Management Accounting - Assigment 1

Table of ContentsTable of Contents...1 Introduction...2 Part 1: Preparation of an operating budget...3 1.1 The purpose and nature of the budgeting process...3 1.2 Select appropriate budg

Table of Contents

Table of Contents 1

Introduction 2

Part 1: Preparation of an operating budget 3

1.1 The purpose and nature of the budgeting process 3

1.2 Select appropriate budgeting methods for the organizations and its budgeting needs 8

1.3 Prepare operating budgets for Phong Phu company according to the chosen budgeting method 13

Part 2: Preparation of a cash budget 18

2.1 Prepare a cash budget for the second quarter by month as well as in total for the quarter 18

2.2 Advice for managements: 19

Part 3a: The variances and Operating statement 22

3a.1 Computation of all the variances and prepare an operating statement 22

3a.3 Report findings to management in accordance with identified responsibility centres 24

3a.3The possible causes of the variances with identified responsibility centre 25

3a.4 Recommend a new supplier 27

3a.5 Recommend the new labor mix 27

3a.6 Explanation about the relation you can see between manufacturing overhead efficiency variance and the labor efficiency variance 27

Part 3b: Flexible Budget 28

3b.1 New performance report for September using the flexible budget approach 28

3b.2 Investigation of the variances in the report 29

Conclusion 31

References 32

This report include four parts

Part 1: This part is explanation of the purpose and nature of the budgeting process and the

relationship of them to planning and control process Six budgeting methods also describe their advantages and disadvantages to choose the best appropriate budgeting method for an

organization After that, nine tables of operating budgets for Phong Phu Company according to the chosen budgeting method are prepared

Part 2: This part are preparation a cash budget for the second quarter by month as well as in total

for the quarter and advice for the company to support them maintain a cash balance of at least

$30,000 at the end of each month

Part 3a: Part 3a computes all the variances and prepare an operating statement for the

management and explains about the possible causes of the variances with identifiedresponsibility centre It also recommends a new supplier, recommends the new labor mix,computed the variable overhead spending and efficiency variance, and explains about therelation you can see between this efficiency variance and the labor efficiency variance

Part 3b: This part are preparation a new performance report for September using the flexible

budget approach and the investigation some of the variances in the report

Part 1: Preparation of an operating budget

1.1 The purpose and nature of the budgeting process

1.1.1 Natured of the budgeting process

In general, budget has three main types: capital budget, cash budget and operating

budget (Collins and Trenberth, 2006, p.241) “The House Capital Budget Committee

considers the state capital budget which approves money for the construction and repair

of public buildings and for other long-term investments, such as land acquisitions and transfers” (leg.wa.gov, accessed 2010) On the other words, a capital budget is a record ofthe organization’s future capital expenditure projects Whereas, “a cash budget is a statement in which estimated future cash receipts and payments are tabulated in such way

to show the forecast cash balance of business at defined intervals” (BPP, 2004, p.162) Finally, the operating budget collects each month’s items such as materials purchases budgets, direct labor budgets, etc, to form an annual budget “Typically, a complete operating budget consists of not only a projected profit and loss statement but also a supporting cash flow statement, as well as a balance sheet” (aaupwiki.princeton.edu, accessed 2010)

The budgeting method is different among companies because of the variety of

organizational structure such as management style, organizational objectives, structure of competition, nature of work etc However, steps in preparing budget are commonly as below

- The preparation of a budget may take weeks or months and the budget committee may meet several times before the master budget (budgeted profit and loss accountand budgeted balance sheet) is finally agreed

- Functional budgets (sales budgets, production budgets, direct labor budgets and so on), which are amalgamated into the master budget, may need to be amended many times over as a consequence of discussions between departments, changes inmarket conditions and so on during the course of budget preparation

(BPP, 2004, p.160)

Budgeting is important for cash management for institutions can avoid deficits Becausethese deficits are often detrimental in any environment, a budget is needed in all types ofenterprises, and not just in the profit sector, but also in non-profit organizations and anytypes of organization to manage costs and revenues.

