Management Accounting Assignment 2

EXECUTIVE SUMMARY In this assignment we explain the purpose and nature of the budgeting process, select appropriate budgeting methods for the organization and its need, prepare budget ac

Management Accounting: Costing and Budgeting

Cost Information Analysis

Submitted: 14/06/201

TABLE OF CONTENTS

EXECUTIVE SUMMARY 6

INTRODUCTION 7

TASK 1: BUDGETING 8

Task 1a: Budgeting process 8

1a.1 The purpose of the budgeting process 8

1a.2 The nature of budgeting process 9

1a.3 Budget of Healthful food, Inc 11

1a.4 Select appropriate budgeting method for the organization and its need 13

Task 1b: Prepare budgets 16

TASK 2: CASH BUDGET 25

2.1 Definition 25

2.2 Prepare cash budget for Eye Care Company 25

TASK 3: STANDARD COSTING AND VARIANCE ANALYSIS 27

Task 3a: Computation all the variances, prepare an operating statement for the management and explain about the possible causes of the variances 27

3a.1 Calculation variances 27

3a 2 Operating statement 29

3a.3 Explanation about the possible causes of the variances with identified responsibility centres 31

Task 3b: Preparing performance report 33

3b.1 Definition 33

3b.2 Preparation a revised performance report for Branson Manufacturing, Inc 34

CONCLUSION 36

REFERENCES 36

EXECUTIVE SUMMARY

In this assignment we explain the purpose and nature of the budgeting process, 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 base on the outcomes in scenario was send from teacher

The assignment is divided into 3 main tasks based on 7 outcomes of scenario

 Task 1

Outcome 3.1: Explain the purpose and nature of the budgeting process

Outcome 3.2: Select appropriate budgeting methods for the organization and its needs Outcome 3.3: Prepare budgets according to the chosen budgeting method

However, because of limitations about words, this report only gives general information about understanding costing and budget The researcher hopes that those disadvantages will

be improved in the future Thanks to teacher Jun Pyo and his lectures help us to complete the assignment successfully

INTRODUCTION

This assignment we are talking about costing and budgeting so we will explain the purpose and nature of the budgeting process, select appropriate budgeting methods for the organization and its needs, prepare budgets according to the chosen budgeting method, calculate variances, identify possible causes and recommend corrective action, prepare an operating statement reconciling budgeted and actual results by applying new techniques were invented to present the accounts periodically, not necessarily at the end of the year, before the management From which, we can have plan to deal with budgetary and control, preparing forecasts and budgets and then comparing them to the actual results So we can improve our skill, we known how to work with numbers in accounting, how to calculated costing and budgeting

TASK 1: BUDGETING

Task 1a: Budgeting process

1a.1 The purpose of the budgeting process

First of all, we need to understanding the word “budget”, according to American Heritage Dictionary; budgeting is a critically important part of the business planning process Business owners and managers need to be able to predict whether a business will make a profit or not

A budget is basically a model of how the business might perform, financially speaking, if certain strategies, events, plans are carried out (Isaac, n.d.)

 Planning process: Identify objectives

To compel planning 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

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 provides a framework for

improve their performance

The interest and commitment of employers can be retained if there is a system which lets them know how well 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

Table 1: Purpose and benefit of budgeting process

1a.2 The nature of budgeting process

Planning and control are important processes which contribute a lot to the success of a company Planning involves establishing a basic strategy, selecting a course of action, and specifying how the action will be implemented Control helps to ensure that the plan is actually carried out and is appropriately modified as circumstances change

The overall planning and control process is summarized in the chart follows:

Step 1: Identify objectives

The objective of Healthful food Inc is increase sales by 12% per year, increase income before tax by 15% per year, and maintain long – term debt at a maximum of 16% of assets Budget is the most possible way to help the company achieve this because a budget assists you in striving toward financial goals Clearly seen the objectives will help Healthful Foods Inc maximize profits Although maximizing their profits is not always as easy as maximizing sales which lead to be successful From which, it can motivate their employees

Step 2: Identify potential strategies

In this step, budget is made to set out specific targets for each strategy Understanding the benefits of using a potential strategy will help business owners and managers of Healthful Foods Inc can appreciate the value of the invested time and money into a comprehensive plan because errors and inaccuracies will always remain since it is impossible to predict the future Major external events such as rising energy prices or the global recession may distort the whole process

Step 3: Evaluate strategies

Strategic evaluation is a way for entrepreneur to assess the ability and effective productivity of their firm and their future endeavors Base on terms of suitability, feasibility and acceptability in the context of strategic analysis, the Managing Director

of Healthful Foods Inc can evaluate and then choose the greatest potential strategies that can help the company to achieve the objective quickly and effectively

Step 4: Choose alternative courses of action

After evaluating clearly, it can help increase the confidence of investors so Healthful Foods Inc with greater access to capital, which makes it easier to grow and expand operations When Healthful Foods Inc develops effective strategies, they gain a competitive advantage over their counterparts, which means greater success in the long run

Step 5: Implement the long-term plan

Chosen strategies together and co-ordinate them into a long- term plan so Healthful Foods Inc can anticipate roadblocks, so be useful for their managers to make decision easily, quickly and correctly In addition, it helps investors see clearly the efficiency

of the firm so that they can know what to do and should invest or not

Step 6 and 7: Measure actual results and compare with plan Respond to divergences from plan

Particularly, when we have long- term plan we can comparing actual results with plans that set out so we can know how many percentage of the plan that has been done and hence we know how much work to do so from which we can balance the performance of the work effectively include money and human resources in the best way Finally, evaluating the actual results and comparison with the plan, its helps the company realizes what the activity is inconsistent from which to set out plans to resolve the problem and avoid wasting time and human resources

