case study

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CASE STUDY: ACTIVITY BASED BUDGETING AT AGRICULTURAL HOLDINGS IN LITHUANIA Ramun÷ Pockevičiūt÷ Alytus City Municipality Administration

Successful business operations are hardly possible without planning. Therefore presently there are extensive discussions about

the importance of planning business activities and estimating the resources required to achieve the objectives set by an enterprise. For this purpose, scientists and practitioners suggest that enterprises should implement a budgeting system. This paper introduces a budg- eting model for agricultural holdings using the Activity Based Costing (ABC) approach. The topic of the paper was chosen in view of the fact that such a combination of accounting management elements is not broadly used by Lithuanian agricultural holding. The key objective of this paper is to present the budgeting system as an important tool in planning and managing the business of an agricul- tural enterprise. This paper looks into the theoretical principles and provides a practical model of the budgeting system. The per- formed research leads to a conclusion that more accurate production cost calculations, budgeting, and budget control are the safe- guards, which help to prevent business failures in the changing and adverse business environment.

Key words: budget, budgeting system, cost, costs, activity, Activity Based Costing (ABC). JEL Classification: M41.

Introduction2

This paper examines the practical aspects of develop- ing and controlling budgeting models, which use the Ac- tivity Based Costing (ABC) approach. The topic of the paper was chosen in view of the fact that such a combina- tion of accounting management elements is not broadly used by Lithuanian agricultural holding. The analysis of relevant empirical and theoretical research works con- ducted by Lithuanian and foreign scientists revealed that detailed research and analysis deal with the ABC benefits separately from the practicality of the budgeting system. Consequently, the Activity Based Budgeting could be an alternative system for improving business management at agricultural holdings.

Budgets measure the set objectives and prompt a rational behaviour of a business as well as determine a systematic approach towards the economic activities of the organisa- tion. Many countries, including Japan, the United States, and Western European countries acknowledge this conception. In the current tough economic environment with increasing inflation rates, shrinking sales volumes, and rocketing busi- ness expenses as well as due to many other factors influenc- ing agricultural activities, the Activity Based Budgeting sys- tem could be a safeguard in coordinating and stabilizing all the fields of the enterprise operations.

Research aim: to present the Activity Based Budget- ing system as an important tool for planning and coordi- nating the business of an agricultural holding.

Research tasks: 1. to implement the budgeting system model in an

agricultural holding (i.e. a dairy company) as a viable business alternative;

2. based on the obtained results, to make suggestions for further business development.

Research object: the process of business planning and control at an agricultural holding.

Research methods: The first part of the paper analy- ses theoretical aspects of the budgeting system efficiency. The second part of the paper deals with empirical re- search aimed at revealing the aspects of the Activity Based Budgeting system related to milk production cost calculations using the ABC method and compiling a budget of the dairy company. The research focused on the dairy business owing to the fact that dairy farms, on a par with other agricultural holdings, are going through diffi- cult times: the purchasing price of milk in Lithuania is among the lowest in Europe.

Theoretical validation of the budgeting system Studies reveal by that the concepts and methods used in

management accounting are similar all over the world. However national studies suggest that a changing environ- ment of an organisation has a direct impact on the modifica- tions in the management accounting. A management ac- counting system is closely related to the projected changes of the internal management system of an organization. The faster modifications in the management system take place, the faster management accounting changes. The conducted studies show that new management accounting methods are rather successfully adopted by fast developing countries, in- cluding Lithuania (Valančien÷, Gimžauskien÷, 2007).

Experts in agricultural economics (White (2007), Greaser and Harper (1994), Doye, Sahs (2005)) maintain that budgets of organisations are designed to provide ag- ricultural production with a decision framework for short

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term and long term economic analyses. The budgeting system of an organisation facilitates a better understand- ing of costs and returns from a production operation. It helps to identify potential risk sources and to appraise the alternatives. Budgeting knowledge and the ability to use it helps producers to make sound business decisions.

