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The uncertain economic activity can be solved with the implementation of more flexible budgeting systems. The research focuses on the discussion of the effects of the budget-less economic uncertainty. The research places importance on flexible budgets during each economic activity.
The research discusses the disadvantages of prioritizing flexible budgets. The resolution to the economic uncertainty is to combine innovative economic activities and more flexible budgeting systems. The company’s flexible budget focuses on offering the best quality products and services to the company’s clients.
In the Astoria Plc case study, Natalie Frow, David Marginson, and Stuart Ogden (2010) emphasise the flexible budget puts great weight on the organisation’s drive to synergise conflicting goals and objectives. For example, Hilton (2007) indicates the sales department sells 10,000 units of its products.
The clients pay for the 10,000 units. However, the production department only produces 4,000 units. Consequently, the clients will have an unfavorable image of the company. The clients will turn to the competitors for their needs, wants, and caprices because the company fails to keep up to its promise to deliver the goods on time.
Hilton (2007) emphasises that the sales department failed to fill the 10,000 units paid by the clients because the marketing department did not institute a production-based flexible budget; this entails inputting production inputs in the preparation of the flexible marketing department’s budget. The production department was not able to supply the required 10,000 units. The marketing department personnel’s goals and objectives were in conflict with the goals and objectives of the production department personnel.
In the Astoria Plc case study, flexible budgets bring caution and risk-averseness. On the other hand, innovation brings forth the unending creativity and adventure of surmounting the challenges of maximising flexible budgets in surpassing any economic uncertainty. The Astoria Plc case study indicates the importance of using the control process to reconcile the discrepancy between innovative processes and budgetary constraints in accomplishing the organisations’ drive to smoothly resolve each economic uncertainty.
The Astoria Plc case study emphasises management’s implementation of the flexible budget to advantageously hurdle all economic uncertainties profitably. For example, the Astoria Plc managers allocate the scarce resources by instituting brainstorming sessions in the allocation or flexible budget preparation activity. In short, budgets must not prevent innovation. Budgets aid innovation by controlling unwarranted expenditures during times of economic uncertainty (Marginson, Ogden, and Frow, 2010).
Lingensjo (2003) emphasises that a company that does not use flexible budgets finds it difficult to estimate the projected cash inflows. A flexible budget is composed of different budgets pegged at different production or sales outputs.
For example, the flexible budget is based on sales or productions of 1,000 units, 2,000 units, 5,000 units, 8,000 units, and 10,000 units. The labor cost component of the flexible budget increases as the production output increases. The raw materials component of the flexible budget increases as the production unit increases. Flexible budgets improve the performance because all scenarios are presented.
On the other hand, Khan (2006) reiterated that the expenses and costs under the flexible budget decreases as production or sales output decreases. The labor cost component of the flexible budget decreases as the production output decreases.
Piranfar (2006) emphasises the raw materials component of the flexible budget decreases as the production unit decreases. Likewise, the variable factory overhead of the flexible budget decreases as the production output decreases. In addition, the purchase component of the flexible budget decreases as the production output decreases.
In the Astoria Plc case study, Natalie Frow, David Marginson, and Stuart Ogden (2010) theorize that flexible budgets lessen the impact of the volatility of unending technological changes. The company has a prepared budget for any eventuality to ensure profitability. During times when economic activity stays on the same production output, management can favorably implement the same budget implemented during the prior year’s operation.
The very essence of flexible budgeting is to save time. A prepared flexible budget contains all probable budgets that may occur during low economic activity, stagnant economic activity, and high economic activity. As the economic condition worsens, management can opt to focus on implementing cost-saving reduced budgets. During times of high economic activity, management can increase its focus on implementing a higher production output budget.
According to Krishan Gupta (2005), cost accounting is the basis for flexible budgeting. The preparation of the budget includes collecting estimated expenses and revenues from the concerned parties or departments. Each department is characterized as a cost center; each center must explain and implement the variances between actual amount spent and budget limitations.
Every organisation’s manager must ensure that costs and expenses never exceed the maximum amount allocated during each accounting period. Also, the budgets are vivid plans of where the company is projected to be going in the next few months or years.
