Budgeting Methods for SnappyDrinks: A Comparative Analysis

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BUDGETING
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Executive summary
Budgeting is a process through which internal control is established effectively and the
departments within an organisation are managed efficiently. In this study the traditional or
incremental method of budgeting is evaluated in relation to SnappyDrinks. Different purposes
and process of budgeting have been discussed in detail. Moreover the study has also provided an
insight into participative as well as top to down approach of budgeting. In addition to this the
study has shed light on alternative methods of budgeting such as activity based budgeting, rolling
budget and zero based budgeting. The study has provided a discussion on the appropriate method
that would be used by SnappyDrinks.
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Table of Contents
Part 1:...............................................................................................................................................4
i. Purpose of preparing the budget and processes required to be followed along with
development of business model...................................................................................................4
ii. Traditional budgeting approaches for planning future cost.....................................................8
iii. Appropriateness of traditional budgetary system...................................................................8
Part 2:...............................................................................................................................................9
iv. Alternative budget methods and improvement on traditional approach along with
drawbacks.....................................................................................................................................9
v. Application of Alternative budget methods...........................................................................11
vi. Analysis of methods for application in business...................................................................12
Conclusion.....................................................................................................................................12
Reference list.................................................................................................................................13
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Part 1:
i. Purpose of preparing the budget and processes required to be followed along with
development of business model
Budgets are prepared for specific organizational purposes which include control, evaluation,
planning, motivation and remuneration. It has been explained below;
Control
Budget is prepared for the purpose of controlling expenses of different types such as operating
and non-operating expenditures. In the opinion of Asogwaand Etim(2017:111), preparation of
budgets helps in outlining different types and amount of expenses that would be required to be
made. It helps in comparing the actual results with that of the expected ones and thus variances
are analysed. Internal management is controlled effectively by assessing the amount of funds
available with company to carry on with different projects. Moreover it also helps in allocation
of expenses as per the requirements and on the basis of units of products. On the other hand it
has been seen that it helps in making all departments or units in a business collaborate and thus
the internal control is carried out effectively. In case of SnappyDrinks, 60 different products are
manufactured that requires effective control on expenses. This is because it uses only traditional
budgeting method which has is not able to provide internal control.
Planning
Planning is another purpose of preparing a detailed budget. Budgets are prepared to plan about
the procedures or steps to meet the expenses, choose different sources of funds and finalise the
process of meeting expense that varies largely. Moreover it helps in three types of planning that
is strategic, tactical and operational planning (Fitzpartick and Hawke, 2015:11). Planning as one
of the purposes helps companies to be proactive and meet the requirements of the businesses
effectively. Moreover it also helps in deciding the best use of sources of funds such as equity or
debt or bank loans. It keeps into account the available funds with the company and extra funds
that are required to meet the expenses related to different activities. In case of SnappyDrinks, it
has been identified that new range of products would be launched that would in turn require
proper planning. Hence budget is required to be prepared to plan about the forecasted expenses,
sources of funds and the revenue that it would generate. It would be more of strategic planning
and tactical would be employed to train employees regarding the needs of the new market. In
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case of SnappyDrinks operational planning would be undertaken to decide about advertisement,
sale and labour expenses.
Evaluation
While preparing budgets different department make their own list of expenses and inform it
through their reports to the managers. Manager by taking this into account outlines those
activities that are consuming large amount of funds of the company. This helps them in
understanding the requirements and thus if it is observed that the activities are not necessary then
they can be eliminated. Preparation of budgets makes the evaluation of the whole process and
activities efficient.
Figure 1: Purpose of budgeting
(Source: Influenced by Fitzpartick and Hawke, 2015:13)
Motivation
Budgets outline various targets related to expenditures revenues, cost of production and others.
These targets are required to be achieved by the managers and workers of the organisation on a
quarterly or semi-annually or annual basis. These targets are treated as performance parameters
for the employees at workplace and based on these they are rewarded or asked to improve. In
case of Snapple Drinks it has been found out that motivation to work for making the new launch
of product a success use if modern budgeting techniques are necessary. In order to achieve
economies of scale as soon as possible preparation of budgets is necessary.
Remuneration
It has been seen that budget is required to be prepared as it helps in understanding the level of
funds that are available to provide remunerations to the employees. In the opinion of De Castilho
Lazaro(2017:14), budgets are prepared to account for the remuneration as expenses and planning
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ControlPlanningEvaluationMotivationRemuneration

to reduce or increase them in future with increase in production or sales. For example in case of
SnappyDrinks, remuneration is required to be decided for the labours that would be appointed
newly for the expansion project. In case of other two products that are new and existing products
the existing labourers’ remuneration would also be required to be assessed for increase.
In order to prepare an effective budget for the company SnappyDrinks should follow the
following process of budgeting;
Sales budget
Sales budget would be required to be prepared for the 15 products that are planned for launch in
the market. Since the finance director has divided the business into three parts hence sales budget
for all three parts would be required to be prepared separately. This can be done by analysing the
past records for the existing 60 products and market analysis for the 15 products would be
required to be undertaken. In case of the expansion plan in any one of the countries such as UK,
EU, China or others, sales budget is not required to be prepared since it would be a
manufacturing facility.
