Select a manufacturing Company and

discuss its Periodic Budget Application

Name : Faiza Ambreen

Class : MBA (B & F)
Roll # : AD 513708
Semester : Autumn 2010
Subject : Cost & Management
Accounting
Code : 5538
Tutor’s Name : Mr. Rizwan

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 Acknowledgement:

First of all, I would like to thank my friends for assisting and helping me in
my research. I would like to thank my research teacher Mr. Rizwan for
helping me how to do my study.

I would like to thank my parents for their financial and never ending
support, for the help in my study and for its success. And it would not be
successful without God who guides me in my everyday life and
activities; I thank Him for the good health he has given to me, and for
the success of my study.

For all the people who helped me a lot, thank you very much and may Allah
bless you all...

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Abstract:
Budgeting systems rely on accurate cost accounting systems. Using cost data collected by
the business's cost accounting system, budgets can be developed for each department at
different levels of output. Different units within the business can be designated cost
centers, profit centers, or departments. Budgets are then used as a management tool to
measure performance, among other things. Performance is measured by the extent to
which actual figures deviate from budgeted amounts.

In using budgets as measures of performance, it is important to distinguish between

controllable and uncontrollable costs. Managers should not be held accountable for costs
they cannot control. In the short run, fixed costs can rarely be controlled. Consequently, a
typical budget statement will show sales revenue as forecast and the variable costs
associated with that level of production. The difference between sales revenue and
variable costs is the contribution margin. Fixed costs are then deducted from the
contribution margin to obtain a figure for operating income. Managers and departments
are then evaluated on the basis of costs and those elements of production they are
expected to control.

COST OF CAPITAL: Capital budgeting and other business decisions—such as lease-buy

decisions, bond refunding, and working capital policies—require estimates of a
company's cost of capital. Capital budgeting decisions revolve around deciding whether
or not to purchase a particular capital asset. Such decisions are based on an estimate of
the net present value of future revenues that would be generated by a particular capital
asset. An important factor in such decisions is the company's cost of capital.

Cost of capital is a percentage that represents the interest rate the company would pay for
the funds being raised. Each capital component—debt, equity, and retained earnings—
has its own cost. Each type of debt or equity also has a different cost. While a particular
purchase or project may be funded by only one kind of capital, companies are likely to
use a weighted average cost of capital when making financial decisions. Such practice
takes into account the fact that the company is an ongoing concern that will need to raise
capital at different rates in the future as well as at the present rate.

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Table of Contents:
Acknowledgement 2
Abstract 3
Table of contents 4
Introduction to the issue 5-10
Practical Study of the organization 11
Data Collection Methods 11
Practical study 12
SWOT Analysis 13-14
Conclusion 15
Recommendation 16
References 17

Introduction to the issue:

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There are two major approaches to coming up with a budget for a business or for an
individual project: top-down budgeting and bottom-up budgeting. While bottom-up
budgeting is the more traditional way to approach budgeting projects and companies, top-
down budgeting began to be more popular among businesses and the government during
the 1990s. Top-down budgeting is more often resorted to by companies and the
government in times of fiscal stress. Top-down budgeting has several advantages over
bottom-up budgeting, along with several disadvantages when compared to bottom-up
budgeting.

What exactly is top-down budgeting?

Top-down budgeting is an overall budgeting process that is based on, instead of building
a budget from the bottom up, an overall estimate that is made of the higher level tasks.
Then those estimates of higher-level tasks are used to set limits on the costs of lower-
level tasks. Money funnels down from higher level tasks down to the lower level tasks
until all tasks that are necessary for a project are given funding. The budgeting process
begins with overall project managers. The estimate for a project or for a larger budget
depends upon the experience and the judgment of the manager or the managers who are
in charge of coming up with an overall budget.

This experience and this judgment of the top managers who are in charge of coming up
with the overall estimate is key to the success and the accuracy of the particular budget.
The manager or managers has to remember to keep in mind high cost tasks that are minor
but are still expensive, any time delays that might happen with the project, problems with
procuring supplies, and any other difficulties that might happen with the project. If the
overall project manager can't come up with an accurate budget, then lower-level
managers and employees will find themselves scrambling for money so that they can
accomplish their tasks with not enough money. These types of problems can lead to the
downfall of the project, based on a lack of funding and lower morale and resentment
among employees.

