Budgeting Approaches for SnappyDrinks Plc: A Comparative Analysis

Desklib provides past papers and solved assignments. This report analyzes budgeting methods for SnappyDrinks Plc's expansion.

Business Finance
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Executive Summary
With a portfolio of approximately 60 diverse products, SnappyDrinks Plc is an energy drinks
production company with worldwide presence, which presently considers enlarging product base
and launching 15 new drinks. However, for doing so, management of finances are a significant
task, which can be done effectually with the means of using budgets. In this report, budgets are
going to be largely discussed with relation to this organisation SnappyDrinks Plc and practically
illustrating how budgets are and could be prepared in it. There is also the presence of
recommendations made to the company regarding the suitability of budget approaches as per its
present and planned operations.
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Table of Contents
Part 1................................................................................................................................................4
Part 2..............................................................................................................................................10
Reference list.................................................................................................................................17
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Part 1
i. An understanding of the purposes of preparing a budget; what processes the company
needs to follow; and how the budget process itself can help development of the business
model
Among the key tools for financial management within a company, budgets are a common and
effectual one. A company’s financial plan within which its expenditure is anticipated and the
earnings from them are forecasted is known as a budget (Weetman, 2010). In every budget, there
are main aspects, which include the following -
Figure 1: Main aspects of a budget
(Source: Created by the learner)
In the words of Atrill (2015), budgets are created within organisational contexts for varied
purposes. The common purposes because of which budgets are created within organisations is
that with the medium of budgets, companies can anticipate the amount of funds they need, the
chances they have to earn loss, ensuring that the desired amount of income will be attained by it
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and financial stability is going to be improved largely. Besides these, the other objectives and
purposes for which budgets are prepared in companies include the following -
Figure 2: Budgeting purposes
(Source: Created by the learner)
For preparing budgets, there also lies the need or requirement of adopting a specific process
(Drury, 2016). The process constitutes of a sales budget, followed by a production budget and
communicating the guidelines of the budget, submitting the budgets of various departments,
approving the budgets and finally agreement and integration of budgets. The detailed description
of the process has been given in the figure below -
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Figure 3: Budgeting process
(Source: Created by the learner)
Budgeting also facilitate companies in the development of their business model (Drury, 2016).
Budgets facilitate companies in making strategic managerial decisions along with the
ascertainment of the ability that it possesses for utilising as well as assigning the resources the
company has (physical along with financial) in addition to the efficacy in sales forecast. In turn,
when all such processes and activities function simultaneously, companies are assisted in
developing and creating their business model.
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SalesbudgetEstimationoftheaveragesalesforthenextperiodandaticipatingsellingpricesandsalesvolumeProductionbudgetCommunicatingbudgetguidelinesSubmittingdepartmentalbudgetsSubmissionofbudgetsofeachdepartmentseparatelyBudgettapprovalObtainingpermissionandapprovalforthebudgetsAgrementandbudgetimplementation

