Financial Accounting: Case Study
1. The problems that appear to exist in Ferguson & Son Mfg Company’s budgetary control system are • The budgetary control system is focused completely on saving money, and is disregarding the operational requirements of the departments. It is highly imperative for the budgetary control process of an organization to take into account the operations plan of the departments and the costs of these operations. This does not seem to be the case with Ferguson & Son Mfg. Company.
Further, once budgetary stipulations are met, the company is further reducing the budget limits leading to lesser scope for proper execution of operations. • “Control should be positive, forward looking and not restrictive” (Jain 2009: 5). A budgetary control system must be motivational. By establishing budgets and requiring the employees to adhere to the budget restrictions, the system motivates the employees to perform better and more efficiently. However, in the present case, the budgetary control system seems to be the cause of much pressure and anxiety.
Instead of improving the performance of the various departments, it is creating bad labor relations and resulting in a decline in the productivity of the employees. • The system in place is restrictive and does not allow
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• A budgetary control system ought to provide adequate flexibility and adaptability. “Given the new competitive realities, there is need for management of embrace flexible and adaptable budgetary planning and control system which has the ability to quickly respond to environmental changes and complexities” (Akintoye 2008: 10). In the case of Ferguson and Son Mfg. Company, the control system is highly inflexible. • The feedback of the employees and the department heads must be considered when drafting or altering the budgetary control system.
Conversely in this case, while establishing the budget and carrying out the control procedure, the feedback of the employees is being wholly discounted and ignored. • An appropriate budgetary control system must be such that the department and/or employee responsible for any overshooting of the budgetary limitations can be held accountable for the same. In Ferguson and Son Mfg. Company, there is lack of accountability and responsibility. As can be seen clearly, each department is trying to evade responsibility by blaming another department for any discrepancies or setbacks.
Michael Rod impugning the responsibility for a problem on Tony William’s department and the latter defending himself by claiming that they were busy with some other work is illustrative of this tendency to dodge responsibility. • Another problem with the budgetary control system is the fact that it fails to allocate resources appropriately and profitably. On account of budgetary constraints, labor is engaged in executing the “special orders” and do not have sufficient time to undertake other important work. The above mentioned problems result in the reduction of the efficiency of not only the system but also the entire organization.
The present budgetary control system is resulting in departmental conflicts and disputes. Each department is blaming the other for non-compliance with budgetary constraints and for any problems that may arise. For instance, Michael Rod, manager of the machine shop at the factory holds Tony Williams, manager of the equipment maintenance department responsible for not repairing the hydraulic press when it had broken down. Since the system is de-motivating for the employees, its implementation and execution leads to lesser efficiency in operations.
Lack of flexibility also renders the system inefficient as the company will not be able to keep abreast with important changes in the internal and external environments and no new innovations can be introduced. Thus, as a result of all these problems namely the lack of flexibility, accountability, feedback and adequate resource allocation, the budgetary control system of Ferguson and Son Mfg. Company does not function efficiently. 2. Ferguson & Son Mfg Company’s budgetary control system must be revised in order to improve its effectiveness.
For this purpose, the company ought to incorporate the following changes and improvements in its system. • The company must espouse “incremental improvement to budgetary control processes” by “linking them more closely to operational requirements and planning systems” (Otley 2006: 291). As noted earlier, the operational requirements of the various budgets are ignored when the budget is being established. The plans and policies of each department must be given due consideration before the budgetary control system is implemented.
• The company should also introduce more flexibility in its budgetary control process. This can be achieved by making regular adjustments in the budgets based on the requirements of the departments and the company and through the “adoption of techniques such as rolling budgets” (Otley 2006: 291). A rolling budget is essentially a “method in which a budget established at the beginning of an accounting period is continually amended to reflect variances that arise due to changing circumstances” (businessdictionary. com).
• The budgetary control system must be made more motivational and provide stimulus for better performance. It should not be restrictive to the quality and production of the organization. This can be done by providing incentives to the departments and employees for keeping within the budgetary limits and offering rewards to those that succeed in doing so. Also, incorporating the employee’s feedback into the budgeting and control processes can serve the purpose. If the budgetary control system is made more motivational, it will induce employees and departments to work with greater productivity and efficacy.
• An essential factor involved in budgetary control is the assignment of responsibility for deviation from the budget. This can be done only when the scope of duties and responsibilities of each department is clearly established. There should be no ambiguity regarding the functions to be performed by each division. Thus, management will be able to determine the source and cause of deviation easily and accurately. Thus the budgetary control system can be made more effective by relating it to operational requirements, making it more flexible and motivational and ensuring better delegation of responsibility.
With a proper and suitable budgetary control system in place, an organization can set standards for and measure the performance of each department and ascertain whether targets are being met. It can also promote coordination, take remedial action where necessary and enhance the overall working of the company. ? List of References Akintoye, I. (2008) Budget and Budgetary Control for Improved Performance: A Consideration for Selected Food and Beverages Companies in Nigeria. European Journal of Economics, Finance and Administrative Sciences 12, 7-17.
BusinessDictionary. com. (n. d. ) Definition of Rolling Budget [online] available from < http://www. businessdictionary. com/definition/rolling-budget. html> [12 August 2010]. Jain, T. (2009) Budgetary Control for Intrapreneurs [online] available from < http://www. slideshare. net/tkjainbkn/budgetary-control-for-intrapreneurs> [13 August 2010]. Otley, D. (2006) Trends in budgetary control and responsibility accounting. Contemporary Issues in Management Accounting, 291-308.