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Question:
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
 
Answer:

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

 

Performance report for the quarter

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.

Cash Budget

 

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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. Clarity in communication of challenge

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

  1. Collaboration is the key

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

 
References

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.

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