Management Accounting - Assigment 2

There are various steps involved in the preparation of the budget and they are listed here:  Estimate long and short term needs of the Company...  Request for sufficient funds: Another

September – Tran Bich Phuong

Aurora – Nguyen Que Anh

Mary – Vu Thi Huong

Tony – Mai Quoc Trung

6th, February 2011

According to the American Accounting Association - “Management Accounting includes themethods and concepts necessary for effective planning, for choosing among alternative businessperformances”

In this assignment, my group had to work as well as an management accounting of a group ofcompanies We need to fulfill all task from the managing director to explore the possibilities ofintroducing appropriate budgeting methods is one of the operating companies Base on theinformation which is given in the scenario, this report will cover the following tasks:

• Explain the purpose and nature of the budgeting process which should normally be taken

in the preparation of budgets in a manufacturing company

• Select appropriate budgeting methods for the organization and its need

• Prepare budget according to the chosen budgeting method

• Prepare a case budget

• Calculate variances, identify possible causes and recommend corrective action

Contents

EXECUTIVE 2

INTRODUCTION 4

MAIN BODY 5

III Prepare forecasts and budgets for a business 5

1 Explain the purpose and nature of the budgeting process 5

2 Select appropriate budgeting methods for the organisation and its needs 13

3 Prepare budgets according to the chosen budgeting method 13

4 Prepare a cash budget 19

IV Monitor performance against budgets within a business 19

1 Calculate variances, identify possible causes and recommend corrective action 19

a Calculate variances 19

b Possible causes and recommend corrective actions 23

2 Prepare an operating statement reconciling budgeted and actual results 27

3 Report findings to management in accordance with identified responsibility centres 28

a Responsibility center 28

b Report 29

B&G Group 30

CONCLUSION 31

APPENDIX 32

REFERENCES 40

Today economic activities are complex and diverse The market is wide and competitionbecomes cut-throat Hence the mere ascertainment of cost is of little use, as provided by costaccounting Besides, the modern management is interested in not only knowing the cost ofproduction, but also in controlling the costs It is possible only if the management is in a position

to determine financial cost, managerial performance, planning etc., and this gave birth to

“Management Accounting” Hence, new techniques were invented to present the accountsperiodically, not necessarily at the end of the year, before the management Such accounts should

be prepared in such a way that the results could be easily compared with the budgeted data andefforts be made to exercise control Such new techniques were termed as “ManagementAccounting”

This report will go on to deal with budgetary planning and control, preparing forecasts andbudgets and then comparing them to the actual results Through this report, it can easily to seethe differences between costing and budgetary systems and will discuss the resulting ofvariances

After finish all duties in this assignment, all members in our group can learn many thing, andimprove our personal skills We known how to work with numbers in accounting, how tocalculated costing and budgeting, ect But sometime we get some problems such as calculatewrong, miss understand the guideline, and to solve them our group need to gather do it again incarefully way or ask our friend After long process we work together with this assignment, all of

us are try our best, so we hope will get good feed back as well as advice from you to help usimprove more and more

MAIN BODY

III Prepare forecasts and budgets for a business.

1 Explain the purpose and nature of the budgeting process.

a The purpose and benefits of a budget

Department managers in a business make decisions every day that affect the profitability of thebusiness 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 the financialoperations of a business is called budgeting A business that does not have a budget or a plan willmake decisions that do not contribute to the profitability of the business because managers lack aclear idea of goals of the business A budget serves five main purposes—communication,coordination, planning, control, and evaluation The detail are:

COMMUNICATION

In the budgeting process, managers in every department justify the resourcesthey need to achievetheir goals They explain to their superiors the scope and volume of their activities as well ashow their tasks will be performed The communication between superiors and subordinates helpsaffirm their mutual commitment to company goals In addition, different departments and unitsmust communicate with each other during the budget process to coordinate their plans andefforts For example, the MIS department and the marketing department have to agree on how tocoordinate their efforts about the need for services and the resources required

COORDINATION

Different units in the company must also coordinate the many different tasks they perform Forexample, the number and types of products to be marketed must be coordinated with thepurchasing and manufacturing departments to ensure goods are available Equipment may have

to be purchased and installed Advertising promotions may need to be planned and implemented.And all tasks have to be performed at the appropriate times

A budget is ultimately the plan for the operations of an organization for a period of time Manydecisions are involved, and many questions must be answered Old plans and processes arequestioned as well as new plans and processes Managers decide the most effective ways toperform each task They ask whether a particular activity should still be performed and, if so,how Managers ask what resources are available and what additional resources will be needed

CONTROL

Once a budget is finalized, it is the plan for the operations of the organization Managers haveauthority to spend within the budget and responsibility to achieve revenues specified within thebudget Budgets and actual revenues and expenditures are monitored constantly for variationsand to determine whether the organization is on target If performance does not meet the budget,action can be taken immediately to adjust activities Without constant monitoring, a companydoes not realize it is not on target until it is too late to make adjustments

