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Questions:

1. Prepare a basic master budget. The general description and the data for the assignment is to be obtained from the associated assignment data file.

2. Research a behavioural and communication issue related to budgeting and performance evaluation

3. Write a brief report addressing the Sales Manager’s concerns, using some of the concepts covered in Topic One Introduction to management accounting.

 
Answers:
Answer 1:

Preparation of basic master budget:

Cost of Goods Manufactured Statement:

       

Particulars

July

August

September

TOTAL

Direct Material Consumed

$59,90,400

$94,46,400

$1,10,59,200

$2,64,96,000

Direct Labor Cost

$31,20,000

$49,20,000

$57,60,000

$1,38,00,000

PRIME COST

$91,10,400

$1,43,66,400

$1,68,19,200

$4,02,96,000

Manufacturing Overhead

$6,25,00,444

$6,84,15,111

$7,11,75,289

$20,20,90,844

COST OF PRODUCTION

$7,16,10,844

$8,27,81,511

$8,79,94,489

$24,23,86,844

Add: Adjustment for WIP

$0

$0

$0

$0

COST OF GOODS MANUFACTURED

$7,16,10,844

$8,27,81,511

$8,79,94,489

$24,23,86,844

Budgeted Production Volume

20800

32800

38400

 

Cost of Goods Manufactured per unit

$3,442.83

$2,523.83

$2,291.52

 

Closing Stock of Finished Goods

6400

7200

9600

 

Value of Finished Goods

$2,20,34,106

$1,81,71,551

$2,19,98,622

 

 

Budgetary Income Statement:

   

Particulars

Amount

Amount

Sales Revenue

 

$41,47,20,000

Cost of Goods Manufactured

$24,23,86,844

 

Add: Opening Finished Goods Inventory

$10,08,64,000

 

Cost of Goods Available for Sale

$34,32,50,844

 

Less: Closing Finished Goods Inventory

$2,19,98,622

 

Cost of Goods Sold

 

-$32,12,52,222

GROSS PROFIT

 

$9,34,67,778

Selling & Administration Expenses

 

-$9,42,74,300

Bad Debts

 

-$68,13,700

NET OPERATING INCOME

 

-$76,20,222

Subsidiary budget:

Sales Budget:

       

Particulars

July

August

September

October

Sales Volume in units

40000

32000

36000

48000

Selling Price per unit

$3,840.00

$3,840.00

$3,840.00

$3,840.00

Budgeted Sales Revenue

$15,36,00,000

$12,28,80,000

$13,82,40,000

$18,43,20,000

 

Production Budget:

       

Particulars

July

August

September

October

Sales Volume in units

40000

32000

36000

48000

Add: Closing Inventory of Finished Goods

6400

7200

9600

 

 

46400

39200

45600

 

Less: Opening Inventory of Finished Goods

25600

6400

7200

 

Budgeted Production Volume

20800

32800

38400

 

 

Direct Labor Budget:

     
 

Quarters

Particulars

July

August

September

Budgeted Production Volume

20800

32800

38400

Labor Hours required per unit

5

5

5

Total Direct Labor Hour Required

104000

164000

192000

Direct Labor Cost per Hour

$30.00

$30.00

$30.00

Budgeted Direct Labor Cost

$31,20,000

$49,20,000

$57,60,000

 

Purchase Budget:

       

Particulars

July

August

September

October

Budgeted Sales Volume

40000

32000

36000

48000

Budgeted Production Volume

20800

32800

38400

 

Gears required per unit

2

2

2

 

Total Gears Required

41600

65600

76800

 

Add: Closing Inventory of Gears

38400

43200

57600

 

 

80000

108800

134400

 

Less: Opening Inventory of Gears

48000

38400

43200

 

Budgeted Purchase Volume (in units)

32000

70400

91200

 

Gear Cost per unit

$48.00

$48.00

$48.00

 

Total Cost of Gears

$15,36,000

$33,79,200

$43,77,600

 

Spindles required per unit

3

3

3

3

Total Lens Material required

62400

98400

115200

 

Add: Closing Inventory of Spindles

57600

64800

86400

 

 

120000

163200

201600

 

Less: Opening Inventory of Spindles

72000

57600

64800

 

Budgeted Purchase Volume (in units)

48000

105600

136800

 

Spindle Cost per unit

$64.00

$64.00

$64.00

 

Total Lens Material Cost

$39,93,600

$62,97,600

$73,72,800

 

 

 

 

 

 

Budgeted Direct Material Purchase

$55,29,600

$96,76,800

$1,17,50,400

 

