Management Accounting: Budget Preparation for Investment in New Manufacturing Facility

This report discusses the impact of investment made by the production manager of Jamini Pty Ltd in the new manufacturing capacity. The budget preparation for investing in new manufacturing facility involves production budget, sales budget, direct labour budget, purchase budget, direct material budget, manufacturing overhead budget, cash budget, cash collection from debtors account, cost of goods manufactured statement and budgetary income statement.

Running head: MANAGEMENT ACCOUNTING
Management accounting
University Name
Student Name
Authors’ Note

2MANAGEMENT ACCOUNTING
Answer to Part A:
Preparation of basic master budget:
Cost of Goods Manufactured
Statement:
Particulars July August September TOTAL
Direct Material Consumed $59,90,400 $94,46,400
$1,10,59,20
0 $2,64,96,000
Direct Labor Cost $31,20,000 $49,20,000 $57,60,000 $1,38,00,000
PRIME COST $91,10,400 $1,43,66,400
$1,68,19,20
0 $4,02,96,000
Manufacturing Overhead
$6,25,00,44
4 $6,84,15,111
$7,11,75,28
9
$20,20,90,84
4
COST OF PRODUCTION
$7,16,10,84
4 $8,27,81,511
$8,79,94,48
9
$24,23,86,84
4
Add: Adjustment for WIP $0 $0 $0 $0
COST OF GOODS MANUFACTURED
$7,16,10,84
4 $8,27,81,511
$8,79,94,48
9
$24,23,86,84
4
Budgeted Production Volume 20800 32800 38400
Cost of Goods Manufactured per unit $3,442.83 $2,523.83 $2,291.52
Closing Stock of Finished Goods 6400 7200 9600
Value of Finished Goods
$2,20,34,10
6 $1,81,71,551
$2,19,98,62
2
Budgetary Income Statement:
Particulars Amount Amount
Sales Revenue
$41,47,20,00
0
Cost of Goods Manufactured
$24,23,86,84
4
Add: Opening Finished Goods
Inventory
$10,08,64,00
0
Cost of Goods Available for Sale
$34,32,50,84
4
Less: Closing Finished Goods Inventory $2,19,98,622
Cost of Goods Sold
-
$32,12,52,22
2

3MANAGEMENT ACCOUNTING
GROSS PROFIT $9,34,67,778
Selling & Administration Expenses -$9,42,74,300
Bad Debts -$68,13,700
NET OPERATING INCOME -$76,20,222
Subsidiary budget:
Sales Budget:
Particulars July August September October
Sales Volume in units 40000 32000 36000 48000
Selling Price per unit $3,840.00 $3,840.00 $3,840.00 $3,840.00
Budgeted Sales Revenue
$15,36,00,00
0
$12,28,80,00
0
$13,82,40,00
0
$18,43,20,00
0
Production Budget:
Particulars July August September October
Sales Volume in units 40000 32000 36000 48000
Add: Closing Inventory of
Finished Goods 6400 7200 9600
46400 39200 45600
Less: Opening Inventory of
Finished Goods 25600 6400 7200
Budgeted Production Volume 20800 32800 38400
Direct Labor Budget:
Quarters
Particulars July August
Septemb
er
Budgeted Production Volume 20800 32800 38400
Labor Hours required per unit 5 5 5
Total Direct Labor Hour
Required 104000 164000 192000
Direct Labor Cost per Hour $30.00 $30.00 $30.00

4MANAGEMENT ACCOUNTING
Budgeted Direct Labor Cost
$31,20,00
0
$49,20,00
0
$57,60,00
0
Purchase Budget:
Particulars July August September October
Budgeted Sales Volume 40000 32000 36000 48000
Budgeted Production Volume 20800 32800 38400
Gears required per unit 2 2 2
Total Gears Required 41600 65600 76800
Add: Closing Inventory of Gears 38400 43200 57600
80000 108800 134400
Less: Opening Inventory of Gears 48000 38400 43200
Budgeted Purchase Volume (in units) 32000 70400 91200
Gear Cost per unit $48.00 $48.00 $48.00
Total Cost of Gears
$15,36,00
0
$33,79,20
0 $43,77,600
Spindles required per unit 3 3 3 3
Total Lens Material required 62400 98400 115200
Add: Closing Inventory of Spindles 57600 64800 86400
120000 163200 201600
Less: Opening Inventory of Spindles 72000 57600 64800
Budgeted Purchase Volume (in units) 48000 105600 136800
Spindle Cost per unit $64.00 $64.00 $64.00
Total Lens Material Cost
$39,93,60
0
$62,97,60
0 $73,72,800
Budgeted Direct Material Purchase
$55,29,60
0
$96,76,80
0
$1,17,50,40
0
Direct Material Budget:
Particulars July August September
Total Gears required for Production 41600 65600 76800
Gear Cost per unit $48.00 $48.00 $48.00
Total Gear Cost
$19,96,80
0
$31,48,80
0 $36,86,400
Total Spindles required for Production 62400 98400 115200
Spindle Cost per unit $64.00 $64.00 $64.00

