Warehouse company, producing a single model dress in the united kingdom (UK)

UNIVERSITY OF ECONOMICS AND LAW FACULTY OF ACCOUNTING AND AUDITING GROUPASSIGNMENT Lecturer: Dieu Hien Group Members: Name Nguyen Tran Trong Nhan Nguyen Ngoc Thao Uyen TIEU LUAN MOI download : skknchat@gmail.com i TABLE OF CONTENT ABSTRACT iii INTRODUCTION iv OPERATING MASTER BUDGET 1.1 Sales budget 1.2 Production budget in units 1 Direct materials budget 1.4 Direct labor budget 1.5 Overhead budget 1.6 Selling, general, administrative expenses budget 1.7 Fixed Production Overheads absorption rate, Product cost per unit, production budget BUDGET INCOME STATEMENT 2.1 Budget Income Statement at 180 GBP/unit 2.2 Budget Income Statement at 190 GBP/unit 2.3 Budget Income Statement at 200 GBP/unit 2.4 Budget Income Statement at 210 GBP/unit 2.5 Budget Income Statement at 220 GBP/unit 2.6 Explanation CASH BUDGET THE REASON THAT CAUSE VARIANCE: 4.1 Direct material usage 4.2 Direct material price 4.3 Direct labor efficiency 4.4 Direct labor rate 10 4.5 Fixed overhead expenditure 10 4.6 Fixed overhead efficiency 10 4.7 Fixed overhead capacity 10 CALCULATION AND EVALUATION BUDGETS PERFORMANCES INDICATORS 11 5.1 Budgets performances indicators relate to cost centers 11 TIEU LUAN MOI download : skknchat@gmail.com ii 5.2 Budgets performances indicators relate to profit centers 11 5.3 Production costs of sales/Sales 12 5.4 Non - Production costs of sales/Sales 12 REFERENCES 13 TIEU LUAN MOI download : skknchat@gmail.com iii ABSTRACT dsdsdsdsdsdsdsds TIEU LUAN MOI download : skknchat@gmail.com iv INTRODUCTION Warehouse Company You work as an Accounts Assistant in the management accounts department of Warehouse Company, producing a single model dress in the United Kingdom (UK) Your work schedule includes analysing and helping to prepare cost information for your Manager TASKS: Prepare the following portions of the operating master budget, by quarter, of the year 2016: a) Sales budget b) Production budget in units c) Direct materials budget d) Direct labor budget e) Overhead budget f) Selling, general, administrative expenses budget g) Using direct labour hours as a basis to allocate fixed production overheads, calculate: o Fixed Production Overheads absorption rate o Product cost per unit o Prepare a production budget in GBP Explain the nature and purpose for each step of the budget preparations Prepare a Budgeted Income Statement in form of absorption costing (by quarter) Suppose the company cannot identify the price of sale units It just estimated the price among 180; 190; 200; 210 and 220 GBP/unit a)Calculate the gross profit for each price level? b)And explain the benefit by using flexible – budgeting method (price changing)? Prepare the cash budget for year 2016 (by quarter) Actually, in 2016, the Warehouse Company sold 330,000 units (as budgeted) Direct material usage Direct material price Direct Labor efficiency Direct Labor rate Fixed overhead expenditure Fixed overhead capacity Fixed overhead efficiency TIEU LUAN MOI download : skknchat@gmail.com v Why they are favorable or adverse and their possible causes (raise at least causes)? Calculate and evaluate some budgeted performance indicators relate to cost centres and profits centres: a)Cost centres: - Productivity (with hours served as an input) b)Profit centres - Profit Margin - Gross profit margin - Production costs of sales/sales - Non-production cost of sales/sales c)Explain the meaning of each ratios mentioned above With some data for budgeted overhead costs above, draw a graph describing the relationship between total overheads and quantity (units) and analyzing this relationship Note: This assignment must be your GROUP work Remember to use in-text citations and supply a bibliography If you are caught plagiarizing, you could have your grade reduced to fail or at worst, you could be excluded from the course TIEU LUAN MOI download : skknchat@gmail.com ANALYSING RESULT OPERATING MASTER BUDGET 1.1 Sales budget Expected units Selling price/unit (GBP) T otal Revenue Table 1.1 Sales budget Nature: Sales budget refers to the estimation of the sales revenue and the sales overheads for a particular period A more accurate sales forecast means better utilization of resources, higher profitability and less wastage Sales forecasting, which is nothing but an estimation of demand for goods or services in the market is essential for preparing a sales budget [1] Purpose: provide the company the information about the goal which Warehouse need to achieve to know how much to spend on production and in any other department 1.2 Production budget in units Budgeted Sales (units) Ending finished goods Total finished goods required Beginning finished goods Required production (units) Table 1.2 Production budget in units Nature: A production budget in units helps Warehouse identify total units that they have to produce in a period TIEU LUAN MOI download : skknchat@gmail.com Purpose: Manager of Warehouse can control the production easily by using a production budget in units Based on production budget in units, Warehouse can forecast the materials and labor need to produce to achieve the goal sales Direct materials budget Budgeted production (unit) DM per unit (Yard) Direct Material (Polyester,Yard) Projected ending inventory (%) Projected ending inventory Beginning inventory Total Require (Yard) Cost per Yard Total Cost Table 1.3 Budgeted Polyester Budgeted production (unit) DM