The main uses of an agricultural holding budget in- clude:

1. clear identification of all inputs required for pro- duction;

2. easy identification of 5 major expenses for the purpose of cost control management;

3. identification of potential changes in the operations; 4. determining the revenue likely to be generated by

the organisation; 5. breakeven price and breakeven yield analysis. Literature separately deals with the advantages of im-

plementing the ABC and a budgeting system. Nonethe- less the synthesis of the ABC and the budgeting system is considered to be an advanced alternative for planning op- erating costs of an enterprise (Greaser and Harper, 1994). The ABC approach was developed and introduced by R. Cooper and R. Kaplan. Quite shortly this system gained popularity and a large number of scientists and practitio- ners contributed to its further advancement (Roztocki et al.). In literature, this approach is referred to as one of the best modern accounting methods. Other researchers con- sider this method to be self-contradictory and conse- quently they maintain that it can not be successfully used by organisations as it provides the internal consumers with even less accurate information than classical ac- counting methods (Armstrong, 1999). However, the analysis of the ABC method shows that it can produce more accurate calculations of the production cost and lead to more precise budgets.

No modern enterprises can successfully achieve their objectives unless they plan their activities. The planning process starts with pinpointing the course of future opera- tions, choosing the methods of working towards the set objectives, and forecasting the potential results. Budget planning is an important precondition for efficient coor- dination of the operations of an organisation. Budget con- trol mechanisms trigger a further progress of the opera- tions, which is crucial in meeting the financial objectives. Such control makes it possible to identify problems and to solve them at an early stage (Jagminas, 2004). Thus, a budget is a plan, which defines the indices of the business activities of an organisation measured in cash and quanti- tative numbers in order to achieve the objectives of the organisation (Mackevičius, 2003).

Generally speaking, planning is required to determine methods for meeting the objectives. An organisation op- erating under the market conditions should plan:

• the quantities and types of products be produced and the product mixes which are best capable of satisfy- ing the existing market conditions;

• the amount of the organisation resources to be used and the required amounts to be borrowed;

• the methods of production and technologies to be used and organizations the enterprise will have to co- operate with;

• the prospective buyers of the products and the methods of distribution to the customers and consumers;

• the ability of the organization to change and adapt itself to market changes (Bagdžiūnien÷, 2005).

Budget planning is about forecasting the financial needs. The success of the operations of an organisation depends on the availability of relevant resources, and fi- nancial resources in particular. Financial needs differ and so does their availability. Thus, in order to analyse the availability of resources required for the operations of an enterprise, large organizations are broken down into smaller and easier to manage units, which are called re- sponsibility centres. A responsibility centre can be de- scribed as a function or a unit of an organisation, where relevant decisions can be made and resources can be con- trolled. It can assume the responsibility for the decisions taken and the results achieved (Valančien÷, 2003). There- fore, the responsibility centres mean decentralization of the operations of an organisation. Each responsibility centre is in charge of a separate function of the enterprise. As a result of such break down of the activities of the or- ganisation, managers can have greater control over the revenue and expenditure flows pertinent to a relevant ac- tivity. Budgets are planned based on the analysis of the information provided by responsibility centres. The budgets show whether the resources of the organisation are sufficient for a particular purpose.

Practical application of the budgeting system Description of dairy operations The largest part of revenue earned by Enterprise “X”

comes from dairy production. Therefore, when we con- sider creating value at a milk processing enterprise, it is important to focus on the value chain as an enterprise can be characterised by its ability to organize and manage its workflows and the value chain of dairy production. When a business budget is drafted, it is assumed that the costs are caused by certain activities; therefore, the main objec- tive is to control the causes of costs, rather than the costs themselves. Owing to the fact that not all activities gener- ate value, it is important to define how much value is cre- ated by each of them (see Figure 1).

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Fig. 1. Value chain at Enterprise “X”

The analysis of Enterprise “X” dairy operations reveals value-adding activities and non-value adding activities. In order to improve the value chain, special emphasis should be placed on scientific research, because the business objectives of Enterprise “X” include supplying organic produce to milk buyers. Even though supplying milk to milk buyers does not represent an important production design activity, the proc- esses of upgrading livestock feeding, watering, and milking systems indirectly create value (see Figure 1.). We can see that a continuous improvement of the existing operating sys- tem based on the experience of other European Union coun- tries is among the strengths of Enterprise “X”.

