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Critically assess the current and future role of management accounting including strategic management accounting.

Analyse the means to initiate and use standard costing, budgeting and risk control within the modern organisation.

Demonstrate the need for financial planning and control and the necessity for measuring performance within an organisation.

Requirement 1

The term budgeting is defined as a process of planning the use of cash and other resources for future projects.  A business prepares various types of budgets and planned its expenditures and cash requirements for the projects that are going to happen in the near future. Types of budgets include cash budget, sales and production budgets and the budgets for different types of business overheads (Weikart, Chen and Sermier, 2012). This report contains preparation various budgets along with the budgeted financial statements for the company which will be incorporated on 1st January 2019, named as CooperWorld Ltd.  It also explains the ways by which CooperWorld can enhance its cash budget.

(a) Production budget

 

 

 

 

CooperWorld Ltd.

 

 

 

 

 

 

 

Production Budget

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

Budgeted units

120

140

160

180

200

220

240

260

240

240

160

180

2340

Add: closing inventory

0

0

0

0

0

0

0

0

0

0

0

0

0

Total requirement

120

140

160

180

200

220

240

260

240

240

160

180

2340

Less: opening inventory

0

0

0

0

0

0

0

0

0

0

0

0

0

Required production

120

140

160

180

200

220

240

260

240

240

160

180

2340

Note:

It is assumed that there will be no opening and closing inventory because the company will be producing only that much units which are required for sales

(b) Sales Budget

 

 

 

 

CooperWorld Ltd.

 

 

 

 

 

 

 

 

Sales Budget

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

Budgeted sales units

120

140

160

180

200

220

240

260

240

240

160

180

2340

Selling Price per unit

300

300

300

300

300

300

300

300

300

300

300

300

Budgeted sales (£)

36000

42000

48000

54000

60000

66000

72000

78000

72000

72000

48000

54000

702000

(c) Material Purchase Budget

 

 

 

 

CooperWorld Ltd.

 

 

 

 

 

 

 

Material Purchase Budget

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

Production

120

140

160

180

200

220

240

260

240

240

160

180

2340

Material Per unit

1

1

1

1

1

1

1

1

1

1

1

1

1

Production needed

120

140

160

180

200

220

240

260

240

240

160

180

2340

Add: closing inventory

0

0

0

0

0

0

0

0

0

0

0

0

0

Total needed

120

140

160

180

200

220

240

260

240

240

160

180

2340

Less: opening inventory

0

0

0

0

0

0

0

0

0

0

0

0

0

Material  to be purchased

120

140

160

180

200

220

240

260

240

240

160

180

2340

Cost per unit

40

40

40

40

40

40

40

40

40

40

40

40

Budgeted purchases (£)

4800

5600

6400

7200

8000

8800

9600

10400

9600

9600

6400

7200

93600

Note:

It is assumed that material per unit required for producing desired units is £1 for each and every month.

(d) Direct Labour budget

 

 

 

 

CooperWorld Ltd.

 

 

 

 

 

 

 

Direct Labour Budget

 

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

Production units

120

140

160

180

200

220

240

260

240

240

160

180

2340

Direct Labour per unit

3

3

3

3

3

3

3

3

3

3

3

3

Labour hours required

360

420

480

540

600

660

720

780

720

720

480

540

7020

Hourly labour cost

7

7

7

7

7

7

7

7

7

7

7

7

Total direct labour cost

2520

2940

3360

3780

4200

4620

5040

5460

5040

5040

3360

3780

49140

(e) Overheads budgets

 

 

 

 

CooperWorld Ltd.

