Budgeting and Decision Making for Amana Ltd

The report explains the importance of budgeting in financial management and provides insights on the budgeting process for Amana Ltd. It also includes suggestions for improvement of certain areas and provides an analysis of the decision-making process for setting up an online store or selling on Amazon.

ASSIGNMENT 2
REPORT

Table of Contents
TABLE OF CONTENTS..............................................................................................................2
INTRODUCTION.........................................................................................................................3
MAIN BODY..................................................................................................................................3
PART A...........................................................................................................................................3
PLAN MONTHLY CONTROL BUDGET REFLECTING ORIGINAL BUDGET, FLEXED BUDGET AND
VARIANCES...................................................................................................................................3
EXPLAINING THE SUGGESTIONS PROVIDED TO AMANA’S CEO FOR IMPROVEMENT OF CERTAIN
AREAS...........................................................................................................................................6
PART B...........................................................................................................................................6
GIVE CERTAIN EXPLANATION FOR THE DECISION OF MR. AMANA ON SELECTION OF ONE
OPTION SUCH AS WHETHER HE MUST PLAN TO SET UP HIS OWN BUSINESS WITH THE
DEVELOPMENT OF WEBSITE OR PROCEED TO SELL IT ON AMAZON BY INCLUDING THE COSTS
THAT ARE NECESSARY..................................................................................................................6
CONCLUSION............................................................................................................................10
REFERENCES............................................................................................................................11

INTRODUCTION
The report prepared below explains importance of budget in financial management that can
be used for predicting futuristic profit and related costs. The budget can be prepared for
businesses, companies, individual persons and other financial institutions as well (Adeinat and
Abdulfatah, 2019). The reports and budgets are made at a point of time for carrying out related
plans efficiently and effectively within given time duration. The report explains monitoring of
funds and prepared reports in Amana ltd company. It also states the inclusion of different tools
and methods which are helpful in preparation of budgets for example original budgets, flexed
budgets and computation of variances as well. The calculation of variances discloses the
observed difference between actual cost and estimated expense in a company. The examination
of Amana’s productivity level and profitability of related firm for year 2020, when pandemic
strike the economy and affected the smooth running & functioning of business in environment.
The report also provides suggestions for better functioning of company and includes analysis for
providing related feedback for selecting one option as whether to start own store on online
platform or decide for tying up its operations with Amazon for sale related activities.
MAIN BODY
PART A
Plan monthly control budget reflecting original budget, flexed budget and variances.
Variance of the budget: A budget variance can be explained as an accounting instance
which can be helpful in finding out whether the actual expenses are less or more than the
projected or expected cost. A negative or unfavourable budget, reflects shortfall in case of
budgets being developed and prepared which might take place due to higher costs or missed
income. A favourable budget is when the expense is lesser when compared to cost expected. The
unfavourable variance explains emergence of higher costs than expected expenditures of budget.
The actual sales computed is less although when the revenue of budgeted amount is more than
the actual amount then the unfavourable balance in variances occur.
Monthly control report: It can be explained as a report that includes the data and
information relating to overhead costs, recorded fluctuations in expenses, payroll and utilities. It

is mandatory for businesses to recognise the areas of spending that reveals the spending pattern
of business persons. In every company, the budget is prepared and maintained by top level
supervisors and managers of the company. The monthly control report helps to evaluate
operating or working expense of a firm. It thus helps to recognize areas where the cost is needed
to increase or decrease for future functioning.
 Original budget: Such budget is prepared with proper understanding of data from
previous collected information. The budget is framed and expenditures are
measured with the help of evidence put at one place from previous year data. It
also assesses in computation of net profit generated in enterprise.
 Flexed budget: It is clear from the word itself as it recommends a budget that keeps
on getting modified and variation in changes is observed. Such budgets help to
record the alteration in profit earned by a business. This budget is useful for
comparing actual results with budgeted records (Booth, 2018). It is a beneficial
technique whereas there is various cost that are static in nature. In such cases, it
leads to certain issue in development of flexed budget.
AMANA LTD
Monthly Control Report
Particulars
Original
Budget
Flexed
Budget Variances Favourable /
Unfavourable
Revenue 2500000 1600000 -900000 Unfavourable
Less: Cost of Goods Sold 800000 840000 40000 Unfavourable
Raw Material 250000 280000 30000 Unfavourable
Direct labor 400000 440000 40000 Unfavourable
Overheads 150000 120000 -30000 Favourable
Gross Profit 1700000 760000 -940000 Unfavourable
Less: Non- operating / Fixed
Expenses
350000 305000 -45000 Favourable
Warehouse rental 200000 170000 -30000 Favourable
Insurance 100000 100000 0

