Operating Budget Essay For Wittgenstein Pty Ltd.

Sales Budget
Particulars	January	February	March	Total
Sales(units)	76820	61450	69130	207400
Average Selling Price	7500	7500	7500	7500
Sales ($)	576150000	460875000	518475000	1555500000

Production Budget
Products	January	February	March	Total
Forecasted Sales in units	76820	61450	69130	207400
Desired Finished goods ending each month	36870	41478	55308
Beginning finished goods	49200	36870	41478
Total Budgeted Production	64490	66058	82960	213508

 Direct Materials Purchases Budget

Direct Material Purchases Budget
Products	January	February	March	Total
Total Budgeted Production	64490	66058	82960	213508
cost of material per unit	19.45	19.45	19.45	19.45
Cost of material for units to be produced	1254330.5	1284828.1	1613572	4152730.6
Cost of material in ending inventory	239040.5	268915.7	358580.2	866536.4
Total Cost of Material Needed	1493371	1553743.8	1972152.2	5019267
Cost of material in beginning inventory	298829.8	239040.5	268915.7	806786
Cost of material to Purchases	1194541.2	1314703.3	1703236.5	4212481

 Labor Budget

Labour Budget
Particulars	January	February	March	Total
Total production units	64490	66058	82960	213508
Direct labour hours per unit	9	9	9	9
Total direct Labour hours	580410	594522	746640	1921572
Direct labour cost per hour	50	50	50	50
Total Direct labour cost	29020500	29726100	37332000	96078600

Manufacturing Overhead Budget
Particulars	January	February	March	Total
Total Budgeted Production	64490	66058	82960	213508
(A) Variable Overhead
Indirect Labour @ $64.52	4160894.8	4262062.16	5352579.2	13775536.16
Power @ $6.15	396613.5	406256.7	510204	1313074.2
Maintenance @ $60.65	35201866.5	36057759.3	45283716	116543341.8
Variable manufacturing cost for opening finished goods inventory	107748000	80745300	90836820	279330120
Other cost @ $46.09	2972344.1	3044613.22	3823626.4	9840583.72
Total Variable Overhead (A)	150479718.9	124515991.4	145806946	420802655.9
(B) Fixed Overhead
Supervision	43016400	43016400	43016400	129049200
Depreciation	3840800	3840800	3840800	11522400
Rates and Utilities	3174000	3174000	3174000	9522000
Maintenance Cost	1254330.5	1284828.1	1613572	4152730.6
Other cost	15363000	15363000	15363000	46089000
Total Fixed Overhead	66648530.5	66679028.1	67007772	200335330.6
Total Manufacturing Overhead (A+B)	217128249.4	191195019.5	212814718	621137986.5

 Ending finished Goods Inventory Budget

Ending Finished Goods Inventory Budget
January	Cost per unit	February	Cost per unit	March	Cost per unit	Total
Direct Materials	19.45	Direct Materials	19.45	Direct Materials	19.45
Direct labours	450	Direct labours	450	Direct labours	450
Manufacturing overhead	374.0946045	Manufacturing overhead	321.5945238	Manufacturing overhead	285.0298907
Total cost per unit	843.5446045	Total cost per unit	791.0445238	Total cost per unit	754.4798907
Budgeted finished goods inventory		Budgeted finished goods inventory		Budgeted finished goods inventory
Closing finished goods inventory in units	36870	Closing finished goods inventory in units	41478	Closing finished goods inventory in units	55308
Ending finished goods inventory	31101489.57	Ending finished goods inventory	32810944.76	Ending finished goods inventory	41728773.8	105641208.1