Production cost calculation and interpretation Table 1 provides the calculation of the production

cost of 1 kilogram of milk based on the information re- flected in the documentation of the agricultural holding.

Table 1. Method of milk production cost calculation at

Enterprise “X”

Total annual expenses attrib- uted to milk production, LTL

Milk quan- tity kg

Milk produc- tion cost LTL/kg

1.245.149 1.767.000 0.705 The above method of accounting for milk production

expenses fails to reveal the amounts of overheads and di- rect expenses attributable to 1 kilogram of milk. Thus it can be assumed that calculations of the production cost of milk products may contain variations. Due to missing in- formation, the implementation of the budgeting system at Enterprise “X” would fail to be efficient, i.e. it would in-

flate the expenses incurred by the Enterprise rather than produce benefit.

The process of measuring costs attributable to 1 kilo- gram of milk based on the traditional costs accounting system can be described as follows:

1. identification of the cost object, i.e. the product, the costs whereof are going to be measured;

2. identification of direct costs attributable to milk yield;

3. selection of the indirect cost allocation base; 4. calculation of the actual indirect cost rate per cost

driver unit; 5. product costs are calculated with respect of the di-

rect and indirect products cost.

Table 2. Enterprise “X” expenses

Type of activities Expenses LTL Forage 448.479 Pharmaceuticals 29.573 Veterinary services 3.432 Repair of agricultural buildings 7.769 Spare parts 27.313 Other materials 36.267 Administrative costs 482.694 Utilities 153.749 Other 2.440 Depreciation 67.833 Total costs: 1.259.549

Firstly, costs related to milk production, i.e. keeping

and feeding milkers, are provided in a centralised manner (see Table 2). The annual milk yield, which amounts to 1.767.000 kilograms, was chosen as the cost allocation base (see Table 3).

Research studies in cattle breeding; Bovine health screening proce- dures; Forage nutrient composition analy- sis and control (use of chemical products and other materials inconsistent with the EU forage stan- dards).

Preparation of the feeding system; Preparation of the water- ing system; Installation of milking equipment; Installation of auxiliary facilities; Installation of the exterior of bovine facilities; Installation of an auto- mated milk pipe line washing system.

Installation of milk cooling equipment;

Milk yield;

Forage prepara-

tion;

Installation of milking equip-

ment;

Installation of an automated milk pipe line

washing system.

Construction of access roads.

Receipt of LT- 01-01F health mark certificate for dairy prod- ucts; Milk deliveries to milk process- ing enterprises.

Research Production design

Production activities

Distribution activities

Costumer service

not added added added added Value: not added

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Table 3. Allocation base calculations

No Allocation base calculations Milk kg 1. Milk yield kg/cow 6.449 2. Number of cows 274 3. Annual milk yield kg 6,449×274= 1.767.000

The information on the costs incurred in agricultural

production revealed in the reporting of Enterprise “X” is useful as it offers exhaustive details on the annual costs of the livestock unit as well as total partial costs incurred by the cost centres. However, as it was mentioned above, it does not reveal the amounts of overheads and total ex- penses attributable to the dairy sector. Thus, the devel- opment of business at Enterprise “X” could be best re- flected by the Activity Based Accounting (ABC) system.

The process of measuring costs attributable to the product using the ABC system:

1. Identification of the main operations. 2. Identification of cost drivers for each operation. 3. Identification of cost centres for each operation. 4. Calculation of the production costs. The overheads accounted for by Enterprise “X” are

given in Table 4. Once the total annual overheads are calculated, the

costs can be allocated using the annual milk yield as a cost drive (see Table 5).

Table 4. Calculation of overheads incurred over a period of 1 year

No COSTS Amount LTL 1. Oil products and gas 98.804 2. Electricity 54.945 3. Veterinary services 3.432 4. Depreciation of long-term assets 67.833 5. Spare parts 27.313 6. Other materials 36.267 7. Repair of agricultural buildings 7.769

Total: 296.363

The influence of the calculated amount of overhead costs is reflected in the profit budget (see Table 5). The overhead costs represent 23.53% of the total costs incurred by the livestock unit. The low profitability of the milk production at the enterprise was caused by the awkward system of milk purchasing prices: 1 kilogram of milk is sold to the state at a price which is almost equal to its production cost. The unfa- vourable agricultural policy framework mainly affects dairy farms and other agricultural holdings.

