Accounting and Financial Management: Operating Budgets and Appraisal

This report provides a comprehensive overview of operating budgets and various investment appraisal techniques. It begins by defining operating budgets, outlining their key elements (revenue, costs) and the budget preparation process, including steps like assumption updates and budget iterations. The report then delves into the benefits of master budgets, highlighting their role in resource allocation, employee motivation, and achieving organizational goals. The core of the report focuses on investment appraisal, explaining methods such as payback period, net present value (NPV), internal rate of return (IRR), and accounting rate of return (ARR). Each method is defined, and its advantages and disadvantages are discussed, providing a balanced perspective on their practical application. The report also includes a basic income statement for Alpha plc. and concludes with a list of relevant references.

Accounting and Financial Management

Table of Contents
Operating budget.............................................................................................................................2
Process of preparing of the budgets.................................................................................................2
Benefits of the Master Budget.........................................................................................................4
Benefits of the Master Budget.....................................................................................................4
Investment Appraisal.......................................................................................................................5
Payback period.................................................................................................................................5
Advantages...................................................................................................................................6
Disadvantages..............................................................................................................................6
Net present value.............................................................................................................................6
Advantages...................................................................................................................................6
Disadvantages..............................................................................................................................6
Internal rate of return.......................................................................................................................6
Advantages...................................................................................................................................7
Disadvantages..............................................................................................................................7
Accounting rate of return.................................................................................................................7
Advantages...................................................................................................................................7
Disadvantages..............................................................................................................................7
References........................................................................................................................................8

Operating budget
Operating budgets are the budgets prepared annually which are normally stated in terms in the
classification codes of the budget. The major features of the operating budget are the pool value
of the resources required for the performance of the operation including the work of the others
(Ognjenovic, Ishkov, Cvetkovic Peric & Romanovich, 2016).
The main elements or the parameters of the operating budget are revenue, variable costs, fixed
costs, and non-operating expenses, non-cash expenses as well as cash used in the payment of the
capital costs. There are several costs which are included such as raw materials, finished goods,
salaries, wages, and utilities, rent and so on. Once the preparation of the budget is done, the
summary has been prepared with certain assumptions as well as projections. It is the duty of the
manager to answer the questions regarding the sales, goals, met or exceeded, or any expenses
that have been incurred in reality but unaccounted for yet. This overall results in the better
planning of the future costs and sales (Ng & Beruvides, 2015).
The main reason for preparing the operating budget is to undertake the analysis of the balance
between the operating expenses as well as income. It improves the overall efficiency and the
effectiveness of the organization. Further the operating budget is classified as deficit budget,
balanced budget, surplus budget depending upon the need and the performance of the business
(Liu, Wang Li & Ma 2018).

Process of preparing of the budgets
The trend to prepare the budgets has not arrived recