Budgeting and strategic planning are two major factors of a particular business enterprise. The business organizations regardless of sector, complexity, size all are heavily dependent on the budgetary systems and the budgets so that they can achieve the strategic goals. The process related to budgeting mainly involves setting of objectives and strategic goals and thereby developing costs, revenues, cash flows and production. The effective investment and financing strategies can thereby help the organizations to decide amount of investments that can be made in the future (Alviniussen and Jankensgard 2015). A budget can be defined as the quantitative analysis which is performed before the policies of the organizations are applied. The major purpose of the budget system is to aid the objectives of the management and thereby direct the managerial efforts effectively.
The budget of an organization is the formulated plan of the objectives of the management. The major functions that are served by the budgets are, systematic planning, coordination and communication, cost awareness and quantification, evaluation and control, motivation. Budgets are also related to the human behaviour and the success of the organization mainly depends on the actions that are taken by the top management and the ways by which they appreciate the importance of interpersonal relationships (Bianchi and Tomaselli 2015). There are three major approaches that can be used to develop the data that is required for the final budget. The three approaches are imposed or top-down budget, participative or bottom-up approach and negotiated approach. The approach of the budget depends mainly on the leadership style of the organization to a large extent. Therefore, it can be said that the formation of budget is important for the successful operations of the organization. The objectives and goals of the organization are supported by the budget that is formulated by the management (Bleyen, Lombaert and Bouckaert 2015).
The cost of the materials that are required for in-house production and the labour cost for in-house production is more as is depicted in the statement. The costs related to outsourcing the manufacturers is quite high. However, the manufacturing overheads are more in case of the in-house manufacturing process. The administrative overheads are same for both in-house or outsourced manufacturers. This has led to the increase in break-even point for the manufacture of the goods of the organization in the in-house factories (De Baerdemaeker and Bruggeman 2015). The increase in break-even point depicts the higher costs related to the processes of the organization.
The statement has shown that sales price is same for both the styles of manufacturing of the organization. The cost of materials is also high for the in-house manufacturers and the labour cost is also high for the in-house manufacturers. This shows that the manufacturing process is costlier for the in-house manufacturing. The manufacturing overheads are high for in-house manufacturers and the administrative overheads are same. The break-even point is low for the outsourced manufacturing process (Gianakis 2017). The margin of safety is high in case of the outsourced manufacturer and unit sales is also high for this type of manufacturing.
Break-even analysis is performed to analyse the success of a new company or a new product line. The Pooma Sports company is planning to launch a new product and break-even analysis helps in examining the feasibility of the product line of Rugby boots. The increase in break-even point of the organization in case of in-house manufacturing has proved that the process of in-house manufacturing is not feasible for the company. The break-even point of the outsourced manufacturing process is low and this shows that the management should employ this process to manufacture the new product line of Rugby boots (Herath, Bremser and Birnberg 2014). This will help the organization in increasing the profitability and ensuring success of the new product line.
The net cash flows can be defined as the difference between the organization’s cash inflow and the cash outflow within a given period of time. The changes that occur in the cash balance of the organization is provided in detail in the net cash flow statement. The amount that is obtained after deducting the total liabilities of the organization from total balance of cash is also defined as the net cash flow of the organization. The sum of money that is lost or gained because of the completion of the transactions is considered to be net cash flow (Johnsen 2015).
Operating profit can be defined as the total profitability of the organization that is obtained before considering the taxes and the interests. The operating expenses of the organization are deducted from the gross profit to determine the operating profit. Operating profits act as a key amount for the managers to depict the expenses and revenues so that they can control them. Operating profits of an organization can also be defined as the profit that is earned from the organization’s normal business operations. The profit that is earned from the investments of the organization is not depicted by the operating profit (Klimaitien? and Jo?ys 2014).
The budget statement that has been prepared for Pooma Sports Ltd. shows that the payments that are to be made by the organization is higher as compared to the receipts and cash sales. The cash purchases, credit purchases, fixed overheads, operating expenses, labour required for production, labour required in the administration departments are higher as compared to the cash and credit sales. The costs related to the regular operations of the organization is higher to the amount of sales of the organization. This leads to the negative amount of cash flow in the organization even if the organization is running in profit after 6 months. The expenses that are linked to the day to day operations of the organization are high and this has led to negative cash flow. The sales that are performed in credit and the credit purchases are also responsible for the negative cash flows (Luther Cottrell 2014).
Operating profit of the organization is obtained from the difference of the total sales of the products and the operating expenses. The fixed overhead costs and labour costs are also deducted from the total sales of the organization. The operating profit of Pooma Sports Ltd. is also negative as the overhead costs of the organization is high.
The apportionment of the costs that are depicted in the costing methods are based on the apportionment of the maintenance costs and the administration costs as well. The maintenance costs and the costs related to administration are chosen so that the overhead costs can be calculated and thereby it can be reduced so that the organization can earn profits. The statement consists the costs related to the direct materials, the direct labour costs of the company. The direct costs related to the company include, indirect labour, rent, insurance of the machines, heating, depreciation of the machines and power of the machines as well. These costs can together depict the overhead costs related to the production of shoes and maintenance. The costs related to staff of the administration and maintenance are also depicted in detail in the statement. The different products that are analysed in this statement are the sports shoes, sports equipment and sports clothing (Pawliczek et al. 2015). The apportionment of the costs is done based on the hours of the machine and the employees of the administration department of the organization.