 

 

 

 

 

 

 

Production overhead Budget

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

Budgeted labour hours

360

420

480

540

600

660

720

780

720

720

480

540

7020

Variable production O/H rate

5

5

5

5

5

5

5

5

5

5

5

5

Variable production O/H cost

1800

2100

2400

2700

3000

3300

3600

3900

3600

3600

2400

2700

35100

Fixed production O/H

9900

9900

9900

9900

9900

9900

9900

9900

9900

9900

9900

9900

118800

Total overheads

11700

12000

12300

12600

12900

13200

13500

13800

13500

13500

12300

12600

153900

Less: non cash item

600

600

600

600

600

600

600

600

600

600

600

600

Total production O/H

11100

11400

11700

12000

12300

12600

12900

13200

12900

12900

11700

12000

146700

 

 

 

 

CooperWorld Ltd.

 

 

 

 

 

 

 

Distribution overhead Budget

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

Budgeted sales

120

140

160

180

200

220

240

260

240

240

160

180

2340

Variable overhead rate

2.5

2.5

2.5

2.5

2.5

2.5

2.5

2.5

2.5

2.5

2.5

2.5

Variable expenses (£)

300

350

400

450

500

550

600

650

600

600

400

450

5850

Fixed expenses

3900

3900

3900

3900

3900

3900

3900

3900

3900

3900

3900

3900

46800

Total distribution O/H

4200

4250

4300

4350

4400

4450

4500

4550

4500

4500

4300

4350

52650

 

 

 

 

CooperWorld Ltd.

 

 

 

 

 

 

 

The Cash Budget

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Total

Beginning cash balance

0

-820

-24810

-14370

500

19800

43530

71690

104280

142840

188200

230640

Total cash collections

Receivables collection

36000

42000

48000

54000

60000

66000

72000

78000

72000

72000

600000

Other income

108900

108900

Issue of shares

20000

20000

Total collections

20000

-820

11190

27630

48500

73800

103530

137690

176280

220840

260200

411540

728900

Less: cash disbursements

Direct material purchase

4800

5600

6400

7200

8000

8800

9600

10400

9600

9600

6400

86400

Direct labor cost

2520

2940

3360

3780

4200

4620

5040

5460

5040

5040

3360

3780

49140

Production overhead

11700

12000

12300

12600

12900

13200

13500

13800

13500

13500

12300

12600

153900

Distribution overhead

4200

4250

4300

4350

4400

4450

4500

4550

4500

4500

4300

4350

52650

Asset purchase

2400

2400

Total disbursements

20820

23990

25560

27130

28700

30270

31840

33410

33440

32640

29560

27130

344490

Excess (deficiency)

-820

-24810

-14370

500

19800

43530

71690

104280

142840

188200

230640

384410

384410

Ending cash balance

-820

-24810

-14370

500

19800

43530

71690

104280

142840

188200

230640

384410

384410

CooperWorld Ltd.

Income statement

Particulars

 Amount

Sales (2340*300)

702000

Less: cost of goods sold (2340*76)

187740

Gross profit

514260

Distribution and administration expenses

52650

Depreciation

600

Net income

461010

CooperWorld Ltd.

Balance sheet as on December 2019

Particulars

Amount

Assets

Cash

384410

Accounts receivables

102000

Property and Equipment

1800

Total assets

488210

Liabilities

Accounts payable

7200

Issued capital

20000

Net income

461010

Total Liabilities

488210

(A) Budgeting is a considered as a very important function of a business. Companies that does not prepare budgets for themselves, faces number of financial problems. It the most commonly used management accounting tool and has many uses in the modern business world. The key uses which are been stated in the academic literature are planning and controlling. Apart from these, use of budgets also produce some other benefits to the business, in today’s era (Edey, 2014). Following are:

