Budgets and Management Decisions (Term Paper Sample)

BUDGETS AND MANAGEMENT DECISIONS
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EXECUTIVE SUMMARY
Budgets are an important tool for firms. Firms use budgets to achieve various objectives. This includes using budgets a tool that guides investments into fixed assets. For instance when trying to allocate funds between competing fixed assets, firms make use of budgets to be able to invest in most efficient projects. In addition, in cases where a firms strategies are compromised, budgets are an effective tools that for ensuring effective allocation to ensure the firm’s capacity is not at stake.
Therefore, the major objectives that would be addressed by Twin River would include communication, planning, control and evaluation objectives. On the part of the variances the analysis found that the highest variance that would be of concern to the management would be the facility rent. The variance could be solved by scrutiny of the actual expense to ascertain whether the budget was underestimated or the firm is operation in an entity that is too way beyond its capacity. Therefore, the study advocated for R&D, strategic alliances, and production efficiency.
Table of Contents TOC \o "1-3" \h \z \u INTRODUCTION PAGEREF _Toc27520033 \h 4BODY PAGEREF _Toc27520034 \h 4Objective of preparing budgets PAGEREF _Toc27520035 \h 4Company revenue and spending variance PAGEREF _Toc27520036 \h 5The main variance that should be of concern PAGEREF _Toc27520037 \h 6Advice to Twin River PAGEREF _Toc27520038 \h 7CONCLUSION PAGEREF _Toc27520039 \h 8REFERENCES PAGEREF _Toc27520040 \h 9
INTRODUCTION
Budgets have been a key planning tool for most companies. Most of them have made use of budgeting a tool that would help them out in making important investment decisions (Danzon et.al, 2018). The current assay will hence assess the objectives of having a budgets, variances that they rise as well as identify areas of concern hence be able to advice Twin River.
BODY
Objective of preparing budgets
Twin River being in the service industry they would be interested in making capital investment and making purchases of fixed assets. This would be influence by the operating environment where inappropriate allocation would lead to strategy compromise. Therefore, budgets have been a communication tool which would be one of the objectives that Twin River would achieve. This is because different departments are linked using the budgets. In addition, they are able to keep within the acceptable limits which helps the firm communicate its major objectives to its employees as well as train them on limited use of resources (Ballard, 2012). Also, budgets help in achievement of coordination objective which is a basic objective in most firms and also for Twin River. Coordination is an important human resource tool which is used to manage resources as well as employees. In addition, coordination helps a firms to be able to improve relations and leadership skills.
Twin River would use budgets to achieve planning objective. Planning ensures that resource allocation is accordingly taken care of. In addition, planning helps in making decisions that are appropriate and they could help firm remain a going concern. Also planning has been a major factors towards ensuring efficient use of economic resources. This is so because time and resources are well managed and thus deadlines are met. Thus would be important for Twin River as they would be able to allocate employees, resources, and meals accordingly, they will also be able to deliver on time which will improve its credibility (Danzon et.al, 2018). The other two major important objectives that could be achieved through budgets include evaluation and control which are a major influence on leadership and management direction.
Company revenue and spending variance

Planned

Actual

variance

% variance

Budgeted meals

18,000

17,800

-200

-1.1%

Revenue

81,000

80,100

100

0.12%

Expenses





Raw material

43,200

42,720

-480

-1.1%

Wages and salaries

10,600

10,540

-60

-0.57%

Utilities

3300

3290

-10

-0.30%

Facility rent

4300

5100

800

18.6%

Insurance

2300

2600

300

13.0%

Fuel

2480

2490

10

0.40%

Net operating income

14820

13360

-1460

-9.85%

From the analysis of the company revenues and expenses, it is evident that overall, the firm is able to keep track of its budget and actualises it. However, there has been great margin variances that the firm need to address which could be a hindrance to it optimal therefore affecting its profits.
Looking at the meals that the firms had budgeted, their production went low with 200 meals. This is an indication that the firm was able to miss out on (200*4.50=900). This kind of loss would be significant to the firm as it leads to under production and thus loss of revenue. In addition, despite the loss, the expenses still hold which has an implication on the operating income and the overall profits of the firm. Consequently, leading to an effect on future firm sustainability.
The raw material in actually was spent than they had been budgeted for. This is an indication that each meal used a higher percent of the raw material than was intended. This led to increase in expenses although less meals were produced through the system. This is an indication that a meal should price differently in case the actual usage without wastage would be higher. This calls for a scrutinised survey into production to assess the best optimal raw material that could be put into production to ensure efficiency. This also goes for rent which has actually spent more than planned for. As well as insurance and fuel. Having high actuals is an indication that the budget was either under estimated or Twin River should review its pricing strategies as well as improve its capacity thus produce more meals? This would be important to achieving economies of scale and assurance to future sustainability (Danzon et.al, 2018).
The main variance that should be of concern
Following the variance analysis, the management should be concerned of the variance in facility rent. In the case of a service firm like Twin River, facility rent is a recurring expense which the firm will have to keep paying each and every month. Considering that the actual production is actually lower, this is an indication that the firm has either rented a big space that they do not use or they have taken up space that is too expensive. This would mean that the firm would need to rethink about their costs by either looking for smaller space, cheaper areas, or even constructing their own production buildings.
Danzon et.al (2018) argued that firms should keep recurring costs at their minimum. This for some firms could be seen as the fixed overheads which would be pressing or squeezing the profits of a firm as well as hurting its future sustainability. Ballard (2012) concurred with them in a study that assessed a firm viability in the future as a result of its current undertakings. The study revealed that firms that had high variances with respect to their expenses did were not good planners and were poor decision makers which led to failure in the future. In addition, firms that have high recurring expense variance are not attractive to investors which has a negative consequence on a company share price.
Also, it should be noted that facility rent does not increase with output. Therefore could be viewed as a fixed expense regardless of the output. Twin River has to pay its rent irrespective of the production output. Therefore, they have to ensure the rent expense is maintained at its lowest by either renting cheaper warehouses or making their own production buildings. Also, the firm could maximise on its production ensuring that they make the optimal use of the rented facility and thus be able to leap economies of scale.
In addition, Ballard (2012) hypothesised a case of cost approach efficiency method. He alleged that firms that are cost leaders are able to set favourable prices that are attractive to customers and thus are able to earn high m