TASK 1:

3a, Explain the purpose and nature of the budgeting process which should normally be

taken in the preparation of budgets in a manufacturing company.

A budget is a factor very important for organization, because it can estimate of costs,

revenues, and resources over a specified period, reflecting financial conditions and goals in

the future. Therefore, it helps company can be run smoothly in the future through items

that it has supplied. According to the course book, the budgeted is definite as “A

quantitative statement, for definite period of time, which may include planned revenue,

expenses assets, liabilities and cash flows”.

The main purpose of budget organization when used it:

According the CIMA Official Terminology about the budget purposes " Budgets may help in

authorizing expenditure, communicating objectives and plans, controlling operations, co-

coordinating activities, evaluating performance, planning and rewarding performance.

Often, reward systems involve comparison of actual with budgeted performance." Through

that, we can see that: the main purpose of using budget is to make sure that company can

be able to achieve objectives that they had set up. Below are purposes for doing the main

purpose effectively:

To compel planning: budgeting forces management to look ahead and make detailed

plans for each department to aim achieve goal. Furthermore, can anticipate and

solve problems.

To communicate ideas and plans: must be ensure that all of people who are involved

in plans know what they are doing. Communication might be one-way or two ways,

it can depends each person.

Coordinate activities: All activities of different departments need to be coordinated

to make sure everyone towards common goals. This means that , for example, that

the purchasing department should base its budget on production requirements and

that the production budget should in turn be based on sales expectations.

Creating the responsibility of budget manager: Require the managers more focus on

the achievement of budget targets. It there are problem, they will make the

adjustment immediately .

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To establishing a system of control: Company control the actual performance by

comparison the actual results against the budget plan. From that, if the budget have

problem we investigated and find out the reasons. It divided into controllable and

uncontrollable factors.

Motivate employees to improve their performance: The interest and commitment of

employees can be retained. If there is a system that lets staffs will know how well

they implement the tasks well or badly that they are performing. So the manager can

know how to provide the incentive for improving the future performance.

Steps to prepare budget:

Step to prepare budget: In present, have various different company on market.

Therefore, each company we have a different procedures for preparing a budget.

Furthermore, the budget committee needs to meet several times and it can be taken

a couple of weeks or months before the master budget ( master budget includes:

budgeted profit and loss account and budgeted balance sheet) is finally accept. After

that, the functional budget (production budgets, sales budgets.....) are make

following the master budget.

Principle budget factor

The principal budget factor: “It is the factor which limits the activities of an

organization”. So, we can identify the budget factor is important in the budgetary

planning process, the stages of preparation of a budget can be done as follow:

To prepare sales budget, we need to prepared some figures such as unit of

product and sales value. Besides, the finished goods stock budget can be

prepare to decide whether if company should increase the finished good stock

levels.

Next, we depending on sales budget á well as the production budget also is

prepared.

And then, will be prepared the resource budgeting for production such as:

machine usage budget, material usage budget and labour budget.

After that, we will be continuous prepared for the material budget and the

material stock budget to determine go up or go down level of stock. Besides

that, the quantity and value of raw material purchases budget also prepare.

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In addition, for preparation of sales and production budget, cost centers need

to calculate the draft budgets for department overheads costs.

Then the budgeted profit and loss account can be prepared.

Finally, some budgets must be prepared like capital expenditure budget,

working capital budget and cash budget in order to accomplish budgeted

balance sheet.

(3.2, 3.3, 3.4) Select appropriate budgeting methods for the Sefton Limited and

its needs. Prepare budgets according to the chosen budgeting method based

on the given information in the scenario including a cash budged.

All of manufacturing companies would like to achieve the expected sales

target that company had set out, and the Sefton also does. This proved that,

sales budget is one of the most effective tools for company to reach its target.

Thanks to sales budget, it will maximum integration of effort between cost

centres as well as helps them co-ordinate smooth and effect. Thus, when we

looking at the sales budget of companies, we can know that company can be

able know how many stock they have in warehouse, what kind of material the

production department need, how much resource company need to achieve

the target and so on.

Alpha Beta

Sales target $ 5,000 $ 1,000

Cost per units $ 182 $ 161

Total cost of sales $ 910,000 $ 161,000

Total revenue 1,071,000

After chosen the Sales budget method to make the sales budget, we depend

on it to make the following budgets below.

