Task 1

In this report, a case study on Leeworthy has been analysed. This report is depicting about a company named by Leeworthy. The case study is explaining that Leeworthy is an organic manufacturer of ice-cream. The company is running very well in its current market. Due to some changes in the political factor, company is forced to make some changes over the manufacturing process and operations. In this case study, the CFO of the company wants to make the changes in current budgeting system. This report has been prepared to analyse that whether company should change the budgetary system or not.

Que 1) Through this study, it has been found that company is using tradition budget system which means this budget helps the company to allot a specific amount to spend for specific financial obligation like insurance, rent or entertainment (Brown, Beekes and Verhoeven, 2011). This budgetary system helps the company to spend the income according to a plan. This budget starts at the time of gaining the amount and list all the expenses which could occur in the next financial year.

Purpose of traditional budgeting system:

Traditional budgeting system is using by the company from last several years. This budget is helpful for the company to maintain the income and expenses of the company. The main purposes of the traditional budgeting system are as follows:

• Review of historical performance:

This budgetary system helps the company to analyse the historical performance of the company (AAA, 1996). This helps the company to find the lose tools of the operations where company has spent more money or from where company could earn more profits. This helps the company to make more profits.

• Forecast the future expenses:

Traditional budgetary system helps the company to identify and analyse the present and historical scenario and according to this analysis, company forecast all the future expenses such as rent, insurance, depreciation etc. (Brewer, Garrison and Noreen, 2005).

• Forecast the future income:

Traditional budgetary system helps the company to identify and analyse the present and historical scenario and according to this analysis, company forecast all the future income such as dividend, interest income, bond interest etc. (Bierman, 2010). 

• A tool for decision making:

It provides a financial framework to the company for decision making. It helps the company to find out the actions which have not be planned by the company. For running a business smoothly, expenditures must be controlled. Such as when budget of advertising exceeds than the decision on “could company spend more money on advertising” is most likely to be “no” (Eriotis, Vasiliou and Ventoura-Neokosmidi, 2007).

• Monitor business performance:

The main purpose of traditional budgeting is to enable the accurate and actual business performance which is to be measured by the company against the future business performance. It helps the company to find out the variances and work upon it to reduce the difference between actual and budgeted expenditure (Weygandt, Kimmel and Kieso, 2009). 

Benefits from traditional budgetary system:

Leeworthy Ices Ltd is using this system from last several years. This system has been helped the company in many circumstances. Some of them are as follows:

• Generates the sense of care and caution:

Analysis

This system generates a sense of care and caution in the line managers. It forces the management of the organization to study about all the problems.

• Guides the management:

It guides the management of the company to relate the formulation and planning of company’s policies.

• Controlling income and expenditure:

This system offers a means of make a control over the income and expenditure. It also gives a plan of spending to the company (Weygandt, Kimmel and Kieso, 2015).

• Define the objective:

It helps the company to define its objectives in a numerical terms for a fix period.

• Management involvement:

It involves all level of managers to achieve the goals of the organization.

• Helps in directing:

It helps the company in directing both the revenue and capital resources in a better and profitable way.

Que 2) Traditional budgetary system addresses many key points in an organization; some of the key points are as follows:

• A description of the business and market:

A brief description about the market and the business operation is required to prepare the budget. It helps the organization to prepare an effective budget.

• Explanation of how the budgetary system supports the organization’s values, mission, vision and objectives:

Budget must be prepared according to the values, mission, vision and objectives of the organization because basically the main goal of preparing a budget is achieving the goals of an organization (Deegan, 2013).

• Details of allocating funds:

Allocation of fund is main element of budgetary. This is quite helpful for an effective budgetary of an organization.

• Expectations to measure the performance against the budget:

The main element of budgetary is measuring the difference between the actual and budgeted result. This helps the company to analyse the profitability.

• Executive Summary:

Executive summary of the budgets provides a brief explanation about the budget (Radebaugh, Gray and Black, 2006).

• Supporting Appendices:

Supporting evidences are bills, revenue receipts, cash book, financial statements etc. This helps the budgetary of a company to be more reliable. 

The chief financial officer of the company is thinking to change the budgetary system of the company. Budgetary system of a company affects the following areas of a business: 

• Strategy:

Strategy is the main element of an organization. It affects the budgetary system of the company at most. Changes in the budgetary system would help the company in making the changes in the strategy accordingly. The disadvantage of changes in budgetary would be demotivation to the employees (Horngren, 2009).