Figure 2: Process of budgeting
(Source: Influenced by Mahal and Hossain, 2015:67)
Production budget
Production budget is required to be prepared in relation to both 15 products and 60 products.
Since required number of units is decided, still production budget would outline the units of
material, number of labours hours and other direct expenses as well as overheads. However in
case of new manufacturing facility that has been planned to be expanded no production budget
would be required to be prepared.
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Proper communication
As it these budgets are prepared by different departments of an organisations or team, rather,
thus a proper communication between different teams or departments is required to be
established. Sales budget should be collected from sales department and production budget
should be collected from the production department. This would then be analysed and take into
consideration by the finance department that is responsible for making a detailed budget
outlining all types of expenses and revenues. On the other hand marketing and HR departments
are also required to be effectively communicated with. This is because the advertisement,
promotion expenses in relation to new product launch as well as feasibility study regarding
expansion of manufacturing unit would be known from them. In case of HR department, it has
been seen that remuneration and labour wages would be known.
Preparation of departmental budgets
All departments of Snappy Drinks are responsible to prepare their own budgets which then
would be procured by the finance department to prepare a detailed budget. Departmental budgets
are prepared first by the departmental managers which are then evaluated by the finance
managers before finally making a proper budget (Mahal and Hossain, 2015:66).
Approval by the managers
The budget that is finally prepared by the managers is then sent for approval by the top
management of the company. If the top management thinks it to be appropriate then it is not sent
for re-evaluation.
Final agreement
Final agreement is done when the top management agree with the budgets that have been
prepared by the finance team.
It has been seen that it would be better for the management of SnappyDrinks if participative
approach is applied rather than top down approaches of preparing budgets. Since top-down
would rather be more dependable form of approach of preparing budgets and participative would
help departments to adopt a collaborative way of preparing budgets. This would enhance the
processes effectiveness. Value of budgeting would be enhanced if collaborative approach is used.
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ii. Traditional budgeting approaches for planning future cost
Since SnappyDrinks applies traditional budgeting approach, hence it is unable to forecast
accurate expenditures and revenue for the expansion plan or existing products. Under
incremental or traditional method of budgeting, it is expected that expenses increase or revenues
increase by a certain level every year. It does not take into account the inflation rate, or other
external factors (Lorain et al. 2015:124). Thus with the help of this it budgets for SnappyDrink
cannot be prepared appropriately. This is because under it for existing products historical
expenses would be used and only a certain hike would be done on a constant rate. Moreover for
new products, incremental form of budgeting would not be suitable as advertising expenses, and
other marketing expenses would not be accepted as per market trends. In case of expansion of
new manufacturing facility incremental method would prove to be useless as it works according
to the historical costs does not forecast costs. The type of business that SnappyDrinks undertakes
requires more sophisticated and modern way of forming budgets. For example it can use zero
based budgeting that would help it analyse and forecast expenses from the beginning. Traditional
method used by SnappyDrinks does not offer a platform to evaluate or research or conduct a
feasibility study. Hence it is not appropriate for the expansion plan.
iii. Appropriateness of traditional budgetary system
Advantages and disadvantages for traditional budgetary system have been discussed about in
order to analyse the budgetary systems appropriateness;
Advantages
● Stability is high in regards to operations as departments take a consistent format of
handling and preparing budgets. This stability is measured in case of incremental method
of budgeting because it is followed by organisations for long.
● Stability in relation funding is also observed since incremental method assumes that
expenses as well as revenues increase at a certain rate. A fixed rate makes the company
prepare for funds and thus there is stability in funding programs (Sokolov et al. 2018:78).
● Traditional method of budgeting is simple and does not take time to prepare budgets.
Snappy Drinks uses traditional method of budgeting for all the above listed advantages. It
has been seen that the budget under such method is prepare according to the last years
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financial results or past records hence it doesn't take time to verify, prepare and forecast
expenses.
Disadvantages
However in spite of advantages, incremental method has been seen to have lots of disadvantages.
These have been discussed below;
● Budgets prepared as per this method cannot be relied upon as it does not offer close to
accurate expenses. Since it does not consider time value of money, inflation and other
factors hence the variances are high in case of budgets prepared under this. It leads to
large expenses that exceed the funds (Barr and McClellan, 2018:85).
● On the other hand it adds less value and uses large amount of time of the management
that could have been used in some other areas of business.
● Budgets prepared under such system does not follow causal model. This means that for
each and every increment in expenses no proper reason is given. This makes the budget
more unreliable.
● It is inflexible in nature and cannot be changed as per changes in units or business
activities.
● There is also a problem related to time lag. Since it is incompatible due to the constant
rate of increment.
Therefore it can be said that Snappy Drinks use of traditional method makes the budget
preparation for both 60 and 15 products ineffective. On the other had it is not suitable for the
planning about the expansion in regards to new manufacturing unit.
