The below report has been prepared with an intention to test the production and cash budget of the company. The below reports will help the management to test the financial viability of the new project. Although looking at the financial numbers and the sales figures it looks like that the project is viable enough but these reports will test the outcomes and ensure whether the company is going in the correct direction or not. However, the company is required to base their results on some assumptions but these assumptions are must to reach out to some or the other conclusion. However, it is important that the assumptions that are being taken by the management should be realistic enough and should not be hypothetical.
|
|
January |
February |
March |
April |
May |
|
Opening Balance |
$ 1,900,000 |
$ (21,386,000) |
$ 5,014,000 |
$ 32,347,500 |
$ 47,647,941 |
|
Receipts (Working Note 3) |
$ 13,464,000 |
$ 53,550,000 |
$ 48,883,500 |
$ 36,050,441 |
$ 29,598,070 |
|
A |
$ 15,364,000 |
$ 32,164,000 |
$ 53,897,500 |
$ 68,397,941 |
$ 77,246,012 |
|
Cash Expenses |
$ 1,550,000 |
$ 1,550,000 |
$ 1,550,000 |
$ 1,550,000 |
$ 1,550,000 |
|
Payment to Milbourn |
$ 35,200,000 |
$ 25,600,000 |
$ 20,000,000 |
$ 19,200,000 |
$ 16,000,000 |
|
B |
$ 36,750,000 |
$ 27,150,000 |
$ 21,550,000 |
$ 20,750,000 |
$ 17,550,000 |
|
Closing Balance (A-B) |
$ (21,386,000) |
$ 5,014,000 |
$ 32,347,500 |
$ 47,647,941 |
$ 59,696,012 |
|
|
January |
February |
March |
April |
|
A. Sales |
220,000 |
160,000 |
125,000 |
120,000 |
|
B. Selling Price for customers |
$ 510 |
$ 510 |
$ 464 |
$ 422 |
|
C. Selling Price for retailers |
$ 306 |
$ 306 |
$ 278 |
$ 253 |
|
D. Revenue (A * C) |
$ 67,320,000 |
$ 48,960,000 |
$ 34,807,500 |
$ 30,407,832 |
|
20% cash receipts in the current month |
$ 13,464,000 |
$ 9,792,000 |
$ 6,961,500 |
$ 6,081,566 |
|
65% cash receipts in the next 30 days |
|
$ 43,758,000 |
$ 31,824,000 |
$ 22,624,875 |
|
15% cash receipts in the next 60 days |
|
|
$ 10,098,000 |
$ 7,344,000 |
|
Total cash collected |
$ 13,464,000 |
$ 53,550,000 |
$ 48,883,500 |
$ 36,050,441 |
Production Budget of Milbourn Manufacturing
Since no information about the closing/opening stock is given, it is assumed that all the production done is sold in the next month.
|
|
December |
January |
February |
March |
|
Production |
2,20,000 |
1,60,000 |
1,25,000 |
1,20,000 |
Material Budget of Milbourn Manufacturing
MATERIAL A
|
|
December |
January |
February |
March |
|
Production (a) |
2,20,000 |
1,60,000 |
1,25,000 |
1,20,000 |
|
Requirement per unit (b) |
3 |
3 |
3 |
3 |
|
Total requirement(c= a*b) |
6,60,000 |
4,80,000 |
3,75,000 |
3,60,000 |
|
Cost per kg (d) |
3.50 |
3.50 |
3.50 |
3.50 |
|
Total cost (e=c*d) |
2310000 |
1680000 |
1312500 |
1260000 |
MATERIAL B
|
|
December |
January |
February |
March |
|
Production (a) |
2,20,000 |
1,60,000 |
1,25,000 |
1,20,000 |
|
Requirement per unit (f) |
6 |
6 |
6 |
6 |
|
Total requirement(g= a*f) |
1320000 |
960000 |
750000 |
720000 |
|
Cost per kg (f) |
4.50 |
4.50 |
4.50 |
4.50 |
|
Total cost (i=g*h) |
59,40,000 |
43,20,000 |
33,75,000 |
3240000 |
MATERIAL C
|
|
December |
January |
February |
March |
|
Production (a) |
2,20,000 |
1,60,000 |
1,25,000 |
1,20,000 |
|
Requirement per unit (j) |
2 |
2 |
2 |
2 |
|
Total requirement(k= a*j) |
4,40,000 |
3,20,000 |
2,50,000 |
2,40,000 |
|
Cost per kg (l) |
10 |
10 |
10 |
10 |
|
Total cost (m=k*l) |
44,00,000 |
32,00,000 |
25,00,000 |
24,00,000 |
|
Total Material Cost (e+ i+ m) |
1,26,50,000 |
92,00,000 |
71,87,500 |
69,00,000 |
|
|
December |
January |
February |
March |
|
Production |
2,20,000 |
1,60,000 |
1,25,000 |
1,20,000 |
|
Hours per unit |
0.50 |
0.50 |
0.50 |
0.50 |
|
Total Hours |
1,10,000 |
80,000 |
62,500 |
60,000 |
|
Labour Rate per hour |
