Financial Budgeting and Analysis - Desklib

This article discusses financial budgeting and analysis, including creating a sales budget, break-even analysis, marginal costing, and the role of budgeting in supporting management and organizational activity. It also includes a projected budget forecast and variance example. The content is relevant for finance and accounting courses in colleges and universities.

Financial Budgeting and
Analysis

Table of Contents
MAIN BODY...................................................................................................................................3
Task 1: Creating a Sales Budget......................................................................................................3
Part C...........................................................................................................................................3
Part D...........................................................................................................................................3
Task 2:..............................................................................................................................................4
Part A...........................................................................................................................................4
Part B...........................................................................................................................................5
Marginal Cost Calculations..........................................................................................................6
TASK 3: The Role of Budgeting.....................................................................................................7
Role of budgeting to support management and organizational activity......................................7
Task 4: Projected Budget Forecast & Variance...............................................................................8
Part C.........................................................................................................................................10
REFERENCES................................................................................................................................1

MAIN BODY
Task 1: Creating a Sales Budget
Part C
Analysing the problems faced in preparation of budget
Budget preparation requires adequate amount of data to estimate the most accurate in
case of absence of data estimation preparation of budgets become difficult. As in the given
situation of Ztatic Trading Ltd the estimate regarding the ending inventory in each case is not
given this leads to problem in creation of budget. Further, budgets prepared needs to be revised
again and again to evolve them with the changing business environment flowing the prepared
budget without considering the changes in the business environment leads to the rigidity in
decision-making. The preparation of budget is a time-consuming process involving lots of
knowledge (Khan, 2019). Managers have the tendency to prepare budgets based on deliberately
low revenue estimates and high estimated expenses to achieve favourable variances. This gaming
with the system by the managers gives rise to serious problems in the future by encouraging
them to indulge in unethical behaviour increasing the frauds in the company (Lu, Lai and Tse,
2018.). Allocation of expenses to various departments while preparation of budget is difficult and
can cause conflicts within the different departments in the company if the expense allocation
technique is not find appropriate by the departmental managers.
Part D
Comparing and Contrasting the possible changes in costs and the impact on the business’
budget
Budget shows the estimated values that the management expects to see in the future but
the actual figures always varies from the budgeted ones. Change in the budgeted figures happens
due to changes in the fixed and variable costs (Salim and Negara, 2018). The changes in the fixed
and variable overheads results in generation of actual profits different from the estimated profit
reflected by the budget. For example, the budget show fixed factory rent as £200,000 per annum.
But the actual rent increased by the 5% during the year. Thus, the profit in budget will differ by
£10,000 then the actual profit. The actual profit for the year will be less by £10,000. Similarly, if
the budgeted advertising expenses were £120000 for the year. But the firm decides to spend
£20,000 more on social media marketing, the result will reflect in the profit amount being less by

£20,000. Also, the spending will result in high sales turnover increasing the actual profit amount
in comparison to the budgeted.
Task 2:
Break even Analysis
Selling Price
£275
Units FC VC TC TR P/L
0 122,410 0 122,410 0 -122,410.00
50 122,410 3,250 125,660 13,750 -111,910.00
100 122,410 6,500 128,910 27,500 -101,410.00
150 122,410 9,750 132,160 41,250 -90,910.00
200 122,410 13,000 135,410 55,000 -80,410.00
250 122,410 16,250 138,660 68,750 -69,910.00
300 122,410 19,500 141,910 82,500 -59,410.00
350 122,410 22,750 145,160 96,250 -48,910.00
400 122,410 26,000 148,410 110,000 -38,410.00
450 122,410 29,250 151,660 123,750 -27,910.00
500 122,410 32,500 154,910 137,500 -17,410.00
550 122,410 35,750 158,160 151,250 -6,910.00
600 122,410 39,000 161,410 165,000 3,590.00
650 122,410 42,250 164,660 178,750 14,090.00
700 122,410 45,500 167,910 192,500 24,590.00
Marginal Cost
Part A
Analysing the use of marginal costinHayes, A. S., 2019g as a management technique

