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16 May 2018

Companies all around the globe use master budgets, but there is considerable variation in the use of participation in the budgeting process. In some countries, top-down budgeting is prevalent, while in other countries, companies frequently use participative budgeting. Why is it important to fnd out who within a company participates in the budget process?

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Reid Wolff
Reid WolffLv2
19 May 2018

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You have just been hired as a new management trainee by EarringsUnlimited, a distributor of earring to various retail outletslocated in shopping malls across the country. In the past, thecompany has done very little in the way of budgeting and at certaintimes of the year has experienced a shortage of cash.
Since you are well trained in budgeting, you have decided toprepare comprehensive budgets for the upcoming second quarter inorder to show management the benefits that can be gained from anintegrated budgeting program. To this end, you have worked withaccounting and other areas to gather the information assembledbelow.
The company sells many styles of earrings, but all are sold for thesame price- $10 per pair. Actual sales of earrings for the lastthree months and budgeted sales for the next six months follow (inpairs of earrings):

January (actual)... 20,000 June (budget)... 50,000
February (actual)... 26,000 July (budget)... 30,000
March (actual)... 40,000 August (budget ... 28,000
April (budget)... 65,000 September (budget) 25,000
May (budget)... 100,000

The concentration of sales before and during May is due to Mother�sDay. Sufficient inventory should be on hand at the end of eachmonth to supply 40% of the earrings sold in the followingmonth.


Suppliers are paid $4 for a pair of earrings. One-half of a month�spurchases are paid for in the month of purchase; the other half ispaid for in the following month. All sales are on credit, with nodiscount, and payable within 15 days. The company has found,however, that only 20% of a month�s sales are collected in themonth of sale. An additional 70% is collected in the followingmonth, and the remaining 10% is collected in the second monthfollowing sale. Bad debts have been negligible.
Monthly operating expenses for the company are given below:

Variable:
Sales commissions..................4% of sales

Fixed:
Advertising.....................$200,000
Rent................................18,800
Salaries........................106,000
Utilities.........................7,000
Insurance......................3,000
depreciation.................14,000

Insurance is paid on an annual basis, in November of eachyear.

The company plans to purchase $16,000 in new equipment during Mayand $40,000 in new equipment during June; both purchases will befor cash. The company declares dividends of $15,000 each quarter,payable in the first month of the following quarter.

A listing of the company�s ledger accounts as of March 31 is givenbelow:

Assets
Cash.............................................................................$74,000
Accounts Receivable($26,000 February sales; $320,000
March Sales)................................. 346,000
Inventory......................................................................104,000
Prepaidinsurance.........................................................21,000
Property and equipment(net).......................................950,000
TotalAssets.................................................................$1,495,000

Liabilities and Stockholders� Equity
AccountsPayable.........................................................$100,000
DividendsPayable.........................................................15,000
Capitalstock.................................................................800,000
RetainedEarnings.........................................................580,000
Total liabilities and stockholders� equity $1,495,000

The company maintains a minimum cash balance of $50,000. Allborrowing is done at the beginning of a month; any repayments aremade at the end of a month.


The company has an agreement with a bank that allows the company toborrow in increments of $1,000 at the beginning of each month. Theinterest rate on these loans is 1% per month and for simplicity wewill assume that interest is not compounded. At the end of thequarter, the company would pay the bank all of the accumulatedinterest on the loan and as much of the loan as possible (inincrements of $1,000), while still retaining at least $50,000 incash.

Prepare a master budget for the three-month period ending June 30.Include the following detailed budgets:

Required
Prepare a master budget for the three-month period ending June 30.Include the following detailed budgets:

1. a. A sales budget, by month and in total
b. A schedule of expected cash collections from sales, by month andin total.
c. A merchandise purchases budget in units and in dollars. Show thebudget by month and in total.
d. A schedule of expected cash disbursements for merchandisepurchases, by month and in total.

2. A cash budget. Show the budget by month and in total.

3. A budgeted income statement for the three-month period endingJune 30. Use the contribution approach.

4. A budgeted balance sheet as of June 30

Read the article below and write a brief (1-2 paragraph) summary. This assignment should be approximately 250 words . Complete this assignment as a Word document.

Time to Scrap Performance Appraisals

Times have changed. More and more companies have decided to radically change (read “scrap” or “re-engineer”) their performance appraisal process.

