Manufacturing Budget Analysis 6 Manufacturing Budget Analysi

Manufacturing Budget Analysis 6 Manufacturing Budget Analysis

Identify the problems that appear to exist in Ferguson & Son Manufacturing Company's budgetary control system and explain how the problems are likely to reduce the effectiveness of the system. The control system of budgets is usually considered as one of the important tools during planning and control of business activities in a business enterprise. The success or failure of the company will be largely dependent on how effective the planning is made. In gaining control of the budgetary system of the organization, the organization needs to set a comparative analysis of the budgeted figures and the actual figures.

However, the company has failed to flex the actual figures with the budgeted figures. This problem has inconvenienced allocation of resources, hence affecting the budgetary control system of the organization (Albright, 2011). The company has also faced the problem of lack of common goals among all the employees. Based on the case provided, Emory had been meant to believe that provision of high quality goods was the main goal of the company, but a closer analysis of the company revealed that low cost had been the major goal. With this form of confusion, employees do not know what the main goal of the company is; hence, decisions aimed at reaching for the goals cannot be made.

The system of budgetary control for the company does not motivate. The system misses the significant factors needed for evaluating performance. With the absence of these factors, it becomes ineffective to evaluate the performance of employees and devise ways through which goals can be attained. There is a great effect of the unmanageable factors in the budgetary control system. In the company, factors like rush orders and improper maintenance have greatly affected the system.

With these factors, the company has been unable to coordinate its departments, leading to ineffectiveness (Albright, 2011). Explain how Ferguson & Son Manufacturing Company's budgetary control system could be revised to improve its effectiveness. One of the improvements that should be made in the system is effective planning. In effective planning, there is a high chance that allocation of resources will become more effective. The company will also stand a better chance to flex the budgeted figures with the actual figures.

Through flexing, it becomes possible to accommodate any uncertainties that are bound to occur if disparity occurs between actual figures and the budgeted figures. To bring a positive effect to the company, the company should also outline its attainable objectives to the employees. Through such a course of action, employees will be acquainted with the objectives and goals of the company and they will be in a position to work in accordance with the stated objectives. Additionally, outlining objectives of the company will help develop a system that rightfully allocates resources to their respective channels (Shim, 2012). The company should also come up with an effective system that aligns with the various manageable factors within the company.

These factors should be controllable at all levels in order to avoid inconveniences caused by unmanageable factors within the company's operations. The company should be able to allocate different budgets that are time-bound and do not show significant disparities after slight changes in performance. The management of the company should also be educated on various budgetary procedures applicable in their areas of duty. Such information will enable management to monitor performance keenly and make necessary adjustments. Finally, the company needs to establish an effective process for realizing profits, creating a coherent framework for the budgetary control system in the organization. With these recommendations, the company can develop an effective system that caters to all departments within the organization.

Explain how the use of an activity-based costing system could change the results of the budget if utilized. It has been noted that the current system of budget encompasses inefficiencies that make the company fail to recognize its business objectives. With the adoption of an activity-based costing (ABC) system, the company will see a significant change in its operations, enabling a more profit-oriented approach.

Firstly, an ABC system will improve the accuracy in costing the company's products and create a more efficient channel for distributing those products. The precise measurement of costs will help the company set customer-friendly prices that still yield profits (Albright, 2011). Using ABC, the company can determine unit costs instead of relying solely on total costs, allowing for better price setting strategies aligned with actual cost structures. This system also supports management in setting attainable goals based on cost and profit analyses.

Furthermore, an ABC system enhances performance visibility. It provides an overview of what needs to be improved and how to do so, acting like a mirror that guides cost-related activities towards achieving both short-term and long-term goals (Shim, 2012). The current disconnect, where employees have "quit trying," can be addressed by providing clearer insights into costs and profitability, motivating employees to align their efforts with corporate objectives.

Paper For Above instruction

Ferguson & Son Manufacturing Company is facing critical issues in its budgetary control system that threaten its operational efficiency and long-term profitability. The primary problems identified include the inability to flex actual figures with budgeted figures, lack of shared goals among employees, inadequately motivating the workforce, and the influence of unmanageable operational factors such as rush orders and maintenance issues. These issues collectively diminish the effectiveness of the company's budgeting processes, impair resource allocation, and hinder performance evaluation.