1a.3 Budget of Healthful food, Inc

a Meet or not meet objective of company

Objective 1: Increase sales by 12% per year

Increase sales =

× 100%

= × 100% = 11.5%

 Not meet objective

Objective 2: Increase income before tax by 15% per year

Increase income before tax

Objective 3: Maintain long – term debt at a maximum of 16% of assets

Percentage of long – term debt =

× 100%

= × 100% = 15%

 Meet objective

Objective 4: Maintaining cost of goods sold at maximum of 70% of sales

Maintaining cost of goods sold =

= × 100% = 60.64%

 Meet objective

With this budget, company meet 3 objective and 1 objective is nearly with the number that company gave for accountant (the objective of company is 12% increase sales and according to budget, sales increase 11.5% when compared with sales value of previous year) In summary, this budget is seem to meet all the objective of company in year 20x2

b The influence of behavior of John Winslow – cost accountant of Healthful Foods Inc

To have a budget that can meet the objective of company, Wilson did two activities and it make slack in accounting

First, he overestimates the ending inventory This activity can make increase the ending inventory of company from that, make decrease cost of goods sold as a result, it make increase income before tax of company.This activity gives wrong information for director

of company and makes a gap in accounting system of company As a result, Director cannot see the right problem that company have and hardly give right solution to deal it Second, he move reclassify fruit and gain inspection cost from manufacturing cost to administrative cost His activity make decrease manufacturing cost so can make decrease inventory and cost of goods sold of company It influences income of company and make manager of company do not have right information about the actual situation of company because of that company’ manager cannot find solution to help company deal its problem

1a.4 Select appropriate budgeting method for the organization and its need

a Fixed and flexible method

Fixed budget

- Allowing a business to measure both short-term and long-term budgets

- Allocating a set amount of money towards essentials such as overhead cost

- Making profit measurement easier, since you allocate the same amount

of money toward necessities on a regular basis (Miriam, n.d.)

- 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

- Fixed budgets will often fail to provide a realistic target against which performance can be judged Certain costs will vary with production

Flexible

budget

- Improved performance evaluation, this allows the company to evaluate the manager performance more fairly

- Useful variance analysis, a flexible budget considers cost increases due

to increased activity levels, eliminating the impact

- Not allowing the manager to insert set figures, prediction is difficult

- Too many variables, when one variable in a flexible budget is subject to change, other variables in the budget can also change, too

- Complicated because flexible budget require the prepares to insert

a range of estimates

Table 2: Comparison between fixed and flexible method

b Top-down (imposed) budget VS Bottom-up (participated) budget

- When a staff is given a certain budget to work with, it must make prudent financial decisions about how the money will be used

(McQuerrey, n.d.)

- Budgets can be inaccurate and not conflict with the objectives of the lower departments because only top managers prepare the budgets

- Managers and employees may be resentful that their input is not valued in the budgeting process (McQuerrey, n.d.)

Bottom-up

budget

- Can be quite accurate for individual tasks As long as no tasks have been forgotten, then this can work quite well

- Bottom-up budgeting involves all members of a particular project, which can be a benefit in terms of organization morale and involvement

- Senior’s manager’s overview of the business can be combined with operational level of details to produce better budgets (Arthur, n.d.)

- Lead those who are in charge of tasks and also project managers to ask for more funding than will actually be needed

- Lacking knowledge may make budget unachievable or cannot connect with opinion of director

- Budget of each department may be not has relationship

- Time consuming: Lack of skill also knowledge (Arthur, n.d.)

Table 3: Comparison between top – down budget and bottom – up budget

c Incremental and zero based budgeting system

- The impact of change can be seen quickly

- Managers can operate their departments on a consistent basis

- The system is simple to operate and easy to understand

- Conflicts should be avoided if departments can be seen to be treated

- No incentive for developing new ideas

- No incentives to reduce costs

- Encourages spending up to the budget so that the budget is maintained next year

- The budget may become out of date and no longer relate to the level of activity or type of work being carried out

Zero based

budgeting

- Allocation of resources linked to results and needs

- Develops a questioning attitude

- Wastage and budget slack should be eliminated

- Prevents creeping budgets based on previous year’s figures with an added

- Affected by internal politics - can result in annual conflicts over budget allocation

Table 4: Comparison between Incremental and zero based budgeting system

Task 1b: Prepare budgets

1 Sales budget

Truong Hai Tire Company Sales Budget For the year 2013

Budgeted sales in units 116,400 27,000

Budgeted sales in dollars 7,566,000 5,400,000 12,966,000

Budgeted sales in dollars = Budgeted sales in units × Selling price per unit

Good production required in Finishing Department 117,990 27,360

Good production required in Molding Department 128,250 28,500

Total unit required = Budgeted sales in units + Desired ending finished good

= 116,400 + 6,590 = 122,990

Good production required in Finishing Department = Total units required – Beginning FG

Passenger is 5% so Good yield in Molding Department is 95%

Truck is 5% so Good yield in Molding Department is 95%

 Finishing Department

Passenger is 8% so Good yield in Finishing Department is 92%

Truck is 4% so Good yield in Finishing Department is 96%

Gross production in Finishing Department =

x 100 = 30,000

3 Direct materials budget

Truong Hai Tire Company Direct Materials Budget For the year 2013

STEEL BELTS

Direct materials required per unit, in pounds 1.5 4

Total direct materials required, in pounds 202,500 120,000 322,500

RUBBER

Direct materials required per unit, in pounds 10 30

Total direct materials required, in pounds 1,350,000 900,000 2,250,000

Budgeted cost of direct materials = Direct materials to be purchased, in pounds x Budgeted direct materials cost per pounds

=2,235,000 × 2 = $4,470,000