• Control:

Budgetary system of a company make a total control over all the expenses of the company. Changes in the budgetary system would be helpful for the companies to make more effective control over the operations of the company.

• Monitoring:

Monitoring is essential for every organization. Budgetary monitors all the actions of a business. Changes in budgetary system would help the company to monitor all the activities more effectively.

• Planning:

Planning is crucial for every activity in a business. Planning of budgetary would also get affected with the changes in budgetary system (Garrison, Noreen, Brewer and McGowan, 2010)

Que 3) Lee worthy’s plan for future:

Leeworthy is planning to make some changes over the operations of the company as well as manufacturing process of ice cream. Leeworthy is also planning to change the geographical area of the factory. The chief financial officer i.e. Vinita is showing her concern about the budgetary system of the company. She thinks that many problems of the company could be resolved by implementing a new budgetary system. It has also been found by her that CEO of the company is quite busy with some other tasks right now.

Analysis:

Vinita finds that many issues could be solved by the company if company would implement the new budgetary technique into the organization. Traditional Budgetary system has been analysed by the Vinita and it has been analysed by her that the existing technique is not effective for the organization and not helping the company to achieve its goals. So she decided to make some changes over the existing budgetary system. The traditional budgetary system is not appropriate for the new business form and for supporting this statement some of the points have been described below:

Lack of Flexibility:

It uses fix amount to plan for the spending. This automatically cut down extra amount required by the company to grow up and meeting the objectives of the company. This restrict the companies to contribute more amount then a fixed % into the budget (Zimmerman and Yahya-Zadeh, 2011). This would be harmful for the company at the time of expanding the business.

No Projection:

This system is static in nature. It does not provide a projection of income and expenditure to the company. This system only shows the fixed % of amount to spend. It ignores all the other factors related to the company and its future expenses and income.

Budget Document:

The budgetary document of traditional system only helps the company to analyse the total expenditure. It does not help the company to track all the expenses and monitor the eal values of the company. This does not offer some techniques to measure the monthly, quarterly or annually budget in comparison of actual spending (Nobes and Parker, 2008).

Thus it could be said that the decision of Vinita is right. Changes in the budgetary system would help the company to resolve many issues as well as helpful for the company to enhance its market.

Que 1) As Discussed above, the chief financial officer of the company is thinking to make some changes in budgetary system. Company is thinking to make a change due to the changes in operations and geographical area. There are many other operating techniques; company could opt to change the technique. Some of the alternative budgetary system of the company is as follows:

Zero Based Budgeting:

In this budgetary system, at the beginning of budgetary planning, last year’s budget is analyzed very clearly and each unit budget is identified. All the spending of the company must be re-justified in this technique and every part of the organization must be re-request (Lafond and Roychowdhury, 2008).

This budgetary system would help the company in developing by offering an effective way of making a control over all the unnecessary costs. All the allocated money in this system has a purpose and help the company to minimize the cost.

Activity Based Budgeting:

It awards the financial resources of the company to its institutional activities which see the highest return in the form of high revenue for the company. This develops the activity groups in budgeting (Datta, ISKANDAR?DATTA and Raman, 2005).

This budgetary system helps the organization to find out that from where company is getting more revenue and according to that company could allocate the funds. This helps the company to spend the expenses only on those project from where company could make more revenues.

Responsibility Center Management:

This budgetary system is designed to support the all operations of a business. In this budgetary system all the departments of an organization get some budgets to spend.

This technique is helpful for the companies to identify the loose points and find that which department is occurring more cost. It helps the company to enhance the profit (Marginson, 1999).

Centralized Budgeting:

This budgeting technique gives all the decision making power to top level management. In this technique, not all the managers advise are required.

This budgetary system helps the company to make a budget from expertise. Error and variances issues are less in this system in comparison of other systems. This budgetary system helps the company to reduce the time and cost of company (Van der Stede, 2001).

Performance Based Budgeting:

This system allocates the funds according to the performance of last year. In this budgeting system, every budget is allocated according to the last year expenses and revenue of the organization.

This budgetary system helps the company to find out the last year performance and take decision according to that. This helps the company to decision making and make a control over extra expenses (Needles, Powers and Crosson, 2013).