Part 2:
iv. Alternative budget methods and improvement on traditional approach along with
drawbacks
In addition to traditional budgeting there exist various other alternatives too. These include
rolling budget, zero based budgeting, and activity based budgeting. Alternative methods of
budgets have been discussed in detail and analysed as follows;
Rolling budget
It is a type of budget that is updated by continuous adding of periods. Either a quarter is added to
a month or earlier period are deducted from it. It is generally prepared for a year and then it is
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broken down into a different periods such as on monthly basis or quarterly basis (Bogsnes,
2016:74).
Benefits
● Under this the budgets are continuously revised that helps in achieving targets at a faster
rate.
● The variance that is differences in actual result and expected outcomes is more accurately
identified in this case. This is because rolling budgets constantly upgrade the periods and
no historical cost is taken into consideration (Rogulenko et al. 2016:4104).
● Assessment of goals and objectives of the company is effective in case of rolling budgets.
This is due to the fact that organisations have to upgrade the periods which automatically
takes into account the changes in inflation or tax rates.
Disadvantages
● It is a complex form of budgeting method as charges as per period have to be made and
managers have to bear this additional responsibility of upgrading periods.
● Managers get less time to review or evaluate the budgets as the budgets are renewed
many times (Heinrich et al. 2016:85).
● Rolling budgets are not suitable for all type of organizations.
● On the other hand innumerable number of changes does not ensure that the planning
would be effective or accurate.
Activity based budgeting
Under activity based budgeting expenses are located or forecasted based on different cost
drivers, activity pools. It contradicts the approach of zero based budgeting that is budgeted
production or output is estimated at the beginning and then allocation of expenses is done.
Benefits
● It is able to control costs more effectively as the amounts of expenses are derived based
on the activity pools (Olesen, 2015:96).
● It offers a proper framework for understanding the amount of resources that are needed to
achieve a certain level of production.
Disadvantages
● Identifying the proper cost drivers is time consuming.
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● There existvarious common costs that cannot be charged or allocated based on a single
activity pool.
Zero based budgeting
Under Zero based budgeting it has been seen that, no up gradation is required. It assumes that
every activity or period starts from zero bases (Moreira, 2018:36). All expenses and revenue are
charged against zero level of unit and hence it is best applied in a manufacturing unit.
Manufacturing unit have to constantly change or increase their level of production hence it zero
based budgeting is more suitable for it than rolling budgets.
Benefits
● Resources are allocated under this method efficiently and it has been seen that it gives
more value to funds.
● Since it starts from zero bases hence it is seen that the activities that are of obsolete
nature are eliminated on it accounted for while preparing the budgets (Asogwa and Etim,
2017:111).
● It helps in analysing various alternatives and thus a more cost effective approach is
chosen.
Disadvantages
● It is time consuming and the staffs who prepare such budgets require high analytical
skills. Thus it turns out to be ineffective if staff is not trained properly.
● It mainly concentrates on the cost savings and expense reduction. Therefore other aspects
such as improvement in revenue or profits are ignored (Fitzpartick and Hawke, 2015:11).
v. Application of Alternative budget methods
In context of Snappy Drinks, it has been seen that the alternative methods of budgeting are more
useful than the traditional way of preparing budgets. For example in relation to the 60 products,
zero based budgeting would be more useful. Reason for the same is that the amount of units
related to the 60 products varies from time to time. Hence it requires a budget format that starts
from the beginning as flexible budget would consume a lot of time adjusting the level of units’
production. In relation to the new products that are 15 products, rolling budget for the time being
is more relevant. This is because; during the extension period of the new product the company
would be adding more units and expenses would rise according to time period (Ponisciakova et
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al. 2015:431). Therefore it would be more useful in adding periods to the budget continuously. In
case of expansion of a new manufacturing unit’s activity based costing would be useful as it
would help in assessing the different activities and expenses would be accounted accordingly.
vi. Analysis of methods for application in business
Zero based budgeting should be used for SnappyDrinks, where the activities are divided into
three are each of which requires specific and different type of attention. Reason for the same is
that the organisation needs has varying needs in respect to existing, new and expansion plan of
facility. In case of 60 products the company is required to adapt to changes as per the market
trend for which zero based budgeting would be more useful. In relation to the 15 new
productsmoreamountofadvertising and promotion expense are required to be incurred. In
addition to this of the productbecomes successful in near future then more such quantities would
be sold by the firm. Hence for the zero based budgeting is more suitable as new units could be
adjusted easily. Moreover the activity based costing would be more suitable in case of expansion
plan of manufacturing unit. The different activities prior to finalisation of everything could be
easily assessed based on activity pools (Morgan et al. 2017:51).
Budgets enable the management of business organisations to remain focused on the internal
financial management processes so that they are able to manage the performance of the
organisation in an effective manner. Budgets that are prepared for business organisations consist
of learning that have been achieved through application of traditional and improved formulas.
Traditional Formulas have improved with time so that developed formulas are formed and more
accurate budgeting is achieved. In this study, purpose of preparing a budget and processes that
are required to be followed to develop a budget has been provided. Traditional approaches
towards budgeting and its appropriateness have been mentioned in the study. Alternative budget
methods and improvement of traditional methods have also been discussed in the study.
Application and analysis of alternative budgeting methods have been provided in the study so
that the budgets of an organisation can be prepared in a much better manner.
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