Full time Warehouse Supervisor
salary
50000 35000 -15000 Unfavourable
Net Profit 1350000 455000 -895000 -66.30%
Analysis and interpretation of report on Amana’s results during the year 2020.
The performance of Amana has been predicted through above prepared control report.
There is definite step that must be followed. The explanation of such steps is as under:
 Regions where extra money is spent: From above carried examination, several
areas are assessed. The evaluation is done with the help of different budgets. By
following the same, various categories of excessive money spent is calculated.
 Tracing the costs: Every company has to incur costs for various reasons such as
selling and manufacturing of goods & products. There are respective tolls such as
process costing, job order costing that helps to calculate expense related to each
task taken out during production cycle (Eraslan Yalcin and Kutlu, 2019). The
examination of each good cost individually helps to reduce expenses that covers
higher cost.
 Identification of areas of excessive incurring of expenditures: There are different
mechanisms related to cost such as cost of labour, other direct expenses and cost of
materials (Haneem and et.al., 2019). The cost audit in company helps in
verification of accounts for keeping an eye on cost of business. It verifies the plans,
procedure and principles that are adapted by cost accountant for analysing the
expenses. It helps to take related effective and efficient measures for monitoring
unnecessary expenses of the company.
From the above analysis, it can be said that Amana Ltd. Must concentrate on
improving revenue, direct labour and raw material for improving the performance:
 The net profit of organisation reduced by 660.30%. Hence the business must
concentrate on minimizing the fixed and variable related cost in relation to
company. The financial health of business can also be improved and profitability of
company can be increased with the help of specified suggestions to Amana Ltd
(Helmold and Samara, 2019).

 There are several fixed overheads of company that cannot be ignored. Cost such as
insurance of fixed assets, employees, rent of the warehouse, salary of employee and
wealth supervisor as well. Fixed cost set by business is less when compared to
actual budgets.
 When compared to primary budgets, the revenue earned by business is very less. It
has declined by 55.29%. The gross value represents the income and activity related
cost of company. So, from starting the value and expense related to variables must
be monitored adequately.
 The switching of real budget is higher than the prepared flexed budget. It must
focus on improving the related selling expenses of enterprise. It will aid in
generating more profit for the company. In case of primary budgets, 100000 units
are being sold at a value of 25 but in case of real budgets the amount being sold and
cost related to sales is very low. The effect of reduced selling rate would prove to
be non-profitable for the firm (Long and Qu, 2018).
 The quantity of raw material and labour is much more than the developed actual
budget. Whereas in case of primary budget, it is valued at 10% of cost per product.
But in real, its price is 280000 that is approximately more than 10% that the
business would focus on reducing the valuation of raw materials that decreases
overall cost of business.
Explaining the suggestions provided to Amana’s CEO for improvement of certain areas.
There are various recommendations that can be provided to Amana Ltd. The brief
explanation is as under:
 The wages of labours must be based on the scale of production. The
employee must be distributed on certain basis. The per unit rate of worker
should be fixed so that additional expense related to wages should not take
place in company.
 For increasing the earning of business, it must keep its focus towards
improving the level of production in a business. The increased level of
production would help the company to reach economies of scale that explains
that the per unit cost of production involved is less. It thus helps to increase

the level of productivity. It is critical to understand the shortage observed in
case of production process (Panescu and Manta, 2018).
 In every business a issue in relation with scarce resources is observed the
reason being the sources available with each company is limited and many
possible alternatives. It is necessary for the business to utilise the resources in
best possible ways that results in sustainable and expected growth &
development of a industry.
PART B
Give certain explanation for the decision of Mr. Amana on selection of one option such as
whether he must plan to set up his own business with the development of website or
proceed to sell it on Amazon by including the costs that are necessary.
It is evident that the business of Amana is rising on a higher rate in different countries such
as US, UK and Europe. Amana is considerate for taking his business on online platform but he is
stuck confused between two situations which must be examined on time before reaching on any
conclusion or decision. They are explained as under:
 The one option that is available with Amana is to pay fees for achieving its set and
expected sales with tying its business with online sites such as Amazon. It would
help the business to make assured sale of 65000 units yearly and it might be
possible that the demand might vary. The total cost that would be associated in
such option is:
Expenditure incurred with Amazon site: £50,000
 Second option available with Amana is related to development of its own online
business website after closing its related business in Birmingham, Brighton and
Manchester, the revenue generated with the help of online site is recorded as 50%.
There is various cost related to such procedure that is of fixed nature such as salary
that is to be paid to programmer working in IT department, delivery cost charged
with relation to sale of good, upgradation cost associated towards website. Further
additional benefit that is provided is guarantee of sales on annual grounds for
100000 units. Hence, the total cost charged for it is stated as under that must be
covered by Mr. Amana:

