The Budgetary Process (Assess the key important stages in the budget process for a medium-sized manufacturing enterprise?)

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The Budgetary Process
Introduction
A budget is a set of intertwined strategies that quantitatively designate an entity’s probable future activities. It can be viewed as an administrative instrument that is responsible for monitoring and forecasting a firm’s necessities on alternative proceeds and expenditures of finance. The budgetary process provides a solid foundation and manifestation for the plans and actions of business. The system is expected to emphasize and enlarge the planning role at different levels of management through predicting and quantifying the future of a company in financial terms. Thus, the future financial needs of a company can only be achieved through the application of a budgetary process in the different operations it undertakes. Therefore, this paper shall explore the budget procedure and assess its key important stages for a medium sized manufacturing enterprise.
The figure below describes how a medium-sized manufacturing enterprise can design its specifications so as to meet its budget goals.

Financial Planning and Measurement
Financial planning and measurement act as a road map, a guideline, and a reminder of organizational goals and the activities that need to be carried out to achieve short-term and long-term targets. The process lays possible costs for medium-sized manufacturing enterprises and seeks to address the avenues of managing those costs (Brüggen & Luft, 399). Financial planning helps enterprises to manage their cash flow processes that usually vary from one season to another.

It takes the variations into account so as to avoid shortages in the future operations of the business. Equally, planning and measurement of financial activities helps in the development of a cash cushion that assists a business take a poor season and still flourish in its operations (Yeske, n.p). The act is achieved through the allocation of funds in projects that yields high returns and avoiding expenditures on activities that may lead to losses.
Stages in the Budget Process for a Medium-Sized Manufacturing Enterprise
Developing a Strategic Plan
A medium-sized manufacturing business should articulate on the plans that it intends to use so as to achieve its mission and vision. The act calls for a written strategic plan that shall ensure the enterprise’s resources are used to support its stratagem and development goals. Therefore, this serves as the first stage of the budgeting process that is vision driven.
Listing of Business Goals
Annual business goals act as the steps that an enterprise shall use to implement its strategic plan and the goals that need to be funded by the budget. The goals should be formulated, and accountability needs to be depicted towards achieving them. It is the responsibility of the management team to come up with a budget that stipulates the aggregate of financial resources that shall be used in achieving each organizational goal (Adam, n.p). For instance, if an enterprise has outgrown its facility and there is an objective to increase space, it calls for budgeting of resources to expand or move its operations.
Developing Revenue, Fixed Cost and Variable Cost Projections
The budgeting formulation committee should look at the aspect of revenue projection based on the historical financial performance and the projected income growth. The estimated growth can be tied to the organizational aims and other planned initiatives that will boost the growth of the enterprise. For example, if a business aims at increasing its sales by twenty percent, the sales projections should be incorporated in the annual revenue projections.
Fixed costs projection should be carried out by looking at the predictable monthly costs that do not change. They may include employee wages, facility outlays, utility charges, rent outflows, insurance rates among many other enterprise disbursements. The costs remain unchanged for a long period and form part of the minimum expenses that should be funded in a budget. For instance, if there are open employee positions, the costs incurred in filling those positions should be part of the fixed cost forecasts.
Variance cost projections are based on the variable costs that fluctuate from one month to another. They may include supply costs, overtime expenditures, and many other outlays. For instance, if higher Christmas sales call for overtime, the act will lead to a creation of temporary costs. Therefore, such expenditures should be budgeted in advance so as to avoid inconveniences in the daily operations of the organization.
Formulating Annual Goals Expenses
The stage includes the formulation of annual goal expenses and projecting costs associated with goal-related projects that the enterprise shall implement. Thus, the costs related to the implementation of the goals are incorporated in the annual budget of the business. On the same note, projected costs should be identified, laid out, and included in the departmental financial plan that is responsible for handling the projects or goals. For example, if the sales department aims at increasing sales by twenty percent, the costs that are associated with the upsurge should be incorporated in the budget.
Stating the Target Profit Margin
The formulation body is expected to come up with a targeted profit margin of the enterprise. The profit margins permit for viewing the returns that are supposed to emerge from the daily undertakings of the company. Similarly, businesspeople use their profit margins to carry out reinvestment operations into the facilities and development of their organizations. Therefore, this shows the significance of this stage of budgeting and the reasons as to why healthy profit margins are a strong indicator of the strength of an enterprise.
The Board Approval Stage
The owners and heads of medium-sized manufacturing enterprises should approve the budget and keep themselves updated on its performance. On the same note, the owners should review their monthly financial statements so as to monitor the budget performance, and be familiar with all expenditures undertaken by their management teams. The act will help to safeguard the enterprise against misappropriation of resources and deter the workforce teams from engaging in fraudulent activities.
The Budget Review Stage
The enterprise should formulate a budget review committee, and it should meet on a monthly basis so as to monitor the organizational performance against its set targets. The committee should review the budget variances that have been portrayed in the daily operations of the organization and gauge matters allied with budget overages (Mungal & Garbharran, n.p). The stage helps the committee to make corrections to overspending or make necessary modifications to the budget if needed. Therefore, if an enterprise decides to wait until the end of the year so as to make corrections or significant adjustments, the act may negatively affect the intended purpose and the outcome of the budgeting process.
Dealing with Budget Variances
Budget variances should be reviewed by the affected departmental managers and questions should be raised so as to establish the reasons behind the inconsistencies. Occasionally, unforeseen situations arise that the management team and employees cannot avoid. The act calls for an emergency fund that shall deal with the unplanned expenditures that may rise in the enterprise as it carries different activities so as to achieve its set targets (Mukwasi & Seymour, 12). An example can be the failure of a critical system or machine that may call for a replacement. The act will lead to a budget variance that will need to be funded by the organization or the affected departmental managers.
The table below shows the aspects of traditional and better budgeting, and how the static and dynamic budgeting methods are applied by medium-sized manufacturing enterprises in their daily undertakings.
Criterion Traditional Budgeting Better Budgeting
Planning and reporting Annual budgets, quarterly updates
Monthly updated forecasts
Indicators Oriented to the past
Early warning
Method of Budgeting Static Dynamic
The allocation of indirect costs
Based on the consumption/time
Based Media
costs

