Capital Budgeting Mowlawn Case Study Executive Summary Capital Budgeting process includes forecasting about the financial position of a company. Financial position comprises of earnings, expenses,…

Capital
Budgeting

Mowlawn
Case Study

Executive
Summary

Capital
Budgeting process includes forecasting about the financial position
of a company. Financial position comprises of earnings, expenses,
cash flows, production, and cost. It is considered as an important
tool for strategic management and a key to a successful business. It
is observed that the companies that prepare the budgets for the next
period avoid many uncertainties and risk factors. However, the market
risk is excluded from this analysis. The investigation shows that the
company has produced 600,000 litres last year and found to have
profits of £1,900,00. Three different output levels were analysed
and the recommendation is for Mowlawn to increase production to
1,000,000 litres where they will make the maximum return on sales of
64.3%. Several behavioural issues were discussed such as gaming. The
analysis of beyond budget would indicate it would not replace
traditional budget.

Introduction

This
report contains a detailed analysis of the budgeting of Mowlawn Ltd.
It will then examine fixed versus flexible budgets and behavioural
issues associated with use of budgets. Finally the report will
examine whether beyond budget with replace traditional budget.

Mowlawn
Case Study

The
budget that is flexed or adjusted with the changes in sales or
production volume is called a flexible budget. The flexible budget is
considered as more useful and sophisticated than a static
budget. The amount of a static budget
does not change. The amount remains unchanged at all levels of
production (Averkamp, no date).

Capital
Budgeting

Last
year

Budget

Output
(litre)

600,000

1,000,000

1,500,000

2,000,000

Selling
Price (£/litre)

5

4.2

3.4

2.6

Sale
Revenue (£)

3,000,000

4,200,000

5,100,000

5,200,000

Fixed
Cost (£)

500,000

500,000

500,000

500,000

Variable
Cost (£)

600,000

1,000,000

1,500,000

2,000,000

Total
Cost (£)

1,100,000

1,500,000

2,000,000

2,500,000

Profit
(£)

1,900,000

2,700,000

3,100,000

2,700,000

Profit
Margin

0.63

0.64

0.60

0.52

The
above table, show the flexible budget at different levels of
production. The variable cost has been changed at each level of
production so the flexible budget has been calculated accordingly.
The actual revenue amount includes the adjustment for the flexible
budget.

The
flexible budget varies along with the production level and volume in
costs calculation. The flexible budget flexes due to the variable
cost per litre included in total cost. The amount of this budget
changes as the variable cost fluctuates at every level of the
production unit. The variable rate is calculated as the per-unit
cost. The manager’s efficiency is measured as the flexible budget is
prepared and implemented successfully. The details of the flexible
budget, units, selling price, costs, and total revenue are given in
the table below.

Sale
Revenue (£)

Variable
Cost (£)

Fixed
Cost (£)

Flexible
Budget (£)

Profit
(£)

Change
inflexible budget to sale (%)

3,000,000

600,000

500,000

1,100,000

1,900,000

36.67

4,200,000

1,000,000

500,000

1,500,000

2,700,000

35.71

5,100,000

1,500,000

500,000

2,000,000

3,100,000

39.22

5,200,000

2,000,000

500,000

2,500,000

2,700,000

48.08

If
the management of Mowlawn Ltd would be able to cut down some portion
of the variable cost per unit, the company might be able to set a
particular level of production at the optimal level. At this point,
the production of 600,000 litres is more profitable for Mowlawn Ltd
rather than increase the number of units to be produced more. This
action would reduce the ultimate amount of revenues (Averkamp,
no date).

Flexible
Budget VS Fixed Budget

Comparison
between Fixed budget against flexible budget

Fixed
Budget

Flexible
Budget

Definition

The
budget that is not changeable or rather is static regardless of
the volume of production

The
budget used to be changed at each level of production

What
is it all about?

A
fixed budget does not change with the fluctuations of business.

