Business Finance Report: Budgeting Methods for TownScape Plc

This report provides a comprehensive analysis of budget preparation, focusing on the case of TownScape Plc, an international manufacturer of street furniture. It begins by outlining the purpose of budget preparation and its importance for business planning, including the steps involved in the process. The report then identifies cost drivers within TownScape Plc and examines the application of traditional budgeting. A significant portion of the report is dedicated to comparing traditional budgetary systems with alternative methods such as rolling budgets, zero-based budgets, and activity-based budgets. It explores the advantages and drawbacks of each method and assesses their potential application for TownScape Plc, ultimately providing recommendations for the most suitable budgeting approach. The analysis considers the company's current challenges, including new contracts and the need for additional manufacturing facilities, and evaluates how different budgeting methods can address these issues effectively. The report emphasizes the importance of selecting the appropriate budgeting system to support the company's future growth and financial goals, considering factors like flexibility, accuracy, and strategic alignment.

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Business Finance
MOD003319

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Contents
Introduction......................................................................................................................................3
Part 1:...............................................................................................................................................3
(i): Purpose of Budget Preparation...............................................................................................3
(ii): Cost Drivers of the TownScape and application of traditional budgeting approach to plan
for the future cost management....................................................................................................5
(iii): Analysis of appropriateness of Traditional Budgetary System............................................6
Part: 2...............................................................................................................................................7
(iv): Understanding of the Alternative Budget Methods and their significant advantages and
drawbacks over traditional approach...........................................................................................7
(v): Potential Application of each Method for the Company.......................................................8
(vi): Recommendations for the Best Budgeting Method for the Company.................................9
Conclusion.....................................................................................................................................10
References......................................................................................................................................11

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Introduction
The present report is developed to provide an adequate understanding of the process of
budget preparation and its significance for promoting the growth and development of a business
entity. The budget preparation enables to develop an expenditure plan that helps in gaining an
estimate of the future needs of the business so that it can implement adequate strategies for
meeting them properly. The report has specifically discussed the case of TownScape Plc that is
regarded as an international manufacturer of street furniture. As analyzed from the case study,
the company adopts the use of traditional technique of budget preparation. However at present
the company is undergoing significant changes with undertaking new and revised contracts of up
to worth £35 million and requires additional plant and manufacturing facility in the year 2018.
The finance director of the company is concerned with the inappropriateness of the current
budgeting system used by the company to meet its future aims and goals. The most significant
problem that the company is facing at present is that the change in the budget approach will
become effective from the year 2019. In this context, the report presents the comparison of the
traditional budgetary system with the alternative budget methods such as rolling budgets, zero
based budgets and activity based budgets. The potential application of these methods to develop
the budget more effectively is also analyzed in the report to identify the best possible method for
developing the budgets for the company in context (Malina, 2017).
Part 1:
(i): Purpose of Budget Preparation
Budgeting can be stated as an important process of business planning by predicting the
potential growth prospects of a company. The purpose of budget is to develop a business model
that helps in providing an overview of potential growth prospects of a company. The budgeting
process enables to forecast the income the expenses and thereby estimating the future
profitability position of a company. It helps in development of a financial framework that detail
out the overall financial activities for facilitating the decision-making of financial managers. It
develops a proposed action plan for planning of future financial needs and also gains an estimate

