Advantages And Disadvantages Of Budgeting

Based on various case studies, you are required to plan, develop, finalise, monitor, and control budgets including:
 Sales Budget
 Purchase Budget
 Expense Budget
 Budgeted Income Statement
 Production Budget
 Performance Reports

 

Sales Budget
	Selling Units	Selling  Price	Total
Sydney	740	$         260.00	$  192,400.00
Melbourne	680	$         220.00	$  149,600.00
Brisbane	620	$         200.00	$  124,000.00
Gold Coast	710	$         190.00	$  134,900.00
Adelaide	550	$         180.00	$    99,000.00
Perth	420	$         170.00	$    71,400.00
Total sales	3720		$  771,300.00

 

Sales Budget
	Selling Units	Selling  Price	Total
Sydney	740	260	=B3*C3
Melbourne	680	220	=B4*C4
Brisbane	620	200	=B5*C5
Gold Coast	710	190	=B6*C6
Adelaide	550	180	=B7*C7
Perth	420	170	=B8*C8
Total sales	=SUM(B3:B8)		=SUM(D3:D8)

 

Purchase Budget
Purchases	Units Purchases	Price of each unit	Total Purchase
October	6643	28	186000
November	10893	28	305000
December	2232	28	62500
Total	19768	84	553500

 

Purchase Budget
Purchases	Units Purchases	Price of each unit	Total Purchase
October	=D13/C13	28	=B7
November	=D14/C14	28	=C7
December	=D15/C15	28	=D7
Total	=SUM(B13:B15)	=SUM(C13:C15)	=SUM(D13:D15)

Particulars	Amount
Proposed Sales	$  95,000.00
Fixed Expenses
Manager`s salary	$    6,000.00
Depreciation of vehicles	$    1,000.00
Depreciation of fixtures and fittings	$    1,500.00
Stationery	$    1,100.00
Rent	$    1,000.00
Interest on Loan	$    2,500.00
General Expenses	$        800.00
Variable Expenses
Advertising	$    2,500.00
Commission	$    1,900.00
Cartage	$        950.00
Discount allowed	$    2,375.00
Total	$  21,625.00

 

Particulars	Amount
Proposed Sales	95000
Fixed Expenses
Manager`s salary	6000
Depreciation of vehicles	1000
Depreciation of fixtures and fittings	1500
Stationery	1100
Rent	1000
Interest on Loan	2500
General Expenses	800
Variable Expenses
Advertising	=600+(B2*0.02)
Commission	=0.02*B2
Cartage	=0.01*B2
Discount allowed	=0.025*B2
Total	=SUM(B5:B17)

 

Budgeted Income statement
Particulars	Amount
Revenue
Sales	45000
Cost of Goods sold	6000
Gross Profit	39000
Operating Expenses
Marketing	4900
Administration expenses	2500
Finance	1200
Total	8600
Net income	30400

 

Budgeted Income statement
Particulars	Amount
Revenue
Sales	45000
Cost of Goods sold	=8000+7000-9000
Gross Profit	=B4-B5
Operating Expenses
Marketing	4900
Administration expenses	2500
Finance	1200
Total	=SUM(B10:B12)
Net income	=B7-B13

	July	August September
Opening Inventory
Units	48
Total	720	900	810
Production	4380	5490	7200
Units	292	366	480
Per unit price
Sales	6000	7200	9000
units	400	480	600
per unit	15	15	15

 

	July	August September
Opening Inventory
Units	48
Total	=0.1*C17	=0.1*D17	=0.1*E17
Production	=B17-(B13+C13)	=C17-(C13+D13)	=D17-(D13+E13)
Units	=B14/15	=C14/15	=D14/15
Per unit price
Sales	6000	7200	9000
units	=B17/B19	=C17/C19	=D17/D19
per unit	15	15	15

