Budgetary Control System (BCS) is defined as a methodical control of an organization's operations through establishment of standards and targets regarding

income and expenditure, and a continuous monitoring and adjustment of performance against them (http://www.businessdictionary.com/definition/budgetary-control.html). For an organization, the budgetary control system is widely considered as one of the most crucial tools used for financial planning and setting goals for the business enterprise. Effective and accurate planning can lead the organization towards success or failure. For the Ferguson & Son Manufacturing Company, the strategy was to compare the fixed budgeted cost with the actual cost each month of every department. This would enable them to view the performance for each department and allow them to better estimate the budget for the next year. However there is also an issue/problem that exists with this approach. In the comparison, the volume of the goods being produced is not necessarily being taken into consideration. The focus is entirely on the dollar amount of the fixed budgeted cost and the actual cost. For example, consider that the fixed budgeted cost for a company is set as $100,000 with 1000 units of good being produced. Lets assume that at the end of the accounting period, the actual cost comes up to $120,000, however, that is with 1250 units of goods produced. If the organization is to view just the dollar amounts for the budgeted cost with the actual cost, the analysis might show as an overspending of $20,000. However, the more efficient and accurate way would be to view the actual and the budgeted cost relative to the quantity of the good produced. In our example, if we adjust our budgeted estimate of number of goods to be produced from 1000 to 1250, well see our budgeted increase to $125,000 [($100,000 / 1000) * 1250]. This would change our perspective and present the company in a positive light since now were accurately portrayed as being within our budget.

Another significant issue with the Ferguson & Sons Budgetary Control system (BCS) is the lack of employee performance being taken into consideration when evaluating the performance of a department. In our case study, we hear Tom Emory, manager of the machine shop in the companys factory, complain how they are always interrupting the big jobs for all those small rush orders (Cite Source from university). The BCS does not account for the financial impact of these interruptions nor does it account for the resources that needs to be allocated for all of these changes. By looking at just the budgeted and the actual dollar amounts, and portraying the department negatively as overspending, Ferguson & Sons run the danger of damaging the employee morale and constantly pressurizing them to do better. To improve their effectiveness, Ferguson & Sons should consider making a few adjustments to their BCS. The first one would be to ensure that the company introduces the idea of a flexible budget, as opposed to a static budget. A flexible budget allows the organization to compare how the actual sales figures stack up against expected sales figures (http://smallbusiness.chron.com/advantagesdisadvantages-flexible-static-budgets-23430.html). It can better serve as an overall indicator of the organizations performance depending on the sales figures or the number of goods produced. The static budget cannot be adjusted regardless of the sales figures or the companys performance. The second adjustment that Ferguson & Sons can implement is to start taking into consideration new work to be done in the future. This also ties back to having flexible budget which can be adjusted based on the actual work being done within the department and further accommodate any uncertainties for the organization. By having unreasonable budget estimates, the company sets itself up for failure. The planning and control department within the company should be better trained to ensure that the budgets created at the beginning of the accounting period are not tightly time-bound. Meaning,

the budget should not be so tightly coupled with the time that the slightest variation in the plan results in a huge impact on the companys performance. To make the current cost-based budgeting system at Ferguson and Sons more efficient, they can consider moving to an Activity Based costing and budgeting system. The Activity based costing system recognizes the relationship between costs, activities and products, and through this relationship assigns indirect costs to products (http://www.investopedia.com/terms/a/abc.asp). Related to activity based costing is the concept of activity based budget (ABB). The ABB is an approach to the budgeting process that focuses on identifying the costs of activities that take place in every area of a business or organization, and determining how those activities relate to one another (http://www.wisegeek.com/what-is-activity-based-budgeting.htm). With the costs broken down for each activity involved in creating the finished good / services, Ferguson and Sons can recognize the specific costs that are involved in the manufacturing process and possibly create a more realistic budgets for each department that are more equitable and in the best interests of the company in the long run. Contrary to the activity based budgeting, the current cost-based budgeting system within the Ferguson and Sons company only compares the actual cost / expenditure with the budgeted cost from the beginning of the accounting period. However, the activity-based budgeting takes into consideration the relationship between the actions and activities that work together to manufacture the final product and then allocate associate cost to them which would ensure the successful completion of those activities. One of the most devastating impact, an ill prepared budget can have, is on the morale of the employees. Numerous studies have concluded the direct correlation between the morale of the employees and the productivity of the company. From our case study, it is very evident that the

employees feel over pressured to meet the unreasonable budget. If I had the opportunity to utilize the budget to change employee behavior and align goals, I would first and foremost move towards the activity based budgeting. This would allow us to consider all of the different costs involved in different departments. The current mentality of the company to tighten the budget each year should not exist. Once the activity-based budgeting is introduced in the company, I would hold training sessions with the employees so that theyre also aware of how the new system would ensure cost from each department is accurately taken into consideration when budgeting for the year. Involving the employees in the budgeting process also creates a sense of transparency which can have a positive impact on the employee morale. Once the new budgeting system is accurately implemented, I would also ensure the company communicates both, the short term as well as the long term goals and objectives. By doing so we can accomplish two things; not only would the employees be able to see direction the company is headed in, but it would also enable the employees to align their own personal goals with the overall goals and objectives of the company. Goal alignment includes effectively communicating the goals and objectives of the company and implementing on various ideas and policies aimed at achieving these goals (http://www.successfactors.com/en_us/lp/articles/corporate-goal-alignment.html). Furthermore, having specific goals set in place increases employee productivity since it provides them with an achievable target, and increased productivity leads to increased returns for the shareholders of the organization.