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of the future financial risks that can impact its growth and performance (Moles and Kidwekk,
2011).
It helps in making a comparison between the actual business growth against the
forecasted performance and thus determining the potential chances of its success. The deviations
found in the actual performance as compared to the predicted can help in identification of the
loopholes in the business strategy. As such, the business managers can implement specific
actions for overcoming the issues identified to ensure the long-term growth and development of
the company. The process of budget preparation in the company need to consist of the following
steps:
 Stage 1: Development of Budget Policy
o The step involves developing the budgeted period, time table and developing the
budget committee in order to provide a clear direction to the management for
developing the budgets. The budget is prepared for the period of 12 months and
each stage is monitored and evaluated by committee on a regular basis. Stage 2: Communicating the Guidelines of Budget to Relevant Managers
o Budget committee is responsible for disseminating the information obtained from
the process to the relevant managers. This is essential to provide understanding to
the budget managers about the strategic plan that need to be undertaken for
supporting the company’s growth and development (Rasmussen, 2003).
 Stage 3: Identification of the Limiting Factors
o The stage consists of identification of the significant problems or issues that can
negatively impact the company plan of future growth and development. Stage 4: Preparation of Budget
o The identification of the limiting factor is followed by determining the overall
impact of the issue identified on the future growth and development of a business
entity. This helps in identification of the issues for which the budget forecast need
to be done for example, sale budget or any other. Stage 5: Developing the draft budgets for all other areas

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o The drafts of other issues that are identified for developing a budget for the
limiting factor should be prepared by the management so that it can be developed
in the future context on identification of the significant problem or issues. Stage 6: Review and Coordinating the Budgets
o The budget committee needs to monitor the consistency of budgets with one
another in order to identify the issue of lack of co-ordination or any that might
impact the budget preparation process. Stage 7: Developing the Master Budget
o It is prepared by the budget committee and includes the preparation of budgets
such as budgeted income statement or statement of financial position. Stage 8: Communicating the Budgets to the Relevant Parties
o The operating budget prepared is passed to the senior management for review and
is also shared across the other departments so that all business managers attain a
clear direction of what needs to be achieved (Wickramasinghe and Alawattage,
2007). Stage 9: Monitoring the Performance against the Budget Prepared
o The step involves identification of the variance between the actual performances
of the company against the determined targets in the budget prepared.
(ii): Cost Drivers of the TownScape and application of traditional budgeting approach to
plan for the future cost management
Cost driver is responsible for the change in the cost of an activity. An activity consist of
more than one cost drivers for example production activity can have cost driver such as machine
hours, labour hours, power unit used, output of inventory, etc. In order to identify the cost driver
for any business it is important to first identify the cost object that is responsible for triggering
the cost in various activities. For example, in case of business that is involved in the regular
material handling has to allocate the total material handling cost to different working units and
for this purpose there is need of cost driver (Adler, 2013).
TownScape Plc is an international company and it is actively involved in the
manufacturing of the street furniture. Some of the important goods manufactured by the
company are benches, litter bins, cycle racks, street bollards and bus shelter. So it can be said

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that there can specific activities that are carried out by the TownScape Plc to convert the raw
material into the finished goods. Some of important activities that can be carried out in company
which is involved in the wood and steel furniture industry are as follows:
Activities Cost drivers in each activity
Receiving of the raw material and storage No. of receipts (receipts/total units), Area used
by product (sq ft)
Machining Machine hours (hours/unit), Direct Labour
Hours, No. of production runs (runs/total units)
Assembly Machine hours (hours/unit), Direct Labour
Hours, Number of units assembled
Finishing Machine hours (hours/unit), Direct Labour
Hours, Number of units forwarded to the
finished goods
Setup Number of Setups,
Utilities Area used by product (sq ft)
Packing No. of deliveries (deliveries/total units)
Engineering No. of hours used by the Engineer or fixed cost
Other Cost Either allocate by machine hours or direct
labour hours
(McWatters and Zimmerman, 2015)
Traditional budgeting is the type of budgeting in which last year budget has been taken as
base in order to plan out the future budgets. In traditional budgeting incremental approach is
applied to incorporate the changes in the existing system such change in sales volume, change in
expenses etc. Incremental budgeting does not allow incorporating the changes such as addition of
new workplace to cope up with the new contracts. So through use of traditional budgeting
technique only changes required in the existing budgeting system can be incorporated in the
future budgets preparation but it fails to respond to the changes required to be incorporated by
the TownScape (Marco, Te'eni, Albano and Za, 2012).