Redburn (2007) reiterated that economic uncertainty can be reduced by projecting future product demand. Management is prepared to retrench some employees during times of economic downturn. Management can easily hire additional temporary workers to fill the additional demand for the company’s products and services during times of bustling economic upturn.
The company uses the flexible budget as a starting point to accomplish its goals and objectives. The flexible budget is accepted by many persons because the preparers of the budget include the inputs from all affected parties. Thus, managers, subordinates, supervisors, and marketing personnel contribute their own inputs in the preparation of the budget. The flexible budget focuses on fusing innovation during the enhancement of the company’s facilities in London, Scandinavia, Ireland, and Continental Europe.
In the Astoria Plc case study, Natalie Frow, David Marginson, and Stuart Ogden (2010) reiterates by combining the positive effects of each budget to the overall goals and objectives includes incorporating the different functions of the flexible budget with the different management control systems. The flexible budget persuades the organization officers to implement more profit-oriented plans when confronted with unfamiliar business situations.
Taylor (2007) insists that economic uncertainty can be reduced by projecting future product supply. Reading news articles may indicate a sudden shift from the company’s products and services to the competitors’ products and services.
Dwight (2009) emphasized that management can use the flexible budget as a basis for increasing, decreasing, or retaining current budget performance standards. Management can use surveys to determine whether the competitors have lower selling prices compared to the company’s products and services. In response management prepares a flexible budget based on the surveys.
In addition, Natalie Frow, David Marginson, and Stuart Ogden (2010) proposes that flexible budgets have a very positive effect on the flexibility and monetary discipline needed for the implementation of effective management strategies. With the implantation of the flexible budgets, management does not have to return to the drawing board each time the production or sales output increases. Likewise, management does not have to return to the drawing board each time the production or sales output decreases.
Hilton theorized (2007) that the fixed budget is based on management’s blindness to the external factors. Management produces only one singular amount of product output, for example 10,000 units in one month. Management instructs the marketing department to sell the 10,000 units only.
Management expects the marketing department to use advertising and other promotional marketing strategies to sell the company’s 10,000 units. Under the fixed budget system, management blames the marketing sales personnel if actual sales are less than the fixed budget sales of 10,000 units. Management does prioritise the current and prospective clients’ needs, wants, and caprices in the preparation of the fixed budget. Production is not based on the changing demand for the company’s products and services.
Czinkota (2007) opined that management uses the flexible budget to communicate its policies. The policies focus on goal and objective benchmarks. Management implements diverse budgets to bring out the best from each employee. The manager can use the carrot method budget system (offer of prices, rewards, promotions, commissions to outstanding employees) for one type of employee.
The money needed for the carrot method is incorporated in the flexible budget. However the manager can also implement the stick method budget system ( failing employees are penalized, fined, suspended, or terminated,) for another type of subordinate.
On the other hand, Weihrich (2009) opined management incorporates the amount needed for hiring the best qualified applicant to snugly fit the vacant employee vacancy in the preparation of the flexible budgets. Further strategic management policies include the inclusion of highly paid experts and managers in the flexible budgets.
Management control includes the firing of employees having lackluster performance and their replacement with better performing workers. Flexible budgeting includes the functions of managers, supervisors, and subordinates to accomplish organizational goals and objectives.
Dubrin (2008) emphasises that management uses the flexible budget to appease workers and officers who fear change. The company uses the flexible budget as basis for reducing the avoidable expenses during times of declining economic demand. The company uses the flexible budget to increase production of goods and services during times when the economic demand increases.
The complaining workers can be easily appeased if they are presented with a flexible budget stating that the company’s revenues are pegged on economic demand or revenues. Some workers, managers, and supervisors fear change and uncertainty. Normally the older employees prefer the old way of accomplishing organizational goals. On the other hand, the younger employees love the challenge of each new job assignment or uncertainty. The organization may have to adapt to change environment to survive.
Jiju Antony reiterates (2005) the company uses surveys from the clients as a basis for making the flexible budget. The flexible budget focuses on combining the right blend of scarce resources to create a product that fills the needs, wants, and caprices of the United Kingdom market segment. The company uses the online order system to generate more revenues. Flexible budget helps curtail the ill effects of any economic uncertainty.
The company should reduce avoidable costs as a basis for reducing the stores’ selling prices. Economic theory states that the demand for the company’s products increases as the selling prices decrease. Bragg (2006) theorized that organizations must make surveys to determine which products are the hottest in the company’s market segment. The company must discard products that have reduced client demand.