In order to escape these types of problems with a project and with company and
employee morale, then a number of managers of particular tasks will ask for more money
than they know is actually necessary for their tasks. Many managers feel that this is
alright to do when top-down budgeting is implemented for a project or for a company.
However, asking for more money than is necessary might not be safe to do in terms of the
overall funds available to the company. Many lower-level managers feel themselves
forced to accept less money than they know is actually needed, and fights between
managers and power plays can end up erupting. This type of situation will end up being
destructive for the company.

Generally speaking, top-down budgeting is seen to be a good way to approach budgeting.

Many companies use top-down budgeting because it is well designed and suited to
traditional organizations that are structured along a hierarchy. When top-down budgeting
is done correctly and accurately, then it has a very high level of overall accuracy. Also,

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because all aspects of the budget are included in the initial budget estimate, then there is a
high level of stability in terms of the amount of money that is given to each of the
different tasks for a particular budget.

If any manager is in charge of coming up with a top-down budget for a particular project,
then he or she will want to talk to lower level employees who will be in charge of
implementing and carrying out particular tasks. Then those employees will be able to
give the project manager a better idea of how much money will be needed for each task.

A comparison of top-down to bottom-up

budgeting
There are two major approaches to coming up with budgets for any home, small business,
or larger company: the traditional method of budgeting is known as bottom-up budgeting,
though many businesses and corporations, along with the United States government, are
moving towards more top-down budgeting, particularly during times of fiscal stress.

Here is a brief overview of the advantages and disadvantages of both top-down budgeting
and bottom-up budgeting.

Bottom-up budgeting

If you are bottom-up budgeting, you begin by identifying all of the different tasks and
steps that are involved in a particular project. Then go through and write down all of the
different resources and all of the money that will be needed for each step. Then, to
determine the budget for the entire project, the funding needed for each step is added
together. To come up with a budget for the level above individual projects, all of the
projects are added together. All of the steps are added together higher and higher until
you come up with a complete budget for either the entire project or the entire company.
When you are determining costs for lower-level tasks, it is usually done by the normal
method of cost estimation. If estimates are made in terms of materials or man hours, then
they must be converted to cash. Costs negotiations will be required between those who
are in charge of each task and the project manager, or the business owner.

Disadvantages of bottom-up budgeting

One of the primary disadvantages of bottom-up budgeting is that it can lead those who
are in charge of tasks and also project managers to ask for more funding than will

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actually be needed. This is done in order to ensure that enough money is procured for
each task to be accomplished, since most people assume that they will not be given all of
the money that they request. This situation can lead to a waste of money and also a
situation of distrust between various members of projects and different managers.

Another drawback to bottom-up budgeting is that it is difficult to actually draw up a

complete and thorough list of every step and task that will be necessary for the
completion of a project. It is easy to overlook a step of a project or a task, a problem that
will lead to major issues in the overall budget.

Advantages of bottom-up budgeting

One of the major advantages of bottom-up budgeting is that the budget can be quite
accurate for individual tasks. As long as no tasks have been forgotten, then this can work
quite well. Also, bottom-up budgeting involves all members of a particular project, which
can be a benefit in terms of company morale and involvement.

Top-down budgeting

Top-down budgeting works the opposite direction of bottom-up budgeting. Top-down

budgeting begins by estimating the costs of higher level tasks, and then those estimates
will constrain the estimates for costs of lower level tasks. So the entire process of coming
up with a budget will begin with upper-level management and an overall estimate of the
entire project. Then the overall budget is divided among the first level of tasks, and then
the budget is divided among lower level tasks and then lower level tasks. This continues
until funding has been given to all of the tasks necessary for a project.

It is important that those managers who are in charge of determining the overall budget
for a project have enough experience that they will be able to come up with an adequate
and accurate budget that will give enough money to each level of tasks, yet will not ask
for too much money.

Top Down or Bottom to Up?????

The budget development process is often viewed as either a top-down or bottom-to-top

process. A variation on these approaches is to make the process an iterative one, either
during its initial developmental stages or through periodic re-forecasts of the original
budget. In each case, executive management's choice of a strategy will have a far
reaching impact.