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(iii): Analysis of appropriateness of Traditional Budgetary System
TownScape is presently adopting the use of traditional budgetary systems for budget
creation and presentation. This system involves developing a budget by taking into consideration
the budget developed for the past year as a base and adjust it for the inflation and the business
changes. It helps in providing an estimate of projected sales and revenue and gain an estimate of
the future profitability position. The company at present is planning to undergo significant
changes for meeting its contractual obligations and as such the use of traditional budgeting
system does not seem to be appropriate in meeting its future business form. This is because it
needs an accurate estimation of plant and manufacturing capacity required in the year 2018 for
meeting its business needs. However, the traditional budgeting system is not a reliable method
for developing accurate estimations as it is often prone to variety if a data entry error as it is
developed with the use of spreadsheets. Also, the budgets prepared with the use of traditional
budgeting system are not reviewed regularly and therefore it is not useful for incorporating the
recent business changes into account. It is not largely useful for developing a strategic plan as the
budget main purpose of creation is cost reduction instead of creating value for the shareholders
and therefore it does not help in development of strategic initiatives for meeting the changes
proposed in business aims and objectives (McWatters and Zimmerman, 2015).
Part: 2
(iv): Understanding of the Alternative Budget Methods and their significant advantages
and drawbacks over traditional approach
The finance director of TownScape need to gain an in-depth understanding of the various
types of alternative budgeting system and their benefits and drawbacks before selecting the best
method for adoption in the company. These can be discussed as follows:
Rolling Budgets
Rolling budget are the budgets that can be updated continually for adding of a new
budgeted period. The budget is subjected to change as per the additional activities to be carried
out a business entity in the coming period of time. The budget involves extending the existing
budget incrementally as per the changes in the business operations. The budget is based on a

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rolling estimate against the forecasted changes in the budgeted activities so that it can be
expanded in future as per the business requirements (Warren, Reeve and Duchac, 2011).
The budget is extremely advantageous for the companies that have high variances in the
economy and commerce. TownScape can gain benefit from this type of budgeting system on
account of its flexibility and incorporates the updated information about the forecasted financial
performance of the company. It will enable the company to become more responsive in respect
of the changes in external environment and also its preparation will not involves nay extra
investment of funds or time by the company. However, the most pertinent drawback with the use
of such budgeting system is that it can adopt the use of unrealistic assumptions such as revenue
forecast that can result in providing large variances (Clowes and Scriven, 2015).
Zero Based Budgets
This method of budgeting adopts the use of Zero Base and all the significant expenses are
recognized for each new period. It involves the preparation of budget from starting point for each
of the line items on the basis of its cost and requirements. Thus, this system of budgeting does
not involve extracting any information from the previous year budget is prepared all fresh.
The significant advantage of this method is that it a flexible type of budget and helps in
overcoming the issues of budget inflation. The potential drawback is that it is subjected to being
manipulated y the managers (Kjerstad, 2003).
Activity Based Budgets
This method of budgeting involves developing budgets as per the cost of each activity
and then involves a compilation of the overall budgeted expenses. It provides an accurate
estimation of the future business expenses and thus improves transparency in the budgeting
process. However, it is associated with the drawback of requiring heavy expenditure and large
consumption of time for its effective implementation and adoption (Tilanus, 2012).
(v): Potential Application of each Method for the Company
TownScape Plc at present is incorporating the use of traditional budgeting system.
However, the company at present is planning for undertaking some major changes for its future
growth and therefore has to adopt some flexibility in its budgeting system to increase its

