The Budget Case
This case is designed to evaluate the budget process at a large manufacturing company. The learning objectives of this case study are as follows:
1. Use the budget to make decisions. 2. Identify how budgeting is used by leadership for planning and control. 3. Discuss ethical considerations in the budget process.
You have just been hired at ABC Manufacturing, and your supervisor has invited you to sit in on today’s budget meeting. You are given a copy of the following proposed budget for next year to review. The budget is being used by ABC to plan for next year. Your supervisor tells you right before the meeting, “We always overestimate because the president always makes us cut the budget by 20%, and besides, I really want to go to that conference in Las Vegas next year.” He continued,” I have really worked hard this year and put in a lot of overtime so I deserve it.”
Prepare a two-page written report by addressing the following tasks:
1. Discuss if you think ABC Manufacturing is properly using the budget process to plan for next year’s expenses.
ABC Manufacturing has a total budget of $1,500 and a fixed asset depreciation rate of 25%. The company believes that it will use about 2/3rds of its $1,500 budget to pay for operating expenses. The company also believes that its original fixed asset investment will last for two years before it needs to be replaced. The company needs to plan how much it will pay for future capital projects (i.e., buildings, machinery, vehicles) based on these estimates. If you agree or disagree with this analysis, explain why you agree or disagree with this analysis by responding in the space below:
In which year do you think ABC Manufacturing should be using the budget process?
The total budget is $1,500 and the fixed asset depreciation rate is 25%.
The company believes that it will use about 2/3rds of its $1,500 budget to pay for operating expenses.
The budgeting process starts with estimating what you think your company will spend on various things over time—this includes things like buying supplies (for example: paper clips), paying employees (such as wages), renting office space, etc.. Then based on these estimates you determine which line items should be included in next year’s budget plan so that all costs associated with them can be covered at once instead of having multiple payments made throughout the year.* This is known as “dollar-value” thinking because it focuses solely on dollars when making decisions about how much money would need spent each month/quarterly period due to certain events happening throughout their history.”
The company also believes that its original fixed asset investment will last for two years before it needs to be replaced. This is because the firm has a good estimate of how long its assets will last and knows how much it will spend on new assets. It also knows how much it will save by not replacing old assets.
The company needs to plan how much it will pay for future capital projects (i.e., buildings, machinery, vehicles) based on these estimates.
The ABC Manufacturing budget process is used as an important tool in the planning process and helps ensure that the business has adequate funds available to cover its operational costs over the coming year.
You may agree or disagree with the above analysis. If you agree, explain why it’s acceptable for ABC Manufacturing to use its budget process as a planning tool but not for other types of expenses.
If you disagree with the above analysis, explain why.
You have now completed your first budget analysis and should be ready to plan with ABC Manufacturing. In order to do this, you need to understand the company’s financial situation and make some assumptions about how much it will spend on operating and capital expenses next year. You can use these numbers if they are accurate or adjust them if necessary – in either case, we hope they help you come up with an efficient budget plan so that the company can continue its operations without having any major problems down the road!
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