Last week at our research conference we spoke with Adobe, Juniper, Kelly Services, and a variety of other companies who have decided to do away with traditional performance ratings and dramatically change the annual appraisal process.

Our research shows that this is a strong and positive trend.

Why the process must change.

Why do companies have annual reviews in the first place? They are an artifact from traditional top-down organizations where we had to “weed out” the bottom performers every year. By forcing managers to rate people once per year we can have annual talent reviews and decide who gets more money, who to promote, and who to let go.

Coupled with the performance rating is the “potential” rating, which tries to capture an individual’s potential to move up two levels in the organization (the traditional definition).

This approach is based on a philosophy that “ we cant totally trust managers” so we’re going to force them to fit people into these rating scales. And in many companies (around 20%) there are forced distributions, which mandate that some percent of employees are rated at the bottom and only a limited percent can be rated at the top.

The well publicized problems with this process abound. These include:

Employees need and want regular feedback (daily, weekly), so a once-a-year review is not only too late but it’s often a surprise. Regular coaching is the key to alignment and performance.

Managers cannot typically “judge” an entire year of work from an individual at one time (imagine if your spouse gave you an annual review!), so the annual review is awkward and uncomfortable for both manager and employee.

Manager-employee relationships are not 1:1 like they used to be. We work with many leaders and peers during the year, so one person cannot adequately rate you without lots of peer input.

While some employees are a poor fit and likely are poor performers, these issues should be addressed immediately, not at the end of the year.

Some companies really do have a lot of high performers, so forced ranking eliminates great people and damages the culture.

People are inspired and motivated by positive, constructive feedback – and the “appraisal” process almost always works against this.

The most valuable part of an appraisal is the “development planning” conversation – what can one do to improve performance and engagement – and this is often left to a small box on the review form.

Companies are nervous about eliminating this process because:

We need a fair and validated way to distribute compensation increases (don’t we?)

We need a record of low performance when we let someone go

We need to capture performance data in an employee’s profile for future promotion and other talent reviews, development plans, and career migration

We need a way to make sure managers are doing their jobs well.

Well, I’ve probably discussed these issues with 100+ companies over the last five years and our research shows more and more that companies are ready to let this process go.

Organization structures have changed and companies need to be more agile. We have a shortage of key talent and the keys to success now focus on regular alignment, coaching, creating passion and engagement, and continuous employee development.

The new keys to success:

Develop a “feedback-rich” culture and set of tools (often online, sometimes formal, often informal) that encourages all employees to give each other feedback. Tools from companies like Achievers, Globoforce, and most HR software vendors now enable and make this easy.

Separate the discussions about performance from discussions about potential and future career plans. Yes we need to evaluate people when raise time comes, but that can be a totally different conversation from.

Talk about performance regularly and let employees create their own goals on a regular basis. Force managers to provide ongoing feedback and teach them how to have honest conversations.

Assume that employees already know something about their own performance, and force them to self-assess. People tend to have a good idea of their own strengths and weaknesses – give them an open and positive opportunity to share it. That starts the dialogue about expectations and the match between their self-assessment and that of the organization.

Enable managers to assess performance regularly. Software teams now use Agile tools which evaluate code on a weekly basis. Managers should be giving people feedback regularly. If they learn to do this on a regular basis it will get easier and employees will learn to appreciate it.

Focus managers on hiring the best, so they build a team which strives for 100% high performers. This is never possible of course, but rather than assuming that 20% of your employees will perform poorly, spend more time on assessment, culture, and fit to make sure very few low performers make it into the organization in the first place.

Remember that everyone wants to succeed. If they aren’t performing well it’s not necessarily their fault – the organization should take responsibility for helping them find a better fit if possible.

Set and reset goals frequently. Companies that set performance goals quarterly generate 31% greater returns from their performance process than those who do it annually, and those who do it monthly get even better results. This means employees get feedback on a continuous basis (most sales organizations work this way). Read our research for more details.

Beware of pay for performance plans. While many companies (particularly investment banking, sales) have large pay for performance plans, research showsthat these can create perverse behavior. People focus on their own goals at the expense of the organization. In sales related roles this process works well – when you move to customer service, engineering, and other “builder” roles they can create problems.

Give your leaders a cultural framework and set of values to work from. Companies like Juniper and Deckers (Uggs shoes) focus very heavily on corporate values, forcing managers to hire and manage to these values. This makes selection easier and enables us to evaluate and coach people against higher level frameworks.

