Financial Position of Stoddard Ltd
Based on the cash budget which I prepared on previous page, we can see Stoddard Ltd is having problem with their cash situation. It is mainly due to the long credit terms for their debtors, overstocking and the initial cash payment for the freehold property and equipment. The management should use the economic order quantity (EOQ) method to carry out their stock control. Other methods such as just-in-time and optimised production technology are also available but since Stoddard is worry about the interruption towards the end of the accounting year, just-in-time method is not the best solution to this situation.
On the other hand, optimised production technology is more suitable for production companies, this is not the best solution for Stoddard. Since we do not have any information on the cost of placing one order and the cost of storage, it is difficult to calculate the actual figure of the EOQ. I would suggest the management of Stoddard to reduce their credit terms to their debtors to one month and to purchase the equipment on credit and to be paid the following month. I would also suggest the management to reduce the stock purchasing from i??
1500 each month to i?? 750.
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A budgetary control involves the establishment of the budgets throughout the organisation by area managers who is aware of his/her budget objective knowing that his actual results will be measured in the budget period and compared with the budget figures. F Wood (2002:520) stated that “When the budgets are being drawn up the two main objectives must be uppermost in the mind of top management, that is that the budgets are for Planning and Control. ”
The budget is a useful way of setting out in detail the planned activities of the organisation for the coming period and relating them to the objectives of the organisation. It is vital in comparing actual performance to planned performance and enabling corrective action to be taken when deviations occur. The budgetary control process places great emphasis on the location of responsibilities within a company. The recognition that performances can be traced to managers, supervisors and workers is an integral part of budgetary control, therefore, to distinguish clearly between controllable and uncontrollable costs.
Controllable costs are those which can be traced to a particular person or group of persons. It would be unfair to hold a manager responsible for costs which are outside his or her control. A Benedict & B Elliott (2001:484) suggested that an organisation should have a budget committee, which is formed by senior executives and managers who act in a collaborative manner. If members of the budget committee do not act in a collaborative manner, behavioural implications will arise out of implementing and operating a budgetary control system.
The most common example is where the manager realises that he has not spent his entire budget for a particular item, then he made a purchase on unnecessary items on the basis that “If I don’t spend this amount this year, the company will cut down next year when I will really need the money. ” In this case, the manager is acting on his own interest rather than implementing the control system in the result of this behaviour, the company has a lot of unusable and unnecessary equipments. Another example is where the manager turns down requests for overtime work because the budgeted overtime has already been exceeded.
In result the job is not completed on time and the company may have to pay a large sum under a penalty clause in the contract. From these two examples, we can see the behavioural implications have impacts on the effectiveness of the budgetary control system. A budgetary control report focuses on various areas of the business to compare the forecast and actual figure. If all budget managers are building in a hidden contingency of, say ten percent, and it turns out in the event that only a quarter or a third of them really need to use this slack, then the company has committed six to seven percent more resources than it need have.
We can argue that it is true that behavioural problems can lead to lack of objectivity in budgetary information, lack of motivation and consequent dysfunctional effects. However this should not be seen as a reason for not budgeting but as a reason to budget in such a way as to minimise the behavioural impacts. The first stage in doing so is recognising the existence of the possibility of such impacts. Measures can then be taken to minimise their effects.