Acct5000 - Intermediate Management Accountig Portfolio

Assignment Cover Sheet

ACCT5000 - INTERMEDIATE MANAGEMENT ACCOUNTIG PORTFOLIO

CASE STUDY

Due: Monday, 9

October 2017, 4 pm

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9.30 am, Friday

TABLE OF CONTENTS

1. INTRODUCTION ................................................................................................. 2

2. BUDGETING ........................................................................................................ 2

2.1- Purpose of Budgeting ............................................................................................ 2

2.2- How Budget Can Be Used to Better Manage ........................................................ 4

2.3- How Budget Can Be Used to Grow a Business .................................................... 5

3. CONCLUSION ..................................................................................................... 5

4. RECOMMENDATIONS ...................................................................................... 6

5. REFERENCE LIST ............................................................................................... 7

1. INTRODUCTION

The growth of a company even during tough times depends on the ability of the

company to form strategies from budgets. However, the case of PEG is unique as the

company first succeeded without budgets. The Phoenix Enterprises Group was

thriving due to the boom in mining in Singapore. Instead of use data and analyzed data

from the budgets and financial statements, Francis used his intuition for budgetary

planning purposes. However, the case study reveals that even with an understanding of

the market, the preparation of budgets help the company to grow during the rapid

economic deterioration. If Francis had hired Bonnie Williamson during the start of the

venture, the revenue of the company could not have been impacted in 2014 due to a

slowdown in the resources sector. PEG would not have experienced financial difficulties

and inability to meet the suppliers’ payment. The impact of making investment choices

is dependent on the ability of the company to prepare budgets and use it for making

vital investment decisions. The purpose of this report would be to highlight the purpose

of budgeting to PEG’s manager Francis Sik.

2. BUDGETING

2.1- Purpose of Budgeting

Francis did not use budgets initially as he did not feel the need for the budgets.

Besides, the business was growing steadily without the preparation of the budgets. The

business had grown and become more diverse without the knowledge about the future

results (Barrett 2007). The situation is worrying Francis because there is no knowledge

nor data to help him to consolidate the investment and ensure superior financial

performance. The purpose of budgeting would entail the forecast of income and

expenditure. Therefore, it uses profitability as a basis and a tool for making a decision.

The budgeting is a means to monitor the business performance (Barsky and Morris

2016).

The major purpose of budgeting is five. The purpose of budget entails (1)

planning, (2) facilitating communication and coordination, (3) allocating resources (4)

controlling profits and operations and (5) evaluating performance and provision of

incentives (Hofstede 2012). The preparation of budget entails forecasting the future

revenue and expenses of the business based on previous revenue and expenses. It is vital

to understand that the purpose of the business is to maximize profits through the

minimization of cost and maximization of revenue (Hofstede 2012). However, the

minimization of cost and expenses should not interfere with the quality of services.

Therefore, the purpose of budgeting is meant to help the company in planning for the

revenue, cost, and profitability of the company.

The second major purpose of budgeting is the facilitation of communication

and coordination. Previous budgets can be used to compare the actual performance and

determine the variance. The variance can be used to facilitate communication and

coordination when preparing the current budgets. The third major purpose of budgeting

is the allocation of resources (Arnold and Artz 2016). During the preparation of budgets,

there is an allocation of resources to different business venture. Budgets help the

company to know what and how resources can be allocated to different venture for the

maximization of revenue and profits. Thus, the purpose of the budget would be to

allocate resources to different business diversity according to the needs, expenses and

revenue generation.

Another significant purpose of budgeting is controlling profits and operations.

The preparation of budget ensures that the company not only plan for profitability but

also control. The controlling of profits and operations occurs when resources allocated

is monitored to ensure that there is no wastage. Finally, the purpose of budgeting is to

evaluate performance as well as the provision of incentives (Barrett 2007). In most

cases, the budgets are often compared against the actual performance to determine the

variance. Ideally, the variance for revenue and profits should be positive while variance

for expenses should be negative. The performance evaluation of the business is

dependent on these two main variables in the budgets (Barsky and Morris 2016). It can

also be used to provide incentives to encourage the employee to work hard. For instance,

the budget can be used and used as an incentive by telling employees that the group or

department that meet the budgets would be rewarded. Therefore, it boosts the morale of

the employees.

2.2- How Budget Can Be Used to Better Manage

All businesses regardless of their size, the budget can help them to improve

management. The budget helps the business to control spending, maximize resources as

well as head off cash flow problems before they can potentially harm the business. The

budgets help the company to use human resources effectively through the collection of

data and use it forecasts depending on the human resources (Barsky and Morris 2016).

Through the opinions of employees on areas of cost reduction or better management can

help to improve sales or insights from the ground. The preparation of budget helps the

company to think about the future, the competitive environment, resources of the

company and possible changes in the industry (Arnold and Artz 2016). These four

factors are the cornerstone of making a strategic decision.

The budget can be used to manage the company through the forecast of the

future better. The company can think of how to manage fixed cost such as rent, staff

salaries, insurance, and utilities amongst others (Barsky and Morris 2016). It would also

help the company to determine how to reduce the variable cost as well as identification

of non-operational costs like taxes and changes in financing. The budgets would help to

eliminate the management philosophy of Francis that was based on optimism rather

than realism. The updating of the budget as circumstances changes ensure that the

company is on top of the situation as well as allocate resources effectively.

2.3- How Budget Can Be Used to Grow a Business

The preparation of a realistic, accurate and thoughtful budget give the company

valuable insights into the business strategy. For instance, Phoenix Enterprise Group can

start to examine the performing parts or services that have untapped potential in the

business portfolio (Barsky and Morris 2016). The preparation of budgets also helps the

business to examine areas that are underperforming. The underperforming can help the

company to grow as the management can strip the dead wood and free or resources for

more profitable projects. The expansion of the business would be based on potential

rather than intuition. The budget helps to evaluate the opportunities using profitability

growth index.

3. CONCLUSION

The failure of Phoenix Enterprise Group to cope with economic turmoil is due to the

lack of proper budgets in the previous years. The hiring of Bonnie Williamson is good

news, but there is lack of processed data on the budgets. The company should have

hired Bonnie Williamson instead of Jessica Boulter. Bonnie Williamson would have

prepared budgets used for growth, better management as well as the formulation of

strategies. Finally, Francis has realized that intuition is a mere luck that cannot help the

company to survive tough economic times.

4. RECOMMENDATIONS

The first recommendation would be for the Bonnie Williamson to use the

process accounting records to understand the trend of each business venture in the

portfolio. Secondly, all the accounting records should be for the formulation of

business strategy. Finally, Bonnie Williamson and Francis Sik should work

together through an open communication channel for the business to return to

profitability in these tough economic times.

5. REFERENCE LIST

Arnold, Markus C., and Martin Artz. 2016. "The Use of a Single Budget or Separate

Budgets for Planning and Performance Evaluation." Arnold, Markus C. and Artz,

Martin, The Use of a AAA 2017 Management Accounting Section (MAS)

Meeting 1-49.

Barrett, Richard. 2007. Planning and Budgeting for the Agile Enterprise: A driver-based

budgeting toolkit. Butterworth-Heinemann.

Barsky, Noah P., and Jan Taylor Morris. 2016. "Corporate Budgeting: Perceptions of a

Next Generation of Corporate Leaders." Management Accounting Quarterly 17

(4): 1-10.

Hofstede, G. H. 2012. The Game of Budget Control. Routledge.

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