analysis.Ecological Economics,p. 145. Dichev, I., 2017. On the conceptual foundations of financial reporting.Accounting and Business Research,47(6), pp. 617-632. Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting..The Routledge Companion to Qualitative Accounting Research Methods,p. 265. Erik, H. & Jan, B., 2017. Supply chain management and activity-based costing: Current status and directions for the future.International Journal of Physical Distribution & Logistics Management, 47(8), pp. 712-735. Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development,Volume 4, pp. 103-112. Jones, P., 2017.Statistical Sampling and Risk Analysis in Auditing.NY: Routledge. Linden, B. & Freeman, R., 2017. Profit and Other Values: Thick Evaluation in Decision Making. Business Ethics Quarterly,27(3), pp. 353-379. Marques, R. P. F., 2018. Continuous Assurance and the Use of Technology for Business Compliance. Encyclopedia of Information Science and Technology,pp. 820-830. Messinger, B. L., Rogers, D. N. & & Hawker, C. D., 2017. Use of Automation and Process Improvement to Achieve a Six Sigma Level of Nonanalytic Quality.The Journal of Applied Laboratory Medicine: An AACC Publication. Mun, K. & Shin, I., 2018.A close look at the role of regulatory fit in consumers’ responses to unethical firms..s.l.:s.n. Raiborn, C., Butler, J. & Martin, K., 2016. The internal audit function: A prerequisite for Good Governance.Journal of Corporate Accounting and Finance,28(2), pp. 10-21. Timothy, G., 2004. Managing interest rate risk in a rising rate environment.RMA Journal, Risk Management Association (RMA),November. Werner, M., 2017. Financial process mining - Accounting data structure dependent control flow inference.International Journal of Accounting Information Systems,Volume 25, pp. 57-80. 14|P a g e