 

Direct Material Budget:

     

Particulars

July

August

September

Total Gears required for Production

41600

65600

76800

Gear Cost per unit

$48.00

$48.00

$48.00

Total Gear Cost 

$19,96,800

$31,48,800

$36,86,400

Total Spindles required for Production

62400

98400

115200

Spindle Cost per unit

$64.00

$64.00

$64.00

Total Spindle Cost 

$39,93,600

$62,97,600

$73,72,800

Budgeted Direct Material Cost

$59,90,400

$94,46,400

$1,10,59,200

 

Manufacturing Overhead Budget:

     

Particulars

July

August

September

Direct Labour Hour

104000

164000

192000

Indirect Labor Cost per DLH

$33.60

$33.60

$33.60

Total Indirect Labor Cost

$34,94,400

$55,10,400

$64,51,200

Power Cost per DLH

$3.20

$3.20

$3.20

Total Power Cost

$3,32,800

$5,24,800

$6,14,400

Variable Maintenance Cost per unit

$37.78

$37.78

$37.78

Variable Maintenance Cost

$39,28,889

$61,95,556

$72,53,333

Fixed Maintenance

$1,81,95,556

$1,81,95,556

$1,81,95,556

Total Maintenance Costs

$2,21,24,444

$2,43,91,111

$2,54,48,889

Other Variable Cost per unit

$24

$24

$24

Other Variable Cost

$24,96,000

$39,36,000

$46,08,000

Other Fixed Cost

$80,00,000

$80,00,000

$80,00,000

Other Manufacturing Costs

$1,04,96,000

$1,19,36,000

$1,26,08,000

Supervision

$2,24,00,000

$2,24,00,000

$2,24,00,000

Depreciation

$20,00,000

$20,00,000

$20,00,000

Rates & Utilities

$16,52,800

$16,52,800

$16,52,800

Budgeted Manufacturing Overhead

$6,25,00,444

$6,84,15,111

$7,11,75,289

 

Cash Collection from Debtors:

     

Particulars

July

August

September

Total Sales Revenue

$15,36,00,000

$12,28,80,000

$13,82,40,000

Collection in the month of Sales

$9,21,60,000

$7,37,28,000

$8,29,44,000

Collection in the following month of Sales

$6,29,20,900

$5,83,68,000

$4,66,94,400

Total Collection from Debtors

$15,50,80,900

$13,20,96,000

$12,96,38,400

Answer 2:

The report is prepared for discussing the impact of investment made by the production manager of Jamini Pty Ltd in the new manufacturing capacity. All the expenses relating to new investment are done by using a flexible budgeting formula. The budget preparation for investing in new manufacturing facility involves production budget, sales budget, direct labour budget, purchase budget, direct material budget, manufacturing overhead budget, cash budget, cash collection from debtors account, cost of goods manufactured statement and budgetary income statement (Benade et al. 2017). 

Any amount of cash shortage developed in the investment of project will be covered by borrowing that is repaid with the interest is repaid. While preparing the budget, sales manager of company is also considering the possible outcome of the negotiation related to tariff with the production manager. It is predicted that making investment in new manufacturing facility will enable the company to manufacture two major parts in house. The assembly process of manufacturing facility is somewhat labour intensive in the current scenario. Investment in new manufacturing facility is expected to automate the assembly process (Bromwich and Scapens 2016). Moreover, it is indicated by the investment made in new facility that there will be reduction in direct labour and direct material costs. However, due to increased investment made in production capacity, there will be increment in fixed manufacturing overhead.

It can be seen that investment in new manufacturing capacity initially decreases the budgeted sales revenue from $ 153600000 to $ 13824000 and eventually it increases to $ 184320000. The budgeted production volume is increasing continuously from 20800 units to 38400 units. There is increase in budgeted labour cost from $ 3120000 to $ 5760000. Moreover, the budgeted direct material purchase is also increasing to $ 11750400 as against $ 5529600. The cost of budgeted direct material is increasing from $ 5990400 to $ 11059200. There is also increase in manufacturing overhead to $ 71175289 from $ 62500444.

With the implementation of budget by investing in new manufacturing facility, total amount collected from debtors is decreasing from $ 155080900 to $ 129638400. When looking at cash budget, it can be seen that there is considerable increase in net cash flow from operating activities from $ 49774956 to $ 85693356 respectively. However, there has not been wide fluctuation in closing balance of cash with balance standing at $ 51774956 to $ 75979044 and further to $ 66185536 respectively. In addition to this, with the implementation of new manufacturing facility, there is considerable increase in cost of goods manufactured from $ 71610844 in the initial month to $ 242386844 in the later month. However, there is decline in cost of goods manufactured per unit from 3442.83 to $ 2291.52.

