Capital Budgeting Techniques - Report

Added on -2020-02-05

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MANAGEMENT ACCOUNTING
Table of ContentsINTRODUCTION......................................................................................................................1TASK 1 .....................................................................................................................................1TASK 2......................................................................................................................................2a) Preparation of cash budget................................................................................................2b) Preparation of budgeted income statements......................................................................3c) Budgeted statement of financial position..........................................................................4TASK 3......................................................................................................................................5CONCLUSION..........................................................................................................................8REFERENCES.........................................................................................................................10
INTRODUCTIONThere is a significant difference between financial and management accounting.Financial accounting is the process of recording all the business transactions in an appropriatemanner. However, management accounting is concerned with the process of using financialinformation by the managers so that they can perform efficient planning and control businessoperations. The present project report will discuss the use of budgeted statement and variouscapital budgeting techniques for the success of hotel business. TASK 1 Budget: It is a financial tool that summarizes all the potential business incomes andspending. In every corporation, managers analyse future operating activities and estimaterevenues and payments for constructing budget. In other words, it is the process of preparingmonetary plan that define business objectives which all the divisions or departments arerequired to achieve (Warren, 2015). Moreover, it helps to determine variances throughcomparing actual and budgeted targets and give advice to take corrective actions to removenegative variances. Each and every firm whether small or large scale is required to draftbudget on the continuous basis. Need for budget preparation arises for maximizing revenues,controlling spending and maintaining sufficient cash available to support daily functions(Turner, 2013). Moreover, it assists the managers to optimally utilize of resources andaccomplish set business targets in an effective manner. Process of budget preparation: Budget can be prepared easily in an ongoingcorporation while it will be very difficult task to construct budget for a new organization. Thereason behind this is that, the historical budget provides an idea about future operations aswithout this it will not be possible to prepare budget for the new hotel.. Forecasting is theinitial requirement for budget preparation (Brooks and Mukherjee, 2013). Firm managershave to forecast cash revenues and spending that will incur in the future period. As per thescenario, hotel managers will estimate sales through determining room occupancy level andmultiply it with the total room rent (Sonawane, 2014). However, payments can be estimatedthrough determining payments for purchasing food, drink and laundry material. Moreover,they have to assess labour and overhead payments which will be incurred in the upcomingperiod. Thereafter, net cash balance will be determined through identifying differencebetween actual and budgeted yields. It may be of two kinds, which are surplus and deficit.Surplus indicates that potential earnings will be higher than payments however; deficitbalance implies that payments will be higher than hotel's operational incomes (Turner, 2016).1 | P a g e
It is the liability of the hotel manager to ensure optimum utilization of business resources soas to avail adequate surplus balance. Otherwise, hotel cannot survive effectively in themarket. Moreover, it assist the managers to ensure hazard free operations and smoothbusiness functioning. After this, , cash balance at the end of budgeting period can bedetermined through adding opening cash balance to the net cash flow of the period (Stephen,Randolph and Bradford, 2016). Limitations: One of the most important limitations is that it is based on the estimationwhich may be inaccurate with reference to future period. Changing the market conditionsmay change the predictions and it might be possible that actual cost will be significantlydifferent from set budgeted targets. Moreover, in case of new hotel, zero base budgetingtechnique will be used for drafting budget. Henceforth, its limitation is that it takes lot of timeand money of the organization (de Souza and Lunkes, 2015). Another limitation is that, afterpreparing budget, all the business strategies and decisions of the senior management focus onaccomplishing their budgeted targets. No changes will be made by the mangers if the marketconditions change.. Conflict of interest may arise regarding methods used by the seniormanagement to allocate resources in different divisions or departments (Chand, n.d.).Another limitation is that it is a quantitative approach which focuses on maximizingprofitability henceforth, excludes all the qualitative aspects. For instance, it eliminatesvarious stakeholders’ interest such as customer demand, product quality, and shareholderswealth and employee satisfaction. TASK 2a) Preparation of cash budgetIt is a summarized statement of future earnings and payments (Noordzy andWhitfield, 2015). As per the scenario, cash budget has been prepared here for six monthsperiod ending on 30th September, 2016. cash budget for the time period of six months Particular AprilMay June July August Sept.Total Oct.Cash sales 121501620028350364503645028350157950Credit sales 283503780066150850508505030240066150Total currentyear sales 40500540009450012150012150094500526500Total cashrevenues 1215044550661501026001215001134004603502 | P a g e

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