Flexible Budget
BUDGET MODEL PARAMETERS:
Selling price per unit, P	$15
Variable costs per unit, V	N/A
Fixed costs, F	$63,000
FLEXIBLE BUDGET
	Flexible
When prepared:	(After  19X2)
Units sold, x	180000
Sales Revenue, Px	$2,700,000
Variable Costs,Vx	$54,000
Contribution Margin	$2,646,000
Fixed Costs,F	$63,000
Operating Income	$2,583,000
FLEXIBLE BUDGET PERFORMANCE REPORT
	Actual	Flexible	Variance
When prepared:
Units sold, x	195000	180000	15000
Sales Revenue	$2,925,000	$2,700,000	$225,000
Variable Costs	$57,000	$54,000	$3,000
Contribution Margin	$2,868,000	$2,646,000	$222,000
Fixed Costs	$62,500	$63,000	($500)
Operating Income	$2,805,500	$2,583,000	$222,500

The company has been performing well as per the given performance budget. This can be stated because the operating income of the company for the given quarter has come out well. The fixed cost of the firm has been restricted, and this has resulted in a high performance by the given firm.

Evaluation of the production manager’s performance for the quarter

The manager, as per the given report has been successful in performing well. He has made efforts to control the fixed cost and for this reason the operating profit has come out well.

	Jan	Feb	March
Beginning Cash Balance	7400	13749	18394
Add: Budgeted Receipt(previous months)	85344	65680	65220
Total cash available for use	92744	79429	83614
Less: Cash disbursements
Purchases	52080	38280	37620
Advertisement	500	500	500
Salaries	8000	8640	8640
Rent	3740	3740	3740
Interest on Mortgage	475	475	475
General expenses	2400	2400	2400
Drawings	7000	7000	7000
GST	4800
Total Expenses	78995	61035	60375
Budgeted Ending cash balance	13749	18394	23239

 

	Jan	Feb	March
Beginning Cash Balance	7400	=B19	=C19
Add: Budgeted Receipt(previous months)	=((G5*0.4)*0.2)+((G6*0.4)*0.3)+((H7*0.4)*0.47)+(H7*0.6)	=((G6*0.4)*0.2)+((H7*0.4)*0.3)+((H8*0.6))+((H8*0.4)*0.47)	=((H7*0.4)*0.2)+((H8*0.4*0.3))+(H9*0.6)+((H9*0.4)*0.47)
Total cash available for use	=SUM(B4,B3)	=SUM(C4,C3)	=SUM(D4,D3)
Less: Cash disbursements
Purchases	=(I6*0.2)+(I7*0.78)	=(I7*0.2)+(I8*0.78)	=(I8*0.2)+(I9*0.78)
Advertisement	500	=B8	=C8
Salaries	8000	=1.08*B9	=C9
Rent	3740	=B10	=C10
Interest on Mortgage	475	=B11	=C11
General expenses	2400	=B12	=C12
Drawings	7000	7000	=C13
GST	4800
Total Expenses	=SUM(B7:B14)	=SUM(C7:C14)	=SUM(D7:D14)
Budgeted Ending cash balance	=B5-B15	=C5-C15	=D5-D15

Budgeted Income statement

 

 

Budgeted Income statement
Particulars	Amount
Revenue
Sales	$  420,000.00
Cost of Goods sold	$  296,000.00
Gross Profit	$  124,000.00
Operating Expenses
Depreciation	$      1,600.00
Loan repayment	$      6,000.00
Cash expenses	$      1,200.00
Advertising	$    17,200.00
Office expenses	$      7,600.00
Rates and taxes	$      3,800.00
Bank charges	$          300.00
Commission on sales	$      4,900.00
Motor vehicle expenses	$      9,600.00
Salaries and wages	$    34,600.00
Pete private	$    31,200.00
Total	$  118,000.00
Net income	$      6,000.00

 

Budgeted Income statement
Particulars	Amount
Revenue
Sales	=30000*14
Cost of Goods sold	=2400+295600-2000
Gross Profit	=B4-B5
Operating Expenses
Depreciation	=0.2*8000
Loan repayment	=500*12
Cash expenses	1200
Advertising	17200
Office expenses	7600
Rates and taxes	3800
Bank charges	300
Commission on sales	4900
Motor vehicle expenses	9600
Salaries and wages	34600
Pete private	=600*52
Total	=SUM(B10:B20)
Net income	=B7-B21