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Production budget:

Production budget

Alpha Beta

$ $

Required for sales 5,000 1,000

Closing inventory 150 150

5,150 1,150

Less: opening inventory 100 200

Unit to be producted 5,050 950

The figures in this table is collected from the Production Budget table such as

5,050 and 950 units are the quantity that they want to be produced and some

numbers gathered in scenario.

Raw material usage:

Raw material usage

M N

$ $

Required for Alpha 60,600 30,300

Required for Beta 11,400 7,600

Total usage 72,000 37,900

In that:

Required for Alpha (M) = 5050 x 12 = 60,600 units

Required for Alpha (N) = 5050 x 6 = 30,300 units

Required for Beta (M) = 950 x 12 = 11,400 units

Required for Beta (N) = 950 x 6 = 7,600 units

Raw material purchase budget:

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Raw material purchase budget

M N

$ $

Raw material for production 72,000 37,900

Closed inventory 4,000 2,000

76,000 39,900

Opening inventory 3,000 4,000

73,000 35,900

The information and data of the table above comes from the Raw Material

Usage table and Scenario.

Direct labour budget

Direct labor budget

Labor hours Cost per hours Total cost

h $ $

Alpha 35,350 10 353,500

Beta 9,500 10 95,000

44,850 448,500

In that:

Alpha = 5,050 x7 = 35,350 hours

Beta = 950 x 10 = 9,500 hours

Production cost budget:

Production cost budget

$

Production over head absorption rate 4.46

Overhead for Alpha 157,637

Overhead for Beta 42,363

In that:

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The production overhead adsorption rate = 200,000 / 44,850 = 4.46

dollar per hour

Overhead for Alpha = 35,350 hours x $4.46 = $157,626

Overhead for Beta = 9,500 hours x $4.46 = $42,361

The information of this table comes from the Direct Labour Budget

table and Scenario.

Direct material budget:

Direct material budget

Alpha Beta

$ $

M 121,200 22,800

N 90,900 22,800

Direct labor 353,500 95,000

Overhead 157,637 42,363

Total production cost budget 723,237 182,963

In that:

M (Alpha) = 60,600 x $2 = $121,200

M (Beta) = 11,400 x $2 = $22,800

N (Alpha) = 30,300 x $3 = $90,900

N (Beta) = 7,600 x $3 = $22,800

The data in the table above is collected from Direct Labour Budget,

Production Cost Budget and Scenario.

Cash budget (3d)

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BUDGET INCOME STATEMENT

For the year ended 31 December (year 3)

$ $

Revenue 1,071,000

Opening inventory raw material 20,000

Purchased raw material 253,700

273,700

Closed inventory of raw material 14,000

Material cost used for production 259,700

Direct wages 448,500

Production overhead 200,000

Production cost of goods completed 908,200

Opening inventory for finished goods 15,000

Finished goods available for sales 923,200

Less: closing inventory of finished goods 50,370

Production cost of goods sold 872,830

Gross profit 198,170

Selling and administration overhead 75,000

Net profit before tax 123,170

Less: tax 30% 36,951

Net profit after tax 86,219

Retained earnings b/f 81,000

Retained earnings c/f 167,219

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CASH BUDGET

For the year ended 31 December (year 3)

Quarter 1 2 3 5

$ $ $ $

Receipts 196,000 224,000 238,000 336,000

Payment:

Material 22,000 37,000 40,000 336,000

Direct way 100,000 110,500 121,000 60,000

Overhead 45,000 50,000 70,000 117,000

taxation 5,000 65,000

Machinery 120,000

Total payment 172,000 197,500 351,000 242,000

Net cash flow 24,000 26,500 (113,000) 94,000

Balance b/f 10,000 34,000 60,500 (52,500)

Balance c/f 34, 000 60,500 (52,500) 41,500

In that

Revenue = (sales volume of Alpha× Sales price of Alpha) +¿ (sales

volume of Beta× Sales price of Beta)

=(5,000 units× $182)+¿ (1,000 units× $161)= $1,071,000

Taxation which is 30% of net profit =123,170× 0.3 =36,951

Budget balance sheet statement

For 31 December, year 3

Cost Depreciation Net

$ $ $

Non- current asset

land 50,000 50,000

Building& equipment 520,000 105,000 415,000

Total non- current

assets

570,000 105,000 465,000

Current assets

Inventory 14,000

Raw material 50,370 64,370

Finished goods 102,000

receivable 41,500

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Cash at bank 207,870

Current liabilities

Payables 118,700

Taxation 36,951 155,651

52,219

Net assets 517,219

Financed by 350,000

Share capital 167,219

Retained earnings 517,219

In that:

