ASSIGNMENT QUESTION
VisionMix Plc is an international manufacturer of TV and radio studio equipment. This includes cameras, lights, sound equipment and digital editing suites. The company produces about 60 different products.
VisionMix has been operating for 25 years and had revenues last year of £250 million. It was listed on the London Stock Exchange 10 years ago and has a market capitalisation of £300 million with debt of £50 million. The founder, Anna, is the CEO and owns 15% of the shares in VisionMix.
The company headquarters is located in Bath which accommodates 20 staff including management, sales, finance, HR and administration. It has a design and manufacturing operation in Hereford where it employs 125 staff in a mainly automated manufacturing facility with onsite storage/warehousing.
The company has recently tendered for and won three new contracts to supply refurbishment and upgrades to three universities teaching broadcasting courses and another to refit news studios for the BBC in Bristol. This will lead to the rollout of 15 new products and systems. Additional plant and manufacturing capacity will be needed during the coming 12 months.
Currently around 65% of VisionMix’s sales are in the UK, 30% to other EU countries, and the remainder outside the EU. In anticipation of the UK leaving the EU, Anna wants to step up efforts to market into the Gulf, North America and the Far East, especially China. She is considering establishing new manufacturing facilities in at least one of these locations.
VisionMix has always used a traditional budgeting system. The Finance Director, Scotti, joined 3 years ago but is concerned that this approach might not be the most appropriate when such significant changes may affect the company in the coming years. However, if a change of budget approach is going to be made, he thinks it should happen in time for next year’s budget process. That way any “bugs” can be ironed out before the company goes through more significant changes in the following years.
For the purposes of his analysis he has broadly divided the business up into three areas: the existing customer base; the new contracts; and the planned expansion of the international business.
Solution
Executive Summary:
The first shows how the budgeting is used for planning, improving operational efficiency and achieving strategic goals for the company. The part shows the advantages and the limitations of the traditional budgeting approach. Incremental budgeting approach is also discussed. This part shows how vision Mix has adopted the traditional budgeting approach in the past and how it is appropriate for its business model. However, for plans, how this model can provide limitations to its budgeting process.
The second part of the report shows the alternative models of budgeting which can be used by the company to look at the possible implementation for future expansion plans. The alternatives are discussed in detail regarding their improvement to a traditional budgetary system and the limitations that it offers. The rolling budget, the zero-based budget and activity-based budgets are discussed as alternatives. The advantages of all three and their respective limitations are shown. The application of all three to Vision Mix is also shown to evaluate the best approach for the company better. Finally, the recommendation is made for the best alternative budget approach to VisionMix.
Case Introduction:
The case revolves around a manufacturer of radio and TV studio equipment, Vision Mix Plc. The company manufactures cameras, sound and light equipment and digital editing suites with a total of 60 different products. The company has been in business for the last 25 years and was listed on the London Stock Exchange 10 years ago. The founder of the company Anna is currently working as the CEO and is also the owner of 15% of its shares. Around 20 staff members help operate the company in various departments in its headquarters and around 125 in the manufacturing facility. After the BREXIT vote, the company wants to have a manufacturing facility built in any of the Far Eastern markets. For this purpose, the company wants to look at the alternative budgeting methods and how it can be implemented and influence the business.
Part 1:
i-An understanding of the purposes of preparing a budget; what processes the company needs to follow; and how the budget process itself can help development of the business model.
Understanding the purpose of Preparing Budget
It is important for a business to plan its future. The targets which a business is trying to achieve are unlikely to be achieved if the managers are not clear on how to direct their companies in future. A budget is seen as a short-term business plan to some extent. The purpose of the budget can be numerous. It helps the company to plan for its annual operations. It also aids the company to coordinate its activities regarding the various parts of the firm, making sure that all parts of the organisation are in harmony with each other. The budget preparation also helps the managers to remain motivated to strive for their goals. Budgeting provides the company with controlling the power of its activities. It also helps with better communication of the plans with the departmental managers. The evaluation of the manager’s performance is also done by using the budgets. The budgeting process helps in promotion of forwarding thinking and helps to coordinate various aspects of the business. The budgetary systems provide a system for the authorisation. The main purpose of the preparation of the budget is to measure the performance issues and the operational efficiency of the business. It helps in improving the projection or revenue forecasts as well.
What Process the Company Needs to Follow?
The process of budgeting is important as it needs coordination between the plans of all departments. It means that a senior manager or a member of the board should be closely involved in the process of overseeing it. Usually, a budget committee is formed to supervise the budgeting process. The management often appoints a Budget Officer who carries out the technical tasks of the committee. Accountants are usually needed for the budget office roles. So, the first step is to establish the responsibilities of the budget tasks. Secondly, the budget guidelines are to be communicated to the relevant managers. Budgets are normally needed to work towards the achievement of the overall business objectives. Thus, managers are to be aware of the environment in which they are operating and how they can use the information in budgeting. The third step is to identify the limitations and key factors. It is helpful as managers can be cautious about it. The next step is to prepare the budget specifically with the limiting factor. The limiting factor is usually the sales which call for the preparation of the sales budget. Finally, all the other budgets are also drafted in accordance. Then review and coordination of the budgets need to be done. The master budget is then prepared which are the budgeted income statement and balance sheet and a cash budget. All the budgets for the individual departments are then communicated to these. The last step is to monitor the performance as compared to the budget.