 Cash budget

	2015
Beginning Cash Balance	-4400
Add: Budgeted Receipt	420000
Total cash available for use	415600
Less: Cash disbursements
Purchases	296000
Depreciation	1600
Loan repayment	6000
Cash expenses	1200
Advertising	17200
Office expenses	7600
Rates and taxes	3800
Bank charges	300
Commission on sales	4900
Motor vehicle expenses	9600
Salaries and wages	34600
Pete private	31200
Total cash required	414000
Budgeted Ending cash balance	1600

 

	2015
Beginning Cash Balance	-4400
Add: Budgeted Receipt	420000
Total cash available for use	=SUM(B3,B2)
Less: Cash disbursements
Purchases	296000
Depreciation	=0.2*8000
Loan repayment	=500*12
Cash expenses	1200
Advertising	17200
Office expenses	7600
Rates and taxes	3800
Bank charges	300
Commission on sales	4900
Motor vehicle expenses	9600
Salaries and wages	34600
Pete private	=600*52
Total cash required	=SUM(B17,B16,B15,B14,B13,B12,B11,B10,B9,B8,B7,B6)
Budgeted Ending cash balance	=B4-B18

 Budgeted Balance Sheet as of June, 2015

Current assets
Cash/bank	1600
Accounts receivable	6400
Raw materials Inventory	2000
Finished goods inventory
Total current assets	10000
Fixed assets
Land and buildings	60000
Machinery	8000
Net fixed assets	68000
Total assets	78000
Current liabilities
Accounts Payable	8000
Total current liabilities
Mortgage	40000
Less:	-6000
Reserves and Surplus	6000
Shareholders’ equity	24000
Total equity and liabilities	78000

 

Current assets
Cash/bank	1600
Accounts receivable	6400
Raw materials Inventory	2000
Finished goods inventory
Total current assets	=SUM(B4:B7)
Fixed assets
Land and buildings	60000
Machinery	8000
Net fixed assets	=SUM(B11,B12,B13)
Total assets	=SUM(B15,B8)
Current liabilities
Accounts Payable	8000
Total current liabilities
Mortgage	40000
Less:	-6000
Reserves and Surplus	6000
Shareholders’ equity	24000
Total equity and liabilities	=SUM(B19,B21,B23,B24)

Budgets can be described as an essential component of the organization which helps in effective management of the various functions in an organization (Brigham et al. 2016).However there exists certain advantages and disadvantages of the budgeting process.

The advantages of budgets are:

• The budget forms an essential aspect of the management as they help the organization to think about the future. The given budgeting procedure with specific guidelines for the managers helps them to divert their attention from the different mundane activities and concentrate on the strategic obligations of the organization.
• It helps in communication and coordination.  It brings together the various departments in an organization and goes a long way in building team rapport.
• The budgets also tend to act as guidance for action.
• Budgets go a long way in evaluating the performance of the organization. It forms an integral part of control and review in a firm and the actual performance may be monitored against it.
• Budgets go a long way in helping to identify considerable savings and maintain overhead costs. The company helps the organization to maintain a control system (Titman, Keown and Martin 2017).

The disadvantages of a budget are as follows:

• Budgets are bureaucratic in nature.
• They involve time and funds. Budgeting procedure can be described as a tedious one and therefore, it requires investment from the organization.
• The organization has to indulge in various efforts to form a budget. This effort could instead be invested in some other productive matter (Barr 2018).
• Experts argue that if the organization has already identified the Key Volume and Activity then why should the organization investing in the exercise of budgeting.
• The budgets are coercive and it is important for a firm to engage in good management and motivate the workforce.

The different kinds of budgets have been discussed as follows;

1. Plant Utilization Budget:

The plant utilization budget is prepared with respect to the working hours, convenient units of plant facilities and other related components of the production budget. It helps in loading on each process, costs, cost centers, dove tails other related aspects.

2. Production Cost Budget:

A prediction costs budget is a budget which is also known as a manufacturing budget and consists of primarily materials budget, labor budget and factory overhead budget.

3. Direct Material Budget: of the

This budget consists of the cost of the direct materials purchased for the organization. This budget assists the purchase department in preparing a schedule of their total purchases and helps them to fix the maximum and minimum level of inventories.

