Management Accounting - Assigment 2

Unit O utcomesOutcome Evidence for Assessor’s decision Internal Verification a Select appropriate budgeting methods for the organisation and its needs b Prepare budgets according to the

BANKING ACADEMY, HANOI

BTEC HND IN BUSINESS (FINANCE)

ASSIGNMENT COVER SHEET

NAME OF STUDENT

REGISTRATION NO

UNIT TITLE Unit 9: Management Accounting: Costing and Budgeting

ASSIGNMENT TITLE Budgetary Planning and Control

ASSIGNMENT ISSUE DATE 04 December 2011

SUBMISSION DEADLINE 06 February 2011

We, hereby confirm that this assignment is our own work and not copied

or plagiarized from any source We have referenced the sources from which information is obtained by us for this assignment.

-FOR OFFICIAL USE

Assignment Received By: Date:

Unit O utcomes

Outcome Evidence for

Assessor’s decision

Internal Verification

a

Select appropriate budgeting methods for the organisation and its needs

b

Prepare budgets according to the chosen budgeting method

a

Prepare an operating statement reconciling budgeted and actual results

b

Outcome Evidence for

Assessor’s decision

Internal Verification

Report findings

to management

in accordance with identified responsibility centres

c

Comments by Assessor - Common Skills

A B C D E F G

Assignment

( ) Well-structured; Reference is done properly / should be done (if any)

Overall, you’ve

Areas for improvement:

ASSESSOR SIGNATURE DATE / /

NAME:

(Oral feedback was also provided)

STUDENT SIGNATURE DATE / /

A MANAGING & DEVELOPING SELF D MANAGING TASKS & SOLVING PROBLEMS

1 Managing own roles & responsibilities 12 Use information sources

2 Manage own time in achieving objectives 13 Deal with a combination of routine & non-routine tasks

3 Undertakes personal and career development 14 Identify & solve routine & non-routine problems

4 Transfer skills gained to new/changing situations & contexts

B WORKING WITH & RELATING TO OTHERS E APPLYING NUMERACY

5 Treat others beliefs and opinions with respect 15 Applying numerical skills and techniques X

6 Relate & interact effectively with individuals & groups

7 Work effectively as a team member F APPLYING TECHNOLOGY

C COMMUNICATING 16 Use a range of technological equipment and systems

8 Receive and respond to a variety of information G APPLYING DESIGN AND CREATIVITY

9 Present information in a variety of visual forms X 17 Applying a range of skills and techniques to develop a

variety of ideas in the creation of new / modified products,

Prepared for:

Mr Jun Alejo Bathan (Lecturer)

Unit 9: Management AccountingBanking Academy, Hanoi

BTEC HND in Business (Finance)

Prepared by:

Triple F GroupPhạm Minh Hoàng – Peter, F03C-065

Đỗ Ngọc Vương Anh – King, F03D-007

Lê Hoàng Long – Dragon, F03D-099

Hồ Ngọc Minh – November, F03D-111Nguyễn Ngọc Thiện – Unstoppale, F03C- 137

Executive Summary

As a role of a management accountant of a group of companies and the managingdirector has asked to explore the possibilities of introducing appropriate budgeting methods isone of the operating companies Base on the information which is given in the scenario, thisreport 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

 Prepare an operating statement reconciling budgeted and actual results

 Report findings to management in accordance with identified responsibility centers

Table of Contents

Executive Summary 5 Introduction 7

Main body 8

3a – The purposes and natures of the budgeting process 8

3a.1 Budget and the importance of budget 8

3a.2 The purposes and benefits of a budget 8

3a.3 Steps in the preparation of a budget 10

3a.4 Preparing functional budgets 10

3a.5 Cash budget 11

3a.6 Budgeted profit and loss account and balance sheet 11

3a.7 Flexible budgets 12

3a.8 Cost estimation 13

3a.9 Computers and budgeting 13

3a.10 Incremental and zero based budgeting system 14

3a.11 Budgeting, performance and motivation 14

3b - Select appropriate method to prepare budget 14

3b.1 Methods to prepare budgets 14

3b.2 Select and analysis about the appropriate method 19

3c Prepare budgets according to the chosen budgeting method 19

3d Prepare a cash budget 23

4a Calculate variances identify possible causes and recommend corrective actions 24

4a.1 Definition of variance 24

4a.2 Possible causes and recommend corrective actions 29

4b Prepare operating statements reconciling budgeted and actual results 30

4c - Report findings to management in accordance with identified responsibility centers 31

4c.1 Responsibility centers 31

4c.2 REPORT 32

Conclusion 34

Reference 34

Introduction

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

As the management accountants of a group of companies the researchers explore thepossibilities of introducing appropriate budgeting and costing methods in the operatingcompanies

In the first part of this report, the purpose and nature of budgeting process will be shownnormally

The second part of this report is going to mention about several budgeting methods Themain purpose is to prepare a master budget it also includes: sales budget, production budget,direct materials budget, direct labor budget, manufacturing overhead budget, selling andadministrative budget And also the preparation of a master budget such as actual sales duringthe last quarter and the budgeted cost of goods sold, dividend that will be paid

The last part of this assignment is to prepare an operating system for control period 13,reconciling budget and actual profit and also calculate variances, identify possible causes The

entire ratios which will be used in this part will base on the information of Francis LTD

Main body

3a – The purposes and natures of the budgeting process

The decisions of managers affect the profitability of the business; therefore in order to makeeffective decisions, the company needs to have a plan for its operations And planning thefinancial operations of business is called “budgeting”

3a.1 Budget and the importance of budget

In fact, the budget process is paramount in the practical world of government or anyorganization According to BPP Professional Education (2004), “budget is a quantitativestatement for a defined period of time”, which involves itemized estimates of anticipated incomeand expenses, including a plan of operation based on such estimates each area of a business’soperations typically has a separate budget

In case study of Francis Ltd, the company has cost centre utilization budgets, conversion costbudgets, material cost budget and so on

In accounting, a budget is definitely important because it reveal values Budgets link thefinancial resources of a business with its purposes Budgets force explicit choices among goals,all of which cost money to implement and therefore compete

The managers of a company will be lack a clear idea to reach the goal of business if theircompany does not have a budget or a plan will make decisions that do not contribute to the

profitability of the business A budget serves seven main purposes – ensure objectives,

planning, communication, coordination, providing framework, control and evaluation, motivation.

3a.2 The purposes and benefits of a budget

In any implementation, a company has to consider about purposes, anticipate costs and benefits

of activities to reduce the risks and achieve the goals Budgeting process relates to every businessactivities of the company, therefore the reason for budget creation ought to be carefullyconsidered before doing anything else

The first purpose and benefit of a budget is to ensure the achievement of the company’s

objectives The organization’s objectives are quantified and drawn up as targets to be achieved

within the timescale of the budget plan Therefore the managers will focus effort to reach

company’s goals For example, the budget shows the sum of money, revenues and expenditures

of Francis Ltd in the period of time, as the company’s business performance so it will remind

the managers about the achievement they need to reach

The 2nd purpose is to compel planning, a budget helps planning forces management to look

ahead, to set out detailed plans for achieving the targets for each department When a budget iscreated, the managers can decide the most effective ways to perform each task This alsodecreases daily operating disruptions while doing business

The next one is communicating ideas and plans It is very important to ensure that each person

affected by the plans is aware of what he or she is supposed to be doing The communicationbetween superiors and subordinates helps affirm their mutual commitment to company’s goals

For instance, in Francis Ltd, the production department and the marketing department have to

agree on how to coordinate their efforts about the need for services and the resources required

Coordinate activities - The activities of different departments need to be co-ordinate For

example, when Francis Ltd sells products, the number and types of products to be marketed

must be coordinated with the purchasing and manufacturing departments in the company toensure goods are available

Provide a framework for responsibility accounting in sufficient details way It means budgets

require that mangers of budget centres are made responsible for the achievement of budgettargets for the operations under their personal control Deviations do not always suggest the needfor imposition of penalties

Establish a system of control and evaluation can be seen, once a budget is finalized, it is the

plan for the operations of the company It means budgets are controlled to determine whether thecompany is following the targets In fact, if the business activities do not meet the budget, thecompany can immediately adjust implements before it is too late

Last but not least, budgets play the role of motivating employees to improve the performance

which budgets are able to provide incentives to departments and every single employee in thecompany to strive the common objectives

3a.3 Steps in the preparation of a budget

Role of the budget is important to appreciate the co-coordinating for Francis Ltd Therefore, the

preparation of the budget has significant process in making a budget, and it differ from business

to business However, in order to prepare a reasonable and systematic budget, every businessfollows given steps

