Question

Question:

Identify the problems that appear to exist in Burbage’s budgetary control system and explain how these problems are contributing to the company’s poor cash position.

Don Flowers, CEO of Burbage Manufacturing looked around the conference room as his management team chatted and settled in for the monthly meeting.

“Let’s get started,” Don said, “we have a lot to cover today, and frankly it’s not all good news.” The room fell quiet. Don continued, “As you know we recently experienced a cash shortage despite last quarter’s record sales. We can’t keep going back to the bank to borrow money to support operations. I am counting on each of you to figure out a way to keep this from happening in the future.”

Brian Mitchell, the newest member of the team raised his hand somewhat sheepishly. “Sir, perhaps if we looked at the Master Budget for last month we could begin to identify areas for improvement.”

Don looked to Alex, his CFO. “Well, Alex that’s your area of expertise and Brian’s suggestion makes sense. Let’s have a look at that Master Budget.”

Alex looked down at the desk and began shuffling through his paperwork. “Well Don, we don’t exactly have a Master Budget per se. I mean we have budgets for different areas within the company, but I really rely on the managers to know what they need to do in their areas.”

Terri, the production manager spoke up, “Hey, wait a minute Alex. You’re the CFO. I’m doing everything I can just to keep up with demand down there on the floor. I don’t have time to worry about that kind of thing. We had a press go down last week and I had an entire shift of down time. Besides, that’s your job, Alex.”

“You know she has a point there Alex. You are the CFO. I need Terri to put all of her time towards keeping the production line running smoothly,” Don said.

“Look, Don, Alex replied, “In January I asked everyone to send me their budgets for the year and the only thing I got was a sales budget from Peter with a note attached that asked for a pay increase for his account managers.”

Brian raised his hand to speak. “Well, I know I’m new here, but at my last company we had budgets for sales, finished goods, cash – pretty much everything was budgeted. It seemed to work pretty well, and everyone had a good grasp of where we were financially.”

Alex, the CFO gave Brian an icy stare.

Don turned to Alex. “Alex, I think this young man has a point. Is there some reason why we aren’t budgeting like he described?”

“Well”, Alex began, “It’s really complicated, Don. Marjorie in materials is short two people and she’s paying overtime to her remaining people just to meet supply requisitions from the shop floor. And then there’s the problem with the corporate office. Every time I turn around I am getting an invoice from them for some piece of office equipment or another. Last week I got a bill from some company that Jessica hired to water the plants. How am I supposed to keep track of all of this? And then ….”

Don raised his hand to cut Alex off. “Look, I know we are a complex organization – but the fact of the matter is that I can’t keep going to the bank every month, borrowing money to pay the suppliers. For heaven’s sake – we are a multi-million-dollar company.” By this time Don was red in the face and everyone around the table was showing an intense interest in the conference table. He continued, “What am I going to tell the shareholders at the annual meeting when we don’t have enough cash to pay a dividend – that Jessica spent their money on potted plants?”

“This is going to end, today. Brian, you seem like a smart young man. You are going to work with Alex and anyone else in this company to get us on board with establishing and using budgets to correct this situation,” Don explained. “Further, as for the rest of you -when Brian comes and asks you for information treat him as if it was me making the request. Understood?”

Everyone nodded their heads in agreement.

“Meeting adjourned,” Don declared.

Answer 1

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Identify the problems that appear to exist in Burbage’s budgetary control system and explain how these problems are contributing to the company’s poor cash position.

Following are the problems that exist in Burbage's budgetary control system:-

(i) Lack of master budget: A master budget is a collection of all the lower-level budgets created by various areas of the organization including estimated cash, budget accounts, and a funding plan. This helps set the strategic direction for the company. The Burbage company has not planned a master budget which has resulted in various issues relating to the company's financial health. The company's goal of achieving a degree in a given period is hard to achieve without a master budget.

(ii) Lack of departmental budgets: The departmental budgets have also not been generated by the company's various departments. A departmental budget lets a company assess a specific department's costs. Burbage's managers from various functional areas are avoiding budget development which results in the company's poor financial position.

The problems that the company is facing due to the absence of a master budget are the following:

(i) Without a proper budget, it becomes difficult for a company to evaluate the business as a whole's earnings and expenditures which reflect the role of the company.

(ii) Without a master budget, the organization is unable to assess each department's expenditures and equate them together with the costs regulated by the profits.

(iii) If the budget is not planned then the company will find it difficult to predict when the income will come and when the company will have to pay the bills due. The company will therefore be left with less cash to pay the bills.

(iv) There were conflicts between departments over the allocation of resources, and departments blamed each other for failing to achieve targets.

The challenges Burbage faces include the lack of the master budget and the lack of departmental budgets. The budgets the firm needs to build are revenue budget, cash budget, production budget, and master budget. In addition, the company plans to establish a system of budgetary management to address the company's problems.