Organizational structure
Oriented vertically, with the hierarchy
and many departments
Oriented horizontally,
with teams competency
Risk management
Estimation based on experience
Analysis of scenarios (best,
possible, the worst)
Costs Driven by Financial Controls in a Business Organization
Different costs have to be mentioned in a budget and be driven by financial controls in a business organization. Budget formulation committees prefer to have the costs spread over different heads so as to be in a position to divide and allocate resources in a procedural way.
Operational Costs
Operational costs are made up of the expenses that an organization has to achieve to implement its activities or projects. Medium-sized manufacturing enterprises view them as selling costs because of the area that they encompass. They include executive salaries, rental and maintenance costs, wages and commissions for other employees, advertising expenses, research and development funding, training costs, and depreciation of selling assets (Lakmal, n.p).
Cost of Goods Sold
It includes the costs of procuring raw materials and revolving them into complete merchandises. The group is made up of direct and indirect labor costs, expenses incurred on direct materials manufacturing products, manufacturing overhead expenses, and indirect costs of service delivery.
Financial Expenses
They are the expenses related to borrowing resources or creating inflows through engaging in fiscal investments. In manufacturing enterprises, these costs include loan origination fees, interest paid on borrowed funds among other financial expenses.
Extraordinary Expenses
They are expenditures allied with one-time dealings or trades or non-recurring activities that are not part of an enterprise’s regular corporate tasks (Morris, 155). They include the costs of selling a business, sale or disposal of a significant asset, the sale of company land or buildings and workforce reduction through employee layoff.
The figure below stipulates how a medium-sized manufacturing enterprise can formulate its budget so as to encompass the different types of costs involved in its day to day operations.

