Short-term budgeting planning

The business owners develop the plans to reach their overall goals and they generally consider it valuable to separate the planning in stages. This would enable the business owners to keep track of the immediate enhancements whereas assessing the progress in the direction of future goals and targets (Sponem and Caroline 2016). The different frames of planning procedure emphasis on the time-sensitive features of the organization structure and environment. A business owner can distinguish the planning depending upon the time frame of inputs and anticipated outcomes.

The period of budgeting is treated as the noteworthy factor in developing the comprehensive programme of budgeting. The current report is based on addressing the top management of HTC Corporation to assess the requirement of long term budgetary plans and short term budgetary plans. The report would also address the relationship between the functional departments and responsibility centres. In the later part of the report an address towards determining cost, price and demand.

Assessing the need for long and short term budgetary plans in the business: 

Short term budgetary planning is important for a business because it takes into the account the characteristics of the company currently and developing the strategies for planning. The situations of production equipment or problems related to quality of the product are treated as the short term concerns (Srivastava 2018). The short term budgeting looks into the aspects of the following three months of operations. The objectives of this budget is to assure that the business is liquid enough to pay the debts before it becomes overdue. The short term budgeting is viewed as the element of survival for the company because if the business does not have the money to pay their debts, they might risk losing their business. The short term budgeting is necessary for HTC so that it can review the bank balances and outflow of cash for the later six to eight weeks to determine the amount of cash payable. It also helps in determining what receivables are coming up and the amount of sales a business anticipates to make (Otley 2015). The short term budgeting is helpful in ascertaining or predicting the balance and considering the additional source of income to cover the payments.

The long term budgeting is generally neglected in the businesses. It takes into the account the period of 12 months of operations and involves periodic reviews regarding each quarter or month. Using them, can make better and more well-informed decision in their business. Fundamentally, the long term budgeting involves putting the strategic goals in numbers (Schaltegger, Stefan, and Roger 2017). The long term budgeting involves better forecast of the amount of cash inflow and outflows a business would experience in future. The long term budgeting is helpful for HTC in providing a comparative result with the actual results by adjusting the budgets accordingly to meet the future needs. Reviewing of budgets would reveal the areas of business that are highly profitable or less profitable, providing an indication of which projects should be considered and the projects that should be dropped.   

Long-term budgeting planning

The responsibility center is treated as the functional entity inside the business which has its own goals and objectives that have the dedicated staff, process and financial reports. The responsibility center is used as specific responsibility for revenues that are generated, expenditure occurred and funds that is invested by the individuals (Johansson, Tobias, and Sven 2017). This would enable HTC’s senior managers of the company to locate all the fiscal activities and business outcomes to a specific employee. By doing this the responsibility center preserves the accountability and can be later used to compute the payment of bonus for the employees.

The functional department on the other hand has the traditional hierarchical structure which is typically structured by the functional departments to clearly define the roles and responsibilities (Ibrahim and Umar 2017). The functional department would have held HTC management to communicate on the event any problems. It also helps the workers in understanding their roles and how the business works by setting out the responsibilities of each part of the business.

Even though the departments and responsibility are separate from each other but their roles are interconnected. For example, the human resource departments are accountable for assuring that other departments have sufficient workers with the right set of skills. The finance department on the other hand makes sure that the money is sufficiently available to execute the activities across all the departments.

                                                                                                        (Source: Kamal 2015)

There are goals of every functional departments and if the business is to be successful then these objectives are tied closely with the responsibility department. On the other hand, from the perspective of accounting, the financial report must be issued to each responsibility center that itemizes the expenditure, revenues and profits to which each functional department is entirely responsible (Kaplan, Robert and Anthony 2016). The goals under the functional department and responsibility center is carefully coordinated to make sure that they are consistent with the corporate objectives and working altogether to attain the overall organizational objectives.

Relationship between functional departments and responsibility centers

The internal and external sources of information that is used to determine the cost, price and demand are as follows;

Internal sources of information:

Firms reputation: The price and demand of the product may be determined based on the reputation of company in the market. For example, a company like HTC can demand for higher price for their brands as the company can enjoy goodwill in the marketplace.