How Budgeting Helps Business Model Development
Budgetary planning helps in providing a method for quantifying the strategy of the business. Every company has a mission which it strives to follow and achieve in the long run (Gowthorpe, 2011). The mission sets the overall direction of the company. The mission can take a long time to achieve even the whole lifetime of a business as well. The strategic objectives set out how the mission would be achieved. It shows the steps which would help achieve the mission in the long run. The budgets help in the fulfilment of these strategic objectives in the short run period (Weetman, 2010).
ii- Demonstrate the application of traditional budgeting approaches (including incremental budgeting) to plan future cost management for this specific business. Illustrate your answer with examples of how products and processes for this business would be budgeted for in a traditional/incremental approach,
Application of Traditional Budgeting Approaches
Traditional budgeting is the method for budgeting which is used by most of the companies. Vision Mix is also using a traditional budgeting approach. This type of budgeting calls for the method in which the previous year budget is taken as a base budget and the New Year’s budget is prepared based on making changes to this budget. The expenses can be adjusted, revenues can be raised, and costs are increased as per the New Year forecasts for demand. The Vision Mix has been using it for its past years, and the future years, the finance manager considers it as not appropriate. The traditional budget needs to be justified over and above the base year budget. The budget is easily implementable and provides stability to the accounting and budgeting process. It also aids in promoting decentralisation as each plant or office has its budget and is allowed to make changes to it within limits defined by the management. This type of budget also gives Vision Mix the opportunity to consolidate its all budgets in one large budget. These are easy to prepare as it is based on past calculations.
Incremental Budgeting:
The incremental budgeting is the budget, which is like the traditional budget, however, Vision Mix would be needed to add only incremental amounts to arrive at a new budget. It is based on the assumption that all departments of Vision Mix would continue working on the current level or more of its expenditure and expenses to generate a current level or more of the revenues and profits.
iii- Analysing whether a traditional budgetary system is appropriate to all or any parts of the business in its planned future form.
Analysis of Traditional Budgetary system for Future Form of Business
The business of the Vision Mix is based on the manufacturing of equipment and sound and lighting fittings of studios. The Vision Mix business model is based on contracts with various universities, media houses and entertainment industry demands. The forecasts for the demand of these products are done, and then budgets are allocated based on the expected sales of the equipment. The budgeting process for Vision Mix tends to be more based on the past budgets and increments to the past budgets. The budget can be termed as appropriate to the current and past scenario of the company as it knows its UK market. Most of the revenues are generated from the UK and EU countries. It is a market in which the company is comfortable, and the forecasts had not been much faltered. It shows that the company can consider its past consideration of the traditional budgeting as appropriate.
However, for plans, the business model of Vision Mix is going to expand. With entrance into the Chinese or any other Eastern market, the company would need to adopt a more flexible budgeting process. Traditional budgeting is more of an inflexible approach and can become irrelevant quickly. The changing environment, market conditions and economy can cause disruptions in the business operations which would make the budget irrelevant if it does not change accordingly in time. The changing environment calls for a budgetary system which can be more adaptive and helps managers to make quick decisions on changes to the budget. The changes of the market could be realised more effectively as well if the company would be able to see its influence on the budget.
Part 2
iv- An understanding of the following alternative budget methods: rolling budgets, zero based budgets and activity based budgets. Explain how each method attempts to improve on the traditional approach and what their respective drawbacks might be.
Rolling Budgets:
Rolling budgets are simply the budgets which act as continuous budgets. The rolling budgets are being constantly updated, and additions and adjustments are constantly made on monthly or quarterly periods. The rolling budget provides a dynamic approach for the managers to change their static budgets into rolling budgets by making changes to it on a monthly or quarterly basis. It is a budget which is the extension of the existing budget. The approach requires more effort than a traditional budget and needs more time as well. It is more of an incremental approach, however it is done on a monthly or quarterly basis. The short-term approach makes it more flexible for planning and control of the management. It makes it more adoptive of the changes in the market. The traditional budgets are usually not changed and are static for 12-month period. However, the rolling budget can be changed if there are some fundamental changes in the business operations.
The changes in the variable expenses, the fixed expansion and other important expenses have an effect on the rolling budget. The limitations of the rolling budget are that it is quite time-consuming as it needs continuous updates. Further, it also can act as a demoralizer for the employees and management, confusing them about the direction of the company. Uneven updates on a monthly or quarterly basis can mislead or complex the process as well.