Marginal cost is the additional cost incurred when the firm decides to produce an
additional unit of product. Marginal cost is the system of accounting that charges the variable
cost per unit and write off the total fixed costs against the total contribution value. The study of
marginal cost is called marginal costing. Fixed costs are differentiated from the variable costs
through marginal costing system. Marginal costing is one of the most valuable technique of
management accounting (Hayes, 2019). The relationship that is established between cost, volume
and profit through marginal costing technique of management serves as solution to various
problems. Controlling the cost is the task that is done by marginal costing. The system bifurcates
the costs into two fixed and variable. Fixed costs are the non-controllable costs and the variable
costs are the controllable costs. Production department controls the variable costs and fixed costs
are controlled by the management. Setting up the optimal selling price in an important
management function that uses marginal costing as a management technique. The marginal cost
for producing a unit is the minimum cost that needs to be covered any per unit selling price
below the marginal cost will result in generation of loss for the company. A firm produces and
sells only that much number of products that gives the largest contribution to the firm. This
technique shows the contribution to fixed costs and profits by each department. The department
contributing least to the company’s profit and fixed cost can be thought of closing or
discontinued by the company. Profit planning is planning for the operations in the future
marginal costing is used to plan in accordance with the objective to attain the maximum amount
of profit. Marginal costing enables the firm to decide whether to produce certain product within
the firm or purchase from the market based on the calculation of most profitable alternative, that
contributes more to the profit. The purchasers purchasing in bulk quantities wishes to get the
products at lower price than the actual price prevailing in the market, marginal cost technique
helps the firm to decide whether to sell the products at lower than the market price or not.
Marginal costing technique facilitates the decision-making. The prices are fixed equal to the
marginal cost plus the amount as per the demand and supply forces.
Part B
Circumstances when marginal costing is used
Management uses marginal costing when additional cost that will be incurred by the firm
by producing an extra unit of product is to be determined. The impact of variable cost on the
output is ascertained. Management uses the technique of marginal costing when costs are needed

to be classified as fixed or variable costs. The costing method is used to determine the value of
stock of work in progress and the goods finished. For selling price determination contribution is
added to marginal cost. Using the marginal costing the profits are calculated as sales less the sum
of marginal and fixed cost incurred. In the circumstance of calculation of Break Even point
determination marginal costing plays an important role (Wolak, 2021). The contribution of each
department in the overall profits of the company needs to be determined to make the decision of
their continuation or discontinuation. The contribution by each department is based on marginal
costing technique.
Marginal Cost Calculations
1.
Number of units sold Price per unit Revenue
20 £10 £200
21 £9.7 £205
Marginal cost of producing
21st unit
Formula = Change in
Revenue / Change in Unit
(£205 - £200) / (21 – 20)
= £5
2.
Number of produced Price per unit Revenue
15 £10 £150
16 £9.50 £152
Marginal cost of producing
16th unit
Formula = Change in
Revenue / Change in Unit
(£152 - £150) / (16 – 15)
= £2

TASK 3: The Role of Budgeting
Role of budgeting to support management and organizational activity
Budgeting refers to the process of creating a proper plan in order to spend money in the
organization. By creating the budget it helps the organization to determine in advance that they
are available with the enough amount in order to do expenses in present and future. This is
basically done by balancing the expenses with the income of the organization. It is important for
the company to have the strategic planning that helps them to create the budget and have proper
organizational activity (Scott and Enu-Kwesi, 2018). By having the good budgeting system it
helps the Ztatic Trading Ltd. To reach its strategic goals by having the proper management of
planning and control its activities such as revenue, financing options and expenses. Budget used
to play and important role in the financial implications of the plans and helps the company to
measure, view and control its results with the made plan. By having the good plan it ensures the
owner of the business to focus on the cash flows, reducing costs, improving the profits and have
good return on investments. This used to help the company by having he proper planning and
controlling of the finances of the organization.
Budgeting helps the managers to have communication with the employees regarding the
plan made which used to have proper coordination in the entire company. The budget made is
basically compared with the actual results which helps the company to know about the areas they
are lacking. The main aim of making the budget is to have the proper management plan and have
good organizational activities. This used to provide the process of controlling the income and
have optimum utilization of resources which makes them to have less expenditure. By having the
proper planning of the expenditure it provides the company to evaluate its policies and attain the
organizational goals (Ostaev and et.al., 2019). The cited organization must have the proper
budgeting of the expenses which makes them to have good productivity and profitability in the
market. The budgets are basically made in advance in order to help the organization to have
proper flow of money and makes the employees to have proper coordination in the organization.
These budgets made by the cited organization are compared with the actual results in order to
check the employee and organizational performance. This used to have proper management in
the cited organization and makes the organization to achieve the profitability in the market by
having more sales. By tis it helps the organization to have the cost reduction of its goods by
having the optimum utilization of the resources. This is the main base for the company to get