per unit (Yard) Direct Material (Lining Material,Yard) Projected ending inventory (%) Projected ending inventory Beginning inventory Total Require (Yard) Cost per Yard Total Cost Table 1.4 Budgeted Lining Material TIEU LUAN MOI download : skknchat@gmail.com Nature: The direct materials budget calculates the materials that must be purchased, by time period, in order to fulfill the requirements of the production budget It is typically presented in either a monthly or quarterly format in the annual budget In a business that sells products, this budget may contain a majority of all costs incurred by the company, and so should be compiled with considerable care Otherwise, the result may erroneously indicate excessively high or low cash requirements to fund materials purchases [2] Purpose: Direct materials budget helps managers to prepare the budgeted income statement by providing information necessary to ensure the plans are financially possible 1.4 Direct labor budget Budgeted production (unit) DL per unit (Hour) Total DL hours Labor rate (GBP) Total Budgeted DL hours cost Table 1.5 Budgeted Lining Material Nature: The budgeted hours for direct labor are determined by the relationship between labor and output The number of producing units are determined in the production budget Then, the number of direct labor hours and the direct labor cost are determined [3] Purpose: The direct labor budget is useful for anticipating the number of employees who will be needed to staff the manufacturing area throughout the budget period This allows management to anticipate hiring needs, as well as when to schedule overtime, and when layoffs are likely 1.5 Overhead budget 1st 105,000 Total Direct labor hours Variable overhead TIEU LUAN MOI download : skknchat@gmail.com Production budget (unit) Production cost per unit Total production cost Table 1.10 Production budget in GBP BUDGET INCOME STATEMENT 2.1 Budget Income Statement at 180 GBP/unit Sale in unit Revenue COGS per unit Less: COGS Gross profit Less: SG&A Net income Table 2.1 Budget Income Statement (180 GBP/unit) 2.2 Budget Income Statement at 190 GBP/unit Sale in unit TIEU LUAN MOI download : skknchat@gmail.com Revenue COGS per unit Less: COGS Gross profit Less: SG&A Net income Table 2.2 Budget Income Statement (190 GBP/unit) 2.3 Budget Income Statement at 200 GBP/unit Sale in unit Revenue COGS per unit Less: COGS Gross profit Less: SG&A Net income Table 2.3 Budget Income Statement (200 GBP/unit) 2.4 Budget Income Statement at 210 GBP/unit Sale in unit Revenue COGS per unit Less: COGS Gross profit TIEU LUAN MOI download : skknchat@gmail.com Less: SG&A Net income Table 2.4 Budget Income Statement (210 GBP/unit) 2.5 Budget Income Statement at 220 GBP/unit Sale in unit Revenue COGS per unit Less: COGS Gross profit Less: SG&A Net income Table 2.4 Budget Income Statement (210 GBP/unit) 2.6 Explanation A static budget is not flexible enough when the price on the market keep changing, which leads the company does not know exactly what the price is, so the company might be choosing the wrong decision The flexible budget helps to solve this problem by adjusting the total expected cost of the production volume which company can achieve, so at which price point the company should produce how many units as they estimate before which they can give the company maximize profit The usefulness or importance of a flexible budget depends very much on the accuracy of the classification of expenses into fixed, semi-fixed and variable ones The important advantages of flexible budget are as follows: Price changing can help the manager control costs, balance between costs and benefits, estimate the sales, the level of activities so that manager can run the business efficiently Different prices make different decisions, the company can choose price based TIEU LUAN MOI download : skknchat@gmail.com 10 on its strategies The management can compare actual costs at the actual volume with the budgeted costs at the actual volume Price is one of the most important things, so that the company needs to choose price which is reasonable for maximizing profit Using a flexible budget in changing price helps the company decide the best price, make adjustments to achieve targets or expectations CASH BUDGET CASH BUTGET Beginning cash b/c Cash Receipt Total cash available Cash disbursement Payment for DM Payment for DL Payment for OVH Payment for S&A Total cash disbursement Preliminary cash b/c Table 3.1 Cash Budget THE REASON THAT CAUSE VARIANCE: 4.1 Direct material usage 4.1.1 Variance: Favorable 4.1.2 Reason: Actual materials used are less than budgeted materials 4.1.3 Possible causes The company has more effective from using material in the production to deduct the wastage, steal, etc The budget is not reliable It may be the budget prepared is not closed to the actual TIEU LUAN MOI download : skknchat@gmail.com 11 Warehouse change the materials In fact, they may use higher quality materials than standard 4.2 Direct material price 4.2.1 Variance: Adverse 4.2.2 Reason: Actual price purchased materials is higher than standard price 4.2.3 Possible causes Suppliers can provide rare materials as well as limit supply product resource to increase the price of materials Using higher quality materials makes the actual price rise Increasing costs related to purchasing, example delivery cost,… In addition, Warehouse also purchased materials that more expensive than in budget 4.3 Direct