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The present report is developed for demonstrating the importance of budgeting process and management accounting techniques for achieving financial control and ensuring accurate decision-making process within an organization. The overall analysis has been conducted in the context of given case study that has presented the importance of an adequate budgeting process and management accounting techniques in the given company Sunny Horizons Ltd. The business has been established by Graham, within UK and is involved in selling quality hand-made wooden garden benches. As depicted in the case study, Graham places emphasis on maintaining quality products and paid little attention towards cost incurred. The demand for the product is high but the sales are limited due to number of products that are produced. The company only maintains financial records on a computer system on annul basis for gaining information about the profits attained. Graham is reaching the age of retirement and is involving his daughter and son for making decisions. Also, the business is also seeking to expand the business by enhancing sales within current market and developing new product lines. The present report discusses and analyzes the importance of a budgeting process within the business by addressing its positive as well as negative aspects for the purpose of aiding Graham children to improve financial planning within the business. Also, it aims to gain an understanding of the use of management accounting information in improving the decision-making process within the business.
The owner of Sunny Horizons Ltd, Graham, is about to retire and his children need to implement a system that helps to grow the business in systematic manner. As such, there are multiple benefits that budgeting process can provide to Sunny Horizons Ltd as this company is moving ahead to the big corporation and there is requirement to move business process in systematic manner as discussed below:
The development of budgets is a complex process which requires proper planning and management review before making it to implement within the company. As such, below are some limitations that Angela and her dad Graham Sun should consider before making the budget implementation within the organization:
On the basis of above discussion held, it is highly recommended to Angela and his dad to implement the formal budgeting process within the company for promoting its growth and expansion plans. Budgeting process will surely improve their performance and provide them with all the planning process for future reference (Rasmussen, 2013). This is because it through use of budget, owner can communicate the business plan in formal manner to the managers of each department. For example, if Graham at Sunny Horizons Ltd (Graham Sun) wish to increase the sales by 20% and profit by 25% then there will be major changes in the requirement of raw materials, sales units, labor hours and cash requirements. All these parameters can only be defined and identified if there is presence of proper budget within the organization. The use of budgeting enables in calculating the breakeven units required to achieve the respective sales target (Berman, 2015). However, it requires proper communication and strategic planning on the part of the company owners to make sure that budget development and implementation is odne in a successful manner.
As analyzed from the given case study, Angela is seeking to provide an understanding to her father about the use of management accounting information for promoting business growth and development. In this context, following are the areas identified within Sunny Horizon Ltd that should adopt the use of management accounting information and techniques for better decision-making. The areas identified are discussed as follows:
This management accounting information is required for assessing the input costs of each step of production such as fixed costs. The cost accounting technique measures the costs related with production activities of a business and then provide a comparison of the input to actual results. This provides assistance to the business managers in ascertaining the financial performance of a company (Holtzman, 2013). The most prominent management accounting technique that can be used by Graham for assessing the cost of the production activities of the business is Activity Based Costing (ABC).
As analyzed from the case study, Graham in the absence of use of any type of management accounting techniques does not place any importance on the operating costs incurred. The product prices are not aligned with the operating expenses incurred and therefore the use of management accounting technique such as Activity Based Costing (ABC) would help in gaining an estimate of the resources consumed in carrying out different business activities. The approach would enable in gaining a control over the business activities and identifying the resources consumed in carrying them for aligning the resources as per the activities. The activities are then assigned to cost objects on the basis of estimation of resource consumption. The activity costs can be attached to outputs and thus the technique of ABC can be used for maximizing the operational efficiency of the company by elimination of wasteful activities. Thus, the use of this cost accounting technique would provide the management an estimate of the actual cost involved in carrying out their various processes or creation of different products or services. The attainment of such type of information would help Graham to take accurate decisions regarding cutting costs and increasing the profits realized (Vanderbeck and Mitchell, 2015). It would help in determining the prices of the products in accordance with the operational expenses and fostering the business long-term growth and development.
Graham by the use of management accounting techniques can gather information about the fixed and variable costs of production that is realized for creation of its high quality products. The management accounting techniques helps in gaining an insight into the costs associated with different business activities involved in development of various products of the business. As stated within the give case study, Graham does not place large attention of its cost information and this is negatively impacting the business pricing decisions. However, accurate determination of the cost involved in production process of the business would help the managers to determine the prices on the basis of overall costs incurred (Meehan, Simonetto, Montan and Goodin, 2011).
The determination of the price for a product is a complex process and is also regarded as major decision to be taken by the management for meeting its break-even point and attaining profits. The setting of an accurate price by the business would have a direct impact on the revenue realized and this should be understood by Graham in a proper manner (Abdel, 2011). The use of cost volume profit analysis (CVP) by Graham would help in setting the price of a product on the basis of cost in addition with a reasonable markup. The analysis would be helpful in depicting a relation between a product and its sales price on the basis of volume of sales, amount produced, expenses, cost and profits. The analysis can help the management in examining the reduction in fixed and variable expenses incurred by the company Sunny Horizons Ltd for declining the sales price and thus selling more units (Bazley, Hancock and Robinson, 2014).
Sunny Horizons Ltd is planning to gain expansion and invest in development of new product lines and therefore the use of capital appraising techniques such as Pay back, NPV, ARR or IRR can provide large help to the business managers for selecting a right project for capital investment (Röhrich, 2014).
The decisions regarding the capital investment can be ascertained by the business managers with the use of management technique such as Net Present Value (NPV). NPV is an effective technique that is used by business managers for determining the potential worth of an investment. The method calculates the difference between the present value of cash inflows and outflows over a period of time by incorporating the concept of time value of money. The projects having positive NPV are accepted by the business managers for potential investment. The selection of a feasible product line by Sunny Horizons can be done on the basis of the results obtained with the use of NPV technique (Baker and Powell, 2009).
On the other hand, the method of IRR that is a discount rate at which NPV of all the cash flows to be realized form a project equal to zero. The projects having positive and higher IRR are accepted for potential investment by business managers. Graham and his children can use the technique of IRR for selection of a feasible product line for the purpose of business expansion (Arnold, 2013).
The method is relatively simpler to use for capital investment appraisal and determining the feasibility of a given capital project. This is because it helps in easily calculating the length of time that is required for recovering the initial investment incurred in a capital intensive project. The technique is simple to apply and can easily help Graham to take the investment decision by considering the breakeven point and selecting the adequate product line for business expansion.
The method can help Graham and his children to select the appropriate product line for diversification on the basis of calculating the return, that is, net income to be realized from a proposed capital investment. The product line that is estimated to provide the maximum income returns can be selected for the capital investment (Reilly and Brown, 2011).
It can be summarized from the overall analysis that that Graham Sun should make use of budgeting process to provide his business with formal future target so that each department heads needs their exact target. So, budgeting process will improve the management performance and also helps to achieve the future business objectives.
Also, it has been analyzed that management accounting information could help the business managers in improving the decision-making process. The management accounting techniques such as cost accounting, cost-volume profit analysis for providing decisions and NPV or IRR for determining the potential worth of a capital investment would facilitate the business managers in making accurate decisions. This type of information should be used by Graham for promoting the growth and development of its company.
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