INTRODUCTION Budgets are significant aspects of business organisation and essential to assess actual performanceoforganisationduringaparticularperiod.Budgetsarenotonlyprovidea framework for assessment of performance bust also gives a detailed comparison of financial data to make vital decisions. Operational budget is kind of budget of that gives a detailed estimation of cost and expenditures associated with different functions and operations. It is generally prepared on annual basis or for short term period (McDonald and Wilson, 2016). This type of budget includes items such as labour, marketing, administration and other production related costs. This report exhibits a complete discussion about budget, various types of budgets and importance of budget of different budgets in business organisation along with practical sums related to preparation of budgets like cash budgets, purchase budgets, sales budgets based on different criteria, income statement and statement of financial position. ASSESSMENT ACTIVITY 1 Task 1.1 Budget:Budget is the estimation of the expense which will be incurred and the incomes which can be generated in a specific period of time. Budget is used as a internal tool in an organisation by the management to know the estimation of profit or loss and to redevelop their strategies to convert the loss in profit. Budget can be prepared before acquiring a new assets to estimate the cost and the to check whether the assets purchased is in the budget of the company or not. Types of budget:Following are the types of budget use by the organisation to see the estimation: ï‚·Master Budget:Master budget is defined as a overall budget to carry out an operation or to know the estimation of the profit or loss of the company. It is known as a summary of all the other types of budget (Raudla, 2012). ï‚·Static Budget:A budget that is left unaltered even if there is a change in the factor related to sales volume or income is called the static budget. This type of budget remains fixed during the whole accounting period.
ï‚·Sales Budget:A sale budget is a budget which is prepared to to see the estimated total sales revenue and all the selling expense including the cost of goods sold during the year to know the estimated operating profit (Engel, 2015). Budgetary control principles:Budgetary control is a system that helps the organisation to control its cost including the cost of preparation of the budget and than comparing it with the actual performance to maximize the profit. The basic principles of budgetary control is to compare the budgeted performance with the actual performance and calculate the variance and also to find out the reason for the differences. Task 1.2 Yes, it is very important to discuss the budget with colleagues and peers to determine the scope and nature of budget planning. As budgetingis the most important part of any financial planning. Discussing it with peers and colleagues will help to understand the parts of budget as in an organisation there are many people working under different department. Budgeting will help the organisation to keep the track of expense. It is considered as an essential tool to convert the general plan into a specific plan to achieve the greater result for the organisation. In the budget sufficient details are given to anticipate the cost and all the expenses and the income which will be generated through the operation for which the budget is prepared (Singer, 2012). It helps the line managers to work with caution and care and also guides the mangers in formulating policies which can help the organisation to achieve the organisational goal. By discussing the budget with peers and colleagues helps to decentralize the obligations. Profit mindedness environment is created in the organisation which motivates the employees to work more efficiently. Budget also helps the top level of management to measure its performance of different departments in an organisation. Through budget sales department can see the product which are no giving profit and can also stop the sales of these products and services. Task 1.3 Expected fees350000.00 Marketing expense: Fixed Advertising (6,800 per annum)81600.00 Advertising (4 % of Expected fees)14000.00 Financial expense Interest paid (1,400 per month)16800.00
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Bank charges (200 per month)2400.00 Administration expense: Accounting staff cost (8,000 per month)96000.00 Stationary (280 per month)3360.00 Depreciation of office equipment (8,500 per year)8500.00 Depreciation of motor vehicles (12,400 per year)12400.00 Rent (2,000 per month)24000.00 Travelling expense (22,000 per year)22000.00 Work cover (3% of total salaries)2880.00 Superannuation (9% of total salaries)302.40 Telecommunication (1,000 per month)12000.00 Task 1.4 Budgeted Profit and loss statement GST - Inclusive GST payable GST Input Tax credit GST - Exclusive Amount Fees Revenues396000-18000378000 Less expense Salaries52500- Long service leave1050- Telephone57205205200 Bank charge1000- Insurance23322122120 Rent11000100010000