i. Demonstrate the application of traditional budgeting approaches (including incremental
budgeting) to plan future cost management for this specific business. Illustrate your answer
with examples of how products and processes for this business would be budgeted for in a
traditional/incremental approach
Digging out the past shows that diverse methods were used previously for a company’s budget
preparation and are known as traditional approaches for budget preparing. The incremental
budget or the incremental budgeting approach is one of the widely used traditional approaches to
budgeting. Drury (2016) referred incremental approach to be the forecast of a company’s budget
by making minor alterations to the existing budget plan of the company through summing up
incremental changes. SnappyDrinks Plc is one of the those organisations in which this approach
is utilised for preparing budget plans, the illustration of which has been shown below -
Budget forecasted for 2018-2019 in SnappyDrinks Plc -
Estimated income Amount Anticipated spending Amount
Sale proceeds £
64,380.00
Direct material expenditure £ 7,595.00
Insurance related expenses £ 2,525.00
Promotion, advertising, public
relations and other marketing
activities
£ 3,625.00
Utilities, maintenance, printing,
stationery
£ 2,375.00
New machineries bought £ 6,425.00
Fuel and electricity related
expenses
£ 2,375.00
Factory premises on rent £ 4,625.00
Legal charges £ 975.00
Labour related expenses:
Staff at Nottingham £ 3,525.00
Factory workers £ 5,075.00
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Budgeted earnings £
64,380.00
Budgeted spending £ 39,120.00
Table 1: Budget forecasted for 2018-2019 in SnappyDrinks Plc
(Source: Created by the learner)
Budget forecasted for 2019-2020 in SnappyDrinks Plc -
Estimated income Amount Anticipated spending Amount
Sale proceeds £
75,968.40
Direct material expenditure £ 8,962.10
Insurance related expenses £ 2,979.50
Promotion, advertising, public
relations and other marketing
activities
£ 4,277.50
Utilities, maintenance, printing,
stationery
£ 2,802.50
New machineries bought £ 7,581.50
Fuel and electricity related
expenses
£ 2,802.50
Factory premises on rent £ 5,457.50
Legal charges £ 1,150.50
Labour related expenses:
Staff at Nottingham £ 4,159.50
Factory workers £ 5,988.50
Budgeted earnings £
77,256.00
Budgeted spending £ 46,944.00
Table 2: Budget forecasted for 2019-2020 in SnappyDrinks Plc by applying incremental
budgeting
(Source: Created by the learner)
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Based on the yearly increment scheme of SnappyDrinks Plc, the budget above is created by
adding up increments worth 18%. Thus, this is an example of how budgets are created in the
SnappyDrinks Plc, no matter what its business environment is and whether this amount of
increment is needed in it or not.
iii. Analysing whether a traditional budgetary system is appropriate to all or any parts of
the business in its planned future form
Although limited, incremental approach towards budgeting is practiced in diverse companies.
The basic reasons for this utilisation are its ease and simplicity and the less amount of time
required for its creation and integration. Besides these benefits, Weetman (2010) opined that,
incremental approaches of budget creation prove being an appropriate approach into companies
where there are no considerable deviations taking place and the activities executed in it remain
constant. These aspects are the primary proof of incremental approach of budget creation to be
an inappropriate approach to create SnappyDrinks Plc’s budget plan, as the company plans roll
out of a new product portfolio that will be consisting 15 new drinks.
Weetman (2010) also stated that the incremental approach of budgeting is limited in nature since
the approach of budgeting fails in accounting for the diverse sorts of factors, which are present
within a company’s business environment along with adding unnecessary increments to its
expenditure. The chances related to the formation of a “budgetary slack” also prevail when this
sort of a budget approach is used. Due to all such reasons and factors, for SnappyDrinks Plc’s
planned future form, incremental budgets would not be a suitable one.
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Part 2
iv. An understanding of the following alternative budget methods: rolling budgets, zero
based budgets and activity based budgets. Explain how each method attempts to improve
on the traditional approach and what their respective drawbacks might be
Drawbacks of traditional approaches for budget preparing can be easily eradicated with the new
or alternate approaches for budgeting. A few such alternate methods include the following -
 Zero-based budget - Using zero to be the base, a zero-based budget could be defined as
alternative form of budget within which expenditures are newly justified and a fresh plan
is prepared for the finances of a company (Atrill, 2015). Pros of these budgets relative to
traditional approaches are that it provides aid for the discontinuation of a company’s
irrelevant or non-effective activities along with reducing and justifying its expenditure.
However, its constraint is that in most situations, zero-based budgets become inflexible or
rigid. They also have a focus over shorter span than the longer span.
 Rolling budget - Widely known as continuous budgeting, this approach of rolling budget
comprises of preparing new and revised financial plans for companies for the next
accounting period, all of which is done by the replacement of the previous budget and
incrementally extending the one that exists (Atrill, 2015). Pros of these budgets relative
to traditional approaches are that environmental analysis is done before this budget is
implemented into companies. However, its constraint is that in many cases, the budget
ends up with employee demoralisation and excessively uses manual labour as well as
time.
 Activity-based budget - Accounting and considering the activities or actions of a
company, a activity-based budget could be defined as alternative form of budget within
which expenditures are anticipated based on anticipating and assigning costs to different
activities. The cost required for every activity is budgeted within such a budget plan. Pros
of these budgets relative to traditional approaches are that this lowers costs by assigning
them to individual activities. However, its constraint is that it excessively uses manual
labour as well as time in addition to increasing pressure or stress among managers.
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v. The potential application of these methods to the company giving specific examples of
how all or some elements of budgeting could be performed more effectively using an
alternative method
The theoretical aspects and explanation of the alternate approaches for budgeting has been
evaluated above. The below is the illustration of a practical application of these approaches into
SnappyDrinks Plc -
Budget forecast using zero-based budgets -
Estimated income Amount Anticipated spending Amount
Sale proceeds on previously
existent product portfolio
£ 36,275.00 Direct material expenditure
on existent product portfolio
£ 8,525.00
Sale proceeds on newly
planned product portfolio
Direct material expenditure
on newly planned product
portfolio
1st drink roll out £ 3,575.00 1st drink roll out £ 1,525.00
2nd drink roll out £ 4,825.00 2nd drink roll out £ 1,625.00
3rd drink roll out £ 4,625.00 3rd drink roll out £ 1,875.00
4th drink roll out £ 4,175.00 4th drink roll out £ 1,225.00
5th drink roll out £ 5,025.00 5th drink roll out £ 2,625.00
6th drink roll out £ 4,925.00 6th drink roll out £ 2,875.00
7th drink roll out £ 4,675.00 7th drink roll out £ 2,325.00
8th drink roll out £ 3,525.00 8th drink roll out £ 2,475.00
9th drink roll out £ 3,675.00 9th drink roll out £ 2,425.00
10th drink roll out £ 3,325.00 10th drink roll out £ 2,375.00
11th drink roll out £ 3,625.00 11th drink roll out £ 2,125.00
12th drink roll out £ 3,825.00 12th drink roll out £ 2,325.00
13th drink roll out £ 4,475.00 13th drink roll out £ 3,375.00
14th drink roll out £ 5,125.00 14th drink roll out £ 3,125.00
15th drink roll out £ 2,375.00 15th drink roll out £ 1,875.00
Operating expenditure:
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Insurance related expenses £ 2,525.00
Promotion, advertising,
public relations and other
marketing activities
£ 3,625.00
Utilities, maintenance,
printing, stationery
£ 2,375.00
New machineries bought £ 6,425.00
Fuel and electricity related
expenses
£ 2,375.00
Factory premises on rent £ 4,625.00
Legal charges £
975.00
Labour related expenses:
Staff at Nottingham £ 3,525.00
Factory staff £ 5,075.00
Budgeted earnings £ 98,050.00 Budgeted spending £ 74,225.00
Table 3: Budget forecasted for 2019-2020 in SnappyDrinks Plc by applying zero-based
budgeting
(Source: Created by the learner)
Budget forecast using activity-based budgets
Activities Delivery
received
Stock
issued
Stock
ordered
Stock
counts
Record
maintai
ning
Super
vising
/
manag
ement
Total
Direct material
expenditure on existent
product portfolio
£
1,060.00
£
1,320.00
£
1,725.00
£
1,640.00
£
1,730.00
£
1,050.0
0
£
8,525.0
0
Direct material
expenditure on newly
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