The preparation may take a period of time, meanwhile the budget committee can

“Functional budgets (sales budgets, production budgets, direct labor budget and so on) which areamalgamated into the master budget, may need to be amended many times over as a consequence

of discussions between departments, change in market conditions and so on during the course ofbudget preparation.” (BPP PROFESSIONAL EDUCATION 2004)

3a.4 Preparing functional budgets

Base on statistic which was informed in the case such as budgeted sales, rejected rate in order tocalculate the gross production as well as the increase in work in process, the following budget isprepared In case study of Francis Ltd, we will learn about the production budget, cost centreutilization budgets, conversion cost budgets, material cost budget, product costs budget a profit

and loss budget Budgets are different kinds of budgets what are divided basing on their function

(95%)

12,600 (90%)

Gross production needed from

Good yield from cost center 14 (4) 10,000

(80%)

14,000(70%)

Good production needed from cost

3a.5 Cash budget

According to the definition of BPP (2004,) cash budget is a statement which is prepared after theoperating budgets (including sales, manufacturing expenses or merchandise purchases, sellingexpenses, and general and administrative expenses) and the capital expenditures budget are

prepared Francis Ltd is the manufacturing company, so the cash budget starts with the

beginning cash balance to that is added the cash inflows to get cash available

The cash balance before budgeted is adjusted by the financing activity to calculate the closingcash balance The closing cash balance is the cash balance in the budgeted or performed in thebalance sheet

3a.6 Budgeted profit and loss account and balance sheet

The budgeted profit and loss account and balance sheet contains all of the line items found in anormal profit and loss account and balance sheet, except that it is a projection of what the profitand loss account balance sheet will look like during future budget periods It is compiled from anumber of supporting calculations, the accuracy of which may vary based on the realism of theinputs to the budget model

In the case of Francis Ltd, the budgeted profit and loss account and balance sheet is useful for

testing whether the projected financial position of the company appears to be reasonable It alsoreveals scenarios that are not financially supportable (such as requiring large amounts of debt),which management can remedy by altering the underlying budget

This would involve the preparation of a budgeted profit and loss account and balance sheet, both of which form the master budget (BPP PROFESSIONAL EDUCATION 2004.)

3a.7 Flexible budgets

Flexible budgets are one way companies deal with different levels of activities According toDennis Caplan (2009) “the flexible budget is a performance evaluation tool It cannot beprepared before the end of the period A flexible budget adjusts the static budget for the actuallevel of output.”

Flexible budgets are also a number of static budgets “The static budget is the budget that isbased on this projected level of output, prior to the start of the period In other words, the staticbudget is the “original” budget” (Dennis Caplan, 2009.)

Thus, the manager must use a budget prepared for the actual level of activity to evaluate thecompany's performance in controlling costs

Flexible budgets has two advantages are planning and control procedure In planning stage,

flexible budget may helpful to know what the effects would be if the actual outcome differ fromthe prediction And at the end of each period, actual results may be compared with the relevant

activity level in the flexible budget as a control procedure (BPP PROFESSIONALEDUCATION 2004.)

3a.8 Cost estimation

Cost estimation is defined as an approximation of the probable cost of a product,program, or project, computed on the basis of available information The important goal of costestimation is to determine the amount of fixed and variable costs so that a cost equation can beused to predict future costs

Cost estimation involves the measurement of historical costs to predict future cost which including three main techniques are account-classification method (engineering method),

high-low method and scatter graph.

Account-classification method is the only method the manager can use to estimate costs when

only one data point is known And this technique depends on the subjective judgement of eachmanager and estimating costs Therefore, just only approximate accuracy can actually beexpected

The high-low method uses the highest and lowest activity it help the company to estimate the

portion of a mixed cost that is variable The high low method may be misleading if the high andlow activity levels are not representative of the normal activity

The last method is creating a scatter graph; it is another method of estimating fixed and variable

costs It provides a good visual picture of the costs at different activity levels However, it isoften hard to visualize the line through the data points especially if the data is varied (Elizabeth A Minbiole, 2007)

3a.9 Computers and budgeting

According to BPP (2004,) functional budgets will be out of balance with each other and will

require modification so that they are compatible The computer is helping the company to

process 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 selling

company, therefore the budgeting process is daunting to say every least to make manual

preparation 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.