According to BPP (2004), a budget is a quantitative statement, for a defined period of time,which may include planned revenues, expenses, assets, liabilities and cash flows

“In order to make effective decisions and coordinate the decisions and actions of thevarious departments, a business needs to have a plan for its operations Planning thefinancial operations of a business is called budgeting”(accmana3d.tripod.com, accessed2010)

Budgeting and financial planning go hand in hand; a budget helps propel the business to

meeting its strategic financial plan closer Distinguishing different between budgeting

and financial planning is necessary to set up budget and planning more clearly and

recognize the value both of them There are5 main different things:

Purpose, compliance

vs fiscal stewardship

Usually developed to match revenues against planned expenditures, meeting reporting requirements

Projects long-term sources and uses of funds, evaluates the effectiveness of programs and departments, and focuses financial resources on programs that help attain business goals.Information, revenue

projections and budget

Strategic financial planning uses this information as a foundation and builds on it

or effective ones otherwise

Focus, tactical vs.

strategic

Focuses on taking care of day operating needs, such as staff, supplies, utilities, and benefits

day-to-Focuses on allocating resources efficiently, making long-range plans for new funds, and ensuring that funds are directed toward goals and priorities of a strategic plan that is well thoughtout in advance, implemented andfollowed

Source: [ CITATION The10 \l 1033 ]

-To assess effectiveness of plans

-To give decision to flow the plan or not

Planning: Evaluate each strategy and Choose alternative courses of action

To communicate

ideas and plans

-To ensure that each person affected bythe plans is aware of what he or she is supposed to be doing

-Communication might be one-way, with managers giving orders to subordinates, or there might be a two-way dialogue

Control: Measure actual results and compare with the plan Manage subordinates, motivate them execute the plan in order to maintain actual results same or better than expected result

Co-ordinate

activities

-To ensure maximum integration of effort towards common goals of the activities of different departments need

to be coordinated

Planning: Identify alternative courses of action (strategies) which might contribute towards achieving the objects

-To investigate departures from budget-The reasons for the departures can be found and acted upon.

Control: employees who join

or badly they are performing

-The identification of controllable reasons for departures from budget with managers responsible provides an incentive for improving future

performance

Control: Respond to divergences from plan

In the case of company here – PhongPhu Ltd, budgeting process support manager control the cash and manufacturing also do better forecasting Follow is 4 main benefits that budgeting process brings to the manager:

Budgeting forces managers to do better forecasting Managers should be constantly

examining the business to spot changes that will impact the business;this thing can be done

by research on budgeting process Managers must put their predictions into definite and concrete forecasts

Budgeting motivates managers and employees by providing useful yardsticks for evaluating performance The budgeting process can have a good motivational impact by

involving managers in the budgeting process and by providing incentives to managers to strive for and achieve the business’s goals and objectives

Budgeting can assist in the communication between different levels of management

Putting plans and expectations in budgeted financial statements — including definite

numbers for forecasts and goals — minimizes confusion and creates a kind of common language Well-crafted budgets can definitely help the communication process.

Budgeting is essential in writing a business plan New and emerging businesses need to

present a convincing business plan when raising capital The managers and owners must demonstrate convincingly that the company has a clear strategy and a realistic plan to makeprofit A coherent, realistic budget forecast is an essential component of a business plan.Source: [ CITATION Joh \l 1033 ]

1.1.3 The way to maximize benefits from budget and the planning and control cycle

To maximize benefits from budget is the same purpose of all organization It show the exactly desire of organization There are some ways to maximize benefits from budget below:

- Select appropriate budget method in order to reduce risk, variance during the operation

- Identify exactly organization objectives Budget of organization has to show purposes of organization of this plan clearly Employees have to understand to decide what they have to do, what they should do and how to get these objectives.Investors and financer also have to get the purposes of plan to decide should or should not invest

