RDBS Corporation produces a variety of plastic products. Some of these products are standard items that are listed in the company’s catalogue, while others are made to customer specifications. The company begins the annual budgeting process in late December, when the managing director establishes targets for the total pound sales and net income before taxes for the next year.
The sales target is given to the Marketing Department, where the marketing manager formulates a sales budget by product line in both units and pounds. From this budget, sales quotas by product line in
units and pounds are established for each of the corporation’s sales districts.
The marketing manager also estimates the cost of the marketing activities required to support the target sales volume and prepares a tentative marketing expense budget.
The operations manager uses the sales and profit targets, the sales budget by product line, and the tentative marketing expense budget to determine the pound amounts that can be devoted to manufacturing
then forwards to the Production Department the product-line sales budget in units and the total pound amount that can be devoted to manufacturing.
The production manager meets with the factory managers to develop a manufacturing plan that will produce the required units when needed within the cost constraints set by the operations manager. The budgeting process usually comes to a halt at this point because the Production Department does not consider the financial resources allocated to be adequate.
2 When this standstill occurs, the director of finance, the operations manager, the marketing manager and the production manager meet to determine the final budgets for each of the areas. This normally results in a modest increase in the total amount available for manufacturing costs, while the marketing expense and corporate office expense budgets are cut. The total sales and profit figures proposed by the managing director are seldom changed. Although the participants are seldom pleased with the compromise, these budgets are final. Each executive then develops a new detailed budget for the operation in his or her area.
None of the areas has achieved its budget in recent years. Sales often run below the target. When budgeted sales are not achieved, each area is expected to cut costs so that the managing director’s profit target can still be met. However, the profit target is seldom met because costs are not cut enough. In fact, costs often run above the original budget in all functional areas. The managing director is disturbed that RDBS has not been able to meet the sales and profit targets. He hired a consultant with considerable experience with companies in RDBS’s industry. The consultant reviewed the budgets for the past four years.
He concluded that the product-line sales budgets were reasonable and the cost and expense budgets were adequate for the budgeted sales and production levels.
As part of his review, the consultant sat with, Ali, the manufacturing supervisor of RDBS Corporation, and Adam, RDBS’s purchasing manager. Each month, Ali receives a performance report showing the
budget for the month, the actual activity, and the variance between budget and actual. Part of Ali’s annual performance evaluation is based on his department’s performance against budget. Adam also
receives monthly performance reports and he, too, is evaluated in part on the basis of these reports.
The monthly reports for January, 2012 had just been distributed when the consultant met Ali and Adam in the hallway outside their offices.
The consultant listened to Ali and Adam’s chat which went like this:
Scowling, Ali began the conversation, “I see we have another set of monthly performance reports hand delivered by that not very nice junior employee in the budget office. He seemed pleased to tell me that
I’m in trouble with my performance again.”
Adam: “I got the same treatment. All I ever hear about are the things I haven’t done right. Now I’ll have to spend a lot of time reviewing the report and preparing explanations. The worst part is that it’s now the 22nd of February so the information is almost a month old, and we have to spend all this time on history.” Ali: “My biggest gripe is that our production activity varies a lot from month to month, but we’re given an annual budget that’s written in stone. Last month we were shut down for three days when a strike delayed delivery of the basic ingredient used in our plastic
3 formulation, and we had already exhausted our stocks. You know about that problem, though, because we asked you to call all over the country to find an alternative course of supply. When we got what we
needed on a rush basis, we had to pay more than we normally do.”
Adam: “I expect problems like that to pop up from time to time – that’s part of my job – but now we’ll both have to take a careful look at our reports to see where the changes are reflected for that rush order.
Every month I spend more time making sure I should be charged for each time reported than I do making plans for my department’s daily work. It’s really frustrating to see charges for things I have no control
over.” Ali: “The way we get information doesn’t help, either. I don’t get copies of the reports you get, yet a lot of what I do is affected by your department, and by most of the other departments we have. Why do the budget and accounting people assume that I should only be told about my operations even though the president regularly gives us pep talks about how we all need to work together as a team?”
Adam: “I seem to get more reports than I need, and I am never asked to comment on them until top management calls me on the carpet about my department’s shortcomings. Do you ever hear comments
when your department shines?”
Ali: “I guess they don’t have time to review the good news. One of my problems is that all the reports are in pounds and pence. I work with people, machines and materials. I need information to help me this
month to solve this month’s problems – not another report of the pounds expended last month or the month before.”
Required: Read the following statement and address the questions below it in the context of RDBS (MIND THE WEIGHT OF EACH
Better budgeting in recent years may have been seen as a movement from “incremental budgeting” to alternative budgeting approaches.
However, academic studies (e.g. Who needs Budgets – Hope and Fraser, 2003) argue that the annual budget model may be seen as (i) having a number of inherent weaknesses and (ii) acting as a barrier to
the effective implementation of alternative models for use in the accomplishment of strategic change.
Critically discuss the above statement in the context of RDBS. In your analysis, you need to refer to relevant literature in order to:
1. Describe the benefits that can be realized from a budgetary control system [20 MARKS]
2. Identify and critically assess FIVE inherent weaknesses of the annual budget model irrespective of the budgeting approach that is applied in RDBS. [20 MARKS]
3. Discuss how the budgeting process as employed by RDBS Corporation contributes to the failure to achieve the managing director’s sales and profit targets. [30 MARKS]
4. Suggest how RDBS Corporation’s budgeting process could be revised to overcome those weaknesses such as the use of the Balanced Scorecard. [30 MARKS]
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