  • Budgets are mostly used for the purpose of planning, which provides directions to the business. They help the organization to collect the information required for making a plan, including all the related items and expenses. By preparing a budget, management comes to know about the cost and expenses which are to be incurred in implementing the plan. Such planning helps in estimating the future business conditions and avoiding the uncertainties (Dugdale and Lyne, 2010). 
  • They also help in establishing control within the organization and is used a tool for measuring performance against the set and predetermined targets. The actual performance of the business can easily be compared with the budgeted one by preparing suitable and appropriate budgets. Such comparison helps in better management and control of business activities (Dlabay and Burrow, 2007). 
  • Budgets are also used as a medium of communication and interaction between the various departments and employees of an organization. As the departments are interdependent of each other, budgets stimulates coordination in their activities. Every division of the organization prepared a budget for itself which communicate the financial plans across the different parts of the firm. Thus, reflecting how the different units of the business are properly managed and are working together towards the integrated plan of the organization, in order to achieve the set targets (Horner, 2017). 
  • If budgets are prepared correctly and appropriately, it may results into enhancing the motivation among the employees and managers of the organization. Knowing the predetermined target will motivate the employees to work in a correct direction and also to increase their performance (Atrill, McLaney and Harvey, 2014). 

Thus, it can be said that, preparation of budgets is very necessary for the companies in today’s business world. Reason being, they guide the business in correct direction and help in achieving greater success. CooperWorld Ltd., being a new company, prepared sales, cash production and overheads budgets. This will help the company to know about their expected cash inflow and outflow along with the expenses and purchases required for the purpose of production.

(B) Cash budget is basically a plan of expected cash receipts and cash payments made during a specific period of time. The inflow of cash include items like cash collected from receivables, cash receipts, sales made on cash basis and other income. On the other side, cash outflow or disbursement include expenses related to inventory, selling and administrative expenses, distribution expenses and other payments. The net effect is denoted by excess and deficiency (Crosson and Needles, 2013). Figures included in the cash budget of CooperWorld Ltd. are:

  • Total cash collections: This item include figures related to the cash collected by the business during a financial year. It consists of cash collection made from the receivables and shares issued.

a) Production budget

Receivable collection: It includes the figures of payments made by the debtors of the company. In the coming year, CooperWorld will make credit sales and 2 month credit period is been allowed to debtors. The sales of January will be collected in March and of February in April. The series continues till the end of the year (Weil, Schipper and Francis, 2013).

Share issued: It includes 20000 ordinary shares issued by the company at par of £1 each. This shows the inflow of cash and hence is recorded under the head ‘cash collections’ (Needles, Powers and Crosson, 2013). 

Apart from these two, another item which is included is the beginning cash balance. It shows the balance of cash at the starting of each month. In January, February and March CooperWorld has negative cash balance in the starting which turns positive later on. Other income is also there.

  • Total Cash Disbursements: Under this head, all the payments made in cash are included. It consists of material purchase, labour, distribution and production overheads and the asset purchase. It basically shows the outflow of cash from the business (Davis and Davis, 2011). 

Direct material purchase: The figures of this item shows the payment made regarding the material purchase by the company for the purpose of production. CooperWorld will be purchasing the material in the year when production is been done and the payment regarding the same will be made in the following month. In January, a purchase amount to £4800 is been made which was paid in February and the amount of material purchase in February will be paid out in March. This will continue till end of the year (DRURY, 2013). 

Direct Labour cost: It shows the cost incurred on hiring labour for the purpose of producing the required production units. The units produced in each month will require labour for 3 hours at the cost of £7 per hour. Through proper calculation and provided information, the total direct labour cost for month of January is expected to be £2520 and of February is £2940. Similarly, the cost is been calculated for other months also (Lal, 2009). 

Production overhead: It include the amounts of variable and fixed expenditure incurred on the production. The variable overhead consists of an absorption rate of £5 per hour for each month and the fixed expense amounted to £9900. The variable production overhead cost amounted to £1800 in month of January and £2100 in February and so on. Fixed cost remain same for every month. The total production of overhead is expected to be £11700 in January, £12000 in February and so on. This expense has to be paid in the same month, when it has occurred.

b) Sales Budget

Distribution overhead: It also include the fixed and variable distribution expenses incurred during the year. The variable distribution overhead is £2.5 per unit sold and fixed cost is £3900. Total variable cost occurred in starting is 300 and then it continues to increase till October. After that the cost reduces but fixed cost remains same. The total distribution overhead reported in January is £4200 and is to be paid in the same month.