36 |
36 |
36 |
36 |
|
Total Labour Cost |
39,60,000 |
28,80,000 |
22,50,000 |
21,60,000 |
|
|
December |
January |
February |
March |
|
Opening Balance |
$ 1,550,000 |
$ (3,342,500) |
$ 18,730,000 |
$ 31,990,625 |
|
Amount received from VGL |
|
$ 35,200,000 |
$ 25,600,000 |
$ 20,000,000 |
|
Total Receipts (A) |
$ 1,550,000 |
$ 31,857,500 |
$ 44,330,000 |
$ 51,990,625 |
|
Labour cost |
$ 3,960,000 |
$ 2,880,000 |
$ 2,250,000 |
$ 2,250,000 |
|
Overhead Cost |
$ 300,000 |
$ 300,000 |
$ 300,000 |
$ 300,000 |
|
Material cost |
$ 632,500 |
$ 9,947,500 |
$ 9,789,375 |
$ 7,575,625 |
|
B |
$ 4,892,500 |
$ 13,127,500 |
$ 12,339,375 |
$ 10,125,625 |
|
Closing Balance (A-B) |
$ (3,342,500) |
$ 18,730,000 |
$ 31,990,625 |
$ 41,865,000 |
Working Note 1
MATERIAL A
|
|
December |
January |
February |
March |
|
Production (a) |
2,20,000 |
1,60,000 |
1,25,000 |
1,20,000 |
|
Requirement per unit (b) |
3 |
3 |
3 |
3 |
|
Total requirement(c= a*b) |
6,60,000 |
4,80,000 |
3,75,000 |
3,60,000 |
|
Cost per kg (d) |
3.50 |
3.50 |
3.50 |
3.50 |
|
Total cost (e=c*d) |
2,310,000 |
1,680,000 |
1,312,500 |
1,260,000 |
MATERIAL B
|
|
December |
January |
February |
March |
|
Production (a) |
2,20,000 |
1,60,000 |
1,25,000 |
1,20,000 |
|
Requirement per unit (f) |
6 |
6 |
6 |
6 |
|
Total requirement(g= a*f) |
1,320,000 |
960,000 |
750,000 |
720,000 |
|
Cost per kg (f) |
4.50 |
4.50 |
4.50 |
4.50 |
|
Total cost (i=g*h) |
59,40,000 |
43,20,000 |
33,75,000 |
3240000 |
MATERIAL C
|
|
December |
January |
February |
March |
|
Production (a) |
2,20,000 |
1,60,000 |
1,25,000 |
1,20,000 |
|
Requirement per unit (j) |
2 |
2 |
2 |
2 |
|
Total requirement(k= a*j) |
4,40,000 |
3,20,000 |
2,50,000 |
2,40,000 |
|
Cost per kg (l) |
10 |
10 |
10 |
10 |
|
Total cost (m=k*l) |
44,00,000 |
32,00,000 |
25,00,000 |
24,00,000 |
|
Total Material Cost (e+ i+ m) |
1,26,50,000 |
92,00,000 |
71,87,500 |
69,00,000 |
|
5% cash payments in the current month |
$ 632,500 |
$ 460,000 |
$ 359,375 |
$ 345,000 |
|
75% cash payments in the next 30 days |
|
$ 9,487,500 |
$ 6,900,000 |
$ 5,390,625 |
|
20% cash payments in the next 60 days |
|
|
$ 2,530,000 |
$ 1,840,000 |
|
Total cash payment |
$ 632,500 |
$ 9,947,500 |
$ 9,789,375 |
$ 7,575,625 |
Working Note 2
|
|
December |
January |
February |
March |
|
Production |
2,20,000 |
1,60,000 |
1,25,000 |
1,20,000 |
|
Sales@160 |
3,52,00,000 |
2,56,00,000 |
2,00,00,000 |
1,92,00,000 |
|
Receipts from VGL Ltd. |
- |
3,52,00,000 |
2,56,00,000 |
2,00,00,000 |
The financial controller of the manufacturer Milbourn Manufacturers Ltd, Ross Kirkham was very concerned about the budgeted numbers that has been set up above. It has provided that if the budgeted numbers are being selected as performance targets then in that case the same could let to behavioural problems such as budgetary slack.
Budgetary slack means the doubt/uncertainty about the forecasted results. It may be the: -
- a) Under-estimation of the budgeted revenue
- b) Over-estimation of the budgeted expenses.
Budgetary slack tends to give a false representation that the outcome of the associated business has turned out better than anticipated. Some instances of budgetary slack are intentional, others are not, and many more fall somewhere in between. Thus in that case either it is important for the management to set up targets that looks reasonable in all respects or if the same are achieved then they should be treated as budgetary slacks. If the budgeted targets are not realistic, then in that case, the same could de motivates the employees which may put the organisation on right track in long run. Thus in that case it is very important to keep managers who are actually involved in the production cycle to be a part of the budgeting exercise.