Invest in leadership development. Being a manager is a tough job. Managers at all levels struggle with selection, hiring, training, coaching, and evaluation. Give them time and tools to learn, a framework for feedback, and a continuous development process so they learn how to become better.

Reward talent “production” not talent “hoarding.” If you pay your managers to “produce output,” they will focus heavily on talent performance and evaluation. This may be a good thing, but ultimately companies thrive by building skills – so in addition to encouraging managers to produce good work, incent them to produce good talent as well.

I’ve had the opportunity to study HR and performance management for almost 15 years now, and this topic has been controversial for a long time. In today’s globalized,talent constrained workplace it’s clear to me that the traditional appraisal has to change.

Businesses thrive on agility, speed, passion, and alignment. The process of driving and measuring performance has to do the same.

In 2001, U.S. airlines spent about 10 percent of their budget onfuel. In 2011, they had to spend 35 percent of their budget onfuel. Airlines, of course, can’t do one bit of business without jetfuel. So when the most important line item in a company’s budgetmore than triples, the consequence is a tremendous amount offinancial pressure. And with nearly all experts agreeing that theprice of fuel will only increase, airlines have the unenviable taskof buying the fuel they need while not breaking their budget.

Industry-wide, there seem to be two main approaches tomitigating the effects of rising fuel prices—reducing overallexpenses and increasing revenue.

Companies focusing on reducing overall expenses related to fuelhave been taking innovative approaches:

Some have tried to reduce their dependence on traditional jetfuels by looking for alternatives. Virgin Atlantic was the firstairline in the world to operate a commercial jet with a biofuel,which was made from coconut oil and babassu nuts. Recently, Unitedannounced a major agreement to purchase algae-derived fuel fromSolazyme.

Delta Airlines, meanwhile, hopes that vertical integration canprovide some budget relief. When it learned that an oil refinery inPennsylvania was going to be shut down, it purchased the facilityso that it could make some of its own fuel. Delta executivesestimate that it will provide a savings of $300 million over fiveyears.

Some airlines are turning to high-tech solutions to reduce fueluse and reduce fuel-related expenses. A number of airlines areusing GPS navigation, rather than radar, to reduce the flight timesof an airplane. Some are adding small winglets, vertical facingtips to the ends of wings, which reduce fuel use by 5%. And manyare looking to new or remodeled aircraft, such as the Boeing 787 orthe Airbus A320neo, which use 15 to 20 percent less fuel than oldermodels do.

Reducing expenses, however, will not balance out the sharpuptick in fuel costs. Companies, therefore, have also focused ongenerating revenue from all aspects of their organization. Nearlyall airlines have taken steps to increase revenue through fees thatcover almost everything. There are fees for checked bags, fees forbooking a ticket over the phone, fees for picking a certain seat,fees for a wider seat, fees for pillows and blankets, fees forcarry-on bags, fees for drinks and snacks, and more. Overall, thefocus on fees has been successful:

In 2016, U.S. airlines collected over $3 billion in feesexclusively just by charging for checked baggage.

From January 2016 to January 2017, 28 new baggage-related feeswere levied on air travelers. Overall, 50 new fees were introducedby U.S. airlines in 2016.

In the first six months of 2016, the airlines collected $1.3billion in cancellation and reservation change fees.

Yet, while airlines may have many options for responding torising fuel costs, not all have done so successfully. Take forexample, Frontier Airlines, a low-cost carried based in Denver. Dueto rising costs and $1 billion in debt, it was forced to declarebankruptcy in 2009. The first two years after emerging frombankruptcy, it lost another $148 million. Even adding extra fees,as nearly all other airlines, hasn’t helped., and Frontier had toeliminate service to cities like Colorado Springs, Dayton, andPhiladelphia, while looking for less competitive places tooperate.

You Decide

- In your opinion, should Frontier Airlines focus on managerialaccounting or financial accounting as it works to get its financesback on firm footing?

- In this environment, would you recommend that FrontierAirlines use a bottom-up or top-down approach to budgeting?Why?

- Many U.S. airlines have solved their financial woes by mergingwith complementary competitors or by making cuts and becoming muchsmaller airlines. Do you believe that these are the only twooptions open to Frontier Airlines? What else could you propose?

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