Flexible
budget changes with every fluctuation of business

Nature

Always
static/ fixed/ unchanged

A
flexible budget is dynamic and changing

Simplicity

A
bit simple.

Fairly
intricate.

Preparation
Method

Fixed
budget is easy to prepare

A
fixed budget is difficult to prepare. The forecasting method
requires many information and a lot of research

Consequences

The
dissonance occurred between actual cost or selling price as well
as the budgeted expenses, or retailing price is high and no
similarity these level

The
dissonance occurred between the actual costs or retailing price,
and the accounted cost or retailing price is low.

Rigidity

Quite
rigid and no fluctuation in business activity accounts.

Pretty
flexible, nearly all business activity
fluctuation
accounts

How
to estimate?

It
is projected on certain suppositions and expectations.

It
is organized through convincing circumstances based on facts and
figures

(Comparing
Budgeting Techniques (Incremental VS ZBB), no date).

Although
it is impossible to forecast all business expenses and earnings
accurately, it is still useful to prepare plans that can predictions
and evaluate the future returns the process of performance evaluation
and budgeting is an ongoing cycle based on planning. The
process of budgeting has involved the planning for future earnings
(profitability).
A
company’s principal objective is earning realistic returns
(profit). A Company is required to adopt certain approaches to handle
future uncertain returns. A corporation having no plan might have
more chances of loss than others. The projections about cash flows,
production, and costs are needed to be maintained by the management
of a company. However, many business ventures design schemes for the
financial activities they are willing to proceed with in the future
to avoid some uncertainties. Each budgeting method has its advantages
and disadvantages. The management has to decide the method of
budgeting according to the requirement of the business.
(McLaughlin,
2014)

Behavourial
aspects of budgeting

The
behavioural aspects may conveniently be summarized as relating to the
following aspects:

Motivation:
The targets setting literature shows that bugets target should be
accepted by individuals, which means that the bugets targets should
be set with
both chanllenging and achievable. If individual does not try a
reasonable level of performance because fo the unrealistic goals,it
may have a negative impact.

Participation:
It
is argued that people need
the
sense of belongings, self-esteem
and personal satisfication.And people can obatin these senses from a
other lifestye which is different from remunerated employment or
self-employment, like the charirity work. And these lifesties is
easier to satisfied people’s needs.

Feedback:
It
is closely realted to the individual’s responsibility including
the negative and positive feedback. And the communication of
negative and positive feedback should be different.

Group
Effects:
The
impact of budgeting process on the group is completely different
from the impact on the individual. If a group has good cohesiveness,
then the individual in the team will have the better performance.

Budget
slack:
The
budget setting process should be sensitive to input data to solve
the problem of overestimating goals so that built-in slack is
defined as soon as possible. It is also important to ensure
flexibility in budgeting to ensure that where slack becomes
apparent, it is dealt with through budget review. (Weetman,
2011)

Beyond
Budgeting

The
traditional budgeting process and planning methods are widely used in
fundamental management techniques based on different types of
organizations. (Ouda
and Makhlouf, 2014)
In the last two decades, the managers and academics have observed
that dissatisfaction developed with the customary budgeting. The old
budgeting methods are not usually criticized for their inflexible
nature. A strong focus has been given on resource allocation.
However, the critiques argue that the process of traditional
budgeting act as a tool of administrative control and improve
management performance. (Libby and Lindsay, 2010) Therefore, an
idea that business need to step beyond budgeting, particularly when
used to set contracts, due to the inherent budgeting flaws. It is
suggested that a range of strategies can take the place of
conventional budgeting, such as rolling projections and
market-related goals. (CIMA
Official Terminology, 2015)

In
addition to beyond budgeting, the elimination of the conventional
budget process is considered as a catalyst to enhance management
control between organisations by fundamentally questioning the way in
which they will be better managed. Therefore, it is a system that is
more adaptive than traditional budgeting. In contrast to traditional
budgeting, members collectively organize and manage organisations,
which is a distributed process. If the word budget is used by beyond
budget model, it means the entire process of performance management.
(CIMA
Beyond Budgeting, 2007).
For example, it changes the emphasis from beating other managers to
beating competition through the development of a successful
performance environment. And customer oriented teams are also being
developed. It can build information systems that provide information
that is fast and accessible across the company. (Dearing, 2019).