Cost of Goods Sold Budget

Cost of Goods Sold Budget
Particulars	January	February	March	Total
Direct materials
Beginning inventory	298829.8	239040.5	268915.7	806786
Material Purchase	1194541.2	1314703.3	1703236.5	4212481
Total	1493371	1553743.8	1972152.2	5019267
Closing Inventory	239040.5	268915.7	358580.2	866536.4
Cost of Direct material used	1254330.5	1284828.1	1613572	4152730.6
Direct labour	29020500	29726100	37332000	96078600
Manufacturing Overhead	217128249.4	191195019.5	212814718	621137986.5
Total Factory Cost	247403079.9	222205947.6	251760290	721369317.1
Beginning finished goods inventory	151044000	113190900	127337460	391572360
Total goods available for sale	398447079.9	335396847.6	379097750	1112941677
Closing finished goods inventory	31101489.57	32810944.76	41728773.8	105641208.1
Cost of Goods Sold	367345590.3	302585902.8	337368976	1007300469

Budgeted Income Statement
Particulars	January	February	March	Total
Sales	576150000	460875000	518475000	1555500000
Cost of Goods Sold	367345590.3	302585902.8	337368976	1007300469
Gross Profit	208804409.7	158289097.2	181106024	548199531
Selling and Administration Expenses
Variable Selling and Administration overhead	86422500	69131250	77771250	233325000
Fixed Selling and Administration overhead	27653400	22122700	24888100	74664200
Net Profit	94728509.67	67035147.18	78446674.2	240210331

Cash Budget

Cash Budget
Particulars	January	February	March	Total
(A) Opening Balance	3840800	175407759	590663156	769911714.3
Receipts
Collection From customers	391782000	486240000	490825500	1368847500
Total (A)	395622800	661647759	1081488656	2138759214
(B) Payments
Payment for Direct Material	1194541.2	1314703.3	1703236.5	4212481
Payment to Labour	29020500	29726100	37332000	96078600
Purchase of Land	-	39943800	-	39943800
Payment of Dividend	190000000	-	-	190000000
Total (B)	220215041	70984603	39035236.5	330234881
Closing Balance(A-B)	175407759	590663156	1042453419	1808524333

Wittgenstein Pty Ltd makes the production of propellers which is used for the production of wind-powered electricity generating equipment. They sold these propellers to various engineering companies in Europe and Australia. The sales manager of Wittgenstein Pty Ltd analyze the various possible outcomes if the current government failed to wins the election then the new government may support the wind-powered electricity generating equipment or may not. The alternative power generating equipment is highly volatile which puts the company’s product in uncertain position. If the new government does not support the current electricity power equipment then the business of the company will go down and the sales of the company will also go down. So the company has to prepare themselves according to the changes in the dynamic environment and think about to produce the alternative source of energy.  Rita Arthurs, the sales manager have to develop new plans for the survival of the company. If the company wants to survive in the dynamic market then the sales manager has to develop new options for making sales. They will export more in those countries where they already selling their product or where the policies regarding the power generating equipment is same as the company’s current government policy.

Paulo Farmer is the production manager in the Wittgenstein Pty Ltd and he makes the budget for every production company makes. He purchased a land in February to build a new highly automated manufacturing facility in which the use of the labour will reduce and the major work is done by the machine itself. So the cost of labour will reduce and the wastage in the direct material will also reduce (Jan, 2013). The new manufacturing facility will increase the fixed overhead cost by 50%.  If the new manufacturing facility will introduce by Paulo then the direct material cost and direct labour cost will decrease by 25% and the cost of goods sold will also decrease but the fixed overhead will increase by 50% and it will increase the fixed manufacturing overhead of the company. But this new facility will increase the profit of the company because the labour cost and material cost will decrease more as compared to the cost of fixed overhead. If the other things remain same as before then the Paulo can think about the investment as he has the required amount of money to build a manufacturing facility.

Production Budget

A budget is a financial plan made by the analyst for a defined time. It is made on the basis of past data and the forecasted changes in the future. Different types of the budget have been made by the Paulo farmer to anticipate the conditions of future. But the budgeted figure has not been always accurate. Paulo farmer is trying to find the difference between the budgeted figures and the actual figures. The cost of the direct material used is very high in actual but the budget shows that the cost of direct material is very low. The budgeted cost of the direct labor is very low but the actual labor cost is very high and it creates the variances between the actual figure and budgeted figure. The difference between the actual figure and the budgeted figure is known as variances. So the Paulo calculate the different variances for finding the reason behind the actual and budgeted figures.