The budget process often affects how the organization's decision-making process is
perceived by lower level managers, how information is disbursed, the quality of the
organization's information and middle management's level of involvement in reaching the
organization's objectives. These are important considerations when deciding upon a
budget process that fits with your organization's structure.

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Let's be realistic. Many large scale organizations elect to develop their budgets based
upon the efforts of a relatively small group of strategic planners. The reasons for limiting
the number of individuals involved vary, but managers often cite cost and time as two of
the primary constraints. Could it be that the actual costs are much higher as a result of
limiting the planning effort to only a few individuals?

If the organization's planners do not have detailed knowledge of the items that they are
budgeting, then they must perform the necessary research themselves or settle for
information whose quality may be less than optimal. Both scenarios can prove to be
increasingly costly. If your strategic planning group is spending a great deal of time
asking questions to mid-level managers, then it may be better to get middle management
involved at the beginning of the budget process rather than later. Take some time to look
at the cost of your organization's information.

Some organizations choose to implement their budget in a top-down approach in order to

impose performance goals on lower management. This strategy is common among large,
bureaucratic organizations and organizations whose management style is autocratic. Is it
appropriate for today's lean, thinly-layered organizational structures? Today's
organizations place a heavy emphasis on workgroups, information dissemination,
participatory-style management and responsible decision making among their low-level
managers. These organizations are trying to improve information quality and the
decision-making process by promoting the use of information throughout the
organization. A top-down approach may actually stifle these efforts and possibly even
alienate low-level managers from 'buying in' to the final budget.

Frontline managers, who are involved in the day-to-day operations of their departments
or divisions, are their organizations' best resource for realistic budget information. These
managers' experience and knowledge can provide realistic information quickly and at a
much lower cost than what usually results from the finance department's time-consuming
research. Executive management is also more likely to be able to hold these managers
accountable for variances from the final budget than if the budgets were developed
without these managers' input.

Somewhere in the Middle

Reaching down to the lowest levels of departmental managers for budget information is
certainly not practical for very large organizations. Without a highly-organized and well-
designed mechanism for managing detailed information, a large organization can be
overwhelmed quickly by the sheer volume of the information that it must consider in the
budget process.

A more practical strategy is to develop a tiered approach, possibly by establishing that the
lowest level of input will occur at the divisional or regional level. Even at one of these
higher levels, it is important that managers are able to easily exchange budget
information with the organization's lower level managers. The greater use of budget

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information throughout the organization will improve its quality and promote
responsibility for the organization's performance.

Staying in the Loop

All budget processes rely greatly upon effective communications. Strong communication
can contribute to improved information quality, lower costs, and an enhanced decision-
making process. Does your organization experience breakdowns in the process of
obtaining and relying upon budgeted information? If so, then it may benefit from making
an effort to better structure its communications during and after the budget process.

An effort to improve communications could be as simple as documenting the budget

process timelines, managerial guidelines, and budget assumptions. Efforts like these can
help keep everyone on the same page. The planning department will benefit by
eliminating the number of areas where potential misunderstandings can occur and disrupt
the process. Also, by developing official guidelines and assumptions, the planning
department builds resources that can be used in both their administrative and research
tasks. Good documentation also serves the mid-level managers who are responsible for
explaining performance variances to senior management. Effective documentation can
reduce the time that these managers spend meeting and explaining their variances to
senior managers. Instead, these managers can spend more of their time managing their
operations and improving their performance.

Is All This Really Necessary?

Simply having a good idea of where an organization is headed will never be good
enough. Executive management should have a detailed plan by which they can measure
their performance and adjust the organization's direction when it becomes necessary.
Without a plan, it becomes very difficult to analyze and understand the factors that are
affecting performance. An integrated budget process can give management the
information and mechanism they need to align the entire organization and focus it on its
goals.

All it needs is for officials to adopt the approach.

Top-down budgeting works the opposite direction of bottom-up budgeting. Top-down

budgeting begins by estimating the costs of higher level tasks, and then those estimates
will constrain the estimates for costs of lower level tasks. So the entire process of coming
up with a budget will begin with upper-level management and an overall estimate of the
entire project. Then the overall budget is divided among the first level of tasks, and then
the budget is divided among lower level tasks and then lower level tasks. This continues
until funding has been given to all of the tasks necessary for a project.

