Budget Analysis Paper

The Budget Analysis
Why do we use budgets? Well, as individuals if we did not use budgets then we would not have enough money to spend it on the things we love to do. Therefore, there is no difference in the business world; a budget is a plan that helps organizations achieve their financial and strategic goals (Nobles, Mattison, & Matsumura, 2014, p. 1316). However, a budget is not all about crunching numbers together; it is a process that will be discussed in detail that addresses the potential reasoning around their variances and why companies choose whether to “make” or “buy” a product in-house. Along with the pros and cons that companies should adopt to aid in nonfinancial performance measures that will cause an impact on the efficiencies
of their operations. Therefore, the budget is a process that should be used by all companies like Peyton Approved to assess in all ethical considerations that will have an impact on the decision-making process of their business.
The initial budget process is a financial plan put in place so managers and companies can make effective decisions that will have an impact on their organizations achieving their goals. Budgets have several purposes such as setting goals, providing a means to measure performance, to plan, track and control spending. However, budgets can vary from company to company, but to be effective in any organization they should develop clear strategic goals, have management involvement, benchmarking, and excellent communication (Sakthivel, 2014). For instance, Peyton Approved uses a static budget to help determined if their cost and efficiency variance is better or worse than expected. Therefore, the budget is an on-going process that starts off by setting goals; the managers act on those goals, then the managers will compare the variances against the budget to make ethical decisions according to their plan.
The purpose of the budget variance is to determine “the difference between the actual amount and the amount budgeted” (Nobles, Mattison, & Matsumura, 2014, p. 1403). However, the variance can either be classified as unfavorable or favorable depending if the company’s revenue increases or decreases their operating income. The potential reasons for the variances are vital in helping managers act quickly to whether the increase or decrease is controllable or uncontrollable due to any unusual events. There are many reasons for variances within the budget, such as the current market, quality, new employees, new /faulty equipment, or even the company’s standards may not be set correctly. Take, for example, Peyton budgeted 30,000 units of raw material, but their employees used 31,000, this variance drives the managers to look into the reasons to why their employees used 1000 more units to produce the order. Therefore, the variances are vital, because they do drive managers to investigate and ask those questions to why they are not functioning as expected.
Although there are some changes that companies should make based on their variance analysis as long as it is relevant to the company’s goals.
Companies should make alterations regularly based on growth, actual income, gross revenues, and any expenditures for things like material, and overhead. Companies re-evaluating their budget regularly allows them to identify and repair those potential problems before they end up falling short, costing them more money and time (Vitez, 2016). For instance, if Peyton’s raw material usage continues to exceed the budget without being addressed, then Peyton could fall short of paying their bills. Therefore, updating the budget regularly to manage their cash flow will enable companies like Peyton Approved to be flexible, prepare future budgets more accurate, and identify those areas that need action taken to be able to achieve their goals in the next budget
period.
Foremost, the company should look at any ethical considerations that may happen due to any changes in the original budget because jumping to the wrong conclusions could cost the company more money, lower performance, and question the integrity of the business (Barrett & Fraser, 1977). However, if the employees at Peyton continue to use 1000 more units than expected and the purchasing dept. just increased the standard quantity by 1000 units without investigating the reasons. Thus, this decision to raise the standard quantity may simply create even more units being used in the next budget period then costing the company to spend more money on materials. Therefore, this decision is considered unethical because it could have simply been the result of the purchasing dept., purchasing a cheaper quality. So, the recommendation is that the budget should be adjusted if there is a significant difference, but only after a thorough investigation is performed to prevent any unethical aspects of the company.
On the other hand, cost variances that continue to be unfavorable can influence businesses to make the decision on whether to “make” or “buy” a particular component in-house or from a vendor. There are many factors to consider that pertained to all relevant and nonrelevant expenses like labor/operating cost, fixed cost, sunk cost, or any expenses, that are related to manufacturing in-house versus going externally. For example, if Peyton’s total variable expenses to manufacture a component such as flour cost $25,000 more than purchasing the flour, then Peyton should consider looking into outsourcing (Martin, 2015). However, cost saving is not the only factor to consider; the decision process should include any quantitative and qualitative decisions such as having control over quality, commitment to deliver on time, the suppliers long-term viewpoints, reliability, and their reputation.
Even though outsourcing is a strategic business decision that helps improve cost and profitability. Companies should also look at any ethical considerations that could arise that might impact their businesses' reputation, such as quality of their service, the risk of confidential data, and any moral obligations. Since Peyton manufactures dog treats, receiving poor quality of service when outsourcing a product could lead to the implication of pets or employees getting sick, which could result in long-term lawsuits which will have an impact on the company's reputation. Also, the leaking of confidential data, lack of obligation to give back to society or to protect the environment, and not following the labor acts for all employees could lead to having a poor public image (Geta, 2013). Therefore, companies should never ignore any ethical obligations, and strickly go for profit over the wellbeing of their employees or customers, because the results could lead to implications that could have a severe impact on their efficiencies of producing their product, or even result in closing down their operations.
In addition, there are some nonfinancial performance measures that companies should adopt to help improve the company as a whole.
Nonfinancial performance measures contribute to evaluating achievement, the company objectives and developing a strategy. Thus, in the case of Peyton Approved, they could adopt a balanced scorecard. “A balanced scorecard is a performance evaluation system that requires management to consider both financial and operational performance measures (Nobles, Mattison, & Matsumura, 2014, p. 1478)”. A balanced scorecard is a great way for companies to encourage communication, internal efficiency, and innovation that provides a picture so the company can see if they are meeting their objectives. However, one downside to using a balanced scorecard it does consume a lot of time in the planning process. Other measurements companies could use, are surveys to measure customer satisfaction, innovation, and product quality. However, nonfinancial measures are not the most effective way to offer the most accurate results compared to accounting measures; they can lack reliability and are difficult to implement (Ittner & Larcker, 1998). As with all business decisions when using any non-financial or financial performance measures, the ethical consideration that a company should consider is that all measurements need to be specific, value driven, support the company's objectives, and are measurable actions that drive top and bottom line business
performance.
In summary, the initial budget process is a plan that helps companies achieve their financial and strategic goals. Managers use budgets to plan, control, and track spending to ensure that their forecast does not exceed their available funds. However, the variance obtained are the difference between the actual results and the budget. Managers use the reasoning around these variables to make business decisions that help improve cost and profitability. Therefore, the data concludes that the initial budget process, the variances, the “make” or “buy” decisions, and the pros and cons of the non-financial performance measures does play a vital role in managers making ethical decisions that will ensure they meet their financial and buisness goals.