4. Capital Budgeting:

Capital Budgeting can be described as the planning and development done for the purpose of maximizing the long term profitability of the business.  It lays down a plan for the capital outlays. They are very important as it helps an organization to make effective capital budgeting decisions. It also has an effect on the long impacts on the company`s cost structure.

5. Zero Base Budgeting:

The zero based budgeting is a budgeting process which helps the firm to prepare a new budget for the firm from the scratch. The managers need to justify the reason behind putting each cost in the appropriate section (Lasher 2013). The given budget has various advantages in the sense that it motivates the members to form cost effective ways of task performance.

6. Performance Budget:

The performance budget has been originated in USA and is based on functions, programs and activities. It is based on a work plan which expresses the achievement of various levels of the organization.

7. Sales Budget:

The sales budget is a functional budget which helps to forecast the sales in an organization. It represents the total sales along with the physical quantities as well. The primary purpose of a sales budget is to estimate the sales and developed a plan accordingly.

8. Production Budget:

A production budget consists of the total volume of production whereby the operations has been divided by days, weeks and months (Zietlow et al. 2018). This helps the department to estimate the correct way of identifying the production of the goods.

8. Cash Budget:

The cash budget can be described as a critical budget whereby the organization determines what the cash requirements of the given period are.

9. Flexible Budget:

The flexible budget is asked on the concept of a fixed budget whereby certain changes are made to the fixed budget in a manner such that the organization can inculcate its costs in the budget.

A master budget can be described as an amalgamation of all the lower level budgets that a company produces with respect to its various functional areas. The master budget also comprises of the financial statements and cash forecasting. The given budget is either prepared on a monthly basis or a quarterly basis (Saunders 2014). The primary purpose of a master budget is to help an organization in achieving its specific goals. Various master budgets also consist of headcount changes which are needed to be made in order to achieve the budget goals.

The budget can be described as a central planning tool which the management makes use of in order to determine the key activities of an organization and to judge the performance in various centers (Finkler et al. 2016). Or the formation of a master budget, the organization should use a participative budgeting technique.

The given budgets form a part of the master budget:

• Direct labor budget 
• Direct materials budget 
• Ending finished goods budget 
• Manufacturing overhead budget 
• Production budget 
• Sales budget 
• Selling and administrative expense budget

Financial risk can be described as the risk which is faced by the shareholders of a particular organization. The various shareholders fear that they will lose out on money which they have invested in the given organization. This happens in cases where the organization`s cash flows are inadequate to meet the financial obligations of the firm (Brooks 2015). When any company makes use of debt financing, the given creditors are paid first and the shareholders become insolvent in case the firm is unable to pay to the organization. Financial risk can also be described as the possibility where an organization defaults on its bonds and due to this the bondholder loses out on their money.

The given measures may be undertaken to avoid uncertainties

1. Preparing a damage report.

This report may help the firm to understand the how a particular happening of an event may cause problems to an organization and what would be the degree of impact on the firm.

2. Avoiding the emotions

A business is a rational organization and for this reason, it is very important for the firm to realize that they cannot make business decisions based on emotions.

3. Focusing on long term objectives

 

The long term objectives of an organization take it towards its futures and this makes it very important for the firm to focus on the long term well being of the organization in order to meet its goals.

4. Clarity in communication of challenge

The communication of the challenge forms an essential aspect of the organization

5. Collaboration is the key

It is very important for a firm to collaborate in the times of the need.

Barr, M.J., 2018. Budgets and financial management in higher education. John Wiley & Sons.

Brigham, E.F., Ehrhardt, M.C., Nason, R.R. and Gessaroli, J., 2016. Financial Managment: Theory And Practice, Canadian Edition. Nelson Education.

Brooks, R., 2015. Financial management: core concepts. Pearson.

Finkler, S.A., Smith, D.L., Calabrese, T.D. and Purtell, R.M., 2016. Financial management for public, health, and not-for-profit organizations. CQ Press.

Lasher, W.R., 2013. Practical financial management. Nelson Education.

Saunders, A., 2014. Financial markets and institutions. McGraw-Hill Higher Education.

Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and applications. Pearson.

Zietlow, J., Hankin, J.A., Seidner, A. and O'Brien, T., 2018. Financial management for nonprofit organizations: Policies and practices. John Wiley & Sons.