EVALUATION

One way to evaluate a manager is to compare the budget with actual performance.Did themanager reach the target revenue within the constraints ofthe targeted expenditures? Of course,other factors, such as market and generaleconomic conditions, affect a manager’s performance.Whether a manager achieves targeted goals is an important part of managerial responsibility

The benefits of budgeting include:

 Helps you gain control over finances Budgeting helps you to acquire control overindispensable and unnecessary expenditures whether they are at a huge business level orfamily levels It is the most effective means of getting rid of debts Budgeting helps you

to adjust your expenses according to the needs and circumstances

 Keeps you informed Personal budgeting helps you to know the exact amount of moneyyou possess It is a self-education tool that keeps you informed about the allocation of

your funds A well made and kept budget helps you to continuously remind of your plansand your gap with your goals

 Improves financial communication Budgeting helps to open communication betweenmembers of a family or partners in joint business when they sit together to discussfinancial issues through budgeting Both for married couples and members oforganizations, who share financial resources and allocations, budgeting helps to makedecisions regarding areas where money has to be spenty All members thus gain controlover finances

 Profitable tool Accurate knowledge about personal monetary affairs provides so muchcontrol in your hands that, you can take advantage of those opportunities that you mighthave missed otherwise

 Helps you achieve definite objectives A budget supports you in moving towardsfinancial goals The most important thing to be considered before any budgeting is thecause for creating a budget This will help you to make a focused effort towardsachieving your tasks A few of these tasks include; buying a house or luxury car foryourself or opting for voluntary retirement when you feel the need of doing so

Budgeting will help to organize your finances in such a way that you will readily have anyinformation whenever and wherever it is desired Make budgeting, a part of your life and keepfinancial worries at bay

b Steps in the preparation of a budget

The preparation of a budget for any organization is a very important phase of the company Eachyear the budget is revised and also looked at The reason for this is that the budget usuallyoutlines a framework within which the company can work It also gives a broad framework toidentify if the company will have a profit or a loss and this in turn will help to reassess the goals

of the company and do appropriate changes in it

There are various steps involved in the preparation of the budget and they are listed here:

 Estimate long and short term needs of the Company

The various long term needs also should be part of the budget The main reason for theformulation of the budget is due to the fact that the long term needs of the company should beidentified and the budget should try to lead the company toward the goal Other than that, theshort term goals which are the planning for the immediate year should also be done at the time ofthe budget

 Calculate the income for the past year, present year and for the ensuing year:

The income of the company for the past and the present year should be compared Various factsshould be taken into consideration and the person or the company should be able to calculate thepossible income for the next year too This will again act as a guideline for the company tofunction to try and achieve the immediate goals

 Justify the estimated income and expenditures:

Budget is a time when the previous year’s income and the expenditure are assessed and thejustification for the income and also the expenditure is given, if there is a change in the incomethat was forecast and the actual income generated This will help to have accountability and alsofor the people concerned to take the whole exercise of budget seriously

 Estimate the costs:

The cost of various aspects is also to be estimated during the year This will make it very easy forthe company to tackle any problems during the course of the year Usually estimations duringbudget time also leave a contingency fund that can be used to tackle any emergency need offunds

 Set budget in accordance with the philosophy of the institution:

The philosophy of one institution varies from that of another institution The philosophy could bethe allocation of funds for a specific cause which is the primary goal of the organization Thisshould be kept in mind at the time of the budget

 Request for sufficient funds:

Another important step in the preparation of the budget is that the financial management of thecompany that makes the budget is that the financial management of the company that makes thebudget can also ask for a specific amount of money for them to tide over certain activities thatneed to be done The request for the funds can be made to the authorities concerned

These are the various important steps of preparing the budget

c Preparing functional budgets

The preparation of functional budgets: A functional budget is the budget that is achievable and isrelated to a specific unit or process or function or department of the organisation It is a group ofrelated activities aimed at accomplishing a major service or program for which a unit ofgovernment is responsible A functional budget is prepare for a process of function

At the outset a principal budget factor or limiting factor is identified This determines scale;examples include sales volume, available finance or productive capacity

d Cash budgets:

A cash budget is extremely important, especially for small businesses, because it allows acompany to determine how much credit it can extend to customers before it begins to haveliquidity problems

For individuals, creating a cash budget is a good method for determining where their cash

is regularly being spent This awareness can be beneficial because knowing the value of certainexpenditures can yield opportunities for additional savings by cutting unnecessary costs

