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Task A1: Complete Budgeted Income Statement

ACA Travel Agency is a small size travel agency, that has a been in business since 2009. It currently employs 2 travel consultant staff and one manager based in the CBD. The main destination of the clientele that visit the agency is South East Asia. This is because your reputation of quality service, good competitive pricing and skilled and knowledgeable agents. Customers are from many nationalities and some of the South East Asian tours that you offer have been very profitable over recent times due to the increase in the commission rate from the suppliers.

A detailed review of the ACA Travel Agency Business plan prior to commencement is recommended. Sections of the business plan can be used throughout this assessment and you may refer to its details for your task completion.

The owners have recently created a position for a contracted financial officer and you have been selected to review the ACA Travel Agency Business Plan, and using the background knowledge and information you will research and apply to the tasks below.The external accountant provided these updated records of Income & expenditure.

You are looking at the below Quarterly Business income statement for the quarter ending 31st March 201X. You have been assigned the task to calculate the Budgeted Income Statement for quarter ending 31st March 201X.)             

A1. The following information is given below: You are to calculate and complete all the shaded areas:

For quarter ending 31st March 201X 

Budget

Actual

International Packages

$ 865,000

$ 668,000

Domestic Packages

$ 729,000

$ 705,000

International Air

$ 456,000

$ 468,000

Domestic Air

$ 458,000

$ 395,000

International Packages

$ 495,000

$ 358,000

Domestic Packages

$ 365,000

$ 345,000

Salaries and Wages

$ 265,000

$ 248,000

Electricity

$ 5000

$ 5000

Advertising & Promotion

$ 301,000

$ 245,000

Salaries and Wages

$ 200,000

$ 220,000

Electricity

$ 5,000

$ 6,000

Advertising & Promotion

$ 100,000

$ 120,000

Salaries and Wages

$ 325,000

$ 130,000

Electricity

$ 10,000

$ 12,500

Advertising & Promotion

$ 85,000

$ 100,000

Salaries and Wages

$ 185,000

$190,000

Electricity

$ 1,800

$ 1,950

Advertising & Promotion

$ 55,000

$ 65,000

A2.  Using the BUDGETED INCOME STATEMENT ACA TRAVEL AGENCY (above) for quarter ending 31st March 201X, discuss in 150-200 words the overall outcome of the budget when compared to the actual: Is it Favourable/Unfavourable

A3. Investigate the BUDGETED INCOME STATEMENT ACA TRAVEL AGENCY for quarter ending 31st March 201X.

Discuss in 150-200 words at least two (2) actions that might be taken by you, as a manager, to correct adverse deviations (unfavourable) in the following situations: 

  • an excess of departmental salaries over budget;
  • a lower actual income volume compared with budget

A4. Based on the above information and your justifications, forecast/budget for the next quarter ending 30 June 201X. You are to forecast and complete all the shaded areas

Several internal and external factors need to be analysed when completing the forecast for ACA Travel:

  • Seasonal travel to South East Asia
  • Travel Advisory/terrorism Alerts available through www.safetraveller.gov.au
  • Market demand change due to online competition
  • Direct bookings with airlines and hotels
  • Packages available through consolidator website

A Travel Agency, has a been in business since 2009 in Sydney CBD. It has not upgraded its Computers, software and printers since opening in 2009.

The owner is thinking of buying new Apple computers and a new professional multifunction printer in three months’ time (December, 201X) at a cost of $65,000. The old computers and printer equipment will be sold for scrap at that time for $3,000.

Record provided by the Accountant show that the opening bank balance of $50,000 at the beginning of October. Other details include

  • The owner estimates $70,000 sales/commission for each month. Half these sales are received in cash and half are received in the next month as they are credit sales from the corporate accounts at the travel agency has payment arrangements with. Octobers credit sales from September, amount to $35,000.
  • Purchases amount to 25% of sales (excluding scrap) and are paid for in cash.
  • Full time labour/staff direct costs are $20,000 each month.
  • Superannuation ($3,000), rent ($3,000), energy bills ($2,000), miscellaneous ($2,500) are all paid monthly.
  • General couriering work amount to $1,000 per month for brochure movement around the region.
  • Rates are paid once in October of $5,000.

Requirements:

Respond to the following by completing the template and prepare a report of recommendations in 300-400 words to answer

B1 Cash budget for each month for ACA Travel Agency, (complete template below) with the view to recommendations to the owner whether they are able to pay $65,000 cash for the computer and printing equipment at the end of December 201X.  

Task A2: Discuss Outcome of Budgeted Income Statement

B2 Outline actions to rectify the problem if the balance at the end of December 201X was negative  

B3   Identify people to consult and inform in relation to reporting and financial responsibilities in this case 

The cash budget you have just completed needs to be modified after some negotiations based on the policy and procedures of ACA Travel Agency and the Business plan.