Building & equipment = opening cost balance +¿purchase during year

= 400,000 +¿ 120,000 = 520,000

Depreciation = opening depreciation balance +¿production

depreciation +¿selling depreciation

= 75,000 +¿25,000 +¿ 5,000 = 105,000

Receivable = opening balance +¿ sales +¿ receipts

= 25,000 +¿1,071,000 −¿994,000 = 102,000

Payable = closing payables balance +¿material purchased

from budget +¿overhead production +¿overhead selling administration

– payments

= 9,000 +¿253,700 +¿175,000 +¿70,000 – 389,000 =

118,700

Taxation = opening taxation – taxation payment +¿ taxation

occurred

= 5,000 -5,000 +¿35,961 = 36,951

Task 2

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(4.1, 4.2).Prepare an operating statement reconciling budgeted and actual

results and also calculate variances, identify possible causes and recommend

corrective action.

1. Material price variance = actual quantity (standard rate – actual

rate)

= ( 2,300 x 4 ) – 9,800 =$600 (A)

2. Material usage variance = standard rate ( standard quantity –

actual quantity)

= 4 x [( 4850 x 0.5 ) – 2,300 ] = $500 (F)

3. Labour rate variance =( actual hours rate x standard rate) –

actual rate

= ( 8,500 x 2 ) – 16,800 = $200 (F)

4. Labour efficiency variance = standard rate x ( standard hours –

actual hours )

= 2 x [( 4,950 x 2 ) – 8,000 ] = $3,400 (F)

5. Labour idle time variance = standard rate x idle time

= 2 x ( 8,500 – 8,000) = 1,000 (A)

6. Variable overhead expense

variance

=( budgeted variable overheads – actual

variable overhead)

= 8,000 x $ 0.3 – 2,600 = $200 (A)

7. Variable overhead efficiency

variance

= (Standard rate x standard hours) –

actual hours

= 0.3 x[( 4,850 x 2 ) – 8,000 ] = $510 (F)

8. Fixed overhead expense variance = budgeted fixed overheads – actual

fixed overhead

=(5100 x 7400) – 42300 = $4560 (A)

9. Fixed overheads volume variance = budgeted fixed overheads per unit x

(budgeted volume – actual volume)

= 740 x (5,100 – 4,850) = $1,850 (A)

10.Fixed overheads efficiency

variance

Budgeted fixed overheads per hours x

( standard hours – actual hours )

= 37 x (9,700 h – 800h) = $ 6,290 (F)

11.Fixed overheads capacity variance = ( budgeted fixed over per hours x

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budgeted capacity – actual capacity)

= 37 x [(5,100 x 2) – 8,000)= $8,140 (A)

12.Sale price variance = ( actual quantity x budgeted rate ) -

actual rate

= [( 4,580 x 20 ) – 95,600 ] = $1,400 (A)

13.Sale volume variance = standard profit per unit x (budgeted

sales volume – actual sales volume)

= 6 x ( 5,100 – 4,850 )= $1,500 (A)

Opening statement

For the month ended 30th April 2010

$

Budget profit before selling administration

expense (5,100 x 6)

30,600

Sales volume 1,500

Budget profit from actual sales 29,100

Selling price 1,400

27,700

Cost variance Favorable Adverse

$

Material price 600

Material usage 500

Labor rate 200

Labor efficiency 3,400

Labor idle time 1,000

Variance overhead expense 200

Variance overhead efficiency 510

Fix overhead expense 4,560

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Fix overhead efficiency 6,290

Fix overhead capacity 8,140

10,900 14,500 3,600

Actual profit before sales and administrative cost 24,100

Sales and administrative cost 18,000

Net profit 6,100

Cross check

$ $

95,600

Sales

Less:

- Cost of material 9,800

- Labor 16,800

- Variable overheads 2,600

- Fixed overhead 42,300

- Selling admin expense 8,000 89,500

- Net profit 6,100

Variance Possible cause Solution

Material

price

Price is goes up

following the

economic situation

have many

fluctuation.

scarce goods

happens in some

period.

Competition in

process buying

material.

Negotiating about

material price with

suppliers to reduce cost.

Should sign long term

contracts with raw

material suppliers to

have the stable price.

Looking for new

suppliers to reduce the

monopoly in buy goods

process .

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Co

stMaterial

usage

The company using

the material

effectively will avoid

wasted and save

costs.

Should recording all of

information about using

the material effectively to

apply it in the future.