3a.10 Incremental and zero based budgeting system

In the real situation of any company, both zero-based budgeting and incremental

budgeting are popular financial methods used by successful business activities Each method

works differently and they both have their advantages and disadvantages associated with them The incremental budgeting starts out with a budget from a previous period The business usesthis previous budget as a basis for calculating the new budget They take the old budget and add

to or subtract from the totals to come up with a budget for the upcoming period

We analyse the result from scenario and calculate: in year 12, Francis Ltd did $1,522,400 insales revenue for both F03 and F04 products For year 13, they expect an increase in sales of 10percent Therefore, their new budget will be $1,674,640 for the year 13

Zero-based budgeting always begins the new budget from an established point of zero Instead ofstarting off with last period's budget and adding or subtracting from it, the company begins withzero, and then goes through every expense that they will incur during the course of business Incase study of Francis Ltd, this budgeting method utilizes much more detail and makes everydepartment accountable for their necessary expenses

3a.11 Budgeting, performance and motivation

The purpose of budgets seems to staff motivation which springs from budget related issues Forinstance, Francis Ltd might provide a reward scheme for the sole purpose of lifting morale - staffmotivation - but a scheme such as this would be impossible to perform if the budget does notallow for it In that case, what led to staff motivation is actually directly or indirectly related tobudget

3b - Select appropriate method to prepare budget

For every company, selecting a most appropriate budgeting method is very important whatdecided the success of budgeting process There are some approaches of budgeting such as

master budget, fixed budget, flexible budget, incremental budgeting, zero-based budgeting, imposed budget and participatory budget

3b.1 Methods to prepare budgets

With the purpose of understanding about different kinds of budgeting methods, the project will

mention about the master budget It is a summary of a company's plans that sets specific targets

for sales, production, distribution and financing activities The master budget generallyculminates in a cash budget, a budgeted income statement, budgeted profit and loss account andbudgeted balance sheet, what noticed in above part In details, the master budget illustrates acomprehensive expression of management's plans for future and how these plans are to beaccomplished

At first, fixed budget refers to remaining unchanged regardless of the level activity (BPP,

2004.) The companies use it when it might have low variable costs In fact, there is not manycompany which use this and those that do rely on it are pretty certain that their business isn’tgoing to have many variations

Advantages of fixed budget Disadvantages of fixed budget

The advantage of fixed budget is allowing

the company to prepare for expenses in

advance (Miriam C, n.d)

- It allows the company to plan ahead

- It is easy to track and keep the company’s

- The company does not have any flexibility todeal with change in the environment, such asemergencies, personnel, competitive pressureand so on

- It is very dangerous for the company if thecompetitors know about the weak points

Recommendation: In fact, it works well for those on a limited budget A fixed budget means

that the company’s expense categories and income will not change monthly Thus, they work onsalary or they are withdrawing a set amount from retirement accounts so employees on a fixedbudget get the same amount of money each month In contrast, a fixed budget approaches

variance by trying to work in excess resources beforehand for any possible changes in demanddown the road which lead to the issues with inventory.

“Flexible budget is for variable cost for different levels of cost driver utilization which isexpected in the future” (Sithambaranathan Prithiviraj, 2008.) Thus, flexible budgeting process can identifies overhead cost drivers of overhead cost and budgeting for the cost which relates to the cost driver for different utilization of that cost driver.

Advantages of flexible budget Disadvantages of flexible budget

- Providing management with real-time data

on projected versus actual outcomes in product

Recommendation: The flexible budget is only created when the actual sales volume is known,

which reduces problems with variance such as inefficiencies in available labor However, at thesame time, makes the flexible budget a more immediate

As presented in the above part, incremental budgeting is concerned mainly with the increments in costs and revenues which will occur in the coming period (BPP, 2004.) This approach is not recommended because it does not take into account changing circumstances However, this method has some advantages and disadvantages:

Advantages of incremental budgeting Disadvantages of incremental budgeting

- The incremental budgeting is stable

- The system is relatively simple to operate

and easy to understand

- Co-ordination between budgets is easier to

achieve

- The impact of change can be seen quickly

- Assumes activities and methods of working will continue in the same way

- There is none incentive for developing new ideas

- Encourages spending up to the budget and therefore the budget is maintained next year