- Establish a system of control The organization should establish Total Quality Management (TQM) system Austerity in manager would bring the best result andavoid hopeless risk during the organization Good in manage material would educe production delays by ensuring unrestricted and continuous supply of

material on time, minimizes the capital investment on the stock of materials, reduce the cost of storage and issuing of materials, reduce wastage and loss of material through pilferage, theft, spoilage, evaporation, to ascertaining the

position of inventory and accurate valuation of closing stock is possible by

introducing perpetual inventory control system

1.2 Select appropriate budgeting methods for the organizations and its budgeting needs

This section examines various methods which can be used as the basis for the preparation

of budgets, either as the principles on which all budgets are based, or particularly for

functional budgets such as the administration budget Functional departments which

support the main operations of the organization may not be so dependent on sales levels Budgeting in non-profit-making organizations also requires a different approach, as

starting from forecasts of demand may not be appropriate

The methods to be considered are:

 Top –down (imposed) budget VS Bottom up (participated) budget

 Incremental budget VS Zero based budget

 Fixed budget VS Flexible budget

1.2.1 Top –down (imposed) budget VS Bottom up (participated) budget

on -Supervisors and middle managers prepare the

budgets and then move them up the chain of

command for review and approval

-The budget is prepared for the lower layers of the organization by top management and

-Can be quite accurate for individual tasks As

long as no tasks have been forgotten, then this

can work quite well

-Good way to approach the budget

-Well designed and consistent with the traditional organizations that are structured

-Lead those who are in charge of tasks and also

project managers to ask for more funding than

will actually be needed

-Budgets can be inaccurate and notconflict with the objectives of the lowerdepartments because only top managersprepare the budgets

1.2.2 Incremental budget VS Zero based budget

on Widely used in commercial organizations and

in the public sector Incremental budgeting

means basing the budget for a department or

function on that of the previous period, usually

Zero Base Budgeting means that the budget for each budget centre starts from

a base of zero for each period Budgets for proposed activities are then put

This system focuses the use of resources

on achieving the organization’s objectives

• Incremental budgeting assumes activities and

methods of working will continue in the same

way, giving no incentive for developing new

- Based on the level of output planned at

the beginning of budget period

-A flexible budget is a budget that is a function

of one or more levels of activity

-The budget depends on one or more measures

of activity volume rather than being fixed in

- Control costs effectively and provide a

certainty of their finances

-Easily in control and plan project for the

future depending on the divergences between

- Flexible budget is a useful tool for planning for managers

- It is a useful tool for evaluating the performances of managers

•Preparing fixed budgets based on one

activity level may not give an indication of

what may happen if actual sales and

production do differ from expected levels

Although the flexible budget is a good tool, it can be difficult to build and manage One problem with the way it is many cost are not fully variable, rather than having a fixed cost

 Organization should select flexible budget because a flexed budget is useful for

preparing a performance report, where the actual costs and income are compared with

the flexed budget applicable to the actual level of activity Differences are shown in a

‘variance’ column, labeled as adverse or favorable This form of report gives meaningful

variances and is more acceptable to the person responsible for the budget The company

will get some benefit from the flexible budget, restructure itself based on activity level, it

is a good tool to evaluate the performance of managers - the tight budget should arrange

to expect any number of levels of activity It is also a useful tool for planning

management; managers can use it to model the financial results in many different levels

of activity

1.3 Prepare operating budgets for Phong Phu company according to the chosen budgeting method

The incremental budgeting system is applied to calculate the budget for the Phong Phu Company This budgeting system is to base next year’s budget on the current year’s results plus an extra amount for estimated growth or inflation next year By using this budgeting system, it is easy to calculate the budgets for the company which is Sales budget; Production budget; Direct materials budget; Direct Labor budget; Manufacturing overhead budget; Ending inventory budget for direct material; Cost of good sold budget; and Budget income statement

1.3.1 Revenue/Sale budget

Always start with sale budget because if the seller know from the marketing guide , how many product which you would produce, how many unit you will going to sale then the company know what to do, know what to buy, basically of begging anythingShow the maximum revenue which manager would get

Budgeted selling price per unit £ 150.00 £ 90.00

Product A Product B

Desired ending FG inventory 700 180

Less: beginning FG inventory 500 200Good finish output require 11,400 12,880

Gross production needed from cost centre P2 12,000 14,000

Budgeted good units to be transferred to P2 12,000 14,000Desired ending WIP inventory 300 125