Table 6 provides a profit budget produced using the traditional budget accounting system.

Table 5. Allocation of overhead costs

No Allocation of overhead costs Milk 1. Total overhead costs LTL 296.363 2. Annual milk yield kg 1.767.000 3. Overhead costs allocated to 1 kg of milk

(Line 1 / Line 2) 0.18 LTL/kg

Table 6. Profit budget using the traditional accounting system

Items Amount LTL Turnover from sales of products LTL 1.431.270 Total directs costs LTL 948.786 Overheads LTL 296.363 Cost of products sold LTL 1.245.149 Gross profit LTL 186.121 Administrative expenses LTL 11.684 Profit from operations LTL 174.437 Profit tax LTL 0 Net profit LTL 174.437

When the traditional method is used to calculate the production cost of 1 kg of milk, which was the case at Enterprise “X”, it is not possible to identify specific op- erations causing higher costs. Therefore, the ABC method enables to identify auxiliary activities involving indirect costs (see Table 7). The allocation base is a material cost driver, i.e. the annual milk yield, kg.

Table 7. Production and overhead costs

Item Costs LTL Cost driver Allocation base Standard Cost distribution %

Production costs Forage production 448.479 milk yield kg/year 1.767.000 0.254 54.33 Wages 376.925.28 milk yield kg/year 1.767.000 0.213 45.67 Overheads Total 0.467 100 Pharmaceuticals 29.573 milk yield kg/year 1.767.000 0.017 6.81 Veterinary services 3.432 milk yield kg/year 1.767.000 0.002 0.79 Repair of agricultural buildings 7.769 milk yield kg/year 1.767.000 0.004 1.79 Administrative costs 105.768.72 milk yield kg/year 1.767.000 0.060 24.36 Oil products and gas 98.804 milk yield kg/year 1.767.000 0.056 22.76 Electricity 54.945 milk yield kg/year 1.767.000 0.031 12.66 Spare parts 27.313 milk yield kg/year 1.767.000 0.015 6.29 Other materials 36.267 milk yield kg/year 1.767.000 0.021 8.35 Depreciation 67.833 milk yield kg/year 1.767.000 0.038 15.62 Other 2.440 milk yield kg/year 1.767.000 0.001 0.56

Total costs: 1.259.549 Total: 0.246 100 Production cost of 1 kg milk 0.713 LTL/kg

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The data in Table 7 show that the highest costs in- clude administrative costs (24.4 %), oil products and gas (22.8 %), depreciation (15.6 %), and electricity (12.7 %). The obtained findings should warn the management of the organisation that disregard of individual activities and a failure to analyse the causes of costs may result in a fur- ther increase of the cost price of the products.

The overview of the cost allocation system at Enter- prise “X” shows that in pursuance of higher profits pre- dominant emphasis should be placed on individual opera- tions and the costs incurred thereby. Furthermore, it is vi- tal to choose a relevant production cost calculation method. Since Enterprise “X” is a multi-activity organisa- tion, it generates profit in any case. However the dairy operations require improvements in management and business organization. Moreover, sources of financing should be sought to expand the business and to improve the quality of marketed milk.

Drafting master budgets for the dairy sector

In order to assess the efficiency of a budgetary sys- tem, it is necessary to produce a fragment of the annual budget of the dairy sector, i.e. a one-month budget. The main operations of Enterprise "X" are those, which have the largest impact on milk production. The costs caused by such activities are direct costs. The master budget in- cludes: 1) direct materials budget, 2) direct labour budget, and 3) other direct and manufacturing overhead budget.

Enterprise “X” budget fragment is compiled for Feb- ruary 2009. In February it is expected to produce 148.340 kilograms of milk and to sell it for LTL 0.81 per kilogram (see Table 8). The estimated sales volumes and price are based on the information for the previous months.