Product life cycle: The stage on which the product is in its product life cycle also create an impact on the price and demand of the product (Kohlmeyer et al. 2015). For example, during the HTC’s stage of product introduction the firm might charge low price so that it can attract the customers and during the stage of growth a business might raise the price.

Promotional activities: The promotional activities that was undertaken by the company to determine the price (Kirst 2018). If the business occurs cost on heavy advertising and sales promotional costs, then the product pricing would be kept on the higher note to recover the cost of product.

Government control: HTC should consider the information regarding the government rules and regulations should be taken into the account while fixing the prices. For certain products, government might pronounce administered prices and hence the marketer has to take into the account the regulations at the time of fixing the prices.

Economic conditions: The marketer is obligatorily required to take into the account the economic state of affairs that is prevalent in the market at the time of determining prices (Kokubu, Katsuhiko and Hirotsugu 2015). With the prevailing condition of recession, the consumer might have to spend less money that would which would enable the marketer in reducing the price so that it can influence the purchase decision.

Channel intermediaries: The marketer should also take into the account the number of channel intermediaries and their anticipations. The longer the chain of intermediaries the higher will be price of the goods.

Using the real numbers to assess the sources of variance is an important strategy of managing the budget variance. Budget is regarded as the primary tool for the financial analyst to manage expenditure and variance originating from budget (Langfield-Smith et al. 2017). By comparing the budget to the actual numbers the analyst of HTC is better able to recognize any variance between the actual costs and the budgeted costs. The greater is the variance, the more help would be required for management. The best strategy of managing the budget variance is to form a monthly report and conducting the regular meetings to discuss the inconsistencies with the management and head of the department. This would allow the responsible person in holding the particular managers accountable for reducing the budget variance.

Determining cost, price, and demand

Another strategy of managing the budget variance is comparing the actual numbers reported against the budgeted report. Researching the reason for variance and identifying the department or group which is mainly accountable for the variance. Providing the budgeted report to the higher level of management (Eldenburg et al. 2016). The budget variance can also be managing by HTC by obtaining the most current expenditure report. The report enable written off the actual numbers by the organization. Therefore, the continuous comparison of budget against the actual numbers helps in minimizing the budget variance.

Budgetary tools are treated as the financial action plan. The budgetary management control tools is particularly useful in reviewing the budgets on a regular basis as the part of yearly planning cycle. The budgetary management controls serves as the means of monitoring and controlling the business in order to assess the differences between the actual and budgeted income (Gooneratne, Tharusha and Zahirul 2016). The budgetary management controls can be used by HTC for benchmarking the business performance by comparing the budget on yearly basis. For instance, the HTC can facilitate comparison of the forecasted figures with the figures of earlier years in order to measure the business performance.

The budgetary management controls act as the key performance indicators that ultimately optimizes the performance of business. The managers are required to understand and monitor the main drivers of their business namely the sales, cost and working capital. Hence, any problems associated towards the problems of cash flow or failing to attain the profitability would show up in the figures when evaluating the business budgets against the forecasted (Arnold, Markus and Martin 2018). This would ultimately help HTC in solving the problems in the early stages and simultaneously optimize the performance of business.

Fixed and variable costs: There are mainly two basic types of costs that are incurred by the business namely the fixed and variable costs. Fixed cost does not vary with input whereas variable costs do vary. Fixed costs is at times known as overhead costs. While preparing budgets, fixed costs may comprise of the rent, depreciation and salary of supervisors. Manufacturing overhead might include the items namely the property taxes and insurance (Burns, Richard, and Joe 2015). The variable costs on the other hand, varies in the direct proportion with the change in the output. In the production facility, labor and material costs is generally treated as the variable costs as it increases with the increase in the amount of production.

Managing budget variance through budgetary tools and controls

                                                                                         (Source: Burns, Richard, and Joe 2015)

Product and Period Costs: The term product and period costs is identical to the direct and indirect costs. Product costs are those costs where the accounting system of the company is associated directly with the output and that are used in the valuation of the inventory (Chak, Suet and Heidi 2015). The period cost on the other hand are charged with the expenditure of the current period. The period cost is not treated as the product cost therefore they are not associated with valuation of inventories.