In this budgeting exercise, the people who are being getting impacted by the budget are actively involved in the exercise that took place for creation of the budget. It is very important to keep managers who are actually involved in the production cycle to be a part of the budgeting exercise. It has been well stated that being in case of Participative Budgeting, the core people who are likely be involved in the implementation of the budgeted numbers are involved at the initial level tends to make the budget more realistic and more alive. The probability of the success of the budget increases in multiple folds in this case. These types of budgets tends to give the employees a feeling that the management is aware about the financial limitations and considering the same the budget has been prepared. The employees of the company feel motivated in this regard and being the budgets are being made with an intention to curtain the expenditures, the participation of the employees tends to make it more realistic.
The attached advantages of Participative Budgeting are as follows:
- The forecast basis and assumptions that has been taken into considerations tends to be more realistic. The quality of the forecasts improves in this case.
- The employees involved in the budget setting exercise tend to feel more motivated.
- The results expected in this case are more achievable then in any other case.
The attached disadvantages of Participative Budgeting are as follows:
- Being in case of Participative Budgeting, the people who are being getting impacted by the budget are actively involved in the exercise that took place for creation of the budget, there is always a probability of creation of conservative budget. These kinds of budgets are conservative in nature with high probability of achieving with any extra efforts expected to be put in by the employees.
- These kinds of budgets generally takes more time to decide on and thus are time consuming and expensive.
- These kinds of budgets may let the management towards introduction of budgetary slacks.
- Sometimes the managers that are involved in the exercise are unqualified to participate in the setting exercise.
There might be a probability that both Milbourn Manufacturing and VGL limited may face trouble in cash management in the initial stages. In the given case, both the companies i.e. Milbourn Manufacturing and VGL limited faced cash shortages issues in their initial stages. There are number of strategies which can be adopted by the management of both the companies to overcome their liquidity crunches.
Some of them are discussed as follows:
- Cash Discount: The management of the company can provide cash discount to the customers in order to get prompt payment from them. This will help them in meeting down their cash requirement in the initial stages. Although they would have to bear the additional cash discount cost but the same is not important at initial stages.
- Watch sales: The management is supposed to watch the movement in the sales closely and thus accordingly they should make changes in their expenses trend so as to manage their cash management.
- Review budget: If the company is more dependent on the short term funding needs then in that case, it is important for the management to review their budget lines and check if any changes are required to be made at the middle.
- Overdraft facility: The banks now a day’s offer cash over draft facilities to the companies to overcome the short term cash shortage problems. The company can use them and accordingly can meet out their needs and requirements.
There might be some situations where the management of the company would not be in a position to keep a control on the prevailing cash shortages. The situation of cash shortage may put some unnecessary pressure on the income statement of the company. The management of the company would not be in a position to work freely. They would always be pressurised and would always keep the cash shortage point into consideration at times of taking all the decisions which might impact the company in long run. The reputation of the company would also get impacted by this act of the management, where the management would always ask the vendors to extend their credit limit and on the other hand would ask the debtors for prompt payment. In the current environment, it is very important for the companies to give sufficient credit to their customer’s ad for the same they require enough cash with themselves. The motivation level of the employees would also get impacted by the same as they know that the cash position of the company is not strong.( Johnston K, demand media)
Similar way like we have consequences in having cash shortages in the books, we also have issues if the cash balance is too high. An adequate cash management is very important. The management in this case should manage the cash and put them in liquid sources where they can earn interest on the amount. The company pay unnecessary interest on the debt in spite to the fact that they have more cash in their very hands. The management if have more cash in their hand, they would lose the opportunity of investing the same in new projects and ventures as it would be treated as a loose of opportunity for the company. Excess cash would always carry a risk of theft. Excess cash on the other hand would create internal conflict within the organisation.( John C, demand Media)
Reference.com, What are the benefits of participative budgeting, Viewed on 25th Sept 2016, https://www.reference.com/world-view/benefits-participative-budgeting-ea68c5588099ab8b
Artcile library, Agarwal R, Behavioural Implications of Budgeting (6 Implications), Viewed on 25th Sept 2016, https://www.yourarticlelibrary.com/accounting/budgeting-accounting/behavioural-implications-of-budgeting-6-implications/52800/
Small business, Kokemuller N, Why Is It a Financial Risk for Businesses to Have Too Much Cash on Hand, Viewed on 25th Sept 2016, https://smallbusiness.chron.com/financial-risk-businesses-much-cash-hand-81214.html
Small business, John C, Advantages and Disadvantages of Excess of Cash for an Organization, Viewed on 25th Sept 2016, https://smallbusiness.chron.com/advantages-disadvantages-excess-cash-organization-22792.html
Small business, Johnston K, Understanding Cash Shortage & Overage in the Income Statement, Viewed on 25th Sept 2016, https://smallbusiness.chron.com/understanding-cash-shortage-overage-income-statement-37788.html
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