ABC's Financial Performance and Budgeting Process

This document discusses ABC's financial performance using management accounting techniques such as margin analysis and product costing. It also explores the budgeting process, including forecasting, planning, and communication. The advantages and disadvantages of operating a budgetary control system are examined. The document provides insights into budgetary planning and control, including the different categories of budgets. The case of ABC Ltd and its budgeting process is analyzed.

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Assignment Brief Number 2

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Contents
Part A: ABC’s Financial Performance through using various management accounting techniques
.........................................................................................................................................................3
Part B: Budgeting Process...............................................................................................................3
Major Functions of the Budgeting Process..................................................................................3
Advantages and disadvantages in operating a budgetary control system....................................4
Part C: Budgetary Planning.............................................................................................................4
Different categories of budgets on the given information as under:............................................4
Part D: Budgetary Control...............................................................................................................7

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Part A: ABC’s Financial Performance through using various management accounting
techniques
Some important management accounting techniques that can be used to evaluate the
financial performance of ABC Company Limited are margin analysis, constraints analysis and
product costing. Some other management techniques such as variance analysis and budgeting
process have been explained below in other parts. In order to evaluate the financial performance
of ABC Limited it is important to calculate the cost and net profit for both the products PC and
VP for the particular month, on the basis of given data and then recommending most appropriate
pricing strategy to overcome the financial problems (Bardy, 2011).
Statement of per unit net profit for both products
Particulars PC VP
Selling Price $ 1,200.00 $ 1,600.00
Labour hrs 2 4
Less:
Direct Material $ 600.00 $ 800.00
Direct Labour $ 200.00 $ 400.00
Other variable O/H $ 200.00 $ 200.00
Variable cost per unit $ 1,000.00 $ 1,400.00
Fixed Cost (Use of OAR) $ 80.00 $ 80.00
Profit $ 120.00 $ 120.00
It has been noted that profit per unit in both cases is equal despite of different labour
hours consumed by both the different products. It means profit per unit of PC on per unit of
labour hour is $60 per unit ($120/2) while it was only $ 30 per unit ($120/4) in case of VP
product. It means there is some serious problem associated with pricing strategies of company
and it is required to revise the price so that maximum profit can be achieved. There is need to
increase the price of VP product to certain level that company can sell maximum quantity and
maximum profit is also achieved. If there is constraint of labour hours than company should
focus on PC and make efforts to maximise its sales units as it has highest contribution per unit
per labour hr (Drury, 2011).
Part B: Budgeting Process
Major Functions of the Budgeting Process
 Forecasting: The development of budgets helps the business managers in gaining an
estimate of the future performance of a firm. The foretasted figures in relation to the
expenses and profits associated with business operations assists in determining the future

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plan of growth and development for a company in the context of competition,
government actions, economic outlook and other such factors that can have an influence
on the demand and supply (Lillis, 2018).
 Planning: The forecasted figures developed by the budgetary process helps in making
decisions regarding the future growth and development of a firm. As such, they assist in
the planning process of management to determine the level of production by gaining an
estimate of the cost incurred and analyzing the amount of capital present.
 Communication: The budgetary process also promotes communication between
individual departments and the top management by providing the determined goals and
targets to be achieved as per the budgeted figures (Drury, 2015).
Advantages and disadvantages in operating a budgetary control system
The most significant advantage of a budgetary control process is to facilitate the
management in carrying out business operations in the most efficient manner by minimizing the
expenses incurred and maximizing the profit attained. The budgetary control system helps in
providing standard benchmark for comparing the actual performance and thus finding out the
variances and the reasons behind their occurrence. The identification of reason behind d the
occurrence of these variances would help in development of significant strategies for overcoming
them. As such, the budgetary control helps in providing a monitoring mechanism for control the
different organizational functions and improving them to achieve the determined goals and
targets (Lillis, 2018).
On the other hand, there are also some limitations associated with the process of
budgetary control that includes its development on the basis of estimates and thus the results
obtained can be misleading. Also, the future is uncertain and thus cannot be predicted in an
accurate manner and therefore the results obtained from the budgetary process fail to present the
actual financial position. The budgets can be revised from time to time depending on the changes
in the external environment and therefore can lose their relevance in determining the future
growth objectives and targets (Lillis, 2018).
Part C: Budgetary Planning
Fixed budgets will be prepared for the coming January to March as ABC company has
single level of activity and it does not change during the year and also there is single set of
business conditions during all period. Fixed Budget is defined as budget which is drawn through
using the single set of details and it remain unchanged irrespective of output volume and revenue
achieved.
Different categories of budgets on the given information as under:
Some Important information need to process before making the budgets
ABC Ltd manufactures only I-Phone (IP) for the month
January to March