                                                                                          (Source: Chen and Clara 2017)

Controllable and Uncontrollable Costs: In the process of budgeting it is useful to recognize the controllable costs and uncontrollable costs. This simply implies that the managers that has the budgetary accountability must not be held responsible for the costs which cannot be controlled.

Out of pocket and sunk costs: Financial managers generally uses the term out of pocket costs and sunk costs when assessing the financial merits of the specific proposals. The out of pocket costs are referred as those costs that need the use of current resources particularly the cash. Sunk costs represents the costs that have already been occurred (Chen and Clara 2017). Financial managers might consider sunk costs as the costs that is related with the tools and machinery along with the out of pocket costs that is related with addition more material and labour.

Planning profit as a means of budgets: The planning phase is associated with the future years of the business. Cost accounting offers a budget of the contemplated material costs, salaries, wages and other costs that are related to production and marketing. Management expresses concerns with the ultimate profit originating from the costs and plans revenues or sales (Chenhall, Robert and Frank 2015). Budgeting represents the forecasting effects on the profits that varies by volume of activity. The labour costs and budgeted material costs is predetermined based on the time required to produce each product. Therefore, the cost data of all the factory overheads and non-manufacturing costs which fluctuates with the activity should be ascertained first to determine the base of profits for the budgeted sales.

Controlling costs through responsibility accounting: Uses of cost data must be used to control costs and the fundamental includes the following;

1. Fixation of responsibility for implementing control
2. Restricting the individual control effort to the controllable costs, and
3. Reporting the performance of the individual.

The fixation of responsibility for controlling costs requires creation of definite lines of authority. The organization chart offers the organizational structure and follows the line of authority to allow the assignment of costs control responsibility to the specific individuals (Collis, Jill, and Roger 2017). Another usage of the cost data includes restricting the individual control effort towards the necessary aspects of the responsibility accounting. Any report must particularly recognize the controllable costs of managers. The better is the effort of supervisor and success of the controlling costs for which the supervisor is accountable, the higher would be the chance for the company to attain the goal of profitability.

According to view of several scholars the cost model is helpful in providing useful information for the purpose of decision making, after gathering and analysing data. The effectiveness of the data is reliant on the correct information for undertaking the correct decision. As per the researchers manufacturing companies uses two most common techniques that is used for external purpose for valuing the inventory and cost of sales (Di Francesco, Michael and John 2017). The absorption costing is commonly used for external purpose and the managerial accounting is useful for making decision by the management. The techniques of costing provide the management with the different net operating profit whereas differences may be very high.

As per the researchers under the variable method of costing only the part of the cost is taken into the consideration in the product that changes with the level of activity. It comprises of the direct material, direct labour and variable manufacturing overhead costs. Fixed costs is not held as the part of product costs under the variable costing system (Driessen, Grant and Megan 2018). Fixed costs becomes the part of the period costs such as administrative and selling expenditure, while in the variable costing method the inventory and the cost of goods sold does not comprises of any fixed costs of production.

Similarly, several studies have argued that the marginal costing techniques approach must be conceded together with the absorption costs because it signifies a real way of controlling costs. Researchers have argued that the different techniques of costing offer different net profit due to the differences in the stock value. The executives of the businesses that are using the ABC costing are content with the costing techniques in comparison to the other technique of costing. The companies that have the standards costing also make use of the software for costing. Therefore, any method of costing such as unit or output costing can be used under any techniques of costing.

Conclusion: 

On a conclusive note, the budget must have proper relation with the objectives of the organization and must be linked with the structure of the company. The managements are under the obligation of keeping the budget as realistic as possible so that it can attain its goals. A good organization like HTC should cover all the phases of operations in its budget with adequate emphasis on the accounting records and process. It is recommended that HTC must establish a budget committee that should consist of budget director, chief executive officer and heads of numerous departments of the organization.  

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