Zero-based Budgets:
Zero-based budgeting is the one in which the budget is made from scratch. The base is zero as it needs the re-evaluation of the statements, and its every line and needs the management to justify all the expenditures that are going to be incurred in future. It provides the approach of budgeting by which the expenses of an accounting period are more nearly calculated as based on the actual expenses that are to be incurred and not by just accounting for the changes in the old traditional activities regarding increments or adjustments. Furthermore, additionally, every activity needs to be justified as well. The costs are to be justified in order of its link to the strategic goals and the revenue targets.
As compared to the traditional budgeting, the zero-based budgets assume that no balances are to be carried forward and thus none of the expenses can be pre-committed. The budgeting system focuses on the identification of tasks and then sourcing of it as based on its expenses not taking into account the current expenditure structure of the company. It is an improvement to traditional method as it helps in the identification of the tasks and finding ways of achieving the targets. It also aids in the evaluation of the alternative sources of funds and solutions. The gives the numbers of budget a priority as all numbers are to be justified (Drury, 2016).
Activity-based Budgets:
It is another method which has been very popular among companies nowadays. The activity-based budgeting is the method which is prepared by using the activity-based costing as a basis for the overhead costs. The method considers the past budget to arrive at the current budget. The activities which drive costs are analysed and identified in this method. Based on this, the resources are allocated to the activity. Activity-based costing is done by bringing efficiency in the organisational activities. The budgets are prepared by justifying the cost drivers of the activity. The method is thus more action oriented and less function oriented.
As compared to the traditional costing, it needs more analysis and evaluation of the cost drivers and activities. Once implemented, it gives the company a competitive advantage to know which activities incur more costs, and which ones generate more revenues. Cost savings can be made using this method as well. It also aids in the elimination of bottlenecks for the company. It treats the business as one unit and not different departments or subsidiaries. However, it required an extensive understanding of the business model and tends to be quite complex and resource consuming. The costs involved in its implementation can be high as well (Atrill, 2015).
v- The potential application of these methods to the company giving specific examples of how all or some elements of budgeting could be performed more effectively using an alternative method.
Application of methods To Company
For the implementation of this alternative, Vision Mix can look for the best alternative for its business model. The implementation of the Rolling Budget would mean that Vision Mix would have to make adjustments or updates to its traditional budget quarterly. It would offer it the opportunity to incorporate the changes it undergoes while expanding to the Chinese market. The expansion to the Chinese market would need the company to increase its fixed expenses to build or purchase its new manufacturing plant. The company would also need the budget to be quarterly adjust the expense for promotion, legal fees and other operating expenses as these are incurred. It is possible that it would realise that more advertising needs to be incurred which would then cause an increase in the budgeted expenses.
The implementation of the Zero-Based Budgeting is done by not taking into account the last year budget. It would call for the company to reevaluate every expense and expenditure that it has incurred in the past and the new expenses that it has to incur in the new venture and justify it to the upper management. It would need Vision Mix to make a new committee for the revaluation of every expense head.
The implementation of the Activity-based costing would call for the identification of each of the tasks. Like Vision Mix would be needed to look at the tasks which are needed to manufacture one product type completely. For each of the activities, what would be the cost driver, and how much activity is needed? It would be a very complex process, and vision Mix would certainly require consultancy in this regard.
vi- Analysing whether one of these methods (or a combination) would be more appropriate to the company.
Most Appropriate Method:
As explained in the above part, the rolling budget is comparatively easier to implement as compared to the zero-based budget and the activity-based costing. Activity-based costing seems to be more complex for the company. Thus, it is disregarded. Similarly, the company can also adopt the rolling budget as the company would need to update it which requires resources as well constantly. The best alternative would be zero-based costing. However, this for new ventures only. The company has already divided its business into three areas. The planned expansion can use zero-based budgeting as the new expansion would need to give justification of every expense which would consequently need more detail and help the business to establish its position as well. The new contracts can be based on the incremental budgeting, as the new contracts would be won in the same market as the UK or EU for which the company seems capable enough to use the traditional budgeting method. The existing customer base can use the traditional budgeting approach as it has been using in the past. All in all, for the three business units, three different approaches for budgeting are recommended to better cater to the business needs and the changing environment of the market: Traditional budgeting for the existing customer base, the incremental budgeting for the new contracts and the zero-based budgeting for the planned expansion in the international business in the Eastern counties.
References:
Atrill, 2015. Chapter 6: Budgeting. In Management Accounting for Decision Makers. 8th ed. London: Pearson.
Drury, 2016. Chapter 9: The Budgeting Process. In Management Accounting for Business. 6th ed.
Gowthorpe, C., 2011. Chapter 16: Budgets. In Business Accounting and finance. 3rd ed.
Weetman, 2010. Chapter 13: Prepaing a Budget. In Management Accounting. 2nd ed. London: FT Prentice Hall.