5MANAGEMENT ACCOUNTING
Total Spindle Cost
$39,93,60
0
$62,97,60
0 $73,72,800
Budgeted Direct Material Cost
$59,90,40
0
$94,46,40
0
$1,10,59,20
0
Manufacturing Overhead Budget:
Particulars July August September
Direct Labour Hour 104000 164000 192000
Indirect Labor Cost per DLH $33.60 $33.60 $33.60
Total Indirect Labor Cost $34,94,400 $55,10,400 $64,51,200
Power Cost per DLH $3.20 $3.20 $3.20
Total Power Cost $3,32,800 $5,24,800 $6,14,400
Variable Maintenance Cost per unit $37.78 $37.78 $37.78
Variable Maintenance Cost $39,28,889 $61,95,556 $72,53,333
Fixed Maintenance
$1,81,95,55
6
$1,81,95,55
6
$1,81,95,55
6
Total Maintenance Costs
$2,21,24,44
4
$2,43,91,11
1
$2,54,48,88
9
Other Variable Cost per unit $24 $24 $24
Other Variable Cost $24,96,000 $39,36,000 $46,08,000
Other Fixed Cost $80,00,000 $80,00,000 $80,00,000
Other Manufacturing Costs
$1,04,96,00
0
$1,19,36,00
0
$1,26,08,00
0
Supervision
$2,24,00,00
0
$2,24,00,00
0
$2,24,00,00
0
Depreciation $20,00,000 $20,00,000 $20,00,000
Rates & Utilities $16,52,800 $16,52,800 $16,52,800
Budgeted Manufacturing Overhead
$6,25,00,44
4
$6,84,15,11
1
$7,11,75,28
9
Cash Collection from Debtors:
Particulars July August September
Total Sales Revenue $15,36,00,000 $12,28,80,000 $13,82,40,000

6MANAGEMENT ACCOUNTING
Collection in the month of Sales $9,21,60,000 $7,37,28,000 $8,29,44,000
Collection in the following month of
Sales $6,29,20,900 $5,83,68,000 $4,66,94,400
Total Collection from Debtors $15,50,80,900 $13,20,96,000 $12,96,38,400
Cash Budget:
Particulars July August September TOTAL
Cash Flow from Operational Activities:
Collection from Debtors $15,50,80,900 $13,20,96,000 $12,96,38,400 $41,68,15,300
Payment to Suppliers -$55,29,600 -$96,76,800 -$1,17,50,400 -$2,69,56,800
Direct Labour Cost Paid -$31,20,000 -$49,20,000 -$57,60,000 -$1,38,00,000
Indirect Labor Cost -$34,94,400 -$55,10,400 -$64,51,200 -$1,54,56,000
Power Cost -$3,32,800 -$5,24,800 -$6,14,400 -$14,72,000
Maintenance Charges Paid -$2,21,24,444 -$2,43,91,111 -$2,54,48,889 -$7,19,64,444
Other Manufacturing Cost -$1,04,96,000 -$1,19,36,000 -$1,26,08,000 -$3,50,40,000
Supervision -$2,24,00,000 -$2,24,00,000 -$2,24,00,000 -$6,72,00,000
Rates & Utilities -$16,52,800 -$16,52,800 -$16,52,800 -$49,58,400
Selling & Administration Expenses -$3,61,55,900 -$2,68,80,000 -$3,12,38,400 -$9,42,74,300
Net Cash Flow from Operating Activities $4,97,74,956 $2,42,04,089 $1,17,14,311 $8,56,93,356
Cash Flow from Investing Activities:
Purchase of Equipment -$2,08,00,000 -$2,08,00,000
Net Cash Flow from Investing Activities $0 $0 -$2,08,00,000 -$2,08,00,000
Cash Flow from Financing Activities:
Dividend Paid -$7,08,000 -$7,08,000
Loan from Bank $0
Repayment of Loan $0 $0 $0
Interest Paid $0 $0 $0
Net Cash Flow from Financing Activities $0 $0 -$7,08,000 -$7,08,000
Net Increase/(Decrease) in Cash Flows $4,97,74,956 $2,42,04,089 -$97,93,689 $6,41,85,356
Add: Opening Cash Balance $20,00,000 $5,17,74,956 $7,59,79,044 $20,00,000
Closing Cash Balance $5,17,74,956 $7,59,79,044 $6,61,85,356 $6,61,85,356
Answer to Part B:
The report is prepared for discussing the impact of investment made by the production
manager of Jamini Pty Ltd in the new manufacturing capacity. All the expenses relating to
new investment are done by using a flexible budgeting formula. The budget preparation for
investing in new manufacturing facility involves production budget, sales budget, direct