For example, without setting a cash budget, spending a dollar a day on a cup of coffee seemsfairly unimpressive However, upon setting a cash budget to account for regular annual cashexpenditures, this seemingly small daily expenditure comes out to an annual total of $365,which may be better spent on other things If you frequently visit specialty coffee shops, yourannual expenditure will be substantially more

e Budgeted profit and loss account and balance sheet

A budgeted profit and loss account can be prepared from the data developed in:

 Sales budget

 Ending finished goods inventory budget

 Selling and administrative expense budget

 Cash budget

The budgeted profit and loss account is one of the key schedules in the budget process It showsthe company's planned profit for the upcoming budget period, and it stands as a benchmarkagainst which subsequent company performance can be measured

The budgeted balance sheet is developed by beginning with the current balance sheet andadjusting it for the data contained in other budgets

f Flexible budgets

A flexible budget is a budget that adjusts or flexes for changes in the volume of activity Theflexible budget is more sophisticated and useful than a static budget, which remains at oneamount regardless of the volume of activity

If the plant manager is required to use more machine hours, it is logical to increase the plantmanager’s budget for the additional cost of electricity and supplies The manager’s budgetshould also decrease when the need to operate the equipment is reduced In short, the flexiblebudget provides a better opportunity for planning and controlling than does a static budget

g Cost estimation

An approximation of the probable cost of a product, program, or project, computed on the basis

of available information

Four common types of cost estimates are:

 Planning estimate: a rough approximation of cost within a reasonable range of values,prepared for information purposes only Also called ball park estimate

 Budget estimate: an approximation based on well-defined (but preliminary) cost data andestablished ground rules

 Firm estimate: a figure based on cost data sound enough for entering into a bindingcontract

 Not-to-exceed /Not-less-than estimate: the maximum or minimum amount required toaccomplish a given task, based on a firm cost estimate

h Computers and budgeting

Computer is tool for enterprises make a budgeting with many different software in accountingnowadays

For enterprises, the financial forecast is planning Financial - is the process of calculating andestimating the financial status of a future business activities Business activities may be abusiness, a new project, an investment plan,

According to BPP (2004,) functional budgets will be out of balance with each other and willrequire modification so that they are compatible The computer is helping the company toprocess and store a totally larger volume of data so that’s using computer will help the company

to do the budget to manage their strategy

In case of Francis Ltd, Computer and budget have the role of manufacturing and sellingcompany, therefore the budgeting process is daunting to say every least to make manualpreparation of a master budget and a cash budget in the real world It totally needs a help ofcomputer to reduce time and effort of employees

Adjustment plan and financial plan of the company every year is a key work for most businessexecutives Even the end result of this financial plan is sometimes less important than the process

we perform the calculation and prediction Because, in the process of preparing this plan youalso aware of the problems you will face in the future and identify yourself to a roadmap to goforward

i Incremental and zero based budgeting system

Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly ingovernment and not for profit sectors of the economy Under zero based budgeting managers arerequired to justify all budgeted expenditures, not just changes in the budget from the previousyear The base line is zero rather than last year's budget

In traditional approach of budgeting, the managers start with last year's budget and add to it (orsubtract from it) according to anticipated needs This is an incremental approach to budgeting inwhich the previous year's budget is taken for granted as a baseline This approach is calledincremental budgeting

Zero based budgeting approach requires considerable documentation In addition to all of theschedules in the usual master budget, the manager must prepare a series of decision packages inwhich all of the activities of the department are ranked according to their relative importance andthe cost of each activity is identified Higher level managers can then review the decisionpackages and cut back in those areas that appear to be less critical or whose costs do not appear

to be justified

Zero based budgeting is a good idea The only issue is the frequency with which a ZBB review iscarried out Under zero based budgeting (ZBB) ,the review is performed every year Critics ofsuch type of budgeting charge that properly executed zero based budgeting is too timeconsuming and too costly to justify on an annual basis In addition, it is argued that annualreviews soon become mathematical and that the whole purpose of zero based budgeting is thenlost Whether or not a company should use annual reviews is a matter of judgment In somesituations, annual zero based reviews may be justified; in other situations they may not because

of the time and cost involved However, most managers would at least agree that on occasionzero based reviews can be very helpful

j Budgeting performance and motivation

Performance budgeting: there is no consensus in the definition of performance budgeting.However, there is agreement that at least there must be a link between the activity of aninstitution and the size of its budget on order for us to talk of performance budgeting Forinstance the OECD defines performance budgeting as “a form of budgeting that relates fundsallocated to measurable results” In addition performance budgeting sys-tem may be categorized

as to the strength of the link between performance information and funding, whether the fundingscheme is retrospective or prospective and whether activity is measured by output or outcomeindicators

Likewise, performance budgeting schemes may be implemented in different ways across sectors

or even within a specific sector For instance, the case mix system used in Danish heath caresector is a form of performance budgeting with a fairly strong link between activity level andfunding However in 2005 the system was implemented very differently in different regions.Hence, in some counties 21% of the budget was linked to activity, while activity determined71% of the budget in others Likewise, in some countries the activity link was only implemented

to organizations at the macro level is unlikely to be effective if it does not include incentives forthe individual decision makers that constitute organizations The different implementations areseldom adjusted correspondingly The explanation might be that scholarly knowledge of thesignificance of organizational setup and supportive incentive hitherto is sparse.