The net operating figure generated from preparation of budgetary income statement is negative and the value stood at -$ 7620222. Since, the net operating income generated by the new manufacturing facility is negative, it is concluded that it is not feasible to implement new facility and should not be opted for.

 
Answer 3:

Participative approach is a process of budgeting where people impacted by budget are actively involved in budget creation. Budgets created under this bottom up approach are more achievable and they are better for morale and employees contribute to creation of budget by using great efforts (Shields 2015). High level of strategic considerations is not taken into account for preparation of budget and therefore, it is required by management to provide employees with necessary guidelines concerning overall preparation of budget. Participatory budget is considered as self imposed and a team based management philosophy are fostered that helps in effective functioning of organization (Van der 2016). Since the budget preparation is done on participative basis, this leads to involvement of many employees that is middle, lower and senior level management. Such type of budget helps in increasing the commitment and understanding and better process of communication. Therefore, there will be increased participation on part of employees and increased contribution towards development of budget. In addition to this, there will be more accurate preparation of budget as budget is prepared by those having best knowledge of their specific areas of operation (Suomala et al. 2014).

Imposed budget on other hand is considered as non participative or authoritative budget as it does not allow for the ultimate holder of budget in participating the process of budgeting. This type of budget is imposed by upper level of management by establishing the parameters according to which budget is established. Lowe level employees do not contribute much and have little input in setting overall organizational goals. The reason is attributable to the fact that they are entitled to perform only the budgeted based calculations that are consistent with the directives (Lavia López and Hiebl 2014). It can be seen that the budget prepared by Jamini Pty Limited uses a flexible method, but the outcome of budget has negative impact on net operating income of company. Such outcome is not favourable and it will not be taken into consideration by production and sales manager. Participative budget on other hand plays an influential role in facilitating communication by determining the need of management for purpose of decision making and cost control (Sintomer et al. 2016). Moreover, they help in addressing the behavioural needs of company as it makes extensive use of human resources. Since preparation of budget involves coordination of non financial and financial planning for satisfying objectives and goals of organization, effective budget reparation should receive contribution or input from all sources.  

Therefore, if the budget would be prepared by involving all lower level employees who have in depth knowledge about the manufacturing facility would have generated favourable outcome. This is so because they would have considered all the parameters impacting the operation and preparation of budget.

 
References list:

Benade, G., Nath, S., Procaccia, A.D. and Shah, N., 2017, February. Preference Elicitation For Participatory Budgeting. In AAAI (pp. 376-382).

Bromwich, M. and Scapens, R.W., 2016. Management accounting research: 25 years on. Management Accounting Research, 31, pp.1-9.

Fullerton, R.R., Kennedy, F.A. and Widener, S.K., 2014. Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7-8), pp.414-428.

Hopper, T. and Bui, B., 2016. Has management accounting research been critical?. Management Accounting Research, 31, pp.10-30.

Klychova, G.S., Faskhutdinova, ?.S. and Sadrieva, E.R., 2014. Budget efficiency for cost control purposes in management accounting system. Mediterranean journal of social sciences, 5(24), p.79.

Lavia López, O. and Hiebl, M.R., 2014. Management accounting in small and medium-sized enterprises: current knowledge and avenues for further research. Journal of Management Accounting Research, 27(1), pp.81-119.

Maas, K., Schaltegger, S. and Crutzen, N., 2016. Integrating corporate sustainability assessment, management accounting, control, and reporting. Journal of Cleaner Production, 136, pp.237-248.

Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.

Shields, M.D., 2015. Established management accounting knowledge. Journal of Management Accounting Research, 27(1), pp.123-132.

Sintomer, Y., Röcke, A. and Herzberg, C., 2016. Participatory budgeting in Europe: Democracy and public governance. Routledge.

Sponem, S. and Lambert, C., 2016. Exploring differences in budget characteristics, roles and satisfaction: A configurational approach. Management Accounting Research, 30, pp.47-61.

Suomala, P., Lyly-Yrjänäinen, J. and Lukka, K., 2014. Battlefield around interventions: A reflective analysis of conducting interventionist research in management accounting. Management Accounting Research, 25(4), pp.304-314.

Van der Stede, W.A., 2016. Management accounting in context: Industry, regulation and informatics. Management Accounting Research, 31, pp.100-102.

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