labor efficiency 4.3.1 Variance: Favorable 4.3.2 Reason: Actual hours worked are less than budgeted hours 4.3.3 Possible causes: Level skilled of labor are improved It takes less time than budget hours to produce unit Warehouse may makes a mistake in estimate times of production 4.4 Direct labor rate 4.4.1 Variance: Adverse 4.4.2 Reason: Actual rate paid for labor is higher than budget 4.4.3 Possible causes Using labor with higher skills lead to an increase in labor rate Labor rate increases in the whole market The tendency in raising wages of labor in the general market makes an influence with Warehouse TIEU LUAN MOI download : skknchat@gmail.com 12 4.5 Fixed overhead expenditure 4.5.1 Variance: Adverse 4.5.2 Reason: Actual fixed overhead expenditure is higher than budgeted fixed overhead expenditure 4.5.3 Possible causes Taxes paid in a period are increased Change in using depreciation method For example, budget use the straight - line method, but actual use the accumulated method 4.6 Fixed overhead efficiency 4.6.1 Variance: Favorable 4.6.2 Reason: Actual number of hours is less than number of budget hours 4.6.3 Possible causes Level skills of labor are improved It takes less time than hours should have taken Warehouse may makes a mistake when estimate the standard 4.7 Fixed overhead capacity 4.7.1 Variance: Favorable 4.7.2 Reason: Actual hours worked are higher than budgeted hour work 4.7.3 Possible causes Raising in labor working overtime Number of hours machine break-down in actual less than budget CALCULATION AND EVALUATION BUDGETS PERFORMANCES INDICATORS 5.1 Budgets performances indicators relate to cost centers Production cost Labor hours TIEU LUAN MOI download : skknchat@gmail.com 13 Productivity Table 5.1 Productivity Productivity measures the efficiency of a company's production process It is calculated by dividing the outputs produced by a company by the inputs used in its production process Productivity can be calculated by measuring the number of units produced relative to employee labor hours or by measuring a company's net sales relative to employee labor hours [5] 5.2 Budgets performances indicators relate to profit centers 5.2.1 Profit Margin Table 5.2 Profit Margin Budget The profit margin ratio, Profit margin conveys the relative profitability of a firm or business activity by accounting for the costs involved in producing and selling goods The greater the profit margin, the better, but a high gross margin along with a small net margin may indicate something that needs further investigation [6] 5.2.2 Gross Profit Margin Table 5.3 Gross Profit Margin TIEU LUAN MOI download : skknchat@gmail.com 14 Gross profit margin Gross profit margin is a metric analysts use to assess a company's financial health by calculating the amount of money left over from product sales after subtracting the cost of goods sold (COGS) Sometimes referred to as the gross margin ratio, gross profit margin is frequently expressed as a percentage of sales [7] If a company's gross profit margin wildly fluctuates, this may signal poor management practices and/or inferior products On the other hand, such fluctuations may be justified in cases where a company makes sweeping operational changes to its business model, in which case temporary volatility should be no cause for alarm 5.3 Production costs of sales/Sales Selling units Product cost per unit Production cost of sales Sales Production cost of sales/sales Table 5.4 Production costs of sales/Sales Production costs of sales/sales calculated by dividing production cost of sales to revenue This ratio shows that how much production cost to exchange to 1$ revenue 5.4 Non - Production costs of sales/Sales Sales S&A Non - production COS/Sales Table 5.5 Non-Production costs of sales/Sales Non-production costs of sales/sales calculated as non-production costs of sales divided by sales This ratio indicates how much non-production costs of sales are born when we earn 1$ sales TIEU LUAN MOI download : skknchat@gmail.com 15 ANALYZING TOTAL OVERHEADS AND QUANTITY (UNITS) RELATIONSHIP 1400000.000 1200000.000 1000000.000 800000.000 600000404250.000 400000.000 200000.000 - Fig Total Overhead and Budgeted Quantity Scscc Scs Cscs csc TIEU LUAN MOI download : skknchat@gmail.com 16 REFERENCES [1]: https://theinvestorsbook.com/sales-budget.html [2]: https://www.accountingtools.com/articles/2017/5/17/material-budgeting-directmaterials-budget [3]: https://www.accountingtools.com/articles/2017/5/17/selling-and-administrativeexpense-budget [4]: https://www.investopedia.com/terms/s/sga.asp [5]: https://www.investopedia.com/ask/answers/040715/how-productivity-calculated.asp [6]: https://www.investopedia.com/ask/answers/031815/what-formula-calculating-profitmargins.asp [7]: https://www.investopedia.com/terms/g/gross_profit_margin.asp TIEU LUAN MOI download : skknchat@gmail.com ... of Warehouse Company, producing a single model dress in the United Kingdom (UK) Your work schedule includes analysing and helping to prepare cost information for your Manager TASKS: Prepare the. .. Using labor with higher skills lead to an increase in labor rate Labor rate increases in the whole market The tendency in raising wages of labor in the general market makes an influence with Warehouse. .. 11 Warehouse change the materials In fact, they may use higher quality materials than standard 4.2 Direct material price 4.2.1 Variance: Adverse 4.2.2 Reason: Actual price purchased materials