Source: (http://accmana3d.tripod.com/id2.html )

Source: (http://benefitof.net/benefits-of-budgeting/ )

Source:(http://www.saching.com/Article/Important-steps-involved-in-preparing-a-budget/5672 )

2 Select appropriate budgeting methods for the organisation and its needs.

3 Prepare budgets according to the chosen budgeting method.

A budget is nothing more than a written estimate of how an organization — or a particularproject, department, or business unit — will perform financially If you can accurately predictthe performance of your company, you can be sure that resources such as money, people,equipment, plant, and the like are deployed appropriately

(http://www.dummies.com/how-to/content/choosing-a-budget-method.html)

 Production Budget:

The production budget calculates the number of product units to be produced, and are derivedfrom a combination of sales forecasts and the expected number of finished goods inventory tohave on hand

(http://www.accountingtools.com/production-budget)

 Cost Centre Utilization Budget

A cost center is part of an organization that does not produce direct profit and adds to the cost ofrunning a company In the future, Investments in public relations and customer service may

result in more customers and increased customer loyalty Because the cost center has a negativeimpact on profit, it is a likely target for rollbacks and layoffs when budgets are cut Operationaldecisions in a contact center, for example, are typically driven by cost considerations Costcenter budgeting provides a further method of planning in addition to primary cost and secondarycost planning This tool enables you to carry out a comparison between actual postings and planbudgets You can thus determine when the budget is exceeded and carry out timely availabilitychecks.

(http://searchcrm.techtarget.com/definition/cost-center)

 Conversion Budget

By means of the budget, you can calculate how much you need to establish a business, howmuch and need to run it A budget issue for a number of entrepreneurs is probably the worstproblems at the beginning They think that only fear can accounting budgeting It is not true Thebudget is a fairly simple problem It is just addition and division Just take a cost

So the changing in the bugdet can be helps the company to fix their budget that’s may have badaffect for their business activities From it, the companies will the plan to bring its moredevelopment

 Material Budget

Direct materials budget is prepared after computing production requirements by preparing aproduction budget Direct materials budget or materials budgeting details the raw materials thatmust be purchased to fulfill the production requirements and to provide for adequate inventories

Preparing a budget of this kind is one step in a company's overall material requirements

planning

(http://www.accountingtools.com/material-budget )

 Product Cost Budget

Production cost budgeting is basically the planning process for a firm's long time productioncosts

 It is very important for a manufacturing firm because:

 It helps in allocation of resources

 It helps in analyzing the profitability of the production activities

 It helps in analyzing the future cash flows from the production activities

 Return on investments

 Profit & Loss Account

A profit and loss account is a summary of business transactions for a given period normally 12 months

- Shows business performance over a specific period of time

 Records incomings and outgoings to show whether a profit or loss has beenmade

 Shows a summary of invoices that have been raised, or sales income that hasbeen generated, including an estimate of work in progress but not yet invoiced

 Includes purchases made from suppliers for goods or raw materials, and anestimate of cost for goods/raw materials used but not yet paid for

One of the important things to remember about a profit and loss account is that it does notrecord whether invoices raised or received have been paid so it therefore does not indicatethe amount of cash your business

(http://www.investopedia.com/terms/p/plstatement.asp#axzz0OifWOuZJ)

Set the production budget, cost center utilization budget, conversion budget, materials budget, product cost, profit and loss account budget:

Table: Production Budget

Production budgeted

Ref Units F03 Ref Units F04

Good finished output required (1) 9,500(95%) (2) 12,600(90%)

Gross production needed from cost

Good production needed from cost

Table: Cost Centre Utilization Budget

Cost Centre Utilization Budget

Cost centre 14 (Variable + Fixed cost)

Cost centre 15 (Variable + Fixed cost)

Table: Material budget.

Material budget

Ref to working

Conversion cost centre 15

Cost at the end of cost centre

4 Prepare a cash budget.

IV Monitor performance against budgets within a business.

1 Calculate variances, identify possible causes and recommend corrective action.

a Calculate variances.

Variance analysis is the evaluation of performance by means of variances, whose timelyreporting increase the opportunity for remedial action It helps management to understand thepresent costs and then to control future costs The value of variance analysis lies in managersbeing able to isolate where increased costs are actually occurring and take remedial action in thatspecific area