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responsiveness for the future changes. As such, the use of alternative method of accounting
would help in improving the responsiveness and flexibility in the budgeting system of the
company. The rolling budget system can be applied by the company on the basis of expectation
of change in the environment. For example, if there is addition of several new product lines each
year that requires monthly updates. Therefore, the system of rolling budget can be potentially
applied by developing a change management team for determination of how often the business
environment is likely to change. The major impact of rolling budget is on planning element of
budgeting as it helps in developing a specific plan for meeting the uncertainties in future. For
example, the techniques of SWOT analysis, brainstorming and balanced scorecard can help in
identifying the external and internal changes that can impact the company performance
(Scheller-Kreinsen and Geissler, 2009).
The method of zero based budgeting can be applied by the company by detailed
examination of all the previous expenditures to identify the wasteful activities to be removed. It
then starts with the use of blank sheet and develops budgets by redesigning the cost structures as
per the future business changes. It will have a major impact on redesigning the operations and
resources of the company as per the new strategic goals developed. The activity based costing
can be applied by identification of the cost drivers that are responsible for incurring revenue and
expenses for the company in and its significant multiplication by the activity level. It will have a
major impact on the coordination element of budgeting as it involves calculating the overall
expenses after determining the cost of each activity (Shim, Siegel and Shim, 2011).
(vi): Recommendations for the Best Budgeting Method for the Company
The company at present is recommended to adopt the use of rolling based budgeting
system as it will enable the finance director to adjust its budgets as per the future business
changes without having large changes in its structure. The finance director can add a future
period of estimation in the budget that is of a month, quarter or year. However, the company in
addition with his budgeting system is also recommended to adopt activity based costing in the
long-term. This is because it will enable the company to implement material changes in its
budget system. As such, the method is required as the use of rolling budge system will only
simply adjust the previous year budgeted amounts as per the forecasted changes. The cost
involved in various activities for adding plant and manufacturing capacity by TownScape Plc can

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be identified accurately and this will help in gaining an estimate of the overall expenses (Tănase,
2013).
Conclusion
It can be stated from the overall discussion that the budget preparation enables to develop
an expenditure plan by the company that helps in gaining an estimate of the future needs of the
business so that it can implement adequate strategies for meeting them properly. It has been
identified from the overall case analysis that the method of traditional budgeting is not suitable
for TownScape. It is recommended to adopt the use of alternative method for improving
flexibility in its budgeting system for meeting the future business changes.

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References
Adler, R. 2013. Management Accounting. Routledge.
Clowes, R. and Scriven, V. 2015. Budgeting: A Practical Approach. Pearson Higher Education
AU.
Kjerstad, E. 2003. Prospective Funding of General Hospitals in Norway: Incentives for Higher
Production? International Journal of Health Care Finance and Economics 3(4),pp. 231-251.
Malina, M. 2017. Advances in Management Accounting. Emerald Group Publishing.
Marco, E., Te'eni, D., Albano, V. and Za. S. 2012. Information Systems: Crossroads for
Organization, Management, Accounting and Engineering: ItAIS: The Italian Association for
Information Systems. Springer Science & Business Media.
McWatters, C., and Zimmerman, J. 2015. Management Accounting in a Dynamic Environment.
Routledge.
Moles, P. and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.
Rasmussen, N. et al. 2003. Process Improvement for Effective Budgeting and Financial
Reporting. John Wiley & Sons.
Scheller-Kreinsen, D. and Geissler, A. 2009. The ABC of DRGs. Euro Observer 11(4), pp. 1-5.
Shim, J.K., Siegel, J.G. and Shim, A.L. 2011. Budgeting Basics and Beyond. John Wiley & Sons.
Tănase, G.L. 2013. An Overall Analysis of Participatory Budgeting: Advantages and Essential
Factors for an Effective Implementation in Economic Entities. Journal of Eastern Europe
Research in Business and Economics.
Tilanus, C.B. 2012. Quantitative methods in budgeting. Springer Science & Business Media.
Warren, C., Reeve, J. and Duchac, J. 2011. Financial & Managerial Accounting. Cengage
Learning.

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Wickramasinghe, D. and Alawattage, C. 2007. Management accounting change: approaches
and perspectives. London and New York: Routledge. Taylor & Francis Group.