1 PERFORMANCE MANAGEMENT AND CONTROL Table of Contents Introduction................................................................................................................................2 Discussion..................................................................................................................................2 Sale forecast and Master Budget............................................................................................3 Production Budget..................................................................................................................4 Direct Material Budget...........................................................................................................4 Direct Labour Budget.............................................................................................................7 Manufacturing Overhead.......................................................................................................7 Selling and Administration Budget........................................................................................9 Budgeted Income Statement................................................................................................10 Conclusion................................................................................................................................10 Reference..................................................................................................................................12
2 PERFORMANCE MANAGEMENT AND CONTROL Introduction Master budget is a budget that is prepared based in the historical data of the existing company, or an estimation or forecast for new companies (Bužinskienė). The vital component of a master budget is the accounting data that provides information of the past, which enables to build a budget that will incorporate attainable goals. The components of the master budget are sales budget, production budget, direct material budget, direct labour budget, manufacturing overhead budget, selling and administration budget, finished goods budget, cash budget, budgeted income statement and budgeted balance sheet. Discussion The most common name that comes to our mouth is molasses as most of us are fond of sweet. Cookies are something that remains favorite for all irrespective of the age. Hence molasses cookies would be something that will cater the needs and will be demanded, if the price are kept competitive with other cookies in the industry. Apart from being healthy, it will be the ultimate choice for the children as it prevents obesity.
3 PERFORMANCE MANAGEMENT AND CONTROL Sale forecast and Master Budget Creating a sales budget is vital to improve the cash flow of the company. By creating a sales budget, the company incorporates, attainable objective that includes required or estimated profit, and the total cost that the company estimates to incur. The sales budget of the company is as provided below: Revenue Budget Selling Price Unit Sold Total Revenue Sale s$5080,000 $ 40,00,000 From the revenue budget, the total revenue has been estimated, which is calculated using the selling price per unit and the total unit expected to be sold.
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4 PERFORMANCE MANAGEMENT AND CONTROL Production Budget Once the sales budget is prepared, the production budget is the next budget that needs to be worked on. The production budget provides necessary information related to the preparation of the direct material, direct material and manufacturing overhead. Here is the production budget and the details of the material, labour and overheads: Production Budget (Units) Sales80,000 EndingInventory2,200 Total82,200 LessBeginningInventory2,000 Production80,200 The above production budget is prepared by including the closing stock of inventory and excluding the inventory already produced in the previous year. Direct Material Budget The direct material budget includes the number and type of materials required to prepare molasses cookie. It includes Sugarcane, chocolate chips, flour, baking soda, salt, salt, cinnamon, cloves and ginger (Filipčev et al., 2016). Since the company has been operating for some years; therefore, it has opening inventory that can also be used in the production process. The basic information related to the direct materials requirement and price are:
5 PERFORMANCE MANAGEMENT AND CONTROL Direct Materials Usage and Purchases Budget Materials usedUnitsPriceCost Sugarcan e 80,20 0 $ 3 $ 2,40,600 Chocolate chips, flour and baking soda 80,20 0 $ 5 $ 4,01,000 Salt, cinnamon , cloves and ginger 80,20 0 $ 2 $ 1,60,400 Total Materials Used $ 8,02,000 Add Target Ending inventory
6 PERFORMANCE MANAGEMENT AND CONTROL Sugarcan e $ 7,000 Chocolate chips, flour and baking soda $ 1,200 Salt, cinnamon , cloves and ginger $ 700 Total Target Ending Inventory $ 8,900 $ 8,900 Less Beginning Inventory Sugarcan e $ 3,000 Chocolate chips, flour and baking soda $ 1,000 Salt, cinnamon , cloves and ginger $ 500 Total Beginning Inventory $ 4,500 $ 4,500 TOTAL PURCHASES $ 8,06,400
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7 PERFORMANCE MANAGEMENT AND CONTROL The direct material usage and purchase budget shows the total purchase the company has done after considering the amount of inventory that has been kept in the beginning and at the end of the financial year. Such information can be used to estimate the requirement for labor and is a useful information in the next part of the budget i.e. direct labour budget. Direct Labour Budget After preparing the sales budget and accordingly estimating the production, the next determination is related to the requirement of the labour. Direct labour includes all the employees actually required to manufacture the molasses cookie on the production floor. The cost per hour includes the wages, payroll taxes and fringe benefits. Hence the total cost has been calculated by multiplying the labour cost per hour with the number of hours worked (Ehrenberg & Smith, 2016). Direct Labour Budget Units Hours Per UnitTotalHours Rateper HourLabourCost Assembl y80,2000.540,100 $ 15 $ 6,01,500 Packing80,2000.18,020 $ 10 $ 80,200 Total0.648,120 $ 6,81,700 Manufacturing Overhead The manufacturing overhead includes all the cost of production incurred other than buying direct raw material and direct labour, that includes some variable and fixed component (Gersil & Kayal, 2016). The fixed manufacturing overhead of the company consist of depreciation, insurance, taxes and miscellaneous expenses. On the other side, variable expenses include indirect labour, supplies, maintenance and other miscellaneous expenses.
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9 PERFORMANCE MANAGEMENT AND CONTROL The above manufacturing overheads shows the variable overhead incurred per unit of molasses cookie production, fixed overhead rate of labour per hour along with the cost of goods sold excluding the value of the ending inventory budget. All the information gathered will now help in preparation of the income statement (Bogsnes, 2016). Selling and Administration Budget The selling and administration budget is prepared since the manufacturing process has to administrated and marketed apart from producing the product itself (Keskinen, 2015). The related administration and marketing cost are shown below: Support Department Costs: Administration$10,34,580 Marketing$6,20,748
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10 PERFORMANCE MANAGEMENT AND CONTROL Distribution$3,10,374 CustomerService$1,03,458 Total$20,69,160 IncomeTaxRate25% Budgeted Income Statement The budgeted income statement shows the profit derived by selling the estimated units of molasses cookies. The above income statement shows that the company has gross profit of around 26%. However, the gross margin is not sufficient to cover the operating cost of the company and hence the company suffers net loss at the end. Since the company is suffering loss, therefore, the company’s tax liability will be Nil (Sadgrove, 2016). Conclusion From the above report, it can be concluded that master budget for the production of the molasses cookies will eventually lead to a net loss to the company. hence, the company needs to focus more in the cost saving methods or increase the selling price of the cookies so as to cover the operational cost and arrive at the net profit eventually. This master budget will
11 PERFORMANCE MANAGEMENT AND CONTROL eventually provide an analysis on the estimated expectation and help the company to take necessary actions thereafter.
12 PERFORMANCE MANAGEMENT AND CONTROL Reference Bogsnes, B. (2016).Implementing beyond budgeting: unlocking the performance potential. John Wiley & Sons. Bužinskienė, R. Master budget formation in private companies. Ehrenberg, R. G., & Smith, R. S. (2016).Modern labor economics: Theory and public policy. Routledge. Filipčev, B., Mišan, A., Šarić, B., & Šimurina, O. (2016). Sugar beet molasses as an ingredient to enhance the nutritional and functional properties of gluten-free cookies.International journal of food sciences and nutrition,67(3), 249-256. Gersil, A., & Kayal, C. (2016). A Comparative Analysis of Normal Costing Method with Full Costing and Variable Costing in Internal Reporting.International Journal of Management,7(3). Keskinen, L. (2015). Organization of the marketing communication activities after fusion-the integration and the decision-making processes. Sadgrove, K. (2016).The complete guide to business risk management. Routledge.