  • The owner estimates $70,000 sales/commission for each month to remain
  • With sales averaging 90% cash and 10% in credit sales, debtors for September were $6,000
  • Purchases average 30% of sales
  • Bank Balance at the start of the quarter was $4,000
  • All other details remain same as above

Respond to the following by completing the template and prepare a report of recommendations in 300-400 words to answer 

B4 Prepare a REVISED cash budget for each month for ACA Travel Agency, (complete template below) with the above information view to making recommendations to the owner whether they can pay $65,000 cash for the computer and printing equipment at the end of the third month (December).

B5   Justify the REVISED cash budget

B6 Identify personnel you to consult and inform in relation to the finalisation of the budget and how have these modifications effected the decision to revise the Cash Flow budget?

B7 Using the initial and revised “Cash Flow budgets” outline reasons behind this type of budget used and the monitoring needs to be undertaken.  

Travel Agency needs some training for the staff and have contacted AAI Training Consultant to help. AAI Training is a small training business focusing on the Travel agency customer service improvement.

The owner over the last 4 years of AAI training has realised that the credit terms are best described at Net 30.

AAI Training have in their Terms of Service that 10% must be paid when the consultation training agreement is signed. The remainder is billed on completion of the training program.

So from experience with accounts receivable collections, the owner assumes the following when projecting cash receipts for the cash flow budget;

  • 70% of the accounts receivable are collected in the month following the completion of the training
  • 20% of the accounts receivable are collected in the second month following the completion of the training
  • 10% of the accounts receivable are collected in the third month following the completion of the training

C1 Using AAI Training Cash Receipts accounts receivable collection pattern and sales forecast, complete the template below to represent cash receipts projection for the first 6 months of 201X.

The actual sales for October, November and December of the previous year were $30,000. These cells have been inserted below.

Respond to the following by completing the template and prepare a report of recommendations in 200-300 words to answer

C2 Describe what “Net 30” means and whether this method of payment is appropriate for a small business such a AAI Training. Outline what the payment due date would be if the invoice was issued on the 10/7/201X    

C3  Outline FOUR (4) methods / ways of Financing that a AAI Training could use to raise capital for its future training expenditure or investment. (Name four sources of revenue)

ACA Travel Agency has now made an arrangement with Academies Tour company to sell their 3 hour tour to visitors. The tour is scheduled to run at 10.00am -1.00pm and 2.00-5.00pm, 5 days per week.

They hired a casual tour guide and have agreed to pay them $40 per hour.

Each tour is scheduled for 3 hours, but the tour guide is rostered for 4 hours for each tour.

Included in the tour is a “coffee and cake” at a café costing $2.00 for cake and $2.00 for coffee per person. There are 10 customers in each tour. Entrance to the museum after the tour is $10.00 for Academies Tour company.

Customers are charged $50.00 per tour.

Respond to the following by completing the template and prepare a report of recommendations

D1 Describe what Breakeven Point (BEP) is and a method of calculating BEP    

D2 Give a summary of fixed and variable costs, and outline 3 direct and indirect costs associated with the above tour

You are required to work out the breakeven point of each tour based on the details; complete all the shaded areas:

Fixed Costs

Variable Costs

Full time staff

$1,000 per week

Casual Staff

Rent

$1,000 per week

Coffee

Insurance

$300 per week

Cake

Utilities

$200 per week

Entry fee

D3 Using the above calculation, and show workings for the Breakeven point associated with the tour.  

D4 When calculating LABOUR for this tour, we include ON COSTS.

  List SIX (6) items which could be classified as on costs for labour in the scenario

D5 Outline recommendations you could make to the owner of Academies Tour company to make the tour more profitable in the long term

ACA Travel Agency has joined with The Event Management Company(TEMC) in charge of organizing 201X “Sculptures by the Sea” Event. You are required to assist the manager of TEMC to complete a cash flow forecast.  

Requirements:

Respond to the following by completing the template and prepare a proposal of recommendations in 200-300 words to answer;

E1 Input the information and data from the case scenario below, using computer accounting software (e.g. MYOB or MS Excel).

(You are to create your own template using the accounting software or use the template provided in Appendix 1 as a sample for excel.)

Your cash flow forecast will predict the bank balance at the end of each month for each month of the year.