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Estimated Contribution $ 600.00 per unit
Month Units Sales
January 3000
February 3000
March 4000
Total Production Cost (Variable Cost + Fixed Cost) $ 200.00
Variable Cost (Direct Material Only) ($70*2) $ 140.00
Each unit of IP requires raw material units of 2 units
Cost of each raw material unit $ 70.00
Actual Sales of previous month December 2500 Units
Raw material units purchased in last December 50000 Units
Raw material consumed in December 5000 Units
Raw material stock remain as on 1st January 45000 Units
Selling Price of each unit of IP
Contribution +
Variable Cost
Selling Price of each unit of IP $600+$140
$
740.00
Sales Budget
Particulars January February March
Unit Sold 3000 3000 4000
Unit Selling price
$
740.00
$
740.00
$
740.00
Total Sales
$
2,220,000.00
$
2,220,000.00
$
2,960,000.00
(Lucey, 2013)
Cash collection budget from sales
Particulars January February March
Total Sales $ 2,220,000.00 $ 2,220,000.00 $ 2,960,000.00
Cash Collected
40% in current month $ 888,000.00 $ 888,000.00 $ 1,184,000.00
60% in following month
(2500 units sold in
December) $ 1,110,000.00 $ 1,332,000.00 $ 1,332,000.00
Total Cash Collections $ 1,998,000.00 $ 2,220,000.00 $ 2,516,000.00

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Production Budget (Production units is equal to sales units of current month)
Particulars January February March
Sales Units 3000 3000 4000
Production Units Required 3000 3000 4000
Add: Opening stock 0 0 0
Less: Closing Stock 0 0 0
Production Units 3000 3000 4000
Raw material purchase budget in quantity
Particulars January February March
Production Units Required 3000 3000 4000
Raw material required per unit of IP 2 2 2
Total Raw Material Required to purchase 6000 6000 8000
Cash payment budget for raw material purchases
Particulars January February March
Total Raw Material Required to
purchase 6000 6000 8000
Cost per unit
$
70.00
$
70.00
$
70.00
Total Cost of Raw material $ 420,000.00 $ 420,000.00
$
560,000.00
Cash Paid
In the following month (50000 units
purchased in December) $ 3,500,000.00 $ 420,000.00
$
420,000.00
(Baker and English, 2011)
Monthly cash budget
Particulars January February March
Cash Collected for Sales $ 1,998,000.00 $ 2,220,000.00 $ 2,516,000.00
Less:
Cash paid for raw material $ 3,500,000.00 $ 420,000.00
$
420,000.00
Cash paid for purchase of equipment $ 300,000.00 0 0
Total Cash Paid $ 3,800,000.00 $ 420,000.00
$
420,000.00

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Cash Flows $ (1,802,000.00) $ 1,800,000.00 $ 2,096,000.00
Add: Opening Balance 20000 $ (1,782,000.00)
$
18,000.00
Closing Balance $ (1,782,000.00) $ 18,000.00 $ 2,114,000.00
Part D: Budgetary Control
Raw Material Variance
Formula of raw material variance = Standard Cost or budgeted cost-Actual Cost
= $420000-$435600 = $15600 (Unfavorable)
Raw material price and usage variances
Formula of raw material price variance = (Standard Price-Actual Price) * Actual Quantity
= ($70-$66)*6600 units = $26400 Favorable
Formula of raw material usage variance = (Standard quantity-Actual Quantity) * Standard Price
= (6000 units-6600 units) * $70 = $42000 (Unfavorable)
(Besley and Brigham, 2011)
Reconciliation statement reconciling budgeted and actual raw material costs for the month
of January
Reconciliation Statement
Particulars Amount
Budgeted or Standard raw material cost $ 420,000.00
($70*6000 units)
Add: Raw material usage variance $ 42,000.00
Less: Raw material price variance $ (26,400.00)
Actual raw material cost $ 435,600.00
Findings and Recommendations for the manager
On the basis of information gathered through the application of management accounting
techniques such as variance analysis it has been found that change in vendor has caused increase
in raw material cost by $15600. It is mainly due to increase in number of quantities required for
manufacturing of one unit of IP. Overall 6600 units of raw material have been consumed to make

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3000 units of IP instead of 6000 units of raw material. It means 600 units of raw material have
become obsolete or it is has come with required quality. It is responsibility of procurement
department to look after the procurement process and check the quality of raw material before
selecting the vendor. Procurement department is responsible for purchase of raw material, so
they will be held responsible for this financial problem (Lucey, 2013).
The corrective action that can be taken in this situation is to ask the vendor to provide
proper quality tested raw material so that quantity required for raw material cannot increase from
the budgeted number. Another corrective action that can be taken is to change the vendor and
select vendor provided in the list at the predetermined price of raw material. As the raw material
price variance is favorable due to lower actual raw material cost than the budgeted cost, it is
suggested that to ask vendor to make sure all the raw materials should pass the quality test and if
it cannot than such raw material should be returned back (Lucey, 2013).

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References
Baker, H. K., and English, P. 2011. Capital Budgeting Valuation: Financial Analysis for Today's
Investment Projects. USA: John Wiley & Sons
Bardy, R., 2011. Management control in a business network: new challenges for accounting.
Qualitative Research in Accounting & Management 3(2), pp.161 – 181.
Besley, S. and Brigham, E. F. 2011. Essentials of Managerial Finance. NewYork: Cengage
Learning.
Drury, C. 2011. Management and Cost Accounting, 6th ed.UK: Thomson.
Drury, C. 2015. Management Accounting for Business Decisions. Germany: Cengage Learning
EMEA.
Lillis, A., 2018. Qualitative management accounting research: rationale, pitfalls and potential: A
comment on Vaivio. Qualitative Research in Accounting & Management 5(3). pp.239 – 246.
Lucey, T. 2013. Management Accounting. Germany: Cengage Learning EMEA.