Question 2: Budget (20 marks in total)
Kuipers Manufacturing is a medium sized company thatmanufactures and markets a range of products. The divisions ofKuipers Manufacturing include whitegoods, kitchenware and outdoorfurniture. The senior management team oversees the budgetingprocess. This includes the managing director, the financialcontroller, the manufacturing director and the marketing director.Jack Kohler the managing direct of Kuipers Manufacturing,recognises the importance of the budgetary process for planning,control and motivation. He believes that a properly implementedprocess of participative budgeting and management by exception willmotivate managers and their subordinates to improve productivitywithin their particular divisions. Based upon this philosophy,Kohler has implemented the following budgetary procedures:
- A target sales revenue and target profit figure are determinedby the senior management team and given to each divisional managerfor the following budget year. Profit targets are based on targetedoverall increases in returns to shareholders and are assigned todivisions based on senior managementsâ expectation of whichdivisions need to improve in the coming year. Target sales revenuesare based on a percentage increase in the prior year's salesrevenues for each division.
- Divisional managers develop their individual divisional budgetswithin the following constraints, as directed by the companyfinancial controller:
- The target sales revenue and profit targets can only differ by10 per cent, and this deviation must be clearly justified by thedivisional manager.
- All fixed commitments should be included in the budget. Fixedexpenditures include such items as long-term supplier contracts andsalaries.
- All capital expenditure projects that are undertaken indivisions at the direction of the senior management team should beincluded in the divisional budgets.
- An estimate of head office charges is provided to divisions forincorporation in their budgets.
- Division budgets need to specify all line items forexpenditure.
- The final divisional budgets are approved by senior management,after scrutiny by the senior management team. Sometimes, as anincentive to motivate divisional managers, the estimated officecharges are increased which has the effect of reducing budgeteddivisional profits. Divisional managers are then asked to reviewtheir overall budgets to find areas of cost saving to meet t heirprofit targets.
- The final budget is used as the basis of control for amanagement by exception form of reporting. Excessive expendituresby each division are highlighted monthly. Divisional managers areexpected to account for all expenditures over budget. Financialresponsibility is an important factor in the overall performanceevaluation of all managers. Kohler believes that the polity ofallowing the divisional managers to participate in the budgetprocess and then holding them accountable for the final budget isessential especially in time of limited resources. He furtherbelieves that the division managers will be motivated to increasethe efficiency and effectiveness of their divisions because theyhave provided input into the initial budgetary process and arerequired to justify any unfavourable performance.
Required:
Prepare a report to the senior management team that outlines theadvantages and limitations of participative budgeting. In yourreport describe the deficiencies in Kuipers Manufacturing budgetaryprocess. Recommend how each identified deficiency can be corrected.(500 words maximum)
Question 2: Budget (20 marks in total)
Kuipers Manufacturing is a medium sized company thatmanufactures and markets a range of products. The divisions ofKuipers Manufacturing include whitegoods, kitchenware and outdoorfurniture. The senior management team oversees the budgetingprocess. This includes the managing director, the financialcontroller, the manufacturing director and the marketing director.Jack Kohler the managing direct of Kuipers Manufacturing,recognises the importance of the budgetary process for planning,control and motivation. He believes that a properly implementedprocess of participative budgeting and management by exception willmotivate managers and their subordinates to improve productivitywithin their particular divisions. Based upon this philosophy,Kohler has implemented the following budgetary procedures:
- A target sales revenue and target profit figure are determinedby the senior management team and given to each divisional managerfor the following budget year. Profit targets are based on targetedoverall increases in returns to shareholders and are assigned todivisions based on senior managementsâ expectation of whichdivisions need to improve in the coming year. Target sales revenuesare based on a percentage increase in the prior year's salesrevenues for each division.
- Divisional managers develop their individual divisional budgetswithin the following constraints, as directed by the companyfinancial controller:
- The target sales revenue and profit targets can only differ by10 per cent, and this deviation must be clearly justified by thedivisional manager.
- All fixed commitments should be included in the budget. Fixedexpenditures include such items as long-term supplier contracts andsalaries.
- All capital expenditure projects that are undertaken indivisions at the direction of the senior management team should beincluded in the divisional budgets.
- An estimate of head office charges is provided to divisions forincorporation in their budgets.
- Division budgets need to specify all line items forexpenditure.
- The final divisional budgets are approved by senior management,after scrutiny by the senior management team. Sometimes, as anincentive to motivate divisional managers, the estimated officecharges are increased which has the effect of reducing budgeteddivisional profits. Divisional managers are then asked to reviewtheir overall budgets to find areas of cost saving to meet t heirprofit targets.
- The final budget is used as the basis of control for amanagement by exception form of reporting. Excessive expendituresby each division are highlighted monthly. Divisional managers areexpected to account for all expenditures over budget. Financialresponsibility is an important factor in the overall performanceevaluation of all managers. Kohler believes that the polity ofallowing the divisional managers to participate in the budgetprocess and then holding them accountable for the final budget isessential especially in time of limited resources. He furtherbelieves that the division managers will be motivated to increasethe efficiency and effectiveness of their divisions because theyhave provided input into the initial budgetary process and arerequired to justify any unfavourable performance.
Required:
Prepare a report to the senior management team that outlines theadvantages and limitations of participative budgeting. In yourreport describe the deficiencies in Kuipers Manufacturing budgetaryprocess. Recommend how each identified deficiency can be corrected.(500 words maximum)