The information you have at your disposal to complete this task is as follows:

  • The event management company has on its books four major events to run which will take place in March, May, August and October.
  • The total of $265,000 of tickets sales will be earned in the months that the events are held. The March event will earn $65,000, and the other events in May, August and October will earn $55,000, $75,000 and $70,000 respectively.
  • Expenditures on casual wages of $10, 000, travel and transport of $60, 000, and venue hire of $24,000 will occur only in the months in which the four events take place. These expenditures will be the same for each event. An extra amount of $2000 will also occur in April and November evenly, for travel and transport and for casual wages respectively,
  • Salaries and Office administration expenses respectively of $180,000 and $36,000 will occur evenly every month.
  • The company’s opening balance on 1 January is $10,000.
  • The company will receive a government grant of $40,000 in July.
  • The company will make a small income of total $6500 from Merchandising during the months in which the four events are staged. The event in March will earn $1,500 merchandising income, and the other events in May, August and October will earn $1,600, $1,800 and $1,600 respectively. 

E2 Outline at least two (2) recommendations to the owner of TEMC on how the decision-making path of the future business could be changed based on your completed budget

E3 Discuss who is required to be consulted and how the completed budget would be circulated to the stakeholders internally and externally. 

Task A1: Complete Budgeted Income Statement

The budget which is prepared is based on a quarter and the budget shows both actual and budgeted results of ACA Travel Agency. The main source of revenue of the business is through international package, domestic packages, international air travel and domestic air travel. The budgeted estimate which is made by the business in case of revenues of the business is shown to be $ 2,508,000 and the actual result which is achieved by the business is shown to be $ 2,236,000.

Therefore, this creates a variance of $ 10.84% which is unfavourable in nature and the management needs to check the operational structure of the business and identify the reasons for such variances (Gorgotskaya and Selyutina 2013). However, on the other hand the business has been able to meet with the budget in terms of the costs and the same has resulted in significant increase in the profitability of the business in comparison to Budgeted estimates and the overall increase is shown to be 72%. The actual results which is achieved by the business in terms of profitability of the business is shown to be favourable when compared to budgeted estimates of the business.

Evaluation of the Performance of the Business

The analysis of the income statement which is prepared by the business shows that the main source of revenue of the business is from transport services for both passengers and goods which is provided for both international and domestic travel (Needles, Powers and Crosson 2013). The budget shows that the management of the company has effectively controlled the costs of the business.

In case a variance has taken place between the actual results and budgeted results due to excess of departmental salaries over the budget, the manager can apply the following steps to rectify the variance

  • The labour force of the business needs to be trained effectively so that they can develop the necessary skills and also efficiency in operations which would allow the business to keep a minimum labour force thereby also control the costs of the business.
  • The salary rates of employee can be reduced in order to meet up with the budgeted estimates.

In case the where the variance occurs due to lower income earned by the business than the figure which was portrayed in the Budget, the manager can take the following steps:

  • The management can follow aggressive sales strategy which would be involving significant focus on the promotion of services by the business and thereby attract customers.
  • The business can also rectify the variance by incorporating new strategy which can attract new clients and also contribute to the revenue of the business.

There has been an increase in the international travel of the business which is shown in the budget which is presented above as there is a trend of seasonal travel to South East Asia which increases the number of passenger to the route and thereby also increase the revenue of the business.

The company has an established a system which advises the passengers to take counter terrorism measures and also can report any suspicious activity to the officials in such a case through a helpline website. The company would also incorporate through checking at airport to prevent such an issue.

The market sales of the business is shown to have increased in the budget above which is due to the reason of increase in sales of the business which is due to higher demand for the business. The competition level in the market has also increased which is a result for the increase in sales and further growth of the business.

The domestic bookings has increased which is shown in the budget above. The company in order to further provide more incentives to the customers also offers hotel bookings along with travel services which are provided at discounted rate and therefore has a positive impact on the revenue which is generated by the business.

Task A2: Discuss Outcome of Budgeted Income Statement

The business also provided packages travel services which can be done through consolidators website. This is also an important activity which earns revenue for the business and the same is also shown in the revised budget for the period.

ACATravel Agency

Cash budget for the three months ending 31/12/2018

October

November

December

TOTAL Quarter

Cash receipts

Cash sales

35,000

35,000

35,000

105,000

Debtors

35,000

35,000

35,000

105,000

Scrap

3,000

3,000

Total cash receipts

70,000

70,000

73,000

213,000

Cash payments

Purchases

17,500

17,500

17,500

52,500

Labour cost

20,000

20,000

20,000

60,000

Superannuation

3,000

3,000

3,000

9,000

Rent

3,000

3,000

3,000

9,000

Energy bills

2,000

2,000

2,000

6,000

Miscellaneous

2,500

2,500

2,500

7,500

Transport and couriers

1,000

1,000

1,000

3,000

Rates

5,000

-

-

5,000

New equipment

65,000

65,000

Total cash payments

54,000

49,000

114,000

217,000

Surplus / Deficit

16,000

21,000

- 41,000

           - 4,000

Cash balance at start

50,000

66,000

87,000

50,000

Cash balance at end

66,000

87,000

46,000

46,000

The above table shows cash budget which is prepared on monthly basis for ACA Travel Agency for the month of October, November and December. The cash budget shows that the business is able to generate positive cash flows in the month of October and November, however, there is a deficit which is shown in month of December of $ 41,000 which is due to the increase in the cash payments of the business.