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Practical Study of the Organization:
Champion Clock is a clock manufacturing company. This is manufacturing clock since
1954. It is also dealing in Import & Export. In 55 years of prestige it is known that
champion is the name of quality. Its product is considered famous due to its quality all
over the world.

House of amms is the sister firm of Champion Clock Co. It use to import Basic Wall
Clocks, Pendulum Wall Clocks, Wall Mirror, Wall arts, vanity, and many other gift
items form UK, Taiwan, China, Korea, Japan. And it is exporting its products to
Bangladesh, Saudi Arabia, UK, and Malaysia.

Data Collection Method:

As I am working in Champion Clock Co since last five years that’s why I have selected
this organization to analyze the budgeting methods due to a better grip and understanding
on information and knowledge as well. I’ve collected data through the following sources.

• in-depth interview
• observation methods
• document review
• Face -to -face interviews
• Computer Assisted Personal Interviewing

I collect data to measures the trends and seasonal variation by conducting a meeting with
the CEO’s of Champion Clock Co. They asked their Sales Department for giving me the
record of their transaction related to my issue.

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 PRODUCTION BUDGET:
Sales drive the level of production. Production is also a function of the beginning
finished goods inventory and the desired ending finished goods inventory. The budgeted
units of production can be calculated as the number of units sold, plus the desired ending
finished goods inventory, minus the beginning finished goods inventory. In planning
production, one must give careful consideration to the productive capacity, availability of
raw materials, and similar considerations.

Below is the production budget of Champion Clock Co. CCC plans to end each quarter
with sufficient inventory to cover 25% of the following quarter's planned sales. CCC
started the New Year with 525 units in stock, and planned to end the year with 700 units
in stock. Below is a quarter-by-quarter determination of the necessary production.
Carefully examine this information, paying very close attention to how each quarter's
desired ending finished goods can be tied to the following quarter's planned sales. In case
it is not obvious, the estimated units sold information was taken from the sales budget;
utilizing the power of the spreadsheet, the values in the cells on row 7 of this
"production" sheet were simply taken from the corresponding values in row 7 of the
"Sales" sheet

Champion Clock Co.

Production Budget

For the year ending Dec 31, 2009

1st 2nd 3rd 4th Annual

Description Quarter Quarter Quarter Quarter Recap

Estimated Units Sold 2100 1500 3000 2400 9000

Desired Ending Finished Goods 375 750 600 700 7000
Total Units needed 2475 2250 3600 3100 9700
Less: Beginning Finished goods -525 -375 -750 -600 -525
Scheduled Production 1950 1875 2850 2500 9175

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SWOT Analysis:
Common Sense has advocated a top-down approach to spending. We believe a top-down
budget approach is essential. Typically, budgets have been developed ostensibly using a
"bottom-up" approach wherein Departments make requests; Managers review and cut;
Boards review and cut further; Taxpayers vote and (often) cut more. In the 90's, this
bottom-up process has resulted in:

*BOE-requested budgets cut an average of nearly 40%.

*Unrealistic budgets submitted in anticipation of likely cuts.
*Taxpayers forced to "make" the tough final cuts by rejecting budgets.
*Wasted budget preparation effort and possible disruption of plans.
*Managers & Boards potentially absolved of responsibility for any consequences of final
budgets.
*Polarization of townspeople.
*Needless expense of multiple referenda.
*Possible loss of credibility of public officials.

While some improvement was noted after formation of our group, initial submitted
budgets still were too large.

What is needed is a "top-down" approach that sets reasonable spending targets EARLY
in the process and challenges management to meet targets with undiminished services.
Equally important, the targets MUST have some clear, defendable rationale behind
them that is known, understood and accepted by the Public. In reality, voters have
often imposed top-down budgets at the 11th hour at referenda when they say, "We will
approve this much and no more." Thus, the town has often had the worst of both worlds:
a bottom-up process ending with a late (and possibly flawed) top-down budget. This
situation was one of the key factors leading to the formation of the Common Sense group.