Less: beginning FG inventory 150 100Good finish output require 12,150 14,025

Gross production needed from cost centre P1 13,500 16,500 P1

P2

Table 1.2: Production budget

1.3.3 Direct material budget

Require product in unit 13,500 16,500Direct material require per unit 3 3Total direct material requite 33,750 49,500Less beginning of raw meterial 500 300Plus: desired ending direct material inventory 600 350Direct material to be purchasd in unit 33,850 49,550Budget direct material cost £ 20 £ 8

Budget cost of direct material to be purchase £ 677,000 £ 396,400

Table 1.3: Direct material budget

1.3.4 Direct labor budget

A B

Gross production in units 13,500 16,500

Direct labor require per unit, in hours 1 1

Total direct labor hours requited 13,500 9,900

Budgeted cost per direct labor hour £ 10 £ 10

Butget direct labor cost in P1 £ 135,000 £ 99,000

Gross production in units 12,000 14,000

Direct labor require per unit, in hours 2 1

Total direct labor hours requited 24,000 12,600

Budgeted cost per direct labor hour £ 10 £ 10

Butget direct labor cost in P2 £ 240,000 £ 126,000

Budget for fixed manufacturing overhead A B

Budget direct hours required for each product

Budget total DL hours required in P1

Budget fixed manafacturing overhead rate

Budgeted fixed overhead allocated to each product 47,077 34,523

Budget for total manufacturing overhead in P1 A B

Total DL hours required 13,500 9,900 Budget variable overhead per DL hours 5 5 Total budget variable manafacturing overhead 67,500 49,500 Budgeted fixed manafacturing overhead 47,077 34,523

Total budget manufacturing overhead 114,577 84,023

Budget direct hours required for each product

Budget total DL hours required in P1

Budget fixed manafacturing overhead rate

Budgeted fixed overhead allocated to each product 82,328 43,222

Budget for total manufacturing overhead in P2 A B

Total DL hours required 24,000 12,600 Budget variable overhead per DL hours 3 3 Total budget variable manufacturing overhead 72,000 37,800 Budgeted fixed manufacturing overhead 82,328 43,222

Total budget manufacturing overhead 154,328 81,022

35%

234,000

81,600

Table 1.5: Budget for manufacturing overhead

1.3.6 Ending inventory budget for direct material

Cost of beginning DM inventory 9,000 1,800

Budgeted cost of desired ending DM inventory: 12,000 2,800

Table 1.6: Ending inventory budget for direct material

1.3.7 Ending inventories budget for WIP and cost of WIP to be used in P2

Ending inventories budget for WIP A B

Budgeted cost of DM to be used 674,000 395,400

Budget cost of direct labor 135,000 99,000

Total budgeted overhead 114,577 84,023

Budget total manufacturing costs in P1 923,577 578,423

Total good units of output in P1 12,150 14,025

Budgeted cost per unit of WIP 76.01 41.24

Budgeted ending WIP inventory in units 300 150

Budgeted cost of ending WIP inventory 22,804 6,186

Cost of beginning WIP 9,750 3,800

Total budgeted manafacturing cost in P1 923,577 578,423

Cost of total WIP available for use 933,327 582,223

Less: budgeted ending WIP 22,804 6,186

Budgeted cost of WIP to be use in P2 910,523 576,037

Table 1.7: Ending inventory budget for WIP and cost of WIP to be use in P2

1.3.8 Ending inventories budget for FG and budgeted COGS

Budgeted cost of WIP to be used 910,523 576,037

Budgeted direct labour cost in P2 240,000 126,000

Total budgeted overhead in P2 154,328 81,022

Total budgeted manufacturing cost in P2 1,304,850 783,059

Good units of output in P2 11,400 12,880

Budgeted cost per unit of FG 114.46 60.80

Budgeted ending FG in units 700 180

Budgeted cost of ending FG 80,122 10,943

Cost of beginning finished goods 50,000 11,000

Total budgeted manafacturing cost in P2 1,304,850 81,022

Less: budgeted cost of ending FG 80,122 10,943

Table 1.8: Ending inventories budget for FG and budgeted COGS