Impresario Ltd sells coffee on takeaway model and it has traditionally used budget for planning and control. The budget will be prepared annually on the firstday of the year. Of course it will also be converted to actual level for measuring performance at the end of the year. Just like that, the next year’s budget will be built on the previous year’s budget after adjusting the level of activity.
However, the company’s management accountants are concerned that this way of budgeting is not completely appropriate in the current situation. In fact, the price of inputs such as coffee bean, gas, electricity, wage…on the market is fluctuating month by month and customers are demanding more and more for the variety of products. For example, now many customers want to drink Americano, Espresso… rather than traditional coffee. As the result, it required the company buy some new equipment and the cost structure also be changed.
What is the Impresario’s current budgeting method? What are its advantages and disadvantages? Based on the theory of budgeting, recommend the alternative method to the case study above and explain why the company should apply the method you suggested.
Budgeting helps a business to plan well for the future by way of keeping a check on the growth of revenue and expenses incurred.
Current budgeting method used by Impresario
At present Impresario is using the incremental budgeting method wherein the help of budget prepared in the previous year is taken and the level of activity in the current year is adjusted to arrive at the current year budget.
Advantages of current budgeting method
1. The method can be easily implemented in an organization because of its simplicity.
2. The employees will find the method easy to grasp.
Disadvantages of current budgeting method
1. Managers may try to wrongly allocate costs and revenue and show that they have attained the target profit for the year.
2. The inflationary rate can never be predicted and hence taking the previous year budget as the base will not be suitable in case of inflation.
3. The managers tend to ignore the objective to reduce costs and attain real profit.