Cash from last month (80%)172800168000175200516000 Cash from two month ago (20%)354004320042000120600 Total cash from sales3482003572003692001074600 Add: GST 10%348203572036920107460 Total Cash Receipt3830203929204061201182060
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NovDecJanFebMar Purchase (60% of sales)177000216000210000219000228000 Credit Purchase177000216000210000219000228000 Amount of Credit purchase paid177000216000210000219000 Cash payments JANFEBMARQUARTER Cash purchase last month216000210000219000645000 Add: GST 10%21600210002190064500 Total cash Payments237600231000240900709500 The summary statement JANFEBMARQUARTER Total actual receipt3830203929204061201182060 Total cash Payments237600231000240900709500 Surplus145420161920165220472560 Opening balance-35400110020271940346560 Closing cash balance110020271940437160819120 Task 1.7 OctoberNovemberDecemberJanuary Sales2992000330880035552003203200 Pan Tel Trading Calculation of Purchases for October to December 2016 OctoberNovemberDecemberQuarter
Sales unit17,000 unit18,800 unit20,200 unit Cost of Goods Sold1360000150400016160004480000 Closing Inventory (20% of next month's COGS)300800323200291200915200 (18200*80*20/ 100) Opening Inventory0300800323200624000 Purchases ($)1660800152640015840004771200 Purchases (Number) (Purchase amount/$80)20760190801980059640 Task 1.8 VARIANCE ANLYSIS REPORT Income/ expense Budget $ Actual $Variance Favourable or unfavourable Sales640000655000-15000Unfavourable Less: Variable costs Cost of sales458000494500-36500Unfavourable Delivery and Installation costs19200131006100Favourable Sales commissions1280016375-3575Unfavourable TOTAL VARIABLE490000523975-33975Unfavourable Less: Fixed costs Advertising52005500-300Unfavourable Energy28003200-400Unfavourable Insurance240024000- Office supplies37003300400Favourable Printing & stationery60005500500Favourable TOTAL FIXED2010019900200Favourable
TOTAL COSTS510100543875-33775Unfavourable NET INCOME12990011112518775Favourable Task 1.9 Forecasting Techniques:The technique of using the past data or historical data to analyse and predict the future trends and make plans according to the new data is called forecasting. The following are the types of forecasting: Direct or Bottom-up methods:In this technique different department make their own forecast after collecting the data from different aspects such as sales data, production data, purchases data, etc. This data later on is brought together and clubbed to find out the forecast about the company's future (Shin and Jang, 2013). Indirect or Top-Down Methods:In direct or top down method firstly the budget is forecasted for the main trade activities and later on the individual department are given their share. In this type of forecasting technique no department is given the free hand to set their forecasting the responsibility of giving the budget to different departments goes with the top level management executives. Scientific Methods:In this type of forecasting methods the management relies upon the past data and make the future prediction about the growth of the company. In this methods the previous years data must be properly organised and should be interpreted in the terms of causal relationship. The scientific method of forecasting is basically based on the causal relationship. In this method forecaster uses many different tools only to guide in making the interpretation of the data (Hamilton, Koehler and Lösel, 2013). Double entry accounting:Double entry system is a fundamental accounting concept that says that every transaction taken place in business will have a impact on at least two accounts. It means that the every entry passed in the journals or ledger account will affect both sides of two accounts i.e., the debit side and the credit side. If one account is debited then the other respective account will be credited in order to maintain the balance of the accounting equation, which is assets = liabilities+capital. In double entry system errors and omissions are easily traceable as they impact on at least two accounts which helps to easily find out the errors or omission (Tsofa, Molyneux and Goodman, 2016).
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Variance analysis:Variance is the difference between the actual performance and budgeted performance. The critical analysis of this difference to find out the reason and formulating new strategies to overcome the difference. When the variance is analysed by the management on the basis of trend this analysis becomes the effective tool. This tool also helps the management to answer the questions like why there is a change in budgeted and actual performance. Variance analysis is also used for forecasting as it uses the patterns from the past data in order to develop the new theory about the business performance in future (McCord, Liu and Singh, 2013).