However,
until now most managers have not been able to accept the arguments
put forward by supporters of beyond budgeting. This could primarily
be attributed to the notion of leadership and success standards,
which have been quite commonly formulated. They provide little
information that is really new. Instead, they simply combine already
familiar management maxims in a thin conceptual packing and market
them as bundled products. Beyond Budgeting’s proponents therefore
will have to do appreciably more developed work and obtain much more
practically implementing their ideas before they can expect their new
controlling philosophy to achieve a breakthrough with practitioners.
In addition, it also has problems with its small circle of potential
customers, its underlying assumptions, its budgetary problems, its
cost-benefit relationship that is unfavourable, and the absence of
empirical evidence on its application. (Rickards, 2006).

Conclusion
and Recommendations

The
companies used to prepare budgets to forecast the future financial
position of the company. Mowlawn Ltd. is involved in the budgeting
process. Mowlawn should increase output to 1,000,000 litres to
maximise return on sales. Many behavioural issues have been explained
such as ‘group effects’. Finally the analysis suggests that
beyond budgeting will not replace traditional budgeting.

References

1.
Averkamp, H. (no date). What
is a flexible budget?.
[Internet].
Available from https://www.accountingcoach.com/blog/flexible-budget.
[Accessed 15 October 2019].

2.
CIMA
Beyond Budgeting.
(2007). Topic Gateway Seriese No.35. London. The Chartered Institue.

3.
CIMA
Official Terminology
(2005). Chapter
1 Management Accounting.
Oxford. Elsevier.

4.
Comparing
Budgeting Techniques (Incremental VS ZBB).
(no date). [Internet]. Available from
https://www.accaglobal.com/uk/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/comparing-budgeting-techniques.html
[Accessed 19 October 2019].

5.
Dearing,
D. (2019). Week
6 Budgeting. 2BMB02-2019-20-SEM1
Managing Finance. De Grey Court 017, York St John University, York.
[10th
October].

6.
Libby,
T. and Lindsay,
R. (2010) ‘Beyond budgeting or budgeting reconsidered? A survey of
North-American budgeting practice’, Management
Accounting Research,
21(1), pp. 56–75.

7.
McLaughlin,
M. (2014). Introduction
to Budgeting (Managerial Accounting).
[Internet video]. Available from

[Accessed 1 November 2019].

8.
Ouda,
Hassan; Makhlouf, Sarah. (2014). Beyond
Budgeting: Is It a Substitute or Complimentary to Traditional
Budgeting? An Empirical Evidence from telecommunications Companies in
Egypt
[Internet]. Available from
https://www.researchgate.net/publication/309380161_Beyond_Budgeting_Is_It_a_Substitute_or_Complimentary_to_Traditional_Budgeting_An_Empirical_Evidence_from_telecommunications_Companies_in_Egypt
[Accessed 23 October 2019].

9.
Rickards, R,C. (2006). Beyond Budgeting: Boon or Boondoggle?
Investment
Management and Financial Innovations.3(2),
pp. 62-76.

10.
Weetman,
P. (2011). Financial
& Management Accounting An Introduction: Behavioural Aspects of
Budgeting.
5th
ed. Financial Times/ Prentice Hall.

Feedback:

Very
well  presented and structured report

Good executive
summary

very
good Introduction

Very
clearly   formatted table showing budgeted profits.

Table Included
a suitable row showing profit margin but should have been a %.

 All Key
terms defined.

Good  discussion
on behavioural aspects of budgeting

Reasonable  discussion
of the whether BB will replace traditional budgeting.

Well
justified recommendations for Mowlawn.

A
good  range of information sources utilised with good use
of Harvard.
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