Table 8. Sales budget

Product Estimated sales kg

Price per unit LTL

Estimated sales LTL

Milk 148.340 0.81 120.155.40

Typically, the production budget is based on the stock of unsold products at the beginning of the relevant period, the production capacities of the organisation, and the es- timated stock of finished products at the end of the pe- riod. While planning the production volumes, it is neces- sary to take into account the potential seasonal demand

fluctuations and the availability of human and material resources (Table 9). In the analysed case, there is no stock of milk: the products produced by cows are imme- diately delivered for sales.

Table 9. Production budget

No Index Dairy products 1. Estimated sales volumes kg 148.340 2. Estimated stock of finished products at

the end of the year kg 0

3. Demand for production (Line 1 + Line 2) 148.340 4. Factual stock of finished products at

the beginning of the budget year kg 0

5. Budgeted finished product volumes kg (Line 3 – Line 4)

148.340

The master budget of Enterprise “X” includes forage, forage additives, water, etc. The forage is produced onsite depending on the number of cattle and horses and the available land resources. The calculations of a one-month relevant raw material rate per one cow are based on the analysis of the data on the annual bovine forage and wa- ter demand (the enterprise has 274 cows), (see Table 10).

Table 10. Direct materials budget

Raw materi- als LTL

Monthly raw material rate LTL/cow

Estimated raw mate- rial demand LTL

Forage 145.14 39.768.00 Water 6.57 1.800.50

Total 41.568.50

The direct labour budget is drawn up based on the number of people employed in the dairy unit, the pay rate per one working day, and the number of working hours per month. The daily wages amount to LTL 23 per em- ployee. The working day is 8 hours. The estimated labour budget accounts for LTL 9.177. The direct labour budget is presented in Table 11.

The overhead budget is provided in Table 12. In the budgeted month, the overhead costs of Enterprise “X” ac- count for LTL 39.796.60.

The overhead budget is prepared for the whole stock- breeding unit. The overheads are allocated to the dairy unit in conformity with the estimated expense rate per 1 kg of milk. Given the total amount of overhead expenses and the monthly yield, 1 kg of milk is allocated LTL 0.268. The calculations are presented in Table 13.

Table 11. Direct labour budget

Activity Number of employees

Fixed number of monthly working hours per one per-

son

Total work- ing hours

Total workdays

Directs labour costs (total workdays × daily wages amount to LTL23 per em-

ployee) Dairy op- erations

21 152 3.192 399 9.177

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Table 12. Overhead budget

No Costs items Amount LTL 1. Pharmaceuticals 2.710.86 2. Veterinary services 314.60 3. Repair of agricultural buildings 712.16 4. Administrative costs 9.695.47 5. Oil products and gas 9.057.03 6. Electricity 5.036.63 7. Spare parts 2.503.69 8. Other materials 3.324.48 9. Depreciation 6.218.03 10. Other 223.67

Total 39.796.60

Table 13. Overhead allocation to 1 kg of milk

No ITEMS Amount LTL

1. Total overhead expenses LTL 39.796.60 2. Monthly milk yield kg 148.340 3. Overhead expenses per 1 kg of milk (Line 1

/ Line 2) 0.268

Once all the above budgets are compiled, the produc-

tion cost budget per 1 kg of milk can be produced. This budget shall specify the direct materials, direct labour, and overhead expenses, as well as the costs of finished goods, which reflect the sum of the above (see Table 14).

Table 14. Estimated production cost budget of 1 kg of milk

No Indices Expense rate LTL/1 kg

1. Forage 0.268 2. Water 0.012 3. Direct labour costs 0.062 4 Overhead expenses 0.268 Total production cost per one unit 0.61

Functional budgets serve a basis for planning the mas- ter budget of the dairy operations at Enterprise “X”. The master budget reflects the financial position of a relevant operation. It summarizes and finalizes the budgetary cy- cle. The master budget forecasts the financial position of the business activity in the future. The cash flow budget

requires performance figures for a period of one month or less. Cash flow means receipts and payments attributable to individual operations. It is presented in Table 15.