ASSESSMENT ACTIVITY2 Task 2.1 Budget objectives: ï‚·Primary objective of budget is to provide a systematic structure. Structure is very important before starting a task. Structure gives us a framework to work and gives the company a basis to plan that what should the company do to maximize its profit. As in Johnson trading, a predefined structure will help the organisation grow and keep track of the employees performance. ï‚·It provide organisation to predict the inflows and outflows of the cash from the company. It is very helpful for the organisations which are growing rapidly or have an uneven sales patterns. These types of firms faces the problem related to cash crises. Through budgeting these company can predict the inflow or the outflow of the cash in the near future and can save the company for facing these types of problems. As Johnson trading is a trading company and these type of companies usually have the uneven sales or some time seasonal sales and can face the problems of cash crises but with the help of budget this problem is not faced. ï‚·Budget provide assistance to organisation to allocate the uses of resources efficiently. With the help of the budget many organisation try to allocate their resources for the purchase of assets or getting into new business. Task 2.2 Actual unit sales for 2016MarchAprilMayJuneTotal 2000022000250002800095000 Forecast sales units22000242002750030800104500 Selling price per unit ($8+60% Mark Up)8.68.68.68.6 Total sales in $189200208120236500264880898700
Task 2.3 PRODUCTION BUDGETMarchAprilMayJune Forecast unit sales22000242002750030800 Plus Finished goods stock closing4400484055006160 Total units required22000290403300036960 less Finished goods stock opening-440048405500 Equals production units required22000246402816031460 Cost per unit in $8888 Cost of production in $176000197120225280251680 Task 2.4 CASH BUDGETMarchAprilMayJuneTotal Collections from Trade Debtors 40 % In month of sale756808324894600105952359480 55% in month following sale1144661300751456840390225 Subtotal190146213323240284105952749705 GST collected19014.621332.324028.410595.274970.5 TOTAL RECEIPTS209160.6234655.3264312.4116547.2824675.5 Payments To trade creditors for purchases [100%]176000197120225280251680850080 Direct labour52800591366758475504255024 Factory overhead52800591366758475504255024 Expenses Fixed800080008000800032000
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Variable28380312183547539732134805 GST paid36383921.84347.54773.216680.5 TOTAL PAYMENTS321618358531.8408270.5455193.21543613.5 SURPLUS/ DEFICIT-112457.4-123876.5-143958.1-338646-718938 Bank balance opening-40000-152457.4-276333.9-420292-889083.3 Bank balance closing-152457.4-276333.9-420292-758938-1608021.3 Task 2.5 Manufacturer’s Budgeted Income Statement for the period ending 30 June 2017: SALES898700 Less COST OF GOODS SOLD Opening Finished Goods Stock117920 Plus Cost of production850080 Less Closing finished goods stock167200 GROSS PROFIT97900 Less Expenses from ordinary activities Selling, administrative and financial Fixed32000 Variable134805 NET PROFIT from ordinary activities-68905
Task 2.6 Budget Balance Sheet as at 30 June 2017 $$$ OWNERS' EQUITY Capital420080 Add / Less Net profit / loss-68905 Less Drawings Total owners' equity351175 ASSETS Current assets731203 Cash at bank-758938 Finished goods stock167200 GST paid16680.5 Trade debtors731203 Total current assets156145.5156145.5 Non-current assets Property, plant & equipment650000 Less Accumulated depreciation130000 Investments Other financial assets Total non-current assets520000520000 TOTAL ASSETS676145.5 Less LIABILITIES Current liabilities GST collected74970.5 Total current liabilities74970.574970.5 Non-current liabilities Mortgage on property250000
Total non-current liabilities250000250000 TOTAL LIABILITIES324970.5 NET ASSETS351175 Task 2.7 Stakeholders are individuals, group of individuals or organisations which are highly affected by decisions and actions of business organisation. Stakeholders are by their nature and interest classified as internal or external stakeholders. Internal stakeholders includes managers, employees and owners etc. which are internally associated with organisation whereas external stakeholders includes suppliers, shareholders, investors, Customers etc. which are affected by decisions and actions of organisation but not not a part of organisation or internally connected (Sponem and Lambert, 2016). Discussion and negotiation of various budgets with stakeholders ensures achievement of business objectives and also improvement areas in budgets can be easily identified. Stakeholder consultation is essential to prepare a effective and appropriate budget. Stakeholders consultation generally includes building productive and strong relationship on long term basis. It helps organisation to identify and analyse new trends and potential challenges which could affect organisation's functions and operations in near future. Following are the methods of Stakeholder consultation are as follows: Focus groups / workshops:In Focus group or workshop is generally a small group of people is chosen by company to discuss about various aspects of budget or a representative of different stakeholders are selected by company. Managerial personnels help in discussions by providing a brief detail of budget and record the entire session along with opinions to improve budget. This method is significant at initial budget development process to make continuous improvement as per feedback of stakeholders (Tharani, 2013). Surveys and opinion polls:Surveys and opinion polls is popular and most widely used method of consultation. It can be through postal or written means, one to one interaction, internet or via telephone. In this method a standardised formate or letter is used by organisation to obtain opinion or feedback but it covers a large number of stakeholders. Sometimes organisation in order to improve their budgets provide special benefits or incentives to encourage feedback or