The failure to flex budget figures in response to actual performance is a significant flaw that impairs the ability to accurately analyze variances and make informed decisions. Budget flexibility is essential for adapting to unforeseen circumstances, yet Ferguson & Son's rigid approach prevents this adaptability (Albright, 2011). This rigidity can lead to misallocation of resources and strategic misdirection. Additionally, the lack of unified goals creates confusion among staff, undermining efforts toward organizational objectives. For example, employees like Emory believed that providing high-quality goods was the primary goal, whereas low-cost production was the actual focus. This discrepancy causes misaligned efforts and inconsistent decision-making, ultimately reducing operational coherence.

Another critical issue is the motivational deficiency within the current control system. A budget system that fails to incorporate performance evaluation factors leaves employees disengaged. Without proper motivation, employees are less likely to strive toward organizational goals, reducing productivity and innovation. Operational unmanageable factors, such as rush orders and maintenance problems, further disrupt departmental coordination, leading to inefficiencies across the organization.

To remedy these problems, Ferguson & Son must initiate a comprehensive revision of its budgetary control system. Effective planning is central to this revision. The company should adopt a more flexible budgeting approach that allows adjustments based on actual performance data. This involves establishing a system of flexible budgets that accommodate changing circumstances and uncertainties (Shim, 2012). Such flexibility facilitates more accurate performance assessments and resource allocation decisions. Alongside, the company should clearly communicate attainable objectives to staff, ensuring that employees understand and align with corporate goals. Transparent communication fosters a cohesive environment where efforts are directed toward shared objectives, reducing confusion and enhancing motivation.

Further, the company should implement an activity-based costing (ABC) system to improve the accuracy of cost measurements. Unlike traditional costing, ABC assigns costs based on activities, providing detailed insights into the true cost of processes and products (Albright, 2011). This precision allows Ferguson & Son to set more accurate pricing, improve profit margins, and better understand operational efficiencies. The ABC system also acts as a performance mirror, illuminating areas needing improvement and guiding strategic decisions.

Training management and employees on budget procedures and ABC principles is vital. Well-informed personnel can monitor performance more effectively and make timely adjustments, bolstering overall organizational responsiveness. Establishing a profit realization process aligned with the ABC system creates a coherent framework for financial management and performance evaluation.

To address behavioral issues among employees, a targeted approach to goal alignment is necessary. The company should communicate clear, measurable objectives linked directly to corporate strategies. Recognizing and rewarding behaviors that support these goals can motivate staff to perform aligned with organizational priorities. Regular feedback and performance reviews grounded in transparent metrics reinforce desired behaviors.

By aligning employee actions with clearly defined goals, Ferguson & Son can enhance productivity, improve quality, and foster a culture of continuous improvement. Such alignment directly impacts profitability by increasing efficiency, reducing waste, and optimizing resource utilization. When employees see their efforts contributing directly to organizational success, overall morale and engagement improve, leading to higher retention rates and a stronger competitive position.

The use of an ABC system and goal alignment also positively influence Return on Investment (ROI) and free cash flow. ROI measures profitability relative to investment, and implementing accurate costing methods like ABC enables more precise profit calculations and strategic decision-making (Crosson & Needles, 2011). Better cost control and pricing strategies increase profit margins, thereby improving ROI. Additionally, efficient resource utilization and cost management increase free cash flow, providing the company with capital to reinvest or distribute to shareholders (Gil-Lafuente, 2005).

In conclusion, Ferguson & Son’s current budgetary issues can be effectively addressed through systemic revisions focusing on flexible planning, clear goal setting, implementation of activity-based costing, and employee engagement. These measures will enhance the accuracy of financial analysis, motivate staff, and improve overall organizational performance. Implementing such strategies will not only resolve existing inefficiencies but also position the company for sustainable growth, increased profitability, and superior shareholder returns in the competitive manufacturing industry.

References

• Albright, S. C., Winston, W. L., Zappe, C. J., & Broadie, M. N. (2011). Data analysis and decision making. Mason, OH: South-Western/Cengage Learning.
• Crosson, S. V., & Needles, B. E. (2011). Managerial accounting. Mason, OH: South-Western Cengage Learning.
• Gil-Lafuente, A. M. (2005). Fuzzy logic in financial analysis. Berlin: Springer.
• Shim, J. K., Siegel, J. G., & Shim, A. I. (2012). Budgeting basics and beyond. Hoboken, N.J: Wiley.
• Albright, S. C. (2011). Data analysis and decision making. Mason, Ohio: South-Western/Cengage Learning.
• Crosson, S. V., & Needles, B. E. (2011). Managerial accounting. Mason, OH: South-Western Cengage Learning.