Give out reward for

workers to maintain the

current situation and

improve it better.

Labor rate

Accept recruiting

apprentices and less

experience workers

to pay salary lower

than standard to

save money for

company.

However, need to

considering whether

these new workers work

effective or not. If they

don’t work well , we

need to hire workers

have experienced

although we must to

spend more money.

Labor idle

time

Machine occur

problem or

breakdown.

Don't have enough

material for

continuous produce

process.

Workers cannot go to

work.

So, regularly checking

and maintaining the

machinery.

Applying various method

the information

technology in produce to

control the warehouse

better like JIT, ERP...

Carrying out the health

checking for workers.

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Labor

efficiency

Increasing of

productivity and rise

profit for company.

Workers don’t work

effective.

Lack of material

Increasing the salary

and bonus for good

worker and have good

performance.

Should not retain staff

who don’t work effective.

Warehouse need to be

checking carefully.

Re

ven

ue

cen

ters

Fixed and

variable

overhead

expenditu

re

Salary of

administrator go up.

Need more office

staffs.

Must to manage tight

and effective.

Hiring right people in the

right position is office .

Sales

price

Stimulate market

demand by reduced

price strategy. To

compete with

competitor.

Price of labor and

raw material

increase.

looking for to create the

new products with lower

price in current but still

have the same function

with previous products.

Signing long term

contract with supplier

and labors.

Pro

fit

cen

ters

Sales

volume

Economic crisis lead

to affect the sale

volume.

Appear many strong

competitors.

Our product is not

suitable for current

demand.

Need to market research

to understand the

current situation to have

effective solution.

Implementing the

various marketing

campaign to attract

customer.

Innovate the products to

suitable and meet

customer demand.

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4c, Report finding

REPORT ON BUDGETING ACTIVITIES

For the month ended (30th April 2010)

To : Managing Director, Sefton Company

From : Management Accountant, Sefton Company

Subject : Problem findings during implementing budgeting activities

Date : 29 April 2010

I. INTRODUCTION

The objective of prepare this report is give out general view about current financial

situation to submitted for Managing Director. Through it, we can see that the top

manager is the person who have wide knowledge. Thus, they can be able to

understand about the plans of organization as well as know clearly about whether

company are used the resource effectively or not and having solution on time.

II. METHOD

We will carried out compare the actual activities and budgeted to evaluate the

performance of company. We use flexible methods to calculate these numbers

above.

III. FINDINGS

Through calculation above, we can see that the actual activities is different from

budgeted. Therefore, it will have some negative and positive effects to company.

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Favorable Adverse0

2000

4000

6000

8000

10000

12000

14000

16000

10,900

14,500

At glance, The bar chart above indicated for we see that: the Adverse Variance is

higher than Favorable Variance about 3,600 respectively with 14,500 and 10,900

respectively. It means that company spends more money in practice than they do in

budget.

Besides, it also tells us that we can hardly predict exactly the same result of the

budget and actual activities. Therefore, It has to have a little difference between

budget and actual activities.

However, if it have the big gap between actual and budget. We must to have a

center who take responsibility for improving better performance as well as reward

them if performance effectively.

Some cost centers seemly don’t work effectively. Their still have some Adverse such

as:

$600 labor time

$1,000 labor idle time

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$200 variable overhead expenditure

$4,560 fixed overhead expenditure

$8,140 fixed overhead capacity

However, there are also have Favorable:

$500 material usages

$200 labor rate

3,400 labor efficiency

$510 variable overhead efficiency

$6,290 fixed overhead efficiency

IV. SOLUTION

To running the Sefton company effectively and better, The top management

of organization need to consider some solution following:

Negotiating the price with supplier, then we signing a long term contract with

them as well as finding new supplier to reduce the selling power of them.

Conducted recruiting fresh graduate student as well as permit final year

student have opportunities to practice in company.

Checking machinery regularly as well as maintained devices.

Applying high technology in manufacturing like ERP system, JIT system,

etc…to help company operation more effective.

Monitoring and observation staffs who work ineffective to give out remedies.

Always updates and product innovation as well as focused on the market

research to more understand about current and future market.

Recording information and activities which make negative and positive effect

of company to find out solutions to resolve and improving in the future.

Support workers and staff in working and give out many reward for the people

work effective.

REFERENCES:

http://www.fao.org/docrep/W4343E/w4343e05.htm

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http://www.scribd.com/mustafa_khuwaja508/d/47064313/9-Budget-preparation

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