success and attain the good profits in the market. By having the proper planning of the budget it
helps the organization to know about amount they are needed in order to achieve the profits. The
cited organization must have the proper budgeting which helps them to focus on the cash flows,
reducing costs, improving the profits, etc.
Task 4: Projected Budget Forecast & Variance
JAN (£) FEB (£) MAR
(£) APR (£) MAY
(£) JUN (£) JUL (£) TOTAL
(£)
OPENING
BALANCE 40,000 2,180 2,710 4,740 -4,730 1,300 5,330 51,530
INCOME /
REVENUE
12,000 16,000 20,000 25,000 24,000 26,000
TOTAL INCOME
/ REVENUE 0 12,000 16,000 20,000 25,000 24,000 26,000 1,23,000
0
EXPENDITURE /
PAYMENTS 0
Acquisition of new
lease for shop 15,000 15,000
Equpment and
Fixtures & fittings 12,000 12,000
Decorating the
outlet expenses 10,000 10,000
Purchases 3,000 5,500 7,000 9,000 10,000 10,500 45,000
Salaries/Wages 7,000 7,000 7,000 7,000 7,000 7,000 42,000
Rent 14,000 14,000 28,000

Lighting & Heating 600 600 600 600 600 600 600 4,200
Telephone Costs 220 220 220 220 220 220 220 1,540
Advertising
Expenses 1,500 1,500 1,500 4,500
Insurance &
Miscellaneous 650 650 650 650 650 650 3,900
TOTAL
EXPENDITURE /
PAYMENTS
37,820 11,470 13,970 29,470 18,970 19,970 34,470 1,66,140
NET MONTHLY
CASH FLOW -37,820 530 2,030 -9,470 6,030 4,030 -8,470 -43,140
CLOSING
BALANCE 2,180 2,710 4,740 -4,730 1,300 5,330 -3,140 8,390
Task (b) Calcula
te the
closing
balance
s for
April,
May,
June &
July if a
positive
varianc
e of 5%
occurre
d in
problem
s faced
in
budget
preparati
on

sales
revenue
for each
of these
months.
CLOSING
BALANCE -3,730 2,550 6,530 -1,840
Part C
As per the Cash Flow Budget of the B&D Clothing Ltd. the company has the negative net
closing balance for the month of January because the fixed expenses are incurred but the sales
volume is zero. The closing balance is positive as the opening balance is more than the total
expenses are the month. The sales start in the February total revenue is the sum total of opening
cash balance and revenue generated through sales. Closing balance is positive for the months of
Feb, March, May, June, and July. The net cash flow is negative for rest of the months because of
total revenue being less than the total expenditure. With the increase in 5% in the sales revenue
for the months from April to July the closing balance will vary positively. As the 5% increase in
the sales is 1000, 1250, 1200, 1300 the closing balance will increase by these values.

REFERENCES
Books and Journals
Hayes, A. S., 2019. Bitcoin price and its marginal cost of production: support for a fundamental
value. Applied Economics Letters. 26(7). pp.554-560.
Khan, A., 2019. Fundamentals of Public Budgeting and Finance. Springer Nature.
Lu, W., Lai, C. C. and Tse, T., 2018. BIM and Big Data for Construction Cost Management.
Routledge.
Ostaev, G. Y. and et.al., 2019. Integrated budgeting at agricultural enterprises: functionality and
management decision making. Amazonia Investiga. 8(22). pp.593-601.
Salim, W. and Negara, S.D., 2018. Infrastructure development under the Jokowi administration:
Progress, challenges and policies. Journal of Southeast Asian Economies. 35(3). pp.386-
401.
Scott, G. K. and Enu-Kwesi, F., 2018. Role of budgeting practices in service delivery in the
public sector: A study of district assemblies in Ghana. Hum Resour Manag Res. 8.
pp.23-33.
Wolak, F. A., 2021. Market design in an intermittent renewable future: cost recovery with zero-
marginal-cost resources. IEEE Power and Energy Magazine. 19(1). pp.29-40.
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