Table 15. Receipt and expense budget

No Receipt

budget Amount LTL

No Expense budget

Amount LTL

1. Receipts 120.155.40 1. Forage and water

41.568.50

2. Trade creditors

8.113.25 2. Wages 9.177.00

3. Total re- ceipts

128.268.65 3. Overhead expenses

39.796.60

4. Total ex- penses

90.541.6

The efficiency of operations is best disclosed by the cash budget, which reflects all financial and cash transactions. The cash budget is based on the receipt and expense budgets (the figures are taken from Table 15) (see Table 16).

Table 16. Cash budget

No Items Amount LTL 1. Income 128.268.65 2. Expenses 90.541.6 3. Cash at the beginning of the month 10.450.20 4. Cash at the end of the month 48.177.25

Cash budgeting helps to measure the contribution of

the dairy operations in the overall performance of the or- ganisation over a period of one month. The forecasted cash comes up to LTL 48.177.25. The information pro- vided by this budget may help to take notice of the prob- lems, which require adjustments to be made not only to the financial (cash) budget but also to the functional budgets (e.g., review of the operating expenses, etc.).

The described operating expense budgets comprise the budget system of Enterprise “X” dairy operations. The said budgets are made compatible with each other and consequently their interaction reflects the coordina- tion of all dairy production responsibility centres and their joint activities (see Figure 2).

Fig. 2. Budgeting system of Enterprise “X” dairy operations

Innovation and research budget

Raw material consumption budget

Direct labour budget

Cash flow budget

Budget of fi- nancing re- quirements

Production programme

Overhead budget

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Such budgeting system enables to plan the activities and to meet the objectives and consequently to increase the sales of milk yield and earn bigger profits. In the con- text of the dairying budgeting system, the cash-flow budget plays an important role. It helps to make estima- tions of the upcoming cash-flow surplus that can be used for short-term investments or enables to make early rele- vant arrangements for the likely shortage of money and thus to cut down the level of potential risks over the bud- geted period.

Control of the key budgets of the dairy production

After one month of operations, the chief executive of

the organisation and a budget expert can compare the ac- tual performance figures of the dairy operations with the planned (budgeted) figures based on the actual informa- tion on the revenue earned and expenses incurred over that period.

Firstly, in February 2009 a static budget is drawn up, which reflects the expected milk purchasing price and the direct and overhead expenses (see Table 17).

Table 17. Static budget

Data Milk Selling price LTL/kg 0.81 Directs costs (materials and wages) LTL 0.28 Sales volumes kg/month 147.320 Allocated overhead costs LTL 39.796.60

In March 2009, the below performance figures were

reported (see Table 18). The actual overhead costs were lower than the budgeted figure entered in February. The more favourable situation resulted from the milk purchas- ing price policy: the milk was sold at a higher price than it was expected (see Table 18).

Table 18. Actual budget

Data Milk Selling price LTL/kg 0.85 Directs costs (materials and wages) LTL 0.302 Sales volumes kg/month 148.230 Allocated overhead costs LTL 40.250.44

The actual Profit and Loss Account compiled in Feb- ruary 2009 reveals that the profit increased due to lower variable and overhead costs (see Table 20).

Table 19. Actual production cost budget per 1 kg milk

No Indices Expense rate LTL/kg

1. Directs costs (material and wages) LTL 0.302 2. Overhead costs 0.27 Total production unit cost 0.572

The actual production cost of 1 kg of milk is calcu- lated in Table 19. The actual production cost shrank by LTL 0.038 compared to the budgeted figure of LTL 0.61 per kilogram.

Table 20. Actual Profit and Loss Account LTL

Items Amount LTL

Sales volume kg 148.230 Turnover from sales 125.995.5 Variable costs 44.765.46 Marginal income 81.230.04 Fixed costs 40.250.44 Profit 40.979.60

Once the static operating budget is compiled, a flexible

use of the budget is essential for the control purposes. The performance results can be controlled by comparing the ac- tual expenses to the budget expenses. The flexible budgeting method is not complicated, but the obtained results are accu- rate only when the changes in costs comply with the pro- jected trends. This budget is presented in Table 21.

Table 21. Static and flexible budget planning

Static budget Flexible budget Sales volume kg 148.340 148.230 Turnover from sales 120.155.40 120.066.3 Variable costs 50.732.28 50.694.66 Marginal income 69.423.12 69.371.64 Fixed costs 39.796.60 39.796.60 Profit 29.626.52 29.575.04

In the analysed case, level 1 and 2 activities are con- trolled. Level 1 variance analysis reveals only superficial in- consistencies in the profit results, thus the actual reasons for their occurrence are not disclosed (see Table 22).