7MANAGEMENT ACCOUNTING
labour budget, purchase budget, direct material budget, manufacturing overhead budget, cash
budget, cash collection from debtors account, cost of goods manufactured statement and
budgetary income statement (Benade et al. 2017).
Any amount of cash shortage developed in the investment of project will be covered
by borrowing that is repaid with the interest is repaid. While preparing the budget, sales
manager of company is also considering the possible outcome of the negotiation related to
tariff with the production manager. It is predicted that making investment in new
manufacturing facility will enable the company to manufacture two major parts in house. The
assembly process of manufacturing facility is somewhat labour intensive in the current
scenario. Investment in new manufacturing facility is expected to automate the assembly
process (Bromwich and Scapens 2016). Moreover, it is indicated by the investment made in
new facility that there will be reduction in direct labour and direct material costs. However,
due to increased investment made in production capacity, there will be increment in fixed
manufacturing overhead.
It can be seen that investment in new manufacturing capacity initially decreases the
budgeted sales revenue from $ 153600000 to $ 13824000 and eventually it increases to $
184320000. The budgeted production volume is increasing continuously from 20800 units to
38400 units. There is increase in budgeted labour cost from $ 3120000 to $ 5760000.
Moreover, the budgeted direct material purchase is also increasing to $ 11750400 as against $
5529600. The cost of budgeted direct material is increasing from $ 5990400 to $ 11059200.
There is also increase in manufacturing overhead to $ 71175289 from $ 62500444.
With the implementation of budget by investing in new manufacturing facility, total
amount collected from debtors is decreasing from $ 155080900 to $ 129638400. When
looking at cash budget, it can be seen that there is considerable increase in net cash flow from

8MANAGEMENT ACCOUNTING
operating activities from $ 49774956 to $ 85693356 respectively. However, there has not
been wide fluctuation in closing balance of cash with balance standing at $ 51774956 to $
75979044 and further to $ 66185536 respectively. In addition to this, with the
implementation of new manufacturing facility, there is considerable increase in cost of goods
manufactured from $ 71610844 in the initial month to $ 242386844 in the later month.
However, there is decline in cost of goods manufactured per unit from 3442.83 to $ 2291.52.
The net operating figure generated from preparation of budgetary income statement is
negative and the value stood at -$ 7620222. Since, the net operating income generated by the
new manufacturing facility is negative, it is concluded that it is not feasible to implement new
facility and should not be opted for.
Answer to Part C:
Participative approach is a process of budgeting where people impacted by budget are
actively involved in budget creation. Budgets created under this bottom up approach are more
achievable and they are better for morale and employees contribute to creation of budget by
using great efforts (Shields 2015). High level of strategic considerations is not taken into
account for preparation of budget and therefore, it is required by management to provide
employees with necessary guidelines concerning overall preparation of budget. Participatory
budget is considered as self imposed and a team based management philosophy are fostered
that helps in effective functioning of organization (Van der 2016). Since the budget
preparation is done on participative basis, this leads to involvement of many employees that
is middle, lower and senior level management. Such type of budget helps in increasing the
commitment and understanding and better process of communication. Therefore, there will
be increased participation on part of employees and increased contribution towards
development of budget. In addition to this, there will be more accurate preparation of budget

9MANAGEMENT ACCOUNTING
as budget is prepared by those having best knowledge of their specific areas of operation
(Suomala et al. 2014).
Imposed budget on other hand is considered as non participative or authoritative
budget as it does not allow for the ultimate holder of budget in participating the process of
budgeting. This type of budget is imposed by upper level of management by establishing the
parameters according to which budget is established. Lowe level employees do not contribute
much and have little input in setting overall organizational goals. The reason is attributable to
the fact that they are entitled to perform only the budgeted based calculations that are
consistent with the directives (Lavia López and Hiebl 2014). It can be seen that the budget
prepared by Jamini Pty Limited uses a flexible method, but the outcome of budget has
negative impact on net operating income of company. Such outcome is not favourable and it
will not be taken into consideration by production and sales manager. Participative budget on
other hand plays an influential role in facilitating communication by determining the need of
management for purpose of decision making and cost control (Sintomer et al. 2016).
Moreover, they help in addressing the behavioural needs of company as it makes extensive
use of human resources. Since preparation of budget involves coordination of non financial
and financial planning for satisfying objectives and goals of organization, effective budget
reparation should receive contribution or input from all sources.
Therefore, if the budget would be prepared by involving all lower level employees
who have in depth knowledge about the manufacturing facility would have generated
favourable outcome. This is so because they would have considered all the parameters
impacting the operation and preparation of budget.

10MANAGEMENT ACCOUNTING
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