Expense for setting up delivery network = £1,50,000
Cost for upgradation of existing website for managing large scale of sales =
£50,000
Salary of a full time IT programmer = £35,000 per annum
Total cost = 150000 + 50000 + 35000 = £ 2,35,000
Thus, it can be concluded that setting up an online website more cost when compared to
other available alternative and a huge difference of £1,85,000 is being recorded. It is evident as
Amazon is a well reputed name and has a competitive brand image in market and is known for
delivering best value towards the delivered product (Ryan and Kahan, 2018).
Hence, it would be beneficial for Mr. Amana to select online business. Consumer base that is
being set by the organisation is huge and it has already engaged many clients and developed
loyalty from their side as well. It would prove to be a better option in future situations because it
incurs less cost and expenses and generate more revenue & profits. Further through evaluation It
can be said that it would save time and reduce unwanted wastage and expenses too.
Recorded differences for planning an online store and carrying out related sales
through amazon are defined below:
Basis Amazon Locating online store
Management In such options the
management and
maintenance is managed
by functioning website on
its own. Mr. Amana is
needed to only pay fees
that is being set.
In such cases the work is
distributed between
owner and the manager
who manages and
maintain the website
related work and make
updates as required.
Cost If Mr. Amana thinks of
selling its related goods
and services that would
be associated with cost of
£50,000 only then it
would result to be the
minimum expense
If the decision to carry
out operations that relate
to sale on its own website
is facilitated then it would
be needing a larger
quantity of investment as
well. The expenses would

prevailing for developing
and setting up a website.
incur at a rate of £
2,35,000 which is higher
than other available
option.
Data The information that is
available would be more
reliable, accurate and in
huge quantity due to the
experience being earned
over a period of time. It
will hence, have more
related plans that can be
used for implementation
and attract a large base of
consumers from
competitive environment.
In such conditions it is
required to start from
beginning that demands
good availability of funds
and a well-planned
budget. It would require
more time for reaching its
equilibrium as well. It is
very difficult to engage
potential customers
present and linked to a
already existing company.
It would lead to situations
that won’t be easy to
handle and manage.
Reach As it is well known that
the website is in existence
from a longer period of
duration and has
competitive customer
base at current time thus
it would be impossible
for a new website to
challenge its working.
It would be more
challenging and would
incur more cost and
consume more time as
well. Sales in such
situations take time and
no guarantee can be
provided in short run.
From the above prepared table, the differences recorded can be explained as under:

If Mr. Amana selects Amazon then it is not necessary that it should get involved in management
and maintenance related operations & activities whereas in case of development of personal
website it would need a experienced level of manager (Zerva, Palou, Blasco and Donaire, 2019).
 It is observed that Mr. Amana website won’t be able to reach large customer base
as there won’t be any useful and relevant data or information available in relation
with its customers who prefer online shopping whereas in case of Amazon it has
already developed its customer base that would prove to be beneficial.
 It takes revenue, time and cost for engagement of consumers already present in
market with a newly prepared website when compared to already existing online
site such as Amazon.
Hence, from above asserted report it is recommended that Mr. Amana must select
Amazon as an option the reason stated is that is gives assured sales on annual basis and no
maintenance or management is required. And, the demand also fluctuates that would assess them
to generate more revenue and profits & also develop skills that would contribute to search more
innovative ways to increase the scale of income earned (Zhou and et.al., 2019).
.
CONCLUSION
From the above prepared report it can be concluded that for every business it is necessary
for business person to plan in advance whether it be budgets or policies that would be
implemented for long run of company. Budgets are helpful for smooth functioning of business in
long run and minimize the risk, cost and impact of unpredictable situations as well. It also helps
to improve efficiency and effectiveness of business in competitive business environment. It is
suggested that the management must not only rely on yearly budgets but prepare them according
to increasing and developing needs of market and organisation as well.

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