Types of Costing Systems
Process Costing
The system can be applied by a manufacturing enterprise whose production units are identical cannot be separately identified (Brierley, Cowton & Drury, 6). The production activity consists of continuous and repetitive processes that undergo different stages. An enduring industrial practice may be composed of diverse portions under which raw material undergo a specific route. Thus, the yield of each phase may act as the input of the subsequent phase of the practice. Under this system, related costs at each distinct fragment of the process are calculated, and the yield of each phase is transmitted to become the input of the succeeding phase. Similarly, certain phases of the industrial procedure may end in a good that may be traded to other companies. The outlays up to that phase can be applied to compute the revenue on such transactions and act as the source for the expenses of the subsequent step of the business course for the final creation.
Absorption Costing
The system targets to allocate all outlays allied to manufacturing process with an effort of comprehending the degree of which sales income covers expenses. Apart from looking at direct or variable costs, a manufacturing enterprise will have to consider the overheads that the business incurs. Overhead elements like operating expenses, depreciation of apparatus, and the issue of salaries need to be taken into consideration. Therefore, these charges must be apportioned to merchandises and facilities using a suitable allocation method. The act shall help an enterprise achieve a fair distribution of funds to the pertinent products.
Activity Based Costing
The system aims to allocate all costs incurred in the production of goods including overhead expenses. It pursues to overcome hitches met by absorption appraisal system regarding allotting overhead expenses to projects (Delpachitra, 145). Therefore, this system ascertains the undertakings that are done by an enterprise and assigns costs to such actions. For a medium-sized manufacturing business to apply this system, it has to discern and measure various accomplishments carried out by workers and apparatuses in assembling the final products (Rahmouni & Charaf, n.p).
Conclusion
The budgetary process helps managers of medium-sized manufacturing enterprises to attain their set goals by alerting and inciting the available resources in a positive way. Organizations that may choose not to undertake the budgetary process are likely to face difficult situations in measuring their performance due to the lack of a target that aids in benchmarking their undertakings. The above discussion has ascertained the significance of the budgetary process for medium-sized manufacturing enterprises in evaluating their performance instead of relying on liquidity and profitability in assessing their activities.
Equally, the paper has demonstrated the need for financial planning and measurement in justifying survival, growth, profitability, and social objectives of medium-sized manufacturing enterprises. Similarly, the costs incurred by business organizations that are driven by financial controls were explored. The paper showed the different costing systems that are available and the suitability of each in differing situations. Therefore, the paper assessed the key crucial stages in the budget process for medium-sized manufacturing enterprises.
Work Cited
Adam, Adam Bąk. “Innovative Concepts Of Budgeting In The Enterprises.” Contemporary Economics 3.1 (2009): n. pag. Web.
Brierley, John A., Christopher J. Cowton, and Colin Drury. “An Examination Of The Types Of Cost System Used To Obtain Product Costs In British Manufacturing Industry.” International Journal of Managerial and Financial Accounting 1.1 (2008): 6. Web.
Brüggen, Alexander and Joan Luft. “Capital Rationing, Competition, And Misrepresentation In Budget Forecasts.” Accounting, Organizations, and Society 36.7 (2011): 399-411. Web.
Delpachitra, Sarath. “Activity‐Based Costing And Process Benchmarking.” Benchmarking: An International Journal 15.2 (2008): 137-147. Web.
Lakmal, Darshana. “Cost Analysis For Decision Making And Control: Marginal Costing Versus Absorption Costing.” SSRN Electronic Journal n. pag. Web.
Morris, John J. “The Impact Of Enterprise Resource Planning (ERP) Systems On The Effectiveness Of Internal Controls Over Financial Reporting.” Journal of Information Systems 25.1 (2011): 129-157. Web.
Mukwasi, Carrington and Lisa Seymour. “Enterprise Resource Planning Business Case Considerations: A Review For Small And Medium-Sized Enterprises.” Journal of Innovation Management in Small and Medium Enterprise (2012): 1-15. Web.
Mungal, Avika and Hari Lall Garbharran. “Cash Management Challenges Of Small Businesses In A Developing Community.” Mediterranean Journal of Social Sciences (2014): n. pag. Web.
Rahmouni, Ahmed Fath-Allah and Karim Charaf. “Success Of Activity-Based Costing Projects In French Companies: The Influence Of Organizational And Technical Factors.” SSRN Electronic Journal n. pag. Web.
Yeske, Dave. “Finding The Planning In Financial Planning: An Integrative Framework For Strategy-Making By Financial Planners.” SSRN Electronic Journal n. pag. Web.