Organizations design, implement and operate budgets for the provision of resources to support plans under implementation. Budgets are statements of quantitative and financial implications for a course of action pursued by the management within the next fiscal period. Companies must decide whether to get their activities done within or to outsource them. Such a decision is influenced by the cost structure among other factors. The purpose of this paper is to discuss the budgeting process, make or buy decisions and nonfinancial performance measures ( Nobles, Mattison & Matsumura, 2014).
Companies use different approaches to develop budgets. The process of developing budgets must engage those who will be responsible for its implementation. Decisions to formulate budgets are driven by the mission and fiscal accountability of the company. The ability of an organization to maximise its scarce resources depends on its ability to plan. Controls should also be carried out to ensure that the plans are carried out. One tool that the management can use to prepare and monitor is a budget. It shows the company's objectives and how the administration will acquire and use resources to achieve the desired goal. Budgeting process involves planning for future activities. In setting operational budgets, the management support, participation in setting the goal, communication results, flexibility and follow up must be considered. Operational budgets must consider the projected sales and activity levels desired to meet the final number of units to be produced. It must also determine the materials and the labor costs including other fixed and administrative expenses for the period in which the budget covers ( Nobles, Mattison & Matsumura, 2014).
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A budget variance arises when the projected activity level differs from the actual level. Companies prepare budgets so that they can plan their activities. Budgeted costs enable them to set the expected sales, the price, and the estimated profits. Actual performance always differs from the scheduled levels, and therefore budget variance occurs. The budgets are set by historical figures, calculated values and similar processes for a predetermined period. When the budgets are compared to the actual statistics, there are usually differences known as variances. Budget variances are obtained by subtracting the lower of the budgeted and actual figures. The differences can be caused by changes in sales volume, material costs or labor costs. The variations can be favorable if the charges are lower or the revenues are higher or unfavorable if incomes are smaller and the costs are higher. A budget variance arises from cost, price or material changes ( Nobles, Mattison & Matsumura, 2014).
Variance analysis from the case looked at the costs, revenues, materials and labor and how the actual figures differed from the budgeted. The investigation established the reasons for the differences the quantities used and the labor hours were more than the planned estimates. Once the source of the variation is identified, the company can use the information to take corrective actions. Some of the possible actions that it should consider include streamlining the work processes. It can also vary the material used for manufacturing the products. It can also improve its supervisory activities on the employees. Lastly, it can adjust future budgets accordingly. When corrective actions are taken based on the budget variance analysis, the plans become more accurate, and the entire process improves ( Nobles, Mattison & Matsumura, 2014).
The company should ensure that ethical considerations are taken into account when implementing the above changes. Any action should not negatively affect the employees, for instance, the company should not introduce punitive supervisory measures neither should the streamlined processes affect the employees. Materials used for manufacturing should also meet the required standards. They should not be toxic, substandard or inferior. Similarly, the necessary level of inspection and the number of defects should even be considered before making any changes that will affect direct materials. In dealing with the number of labor hours, the company should identify the reasons as to why more time was used in producing the same number of units as opposed to squarely blaming the employees. Any action by the company should consider the ethical dimension and how it will affect its performance. The company should, therefore, streamline its work process, vary its direct materials and improve its supervisory ability because such actions will not negatively affect any concerned party but will lead to improved performance ( Nobles, Mattison & Matsumura, 2014).
A make or buy decision depends on the overall objective of the company. The company should outsource if the costs of producing the product in-house are more than the costs of buying. Such a decision should consider what is currently made and the price quoted by the seller must be lower than the marginal costs. If the decision is to make, the total costs should include other expenses like depreciation, interest on capital and the total cost should be compared with the price of purchasing a similar product. Apart from the cost factors, the company should consider other non-quantitative factors like the reliability of the supplier and the quality of materials. In deciding whether to make or buy, the management should determine the impact of such a decision on the employees of the company, set standards and how critical the activity or product is to the company. The implication is that cost alone cannot be used to decide whether to make or buy. Other factors and a delicate ethical balance must be achieved in either decision. Choices that consider all the factors will positively affect the efficiency of operations ( Nobles, Mattison & Matsumura, 2014).
The company should not base all its performance on financial performance. Other measures like employee or customer satisfaction should also be used to determine the performance of the company. Although it is difficult to quantify and compare nonfinancial return, they offer crucial parameters in which an entity can be judged from. They also consider the human aspects of an organization and how it treats its stakeholders. Financial performance measures are more straightforward to compute and can be used to describe the performance of an entity. Similarly, they are useful in comparing the company with similar firms in the industry. However, such measures assume that monetary measures are the ultimate determinant of a successful business. They disregard other elements that are crucial to the success of the company ( Nobles, Mattison & Matsumura, 2014).
The purpose of this paper was to discuss budget process, make or buy decisions, and nonfinancial performance measures. The process of making budgets was considered including variance analysis and potential reasons for the variation. The paper also discussed some of the changes that can be made by the company based on variance analysis. Ethical dimensions of the proposed changes were even considered in the discussion. The paper also discussed make or buy decisions and non-financial measures and why companies should use them.
References
Nobles, T. L., Mattison, B. L., Matsumura, E. M. (2014). Horngren’s financial and managerial accounting (4 th ed.). Upper Saddle River, NJ: Pearson Education, Inc.