The cash payments have increased because of the purchase of the new equipment which is to be purchased by the business and the same is shown to be $ 65,000. The budget shows that there is a deficit of $ 4,000 as shown in the table above (Klychova, Faskhutdinova and Sadrieva 2014). Therefore, from the above budget, it can be said that the business would be able to pay for new equipment effectively and also maintain a positive cash balance as shown in the closing cash balance shown above.

The deficit in the budget can be rectified by the business by incorporating effective control over the expenses of the business which have resulted in cash outflows of the business. The management can cut off certain expenses which are unproductive in nature and therefore reduce the total cash payments which the business needs to pay and improve the deficit which is shown in the budget. The business can slightly reduce the costs of labour in the business which can also reduce the cash out flows of the business which can deal with the deficits of the business.

Revised Budget

The cash budget which is shown above is revised considering certain changes in the sales and purchase which is achieved by the business. The revised cash budget of the business shows that there has been increase in the cash payments for the business and therefore the same has resulted in the increase in cash outflows of the business. The cash inflows of the business is shown to be $ 212,000 during the quarter and the total cash payments of the business is shown to be $ 227,500 for the quarter. The result for the same shows that there is a deficit of $ 44500 and there is also negative cash balance in the business. The cash balance which is shown at the end of the quarter is shown to be $ 11,500. The balance is shown to be negative and therefore the business needs to improve the situation.

The revised cash flow needs to be confirmed by the operational managers and finance manager of the business and the same also needs to be approved by the top level management of the business.

The net 30 days refers to the period of 30 days which is allowed by AAI training to the business for paying the account receivable balance of the business. This basically represent the credit period which is allowed to ACA Travel Agency. The credit period policy which is allowed for the business is appropriate as this allows the business to effectively (Warren, Reeve and Duchac 2013). The due date for the payment if the invoice has been issued on 10/7/201X would be on 9/8/201X. The payment method which is applied is appropriate as this would allow the business not only to maintain its liquidity but also manage the debtors of the business more efficiently.

The methods which can be applied by the business for the purpose of financing the training of a business are shown given below:

  • Debt capital: The business can take debts from banks in order to finance training program of the employees of the business. The debt can help the business to maintain a stable liquidity position in the business.
  • Government Grants: In certain cases, the travel agency receives grants from the government to carry out such training process.
  • Retained Earnings: The business has the option of using retained earnings which would allow the business to maintain stability in the business.
  • Borrowings from Directors: The business can also make internal borrowings from the management of the business in order to finance the training of the business.

Breakeven Point

The breakeven point of the business refers to a situation where is the business makes no profit or loss and the business only able to cover the costs of the business. The BEP of a business represent the minimum services which the business must provide to stay (Kotas 2014). The calculation of BEP requires consideration of the fixed costs of the business and the sales of the business.

Fixed Costs

Variable Costs

Full time staff

$1,000 per week

Casual Staff

160

Rent

$1,000 per week

Coffee

20

Insurance

$300 per week

Cake

20

Utilities

$200 per week

Entry fee

10

Total

$2500

Total

210

On-Costs of Labour

The on-costs of the labour which are related to the business are listed below:

  • Supervisor Salary
  • Accountant Salary
  • Salesmen Salary
  • Maintenance expenses
  • Assistance Salary
  • Labour medication and supplies

The academic tours of the business can further improve the business by increasing the number of customers per slot by 5 people and include another guide for effective maintenance of the service (Bogsnes 2016). The business can include proper café provisions within the tour and also provide additional services.

Reference

Bogsnes, B., 2016. Implementing beyond budgeting: Unlocking the performance potential. John Wiley & Sons.

Gorgotskaya, E.A. and Selyutina, L.G., 2013. Budgeting as the innovative finance management method of a building company in the conditions of business scale growth. Of beaming and organization of effective functioning of innovation sphere of economy enterprise, industry, the complex: proceedings of the International ?onference, 28-30 April, 2013, p.92.

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.

Kotas, R., 2014. Management accounting for hotels and restaurants. Routledge.

Needles, B.E., Powers, M. and Crosson, S.V., 2013. Principles of accounting. Cengage Learning.

Warren, C., Reeve, J.M. and Duchac, J., 2013. Financial & managerial accounting. Cengage Learning.

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