Que 2) The above discussed budgeting system could be altered the earlier used budgeting system in Leeworthy. All the budgetary systems have some benefits as well as drawbacks. Some of the pros and cons of budgetary system are as follows:

Zero Based Budgeting:

This budgetary system could alter the traditional budgeting system in Leeworthy. This budgetary system would help the company to allot the expenses according to the previous year.

Advantages:

If this technique is used in the company than it would help the company to reduce the extra cost and all the allocated funds would have a purpose (Warren, Reeve and Duchac, 2013). Funds would not be allocated on the basis of past year but it would be allocated on the basis of some purpose.

Disadvantages:

This system is very time consuming and it’s not possible for the company to shift the business as well as adopt such a time consuming system. This budget also takes the help of previous budget, but Lee worthy’s last year budget would not be helpful for the company as the mission, objectives, area of the organization would be change.  

Activity Based Budgeting:

This budgetary system is prepared according to the most revenue generated department. It develops the fund source grouping, aligns resources according to the strategic objectives, develops the grouping etc.

Advantages:

It would be helpful for the company to make more profits as company would allot more funds to only that department from where company would get more return.  It would also help Leeworthy to connect all the strategies, mission and objectives of the company with budget (Warren, Reeve and Duchac, 2013).

Disadvantages:

Implementing of this system requires a substantial resource and time commitment which might not be feasible for the Leeworthy. It also requires at least 3 years to the organization to understand that which department is more revenue generating.    

Responsibility Center Management:

In this system, each department would be allocated different budget to accomplish the goal. This system focuses on overall operations of the organization.

Advantages:

This budgetary system would help the company to identify the departments which are generating more revenues and those departments which are losing more expenses (Nobes and Parker, 2008).

Disadvantages:

This system would not be more helpful for the company as it is not possible for the company to identify the revenue and expenditure of each department (Needles, Powers and Crosson, 2013). It is more time consuming as well as cost consuming.

Centralized Budgeting:

In this system, all the budgeting decisions are only taken by the top level management. They do not take help from middle and lower level management.

Advantages:

This budgetary system would help the company to make a budget from expertise. This budget would be sorted and would help the company to reduce the cost and time consumption.

Disadvantages:

This system would not be more reliable as top level management could only prepare the budget according to the previous year data (Weygandt, Kimmel and Kieso, 2009). Market condition, operational issues would be ignored in this system. Managers would be demotivated.

Performance Based Budgeting:

This system depicts that budgets must be prepared according to the last year performances. In this system every department has been analyzed and identified that which department’s performance is better.  

Advantages:

This system would help the company to identify that which department is garneting more revenue. This would help the company to reduce the cost and motivate the employees of a specific department.

Disadvantages:

Leeworthy would not be able to apply this budgetary system due to the requirement of previous year data. Time consumption would be more in this technique (Weygandt, Kimmel and Kieso, 2009).

According to the above analysis, it is suggested to the company to change the budgeting system. Zero based budgeting system is the best technique for the company. It would help the company to manage all the issues and help the company to resolve many problems.

Que 3) Through the above study it has been analyzed that Zero based budgeting system is the best budgetary system for the company. Some of the reasons behind suggesting the Leeworthy to Zero based budgeting system are as follows:

• Generates the sense of care and caution:

This system generates a sense of care and caution in the line managers. It forces the management of the organization to study about all the problems. And this system motivates all the managers and employees to work effectively (Williams, Haka, Bettner and Carcello, 2005).

• Guides the management:

It guides the management of the company to relate the formulation and planning of company’s policies. It also helps all the managers to accomplish all their goals according to the projected budget.

• Controlling income and expenditure:

This system offers a means of make a control over the income and expenditure. It also gives a plan of spending to the company. Through this budgetary system Leeworthy could easily identify the extra expenditure and less income of the organization (Weygandt, Kimmel and Kieso, 2009).

• Define the objective:

It helps the company to define its objectives in numerical terms for a fix period. This also helps the Leeworthy to share the objectives with all the employees.

• Management involvement:

It involves all level of managers to achieve the goals of the organization. This helps the company to motivate all the employees.

• Helps in directing:

It helps the company in directing both the revenue and capital resources in a better and profitable way (Horngren et al, 2005). 

Conclusion:

Through this case study, it has been analyzed that there are many budgetary system for an organization to implement in its business and allocate the funds accordingly. It has been found that the best budgetary system for the Leeworthy is zero based budgeting system. It could also be said that every system is different from each other and offering some unique facilities. But for Leeworthy zero based budgeting system is best.

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