In 1999, the BOF attempted a top-down budget. While the timing was better, we believe
the underlying rationale was flawed. Their rationale appeared to be simply "Don't exceed
a 1 mill increase". With this approach the taxpayer could look forward to a near 1 mill
increase every year. SPENDING, NOT MILL RATE MUST BE THE FOCUS. The
goal is to set reasonable SPENDING targets and let the mill rate be a fall-out.

Our group has developed a top-down approach that we believe has merit. A brief
description of it follows.

*Basic spending (i.e. excluding major new Capital items) is allowed to increase by the
cost of living.
*All new revenue from the Grand List increase is not automatically spent - only 80% is.

*A spending reduction due to increased efficiency (0.25%) is required. (For some time a
factor of 0.5% was used. However, in recognition of efficiencies already made, a reduced

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factor is considered appropriate at this time.)
*Spending for major new Capital items is then added but only after items are well
justified, well planned, and well publicized.

The advantages of the top down approach are as follows:

• It is straightforward and easy to develop.

• It is based on a reasonable rationale that voters can understand.
• It provides a dollar value and a rationale that the voters can endorse and rally around.
• It works with the budget bottom line and, thus, avoids the potentially divisive discussions
over specific line items.
• It requires officials to develop efficiencies and set priorities.
• It provides early guidance to officials so that they can tailor their budgets to a level that
voters will support, thereby avoiding need for significant cuts.
• It prevents disruptions to planning produced when budgets are rejected at the 11th hour at
referenda.

It can save money by avoiding multiple referenda.

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Conclusion:
Top-down, bottom-up, and middle-out budgeting are methods for allocating and reporting
budget amounts, depending on the level of detail by which you enter budget amounts.

You can use one of these methods for your entire business, or you can use a combination
of these methods by choosing the method that is most appropriate for each part of your
organization.

With top-down budgeting, you enter budget amounts to key accounts at the top level, and
then distribute those amounts among lower-level accounts. For example, you can enter a
budget for the entire company based on goals established by top management, and then 0
assign budget amounts to each division or cost center.

There are two ways to perform top-down budgeting:

o Use budget formulas and Mass Budgets to calculate budget amounts for
lower-level accounts.

o Create a master budget and link to it all related division-level budgets.

You limit the amount that you can budget to your lower-level budgets
based on the amounts you budget to your master budget.

For bottom-up budgeting, you enter detailed budget information at the lowest level, then
use the Financial Statement Generator to review summarized budget information at
higher levels.

For example, you could define budget organizations for the lowest level within your
company, such as by cost center. Then, after each manager enters their cost center
budget, you can summarize these budgets at the division and company level using the
Financial Statement Generator.

Middle-out budgeting is a combination of the top-down and bottom-up methods.

You enter budget amounts for each division based on goals established by middle
management. You then use budget formulas and Mass Budgets to calculate budgets for
cost centers within each division. You can also summarize your budgets for all divisions
using the Financial Statement Generator.

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Recommendations:
• Review your budget. Before you do anything else, take a close look at your
budget and make sure that the assumptions on which it is based are accurate and
make sense in your changing market. If your market is growing quickly, you may
need to adjust up your estimates. Sometimes, it's the budget — not the spending
— that is out of line.
• Freeze spending. One of the quickest and most effective ways to bring spending
back in line with a budget is to freeze expenses such as pay raises, new staff, and
bonuses.
• Postpone new projects. New projects, including new product development,
acquisition of new facilities, and research and development, can eat up a lot of
money. However, if you are too zealous in curbing spending when you need to
develop new products or services to compete, the result can be disastrous for the
future growth and prosperity of the company.
• Lay off employees and close facilities. This is the last resort when you're trying
to cut expenses. Although these actions will result in an immediate and lasting
decrease in expenses, you also face an immediate and lasting decrease in the
talent available to your organization. Productivity and morale of remaining
employees may also suffer.

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References:
 Box, George; Jenkins, Gwilym (1976), Top down budgeting: forecasting and control,
rev. ed., Oakland, California: Holden-Day

 Gershenfeld, Neil (2000), The nature of mathematical modeling, Cambridge:

Cambridge Univ. Press, ISBN 978-0521570954, OCLC 174825352

• www.scribd.com
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