Table 22. Level 1 analysis. General (static budget) variance

DeflectionVariance LTL Amount LTL Revenue 5.840.1 Production cost: 5.512.98

Variable costs -5.966.82 Fixed costs 453.84

Profit 327.12

Once a flexible budget is prepared (revised in accor- dance with the actual sales volumes), the Level 2 control allows to evaluate the impact of the changes in price and sales volume on the performance results. The price vari- ance is reflected by the difference between the profits of the actual price and flexible budgets, while the sales vol- ume variances are revealed by the difference between the profits in the flexible and static budgets (see Table 23).

A general (static) budget variance indicates that the actual profit differs from the budgeted one by LTL 327.12 (see Table 22). The Level 2 control reveals the reasons behind this difference. The actual milk sales vol-

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umes (148.230 kg) are slightly lower than budgeted (148.340 kg), thus, in view of the actual results, the budgeted profit decreased by LTL 51.12. When a forecast of the purchasing price was made, the earnings were ex- pected to be lower. However the variance between the ac- tual and forecasted price amounted to LTL 0.04, i.e. the

actual price was higher than the forecasted price. Due to this reason the budgeted profit increased by LTL 11.404.56. The management of Enterprise “X” should fo- cus on the forecasted milk purchasing prices, since the price variance has the largest impact on the changes in profit.

Table 23. Level 2 analysis. Sales volume and price variances LTL

Actual budget Static budget Flexible budget Sales volume variance Price variance Profit 40.979.60 29.626.52 29.575.04 -51.12 11.404.56

The current position of Enterprise “X” can lead to a

conclusion that the future of the dairy enterprise will de- pend on the breeding system and a careful selection work rather than prices. Primary responsibility is placed on the research staff, as the studies and findings represent the basis for the future operations of the enterprise. The di- rector of the organisation and the budgeting expert, who organise the control of all units of the enterprise, includ- ing stockbreeding, will be able to identify the main con- straints in the development of Enterprise “X”.

Discussion In summary, considering the current general position of

the dairy enterprise it can be assumed that the future of this organisation and other agricultural holdings will depend on the improvement of the breeding system and a careful se- lection rather than prices. Primary responsibility is placed on the research staff, as the studies and findings represent the basis for the future operations of the enterprise. Subject to a designed budget system of the organisation and incor- poration of the Activity Based Costing into the existing ac- counting system and control of operations of the enterprise, the management of the organisation will have a possibility of identifying the major constraints in the development of the enterprise and the advantages for maintaining future operations. Furthermore, a question could be raised wheth- er the budgeting system of the organisation is based on the new Activity Based Costing (ABC) approach will be bene- ficial for the enterprise or will it just inflate the operational costs. Those questions should be answered by the man- agement of the enterprise, who decide whether they should linger at the current level of costs management or whether they prefer to choose a more up-to-date management ac- counting tool (i.e. cost budgeting system).

Conclusions 1. The empiric research brings to a conclusion that:

a) the calculations of the production cost of the milk yield (the cost driver) provide a detailed overview of the ex- penses and their relative percentage in the total produc- tion cost of the milk yield. Furthermore, based on the ob-

tained findings decisions can be made regarding the func- tions where changes could be made depending on the value created by the function to the end user; b) on the other hand, a more accurate production cost of milk raw material calculated using the ABC principles allows to make more exact budgets of the organisation that facili- tate a rational estimation and allocation of the enterprise resources in tackling the goals of the enterprise; c) the control of the compiled budgets provides variances be- tween the actual and budgeted results of the function. Economically, the obtained variances are treated as fa- vourable or negative with respect of the performance of the enterprise. Any variances that are significant in the performance of the enterprise require thorough analysis in order to identify the reasons of their occurrence and to take preventive measures in the future.

2. According to scientific and empiric researches, the application of the cost budgeting system at agricultural holdings could be an alternative measure under the changeable and variable economic and business circum- stances.

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