Asset purchase: CooperWorld will be purchasing an office equipment in January 2019 worth £2400. The asset will depreciated at 25% per annum. This purchase shows the outflow of cash.

(C) For a company, it is very necessary to have an appropriate cash budget which shows the strong position company’s cash flow. It is very essential for the companies to timely review their cash budget and should take necessary measures to improve the same. The cash budget of CoopWorld Ltd. shows that company has negative cash balance in the starting three months of the year 2019. There can be various reasons for such negative figure. But, the thing which is taken into consideration is that it is important for the CoopWorld to take certain steps for improving the position of cash. It can be done in following ways:

  • First of all, company should make cash sales along with the credit sales. The amount of cash sales will be treated as a cash inflow in the business and will also increase the cash balance.
  • The time given to debtors for making payments should be less than the time taken by the company from creditors. Reason being, if payables got due before receivables, then the company will have to face cash flow problems. Early and timely collection of receivables will definitely improve the position of cash budget and also turns the negative figures into positive ones (Brigham and Houston, 2012). 
  • Another way is that instead of buying the equipment, CooperWorld should take the same on lease. Leasing allows the company to pay the required amount in small instalments which eventually improve its cash balance. Moreover, lease payments are treated as business expense and hence, can be written off.
  • Before selling goods on credit, company should do a credit check of its customers, so as to know about their creditworthiness. Similarly, company should make early payments to its suppliers and creditors and should maintain a healthy relationship with them. All these efforts will directly and indirectly improve the cash budget (Brigham and Houston, 2012). 

Apart from the above steps, inventory management, providing discounts on loan can also enhance the cash budget of the organization.

Conclusion 

The above report concludes that budgets are very necessary for an organization to prepare. Also by taking corrective steps, a company can improve its cash budget (Swain and Reed, 2014).  CooperWorld should adopt the mentioned ways in order to increase and improve its cash position. A suitable and appropriate cash budget can help in meeting the financial obligation easily and also contributes in the strong position of liquidity.

References

Atrill, P., McLaney, E. and Harvey, D., (2014). Accounting: An Introduction, 6/E (Vol. 6). Australia: Pearson Higher Education AU.

Brigham, E.F. and Houston, J.F., (2012). Fundamentals of financial management. 13th ed. USA: Cengage Learning.

Crosson, S.V. and Needles, B.E., (2013). Managerial accounting. 11th ed. USA: Cengage Learning.

Davis, C.E. and Davis, E., (2011). Managerial accounting. Hoboken: John Wiley & Sons.

Dlabay, L. and Burrow, J.L., (2007). Business finance. USA: Cengage Learning.

DRURY, C.M., (2013). Management and cost accounting. 7th ed. London: Springer.

Dugdale, D. and Lyne, S., (2010). Budgeting practice and organisational structure. Oxford: Elsevier.

Edey, H.C., (2014). Business Budgets and Accounts (RLE Accounting). New York: Routledge.

Horner, D., (2017). Accounting for Non-accountants. 10th ed. United Kingdom: Kogan Page Publishers.

Lal, J., (2009). Cost Accounting 4E. New Delhi: Tata McGraw-Hill Education.

Needles, B.E., Powers, M. and Crosson, S.V., (2013). Principles of accounting. 11th ed. USA:  Cengage Learning.

Swain, J.W. and Reed, B.J., (2014). Budgeting for public managers. New York: Routledge.

Weil, R.L., Schipper, K. and Francis, J.,( 2013). Financial accounting: an introduction to concepts, methods and uses. 14th ed. USA: Cengage Learning.

Weikart, L.A., Chen, G.G. and Sermier, E., (2012). Budgeting and financial management for nonprofit organizations. California: CQ Press

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