Answer to Question #196293 in Accounting for jamila

Question

(a) You have been hired as a trainee accountant by the BDL group. and you are given the task of preparing a monthly budget for the production department. What factors will you consider in setting production requirements? Why inventories are important in production budgets?

(b) Tonwal group operates in such a dynamic environment that the top management stresses achieving the targets under all situations. What consequences of such an approach may have on Tonwal’s operations? How can the budgetary slack cause negative consequences on Tonwal’s long-term operations?

Answer 1

a)

Factors to consider when drawing a production budget

Drawing of production budget (estimates of the direct and indirect (labor) materials as well as other related overheads) requires that a number of factors be taken into account for an effective out. As a trainee accountant tasked with the responsibility of designing an production budget, I will consider the following factors; one is the records of previous monthly budget for the company to assist in making a forecast or guidance on the future expected expenditures for the company; secondly I'll take into account the prevailing economic situation relative to the previous month of activities especially on the market prices for both direct and indirect materials. Thirdly, expected sales projection for the company would be of much significance to me in drawing up the budget to ensure the company does not under-produce not over-produce, i.e. to ensure the company maintains a reasonable inventory level.

importance of inventory in drawing production budget:

Inventories are important in drawing production budgets since it enables the company to meet unexpected demand in case of unprecedented rise, to ensure their is no shortage hence price stability and customer satisfaction by keeping lead time at minimum and also to ensure other costs such as those of storage, damages or loss and even expiry. Such can be attained by keeping a reasonable stock or inventory level in the company.

b)

Consequences of achieving targets under all circumstances:

The quest by top managers Tonwal Group to achieve targets under all circumstances can bring with it a myriad of implications most of which are unfavorable. some of the consequences of wanting to achieve targets under all circumstance include but not limited to the following; fatigued or demotivated employees who many times will either operate under deplorable conditions or be forced to stretch beyond their capabilities, improper and under utilization of resources, duplication and reassignment of duties and responsibilities leading to inefficiencies among others in the organization.

Negative Consequences of Budget slack.

One integral aspect of budget slack or padding is over-estimation of costs against the expected revenues, seen by many a prudent way of cushioning or curbing by any impending adjustment by the top management, it can bring forth undesired consequences; in case the adjustment by way of slashing or reducing and even doing away with some of the provisions, is actually carried out by the top management, it may result in resentment and a sense of distrust between those involved in designing the budget and the top managers responsible. Another implication of budget slacking is that it can portray a fall impression of the organization in terms of financial strength as larger figure in the budget may not necessarily be in tandem with actual position of the organization.