According to Stuart Jackson (2011), flexible budget case study solutions involve both strategic development and implementation of the flexiblebudget. Communicating the importance of the flexible budget entails taking into consideration the diverse cultures of the different parties within and outside the organisation.
Peter Simmouns (2010) insists that flexible budgeting has some disadvantages. First, flexible budgets curtail innovation. Some managers prefer the challenge of using new products and processes. The flexible budget is seen as a controlling device putting a ceiling on actual expenses during economic uncertainties.
To resolve the issue, the flexible budget should be scrapped in favor filling the clients’ changing needs, wants, and caprices. The flexible budget must not hold the marketing people from innovatively investing in research and development in the saturated U.K. market segment.
Second, Hilton (2007) insists flexible budgets fail to take advantage of the clients’ demand shifts. Production cannot venture into uncharted product territory. The production department cannot create new products not included in the flexible budget. The marketing department cannot sell a product that is not incorporated in the flexible budget.
Since the new product demand is not found in the flexible budget, the company fails to generate more revenues from the clients’ shift to the competitors’ new product or process. In another case study, Per Lidbom (2010) reiterated that soft flexible budgets are created to incorporate instances when the flexible budget fails to meet the clients’ significant demand changes. The flexible budget must be adjusted to serve the changing demands of current and prospective clients.
IN A NUTSHELL, the resolution to the current economic uncertainty is mixing innovative economic activities with a more flexible budgeting system. Natalie Frow, David Marginson, and Stuart Ogden (2010) emphasise the flexibility of the flexible budget puts great emphasis on the organisation’s drive to synergise conflicting goals and objectives.
Flexible budgets aid management’s innovative efforts to surpass competitor revenues during times of economic uncertainty. A company that does not use flexible budgets finds it hard to project the net cash inflows. The expenses and costs under the flexible budget are reduced as production or sales output decreases. Flexible budgets reduce the impact of the volatility of fast technological changes.
Combining the positive effects of each budget to the overall goals and objectives must incorporate the diverse functions of the flexible budget with the different management control systems. Lastly, strategic management focuses on using the flexible budget as a basis for increasing the company’s profits. There are some disadvantages of prioritizing flexible budgets. Indeed, uncertain economic activity can be easily resolved with the implementation of more flexible budget plans.
References
Antony, J. (2005) Statistical Thinking and Its Role for Industrial Engineers and Managers in the 21st Century. Managerial Auditing Journal, 20(4), 354-363.
Bragg, S. (2006) Outsourcing. London, Wiley & Sons.
Czinkota, M., (2007) International Marketing, London, Cengage Press.
Dubrin, A. (2008) Essentials of Management. London, Cengage Press.
Dwight, R., (2009) Performance Measurement: Roles and Challenges. Industrial Management & Data Systems, 109(5), 646-664
Frow, N.,Marginson, D.,& Ogden, S. (2010) Flexiblebudgeting: Reconciling budget flexiblity with budget control. Accounting, Organisations and Society, 35(4), 444-461
Gupta, K. (2005) Costing in a New Enterprise Environment. Managerial Auditing Journal, 20(4), 337-353.
Hilton, R. (2007). Managerial Accounting. London, McGraw Hill Press.
Jackson, S. (2011) Making Strategies Work. Journal of Business Startegy, 32(1), 61-63.
Khan, M. (2006) Management Accounting. London, McGraw Hill Press.
Lidbom, P. (2010) Dynamic Commitment and the Soft Budget Constraint. American Economic Journal Economic Policy, 2(3) ,154 -179.
Lingensjo, R. (2003) Construction Budget Management, London. Lingensjo Press.
Piranhar, H. (2006) Flexible Management of Logistics in Response to Turbulent Oil Prices, International Journal of Business Environment, 1(3), 280-300
Redburn, F. (2007) Performance Management and Budgeting, London. Sharpe Press.
Simmons, P. (2010) Effects of Structural Constraints and Costs on Choices. Labour, 24(1), 25-45.
Taylor, J. (2007) Principles of Economics, London. Cengage Press.
Weihrich, H. (2009). Management, London. McGraw Hill.
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