Sometimes the reason for the variances is incorrect information is taken for making the budget for a period. And all the plans and policies are made according to the need of budget. The Anticipation of waste is not made correctly by the Paulo and because of that, the direct material cost is increased as compared to budgeted figures. The budgeted figures of direct labor cost are also different because the measurement of completion of work is not made correctly by the Paulo. Idle time is not taken into consideration while making the budget of the labor cost and because of those differences arises in the actual and budgeted figures.

Some are the causes for the difference in actual and budgeted material is poor management of materials, lower quality of material purchased by the company, a rise in market price, etc. The reasons for the difference in actual and budgeted labor cost is a rise in market labor rate, poor negotiation of wages between the employer and labor, poor training is given to the labors, etc.  When the next time Paulo makes the budget he has to analyze the possibilities of these factors and make decisions according to the requirements of the company. So the chances of differences between the actual and budgeted figure will decrease (Schmidt, 2017).  

Imposed Budgetary approach: Imposed budget is basically a budget developed and prepared by the higher authority and the top management having little or no input from the operating personnel; objectives of the budget and constraints of the budget then informed to these operating personnel’s. This budget process may be seen as a punitive device and in this approach there is a high competition for the funds among the lower-level management. This budgeting bottom approach need to create the budgets that are imposed on a company by the top level management, having very less participation by the employees and the staff of the company. In a top-bottom system, budgets are imposed on the individuals by their top level managers (Bragg, 2013). The budget is mainly prepared by the top-level and higher management and then imposed on the lower layers of the organization. Imposed approach of budgeting can contribute to a lack of team spirit. It can also lead to staff dissatisfaction and poor morale. In the current situation all the decisions regarding the budget are made by the Paulo and so many differences have come in the actual and budgeted figures. If the imposed budgetary approach is made for preparation of budget than the decision making will be done by the top management of the company and the only work is done by the Paulo is to implement the budget in the organization.

Participative budgeting approach: It is a process of budgeting in which the people are energetically involved in the creation process of the budget. The basic and structures approach to budgeting need to create budgets which are highly achievable than are top-bottom budgets that are majorly imposed by the top level management, having very less participation of the employees and the staff of the company. This budget is also good for the morale, and needs to conclude in high efforts by the employees and the staff to attain the budget which was previously predicted (SEOPE, 2015). It is the matter of fact that a quality participative budget does not take top-level strategic considerations into the material account. The management required providing the employees and the staff with the guidelines concerning the overall direction and area of the organization, and also the matter of fact is that how their individual and personal departments fit into that area and direction. In the current situation all the decision making is done by the Paulo himself. This approach states that the all the members of the organization will take part in the activities of the companies. If the suggestion from different personal has taken by the Paulo than the variances might be low and he will not be liable for all the differences between the actual and budgeted figures.

Bragg, S. (2013). Budget variance. Retrieved Aug 10, 2017, from https://www.accountingtools.com/articles/what-is-a-budget-variance.html

Jan, I. (2013). Cash Budget. Retrieved Aug 10, 2017, from https://accountingexplained.com/managerial/master-budget/cash-budget

Schmidt, M. (2017). Budget, Budgeting, and Variance Analysis. Retrieved Aug 10, 2017, from https://www.business-case-analysis.com/budget.html

SEOPE, O. (2015). BUDGETING AS A POLITICAL PROCESS: A CASE STUDY OF DR RUTH SEGOMOTSI MOMPATI DISTRICT MUNICIPALITY. Retrieved Sept 15, 2017, from https://dspace.nwu.ac.za/bitstream/handle/10394/17657/Seope_OE.pdf?sequence=1