This report is addressed to the chief executive officer of Clark Casc Logistics PLC. I am working as a manager at the Loading Bay of the company. The chief executive officer of the company is bothered about the actual expenditure going beyond the budget because of which the company has made and overall loss of 3.2 million euros. The report is about the proposed budget. The last year’s budget for the loading bay was 918000 euros which were exceeded by 10000 euros. The current year budget was set at 469000 euros and expenditure is 478000 euros for the first six months. This clearly shows that the expenditure does not follow the budget and overspending is there which need to be controlled. Therefore, the top management is concerned about the overspending which is resulting in losses to the company, and a meeting with the managers of different divisions is conducted. At this meeting, the discussion point will not be the current year because the management understands that much cannot be done in the current year because already 6 months have completed, but the discussion about the next year’s budget will be done with a view of controlling the overspending by the managers. The meeting is about the total budget for 882000 euros for the next year. I being the manager of the loading bay of the company have to provide a report before the budget discussion meeting about the proposed budget and the savings which can be done in order to stop the overspending and to prevent the company from losses(Uyar, 2009).
Through this report, I will be providing a relevant approach for the budget of the loading bay division and also, the calculations based on the previous year budgeted and actual figures will be provided using the relevant approach. Show the calculations, the next year budget will be predicted and proposed to the chief executive officer of the company through this report, discussion about which will be done in detail in the upcoming meeting on the budget discussion(Egbunike & Nkiru, 2017). This proposed budget will be followed by a Conclusion and recommendations on the various possible ways for the achievement of this budget and the regarding the savings. Two tables are shown below. The first table is depicting the last year’s budgeted figures and the actual expenditure which clearly shows that the actual expenditure exceeds the budgeted figures. The second table is about the current year’s budget and actual expenditure for the six months of the current financial year. This table also depicts that the actual expenditure is more than the budgeted figures.
Table 1: Last year budget and actual expenditure of Clark Casc Logistics PLC
Table 2: Present year’s budget and actual expenditure of Clark Casc Logistics PLC for the first six months
In both the tables, one observation is common that the actual expenditure for the wages and employers National Insurance and pension contribution, equipment maintenance, insurance costs, and administrative costs are exceeding the budgeted figure. The company needs to prepare a logical budget considering the uncertain situations and emergencies so that the management and the company prepare its marketing strategies and selling strategies accordingly to cover all the expenditures in advance(Silva, Fortunato, & Bastos, 2016).
Budget is a financial plan for a specific period of time and it is prepared based on historical data, past experiences, future predictions and uncertainties. All of these are considered while preparing a budget and it is a quantitative plan which helps in planning of various business activities, controlling the business activities so that unnecessary spending can be controlled and measured, communication of the various expenditure heads for the upcoming year and the proposed cost to be incurred on the various business activities. The budget also helps with coordination, evaluation, delegation, authorization and motivation. Clark Casc Logistics PLC is also making use of budget for all these purposes. The company is involving the managers in deciding the budget, which helps to make us more responsible and also it enhances our motivation level. There are different approaches which can be used in budgeting.
- Incremental budgeting: This approach of budgeting considers the previous year budget and some adjustments are made for the previous year budgeted figures based on the market situation and the needs of the business. Though, this approach of budgeting simple and easy to understand and can be used in continuity without much effort and difficulties(Lidia, 2014).
- Zero based budgeting: This is a modern method of budgeting where the budget is starting from a zero base and it is not based on the historical data. The past records are not required for this approach of budgeting. This approach prepares every year’s budget as a fresh budget without making use of previous year data which make it more accurate and optimize the allocation of resources. However, it is an expensive method itself because it needs extensive training. The loading bay department can make use of this approach as most of the expenditures are identifiable, but considering the other departments where not every cost is measurable because of the intangible nature, such as the cost of marketing and Research and Development, this method of budgeting will not be used.
