Budgeting and Forecasting for On The Beach Company

The present report has been prepared to evaluate the worthiness of business of On The Beach Company. As the company is operating under the apparel manufacturing industry of the Australian economy, the industry as well as economic factors have been analysed while determining whether it would be successful to carry the business in the upcoming years i.e. year 2019 and onwards. Further, as a part of business analysis, various budgetary plan has been prepared for 2019, keeping in mind the past trends and future anticipations. The contribution analysis has also been undertaken for all the business product units of the company and it has been found that the product segment Beach Bags is not going to generate profitability for the business and hence it must be shut down. The financial performance of the business is expected to be stable in the coming years as depicted by the budgets.

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Management Accounting

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Executive Summary:
The present report has been prepared to evaluate the worthiness of business of On The Beach
Company. As the company is operating under the apparel manufacturing industry of the
Australian economy, the industry as well as economic factors have been analysed while
determining whether it would be successful to carry the business in the upcoming years i.e.
year 2019 and onwards. Further, as a part of business analysis, various budgetary plan has
been prepared for 2019, keeping in mind the past trends and future anticipations. The
contribution analysis has also been undertaken for all the business product units of the
company and it has been found that the product segment Beach Bags is not going to generate
profitability for the business and hence it must be shut down. The financial performance of
the business is expected to be stable in the coming years as depicted by the budgets.

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Table of Contents
Executive Summary:..................................................................................................................1
Introduction:...............................................................................................................................4
Budgeting function:....................................................................................................................4
Overview of Budgeted Results of 2019.....................................................................................4
Contribution Analysis:...............................................................................................................5
Cash Position:.............................................................................................................................7
Analysis of current market conditions and future predictions...................................................8
Conclusion with Recommendations:..........................................................................................8
References:...............................................................................................................................11

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Introduction:
On the beach is the Australian firm that operates its business of manufacturing the swimwear
as well accessories for both male and females. The firm is mainly dealing in four products i.e.
one piece swimsuits for women, board shorts for men, beach towels and the beach bags. The
management of the firm is desired to set the targets and goals for the upcoming year i.e. 2019
and hence requires various types of budgets to be prepared. Budgeting practice will enable
the firm to determine the level of profitability that it can achieve in the subsequent years. All
such budgets will be prepared on the basis of past trends and future expectations from the
business as well as industry or market in which it operates.
Budgeting function:
Budgeting function is the main function of management accounting that facilitates financial
planning of the business. It allows the managers to estimate all the expenses and anticipation
of income that are going to occur in the coming period for which budgets are prepared (Hope,
Fraser, 2013). In the present case, On The Beach has just concluded its business for the year
2018 and on the basis of financial statements of the same year it requires the budget for the
next financial year.
Overview of Budgeted Results of 2019
The budgets have been prepared keeping in mind various factors that could affect the
performance of the business. The sales budget of the company is prepared on the assumption
that there will be lowest sales of the towel product of the company as only 1560 units are
expected to be sold. The product that is going to be sold in the highest proportion in year

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2019 is the one piece swim suits. It is expected that total 12500 one pieces in the coming
year. Also, the selling price of one piece is also highest and hence this product generates
maximum revenue for the business. Though the business has made the total sales of $
2,358,600, the total cash collection from the current year’s and previous year’s sales $
2,394,570. The difference in these figures is due to the credit sales policy. There are certain
sales of year 2018 which will be collected in 2019 and there are certain sales which are made
in year 2019 but the collection for such sales will be made in year 2020 as per the credit
policy of the company. As the company also manufactures the products that it deals in, it
requires the raw materials to produce such products. The total purchases of the raw material
is expected to be of amount $ 2,070,670. However, the total payment that will be made in
year 2019 for the purchases will be $ 983,019. The variation in the total purchases and
payment for the purchases is due to the credit purchases made by the company. The total
payment of purchases in 2019 includes the payment for purchases for year 2018 and it
excludes the purchases amount that is due for payment in the next year i.e. 2020.
Contribution Analysis:
The contribution analysis has also been undertaken to identify as to which product is most
profitable and which has the minimum contribution margin (Hansen, Mowen & Guan, 2007).
The following table shows the contribution margin of all the products dealt by On The Beach
Company.
One Piece
Swim
Suits
Beach
Shorts Towel Beach Bags
Selling Price Per Unit $ 100.00 $ 80.00 $ 50.00 $ 45.00

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Less: Variable Cost
Direct Materials $ 34.25 $ 34.25 $ 31.50 $ 26.50
Direct Labour $ 28.00 $ 21.00 $ 11.20 $ 16.80
Manufacturing Overhead
(Variable) $ 3.63 $ 2.72 $ 1.45 $ 2.18
Total $ 65.88 $ 57.97 $ 44.15 $ 45.48
Contribution per unit $ 34.12 $ 22.03 $ 5.85 -$ 0.48
Contribution Margin 34% 28% 12% -1%
ne ieceO P
Swim Suits each ShortsB owelsT each agsB B
-5%
0%
5%
10%
15%
20%
25%
30%
35%
40%
Contribution Analysis
Series1
Products
Contribution Margin %
Figure 1: Contribution Analysis of Products of Company
The above analysis has shown that the each product has different contribution margin due to
the difference in the selling price per unit of each product and different variable cost involved
in the production of each different product (Drury, 2013). The highest contribution generating
product is the one piece swim suits and this shows that it is the most profitable product of the
company. The beach bags segment of the company has the negative contribution margin
which shows that this product is not even able to recover its variable manufacturing costs and
hence the production of beach bags entails losses (Horngren et. al., 2002). Therefore, it is

