2 Kitch Co
Kitch Co manufactures and markets a range of small electronic kitchen appliances, including coffee makers and toasters. The company currently earns revenues of $55 million per annum, and has a functional organisational structure.
Kitch prepares annual budgets, and it currently operates an incremental budgeted system. The budgets are set by the budget committee which is comprised of six members of the senior management team: the Chief Executive, the Finance Director, the Marketing Director, the IT Director, the HR Director and the Operations Director.
No other members of staff apart from these six senior managers are involved in the budget setting process.
In recent years, all the members of Kitch’s senior management team have received annual bonuses of between 10% and 25% of their annual salary. The amount of bonus each manager receives is based on a comparison of the actual costs for their functional area compared with the budgeted costs for that function. All the managers in the company are eligible for these bonuses, not just the senior management team.
Kitch has just appointed a new finance director, who previously held a senior management position within a large retail organisation. The new finance director was shocked when he heard about the way Kitch sets its budgets, and said he felt this should be changed as a matter of urgency.The new finance director is keen that Kitch should introduce a zero-based budgeted system instead of its current incremental system, and he believes it is vital that the budget-holders for all the cost centres are involved in the budgeting process.
Required
a) Discuss the problems with Kitch’s current system of budgeting and the factors Kitch should consider before implementing a system of zero-based budgeting.