HR7003 Assignment Sample 2024
Objectives of Budgeting
Budgeting is the process of estimating the appropriate amounts of Revenues and Expenditures that are accrued to/paid by a company over a particular time period. The objectives of Budgeting are as follows (Yilmaz, 2018):
- Structure:Budgets are extremely useful in showing a company how it needs to perform in the coming months. It essentially guides the company in the right direction. However, a company’s budget will provide an optimum structure of the company if and only if the senior management continually reviews the budget and accordingly gauges employee performance.
- Allocation of Resources: Budgets can be used by companies in order to effectively allocate funds for certain activities such as the purchase of a fixed asset. It is necessary to note that companies should also use other parameters as well when assessing financial activities such as determining the capacity constraint of a fixed asset before its purchase.
- Cash Flows: Budget acts a useful tool in predicting cash flows but it is necessary to note that the estimates can only be reliable in the short-term and so must be accordingly conducted every 2-3 months.
- Measurement of Performance: Budgets allow companies to measure an employee’s performance using budget variances and accordingly plan annual appraisals.There is a case of allowing independent firms to prepare budgets for companies so as to not allow individuals within the company to intentionally set easily achievable targets.
- Modelling: If companies face a scenario wherein they have to make a choice between certain ventures it can calculate the viability of undertaking each of the business ventures by creating different budgets with realistic assumptions.
Benefits to London Docks Café from using Robust Budgeting Procedures
- Systematic Planning and Efficiency:Budgeting provides a systematic method of limiting cost (Becker et al., 2016). Furthermore, it outlines the most efficient way of allocating resources for the company.
- Meaningful communication and co-ordination:Budgeting takes essential feedback from lower levels of management and provides a detailed insight into the company. The budgeting committee coordinates between sales and manufacturing teams at the very least and coordinates their areas to improve upon.
- Maximizing profit:Budgeting ensures that the company tries to achieve the highest amount of profit possible. The budgeting team conducts meaningful communication and planning between departments ensuring resources are put to optimal use.
- Forecasting:Budgeting procedures allows financial managers to take notice of upcoming cash requirements and accordingly take credit in advance.
Revenue and Spending Variance – London Docks Café
Budget Variance is the process of calculating the differences between the expected and actual costs of a company as well as the differences between the expected and actual revenues (Mak and Roush, 1994). We have been provided with the planned and actual budgets of London Docks Café. We have merely added the fixed costs for illustrative purposes, as fixed costs generally do not change with changes in quantities. We have denoted adverse and favourable variances as A and F respectively.
Revenue Variance of London Docks Cafe
| Planned | Actual | Variance | ||
| Volume of Sales | 20,000 | 18,000 | 2,000(A) | |
| Value of Sales (Volume*£5) | £100,000 | £90,000 | £10,000(A) |
Spending Variance of London Docks Café
| Planned | Actual | Variance | |
| Volume of Raw Materials | 20,000 | 18,000 | 2,000(A) |
| Value of Raw Materials | 50,000 | 45,000 | 5,000(F) |
| Salaries and Wages (fixed) | 5,500 | 5,500 | N/A |
| Salaries and Wages (variable) | 5,000 | 4,500 | 500(F) |
| Utilities(fixed) | 2,500 | 2,500 | N/A |
| Utilities (variable) | 1,000 | 900 | 100(F) |
| Rent Payable | 5,000 | 5,500 | 500(A) |
| Insurance Expense | 2,800 | 3,200 | 400(A) |
| Fuel | 2,500 | 2,800 | 300(A) |
Variance Analysis and Interpretation- London Docks Café
From our variance analysis of revenue, it is clear that the planned budget of London Docks Cafe is overestimating the total units of meals it would sell in the month of December. This could be due to setting an over-optimistic sales target for the month or it could be due to genuinely unforeseen circumstances that affected demand and would require further analysis.
If the fall in demand is due to unforeseen circumstances, conducting further analysis is necessary to check whether the drop in demand was a one-off incident or it could become a recurring trend either in the month of December or for all coming months.
For instance, if individuals prefer cooking meals for Christmas at home which leads to the drop in demand it would count as a recurring trend that occurs only in the month of December however if there is a study highlighting the adverse effects of eating outside which gains widespread public attention in the month of December and consequently affects demand it most likely would be a case of a recurring trend that would occur for the coming months.
An example of a one-off incident affecting the revenue of London Docks Café would be a temporary shut-down of the Café for a health and safety inspection.
Next, we conduct an analysis of the variance of expenditure. From our study, we can see that London Docks Café has overvalued the costs incurred of raw materials which is generally a favourable outcome but in this case the price of raw materials have not changed so this is just due to the drop in demand of meals provided by the café. There are three areas of concern for London Café’s management. These are the expenditures incurred to procure rent and insurance facilities and fuel expenditures.