The next statement that has been prepared by the costing team of Pooma Sports Ltd. has been prepared in such a way so that the overhead costs of the operations can be reduced. The costs related to materials, labour, rent, insurance of the machines, administration costs and depreciation of the machines are decreased so that the profits can be increased. The hours of usage of the machines are also analysed to decrease the overhead costs,
The proposed costing method that has been formulated so that the overheads costs can be reduced has been expressed as being superior for the organization. The overhead costs related to sports equipment and sports clothing has reduced, however that of the sports shoes have increased to a certain level. The costs that are related to the labour, equipments and machinery requirement are analysed and thereby the cost management team has attempted to decrease the overhead costs. The departments of sports equipments and sports clothing have been struggling to make profits from the last few years. The decrease in the overhead costs of the equipment can help in increasing the sales and profitability (Raghunandan, Ramgulam and Raghunandan-Mohammed 2012).
The sales of the products related to these categories can increase and this will further increase the profitability of the organization. The view of the sales director regarding the proposed cost methods is therefore right and the proposed cost method will help in further reducing the overhead costs related to the operations of the company. However, the overhead costs related to sports shoes have increased substantially and this is a drawback of the proposed cost method.
The organization has been planning the purchase of two new equipments so that the costs can be saved and efficiency of the production can increase. The two new pieces of equipments are Superstitcher and Gluemaster. The function of Superstitcher is to automate the processes related to production of the equipment which require stitching like, baseball mitts and footballs. The function of Gluemaster is mainly to improve the processes of production and the quality of the product for the items that require adhesive, like squash balls and tennis (Van der Stede 2014).
The purchase and implementation of the two new equipments are expected to increase the profit and rates of return of the organizations. The period of payback for Superstitcher is 4 years and that of Gluemaster is around 3 years. The cash flow statement related to the two new equipments has depicted the effect of the introduction of these equipments on the profits of the organization. The Superstitcher can help in the automation of the processes for stitching related equipments and Gluemaster can help in the development of the production process. However, due to the lack of enough funds the organization needs to choose any one of the equipments so that the operations can be improved (Réka, ?tefan and Daniel 2014).
The product line of the organization does not contain many products which require high amounts of stitching. This factor has reduced the need for the purchase of Superstitcher and it can only be introduced if the product line increases in the future. The Gluemaster can however be effective to reduce the costs and thereby increasing the efficiency of the organization based on the product lines that are offered by the organization. The Gluemaster can effectively increase the efficiency of Pooma Sports Ltd. by increasing the speed of production. The increase in production can thereby increase the profitability of the organization (Soboleva and Parshutina 2016). The organization is therefore recommended to purchase Gluemaster as it will be the most effective and efficient equipment for the improvement of the sales. The capital that can be invested by the organization is quite less and this can allow the purchase of only one of the equipment for the improvement of sales.
References
Alviniussen, A. and Jankensgard, H., 2015. Enterprise risk budgeting: bringing risk management into the financial planning process.
Bianchi, C. and Tomaselli, S., 2015. A dynamic performance management approach to support local strategic planning. International Review of Public Administration, 20(4), pp.370-385.
Bleyen, P., Lombaert, S. and Bouckaert, G., 2015. Measurement, incorporation and use of performance information in the budget: A methodological survey approach to map performance budgeting practices in local government. Society and Economy in Central and Eastern Europe, 37(3), pp.331-355.
De Baerdemaeker, J. and Bruggeman, W., 2015. The impact of participation in strategic planning on managers’ creation of budgetary slack: The mediating role of autonomous motivation and affective organisational commitment. Management Accounting Research, 29, pp.1-12.
Gianakis, G.A., 2017. Strategic Planning and Capital Budgeting: A Primer. Handbook of Debt Management, p.207.
Herath, H.S., Bremser, W.G. and Birnberg, J.G., 2014. A balanced scorecard strategic initiative planning model with resource constraints. In Advances in Management Accounting(pp. 1-38). Emerald Group Publishing Limited.
Johnsen, Å., 2015. Strategic management thinking and practice in the public sector: A strategic planning for all seasons?. Financial Accountability & Management, 31(3), pp.243-268.
Klimaitien?, R. and Jo?ys, S., 2014. THE METHODOLOGY OF IMPLEMENTING THE “BEYOND BUDGETING” SYSTEM IN A COMPANY. Science and Studies of Accounting and Finance: Problems and Perspectives, 9(1), pp.65-76.
Luther Cottrell, T., 2014. Strategic budgeting instead of strategic planning. The Bottom Line, 27(2), pp.49-53.
Pawliczek, A., Kozel, R., Vilamová, Š. and Janovská, K., 2015. On the strategic planning, innovation activities and economic performance of industrial companies.
Raghunandan, M., Ramgulam, N. and Raghunandan-Mohammed, K., 2012. Examining the behavioural aspects of budgeting with particular emphasis on public sector/service budgets. International Journal of Business and Social Science, 3(14).
Réka, C.I., ?tefan, P. and Daniel, C.V., 2014. TRADITIONAL BUDGETING VERSUS BEYOND BUDGETING: A LITERATURE REVIEW. Annals of the University of Oradea, Economic Science Series, 23(1).
Soboleva, Y.P. and Parshutina, I.G., 2016. Management of investment attractiveness of the region by improving company strategic planning. Indian Journal of Science and Technology, 9(14).
Van der Stede, W.A., 2014. Budgeting and management control. John Wiley & Sons, Ltd.
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