- Activity-based budgeting: This budgeting technique is a top-down budgeting method which considered the targets while making the budget. This approach analyzes the various activities which are required to meet the targets and objectives of the company and accordingly the cost expectations in performing these activities is analyzed. This approach is more suitable when the targets are clearly defined and known to the management. Because of this, activity-based budgeting approach is not being used for the loading Bay department.
- Value proportion budgeting: This approach of budgeting study each and every part of the budget from the point of view of stakeholder and the company. Each and every item of the budget has to be justified by the management and these activities must be e creating value either for the customers, employees on the other stakeholders. In the absence of any justification, the particular item or activity is considered unnecessary and has to be eliminated from the budget(Santhosh, Indumathi, & Kumar, 2019).
For the next year of the company, the approach for the budgeting will be using a mixture of incremental budgeting approach and value proportion budgeting. The Other approaches that are zero based budgeting and activity-based budgeting is not suitable to the department because of various limitations, lack of clear sales target information and involvement of high training cost for the use of this type of budgeting. Incremental budgeting has many limitations too, such as this budgeting approach can lead to overspending if proper justification for each and every increase in the budget is not provided. Also, adjustments in the budget have to be done after Thoreau analysis of the market which requires time and effort. In order to remove these limitations, value proposition budgeting is also used along with incremental budgeting to justify each and every item of the budget. It will help to control the overspending and unnecessary activities which are not going to add any value in the business and the stakeholders. The incremental budgeting is suitable for the loading bay because much fluctuation in the actual spending in comparison to the budgeted figures is observed for the wages, equipment maintenance, administrative costs and insurance costs which can be predicted accurately if properly analyzed and observe the market conditions. Also, this approach is easy and simple to use and does not required specialized training of the staff members to understand and can be used in continuity. Therefore, incremental approach and value proportion approach of budgeting will be used together to plan the activities in the best possible manner(Msi, Saputra, & Muda, 2017).
In order to calculate the next year budget, the last year and current year budgeted figures are used. The current year budgeted figures have shown the budget for 6 months. The 12 months budgeted figures are calculated from this data for the current year which is shown in the below table. The increase and decrease are calculated by comparing the last year budgeted figures with the current year budgeted figures. It has been observed that some of the figures are not showing any change while some other figures are showing increases(Roestel, 2016). The increase in the budget figures from last year to current here is not much. None of the activities showing a decrease in the expenditure.
|Particulars||Budget of last year(A)||Budget of current year for 6 months (B)||Budget of current year for 12 months (A *2) (C)||Change in budget from last year to current year (C-A) (D)||Percentage change (D/A*100)||Next year proposed budget change||Next year budget|
|Wages and Employers’ National Insurance and Pension Contributions||528||268||536||8||1.52%||8.1||544|
|Heating and Lighting||30||16||32||2||6.67%||2.1||34|
|Apportionment of Central Administrative Costs||74||40||80||6||8.11%||6.5||87|
|Insurance Costs – Apportioned Based on Past Claims||20||10||20||0||0.00%||0.0||20|
|Total Expenditure, Tax and Dividends||918||469||938||20||2.18%||21||960|
Table 3: Calculations of next year budget
The above table is showing the next year budget calculations based on the basic analysis of the previous year and current year data. There is some additional information provided by the chief executive officer through the email regarding the apportionment of Central Administrative costs and the increase in the wages which needs to be adjusted before proposing a final budget for the next year. The Central Administrative costs have to be considered equal to the current actual cost incurred by the business for the loading Bay which is 80000 euros. There is an increase in the wages due to the trade unions by 3%, which need to be adjusted in the next year proposal(Carvalho & Jonker, 2015). According to the basic formula, the increase in the wages shows 1.52% increase, which needs to be altered by 3% increase. Also, the total budget for the next year according to the above formula shows 960,000 euros whereas the top management has asked to set a budget within 882000 euros which is even less than the last year budget. It means, there is a need to exclude some of the cost and detailed analysis is required for the same. The updated data is shown as follows:
|Particulars||Budget of current year for 12 months||Next year budget as per calculations||Adjustments as per requirements of company (Proposed budget)||Notes|
|Wages and Employers’ National Insurance and Pension Contributions||536||544||552||(3% increase applied on the current year)|
|Equipment Maintenance||76||76||76||Same as per calculation|
|Equipment Depreciation||74||74||74||Same as per calculation|
|Buildings Maintenance||36||36||36||Same as per calculation|
|Buildings Depreciation||56||56||56||Same as per calculation|
|Heating and Lighting||32||34||34||Same as per calculation|
|Goods Refrigeration||16||18||18||Same as per calculation|
|Apportionment of Central Administrative Costs||80||87||84||(Same as current year actual for 12 months)|
|Insurance Costs – Apportioned Based on Past Claims||20||20||20||Same as per calculation|
|Other Costs||12||14||14||Same as per calculation|
|Total Expenditure, Tax and Dividends||938||960||964||Total|
Table 4: Proposed budget as per calculations and adjustments
The proposed budget using the relevant calculations based on the incremental budgeting technique and value proportion approach shows that each and every activity mentioned in the budget is important for the department of loading and unloading and then of the activity can be ignored. The company wants to set a budget for the loading Bay at 882000 euros, which is not practical because prices are increasing and the increase in the wages is even more than the expectation which is 3%. During the last year, the budget for the loading bay was 918000 euros and the actual expenditure was more than the budgeted figure 928000 euros(Lawal, 2017). Even the current your expenditure is showing an increase in comparison to the last year expenditure and setting a budget, even less than the last year budgeted amount is not possible without sacrificing on quality. If the company sets budget for the loading and unloading activities at 882000 euros, the variance of the actual expenditure with that of the budgeted amount will be much more than the last year and current year because this budget is not feasible. However, the situation of the company and the concerns of top management is understandable and costs can be controlled further and the budget can be brought down the proposed budget figure of 964000 euros. There are some of the recommendations which can be used by the company and which can further be discussed in the detail in the meeting:
- Job rotation of excess staff members: Human resource manager can review the performance of the staff members at the loading bay with me and detailed discussions can be done on the performance of each and every staff member. I have observed that more members are employed at the site than the required number because of which more leisure time is spent by them on unproductive activities. I would not suggest to fire these extra staff members, but job rotation can be done and these staff members can be sent to those departments where there is a requirement of additional staff members. Termination of services of the employees is not recommended because of the pressure from the trade union which can hamper the work. This will help to reduce the cost of the loading bay as wages are one of the most prominent expenditure of the department(Himme, 2012).
- Personal involvement to save cost: I personally assure you that I will be able to get the work done without compromising on quality with the Limited number of staff members and can also provide additional help to the human resource manager in the job rotation by having a one-on-one interaction with the staff members about their preferences for the job rotation. I will also cross check the maintenance expenses of equipment and building because after the wages, it is one of the activities which is contributing a lot to the expenditure and cost. Staff members can be encouraged to perform more effectively and more productively through my active engagement and supervision. I will also make sure that motivational tactics are used for appreciation, reward and recognition techniques to keep the staff motivated and to perform more effectively in less time(Oparanma & Nwaeke, 2015).
The success of these control measures cannot be confirmed as it will be a hit and trial for the company. The budget cut should not be this much because it will add an additional burden on the staff members and on me because I do not want to sacrifice on quality as some expenditures are necessary and important to create value for the organisation and to provide satisfaction to the consumers. Sacrificing on quality may benefit the company in the short run, but in the long run, it is going to harm the reputation, performance and profitability of the company. If still, there is no other way, then cutting down the budget to 882000 euros, then the most recommended method is job rotation of the accept staff members. Also, the staff members can the encourage to perform more effectively to my personal engagement and supervision(Covaleski, Evans, & Luft, 2006).
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