Generally, insurance and rent expenses are fixed and deducted on a monthly basis so the management must look into why this adverse balance was created. It could be due to certain events that triggered higher expenses within the month or due to a clerical error. Finally, fuel expenditure was greater than the expected amount probably because of an increase in fuel prices from the time it was calculated so the management must improve its method of calculating fuel costs by accounting for price fluctuations to a feasible margin.
Profitability and Sustainability
The profit earned by a company can be generally defined as the excess amount of revenues and incomes a firm earns over its costs and expenses. Profitability is closely linked with a company’s profit with a key difference- profitability is a relative measure while profits are an absolute measure.
A firm’s profitability is defined as its inherent ability to generate profits on given its organizational size and structure (Ball et al., 2015). For example, a £5,000 monthly profit would be a big deal for a small-medium sized company but would be negligible for a publicly-listed large company such as Apple.
Sustainability is a concept which majorly focuses on the fulfilment of needs of the current generation without compromising the needs of future generations (Hallin, Karrbom-Gustavsson and Dobers, 2021). It essentially comprises of 3 main areas:
- Economic sustainability:Sustainable long-term economic growth which minimizes the negative impact of a firm on the environment and the culture of the people and society as a whole.
- Environmental Sustainability: Ensuring that production and selling methods of the company is done by maximizing the use of renewable resources and minimizing pollution created.
- Social sustainability: Social sustainability is a very loosely defined topic. The most general definition of socially sustainable societies are these societies are diverse, equitable, well-connected and democratic in nature wherein an individual can enjoy a decent standard of living.
Ways of Improving Profitability and Sustainability- London Docks Café
In order to improve profitability, the café must ensure a superior quality of their meals which would increase the demand substantially. Moreover, they must revamp their pricing strategy and make it more flexible, allowing customers more options and feasibility. This will also increase demand as it could be possible that customers choose not to go to the café due to the lack of options present. Furthermore, senior management must design promotional offers which are adequately designed to increase sales volume as well as revenue.
If the firm is in a position to cut prices temporarily so as to eliminate competition, it may choose to do so. Finally, methods of minimizing the cost of inputs must be estimated. From the financial performance in the month of December itself we can see that there is room for minimizing costs in the future- the contractual obligations on rent and insurance must be carefully inspected and additional expenses incurred must be done away with.
Sustainable measures that the firm can take are manifold. The company should look at sustainability as a continuous process. It could start its sustainability drive by ensuring diversity in its workforce and equal opportunity for employment irrespective of an individual’s race, gender, creed, or socio-economic background.
Furthermore, it should ensure that it uses renewable energy sources for cooking their meals or should start transitioning towards renewable energy sources for their meals. It should minimize wastage of food and food-resources by ensuring accurate provisioning and ordering and by enforcing a no-wastage policy in their restaurant wherein an individual will be fined if they waste their food.
A more refined and sustainable fining policy would be using the portion of leftover food for landfills to the extent that is possible (not all foods can be used in the creation of landfills) and fining the rest. Minimizing/Eliminating the use of plastic is an extremely necessary measure for the café as it will propel demand as well as have a positive effect on the environment. Finally, the restaurant must try to work towards a zero-waste certification, which means that London Café will either produce zero waste or a negligible amount- no plastics, all foods are consumed or used in generation of landfills.
References
- Ball, R., Gerakos, J., Linnainmaa, J.T. and Nikolaev, V.V., 2015. Deflating profitability. Journal of Financial Economics, 117(2), pp.225-248. Available at: https://www.sciencedirect.com/science/article/abs/pii/S0304405X15000203.
- Becker, S.D., Mahlendorf, M.D., Schäffer, U. and Thaten, M., 2016. Budgeting in times of economic crisis. Contemporary Accounting Research, 33(4), pp.1489-1517. Available at: https://onlinelibrary.wiley.com/doi/abs/10.1111/1911-3846.12222
- Hallin, A., Karrbom‐Gustavsson, T. and Dobers, P., 2021. Transition towards and of sustainability—Understanding sustainability as performative. Business Strategy and the Environment, 30(4), pp.1948-1957. Available at: https://onlinelibrary.wiley.com/doi/full/10.1002/bse.2726
- Mak, Y.T. and Roush, M.L., 1994. Flexible budgeting and variance analysis in an activity-based costing environment. Accounting Horizons, 8(2), p.93. Available at: https://www.econbiz.de/Record/flexible-budgeting-and-variance-analysis-in-an-activity-based-costing-environment-mak/10007087268
Yılmaz, F., 2018. Budgeting as a Tool for Sustainable Development. In Handbook of Research on Supply Chain Management for Sustainable Development (pp. 42-60). IGI Global. Available at: https://www.igi-global.com/chapter/budgeting-as-a-tool-for-sustainable-development/203958
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