Journal- Budgeting Process

Journal- Budgeting Process

Introduction

A budget is a spending plan considering the estimated future, current expenses, and income for a specific period. Budgeting is vital for every organization because it enables the organization to understand the amount of money it has, how much has been spent, and how much will be needed in the future. A budget also guides organizations on the unwanted costs that should be eliminated to meet their financial goals. The manufacturing process consists of many expenses, including unexpected costs that could impact the success of the process and the overall organizational performance. This report will focus on the factors that need to be considered when estimating and budgeting for a car manufacturing firm’s upcoming year and the departments that would be involved in the budgeting process.

Factors That Would Be Considered When Estimating and Budgeting For the Upcoming Year

One of the factors that would be considered in the car manufacturing firm’s estimation and budgeting is the estimated revenue. According to Weygandt et al. (2016), revenue is the decrease or increase in liabilities resulting from the performance of services or the sale of goods in everyday business operations. The main components of estimated revenue are the estimated cost of goods or services offered and sales forecasts. The organization can look at past sales and cost of goods to determine whether the estimated revenue will be high or less based on the revenue the company has been generating in the past and the factors that could be impacting revenue, such as changes in sales trends and cost of raw materials. The organization may also review the revenue generated by other car manufacturing firms in the same region to estimate the revenue they can create and predict whether revenue will increase or decrease.

The second factor that would be considered is fixed and variable costs. Fixed costs remain constant despite the changes in production volume (Harris, 2014). The fixed costs the car manufacturing firm may incur include employee salaries, rent, insurance premiums, and internet services. The organization should consider these costs to set aside the money needed to cover them when creating a budget and use them as a reference point to determine whether there are issues in the organization’s finances when they exceed the budget. On the other hand, variable costs are costs that change or vary based on the production volume. Variable costs include the cost of shipping finished products to customers, electricity used in the manufacturing process, and the cost of raw materials and distribution channels. The organization can use variable costs to estimate the changes in operating costs and set aside enough money to cover all operating costs.

The third factor that would be considered is the organization’s expenses. According to Weygandt et al. (2016), expenses take different forms and are identified by different names based on the type of service used or asset consumed. The main types of expenses include selling expenses, cost of goods sold, administrative expenses, marketing expenses, income taxes, and interest expenses (Fox, 2013). One of the considerations that the organization should consider when estimating expected revenue is the costs that are directly related to revenue because the organization’s gross margin does not substantially fluctuate unless new products are being developed, changes in the inventory process, or inefficiencies in the manufacturing process. The second consideration is fixed expenses such as insurance and rent. The third consideration is employee compensation. The organization should plan whether employee compensation will be increased based on production when estimating and creating their budget. The fourth consideration is employee headcount estimates. The organization should consider whether it plans to hire new employees in the future to set aside the salaries for the new employees in their budget.

The fourth factor is cash flow. The organization should consider the money generated from its operations and the money spent to cover expenses. Previous financial records can be used to estimate future cash flows when developing a budget. Cash flow also includes the profit generated by the organization in the past. The organization can use the changes in profit in the past to determine whether the business is growing or not. An increase in profit indicates business growth and can be used to estimate future cash flows and profit. Estimating the profit that the organization will make in the future is vital in making investment decisions and determining the functional areas that need more funds to facilitate business growth. For example, the organization may decide to invest in manufacturing a specific type of car based on the profits generated from selling the car or recall the production of cars that do not generate any profit.

Departments That Would Be Involved In the Budgeting Process

One of the departments involved in the budgeting process is the management department. The department includes the organization’s top executives and managers involved in staffing, planning, leading, organizing, and controlling. The management department is vital in developing and overseeing the budgeting process based on the organization’s goals and financial capacity. The management department must also approve the budget requests and authorize the allocation of funds to avoid misappropriation, hence the need to involve them in the budgeting process. The management department would also analyze the budget to ensure the estimated spending is reasonable based on the organization’s performance and stakeholder expectations.

The second department that would be involved is the finance department. The finance department would be required to oversee the budget appropriations and recommend changes based on the organization’s financial performance. The financial department would also examine past financial statements to create accurate revenue and expense estimates. The finance department may also evaluate the economic trends that could impact the organization’s budget and identify future investments to help it meet its financial goals. The finance department would also provide information about financial forecasts, such as variable cost changes, and advise the organization on meeting variable costs without exceeding the budget.

The third department that would be involved is the operations management department. The department would ensure that the budget considers all operating expenses and sets aside enough money to cover operating costs. The operations management department would also create a budget that meets the organization’s production goals, plan for investments that can help the organization increase profit and revenue, and provide advice on budget allocation. The operations management department would also provide information about the expected production capacity to help estimate future operating costs and revenue. For example, the operations management department would forecast the organization’s future production needs, such as raw materials and resources, thus improving the accuracy in estimating revenue and operating costs.

Conclusion

Budgeting is essential for every organization because it ensures that an organization has enough funds to sustain operations. The main factors that should be considered in the budgeting process are revenue, fixed and variable costs, expenses, and cash flow. The budgeting process should also involve the departments directly linked to the organization’s daily operations, such as the management, finance, and operations management departments, to ensure that the organization’s financial performance, goals, and production capacity are considered.

References

Fox, R. (2013). The basics of expenses. Tax Strategies for the Small Business Owner, 47–52. https://doi.org/10.1007/978-1-4302-4843-9_4

Harris, C. (2014). Fixed and Variable Costs. https://doi.org/10.1057/9781137370891

Weygandt, J. J., Kieso, D. E., & Kimmel, P. D. (2016). Financial Accounting: Tools for Business Decision making. Wiley.

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Assignment Content

Assume you work for a car manufacturing firm and are trying to estimate and budget for the upcoming year. What types of factors would need to be considered? What departments would be involved in this budgeting process? Explain.

Your assignment should consist of at least 2–3 pages, not counting a title page (if included) or references page. You must use at least 2 references, one of which can be your textbook. Adhere to APA Style when creating citations and references for this assignment. APA formatting, however, is not necessary.