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recommended that the company must not take up the manufacturing of beach bags and must
utilise the spare capacity in the production of one piece swimsuits as it is the most profitable
segment of the company and also it will generate more revenue for the business. The next
best product in terms of contribution margin is beach shorts as this product segment has the
capacity to generate next highest contribution margin i.e. 28%. If the company is resource
constraint, then it is recommended that it must rank all the products on the basis of their
contribution margin and on the basis of such ranking, the company must allocate the
resources such as machine hours, labour hours, raw materials etc. so as to generate maximum
profitability for the business (Quattrone, 2016).
The budgets of On the Beach Company shows that the company will be earning a gross profit
of around 48.65% of the total sales of the year and this show that company will have sound
profitability in terms gross profits. The operating expenses of the business are quite low in
amount and constitute only 4% of the total sales. Hence, the operating profit of the company
is 44.57% of the total sales. The budgeted income statement of the company shows that it will
have sound profitability position in the coming year (Zimmerman & Yahya-Zadeh, 2011).
Cash Position:
The cash position of the business is expected to increase in the forthcoming year in
comparison to year 2018. The closing cash balance of year 2018 was only $ 42,250 and the
closing cash balance as on 31st December, 2019 is expected to be $ 265,032. This shows that
the business will have sound liquidity position in the market. The company must divert the
excessive cash balance of the business to the areas which offers certain returns on such
surplus cash balance of the business (Alleyne & Weekes-Marshall, 2011).

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Analysis of current market conditions and future predictions
As Australia is facing the worst weather with extreme hotness in the atmosphere therefore
more and more people are visiting beaches frequently. This factor ultimately increases the
demands for the beach products such as beach wears and other accessories. Further, the
economic growth of the country is expected to be accelerated in the forthcoming years which
will result in increase in the consumer’s income and ultimately the consumer spending will be
increased (Trading Economics, 2018). These factors will result in the increased demand of
the products of the company. Further, the population of the country is also expected to
increase in the coming years. When the population density of the nation will increase, more
and more people will visit the beaches and this will enhance the ultimate demand of beach
apparels and other accessories (Statista, 2018). Small and local brands of the beach products
help to maintain the interests of the consumers in the beach apparels and accessories. The
cloth retail industry has faced various challenges in the last years such as increased rental
cost, intensified competition. The revenue of the said industry is assumed to grow at an
annual rate of 2.9% (CAGR 2018-2021) till the upcoming five years from 2019 (IBIS World,
2018). However, due to advancement in the technologies in Australian economy, the
businesses are going digital and therefore the competition in the areas of online business is
increasing rapidly.
Conclusion with Recommendations:
The business prospects for the beach apparels and accessories seem to be quite strong in the
Australian economy looking at the internal as well as external business environment of the
apparel industry. The financial as well as liquidity position of the company is going to be

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strengthened further when the overall economic growth of the country will be achieved.
Hence On the Beach must take further its business.

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References:
Alleyne, P. and Weekes-Marshall, D., 2011. An exploratory study of management accounting
practices in manufacturing companies in Barbados. International Journal of Business and
Social Science, 2(9).
DRURY, C.M., 2013. Management and cost accounting. Springer.
Hansen, D., Mowen, M. and Guan, L., 2007. Cost management: accounting and control.
Cengage Learning.
Hope, J. and Fraser, R., 2013. the Budget. Budgetierung im Umbruch?, 1, p.71.
Horngren, C.T., Bhimani, A., Datar, S.M., Foster, G. and Horngren, C.T., 2002. Management
and cost accounting. Harlow: Financial Times/Prentice Hall.
Horngren, C.T., Sundem, G.L., Stratton, W.O., Burgstahler, D. and Schatzberg, J.,
2002. Introduction to Management Accounting: Chapters 1-19. Prentice Hall.
IBIS World, 2018. Clothing Retailing - Australia Market Research Report. Available at: <
https://www.ibisworld.com.au/industry-trends/market-research-reports/retail-trade/other-
store-based-retailing/clothing-retailing.html> Accessed on: 27.08.2018.
Quattrone, P., 2016. Management accounting goes digital: Will the move make it
wiser?. Management Accounting Research, 31, pp.118-122.
Statista, 2018. Apparel Australia. Available at: <
https://www.statista.com/outlook/90000000/107/apparel/australia> Accessed on: 27.08.2018.
Trading Economics, 2018. Australia - Economic Forecasts - 2018-2020 Outlook. Available
at: < https://tradingeconomics.com/australia/forecast> Accessed on: 27.08.2018.

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Zimmerman, J.L. and Yahya-Zadeh, M., 2011. Accounting for decision making and
control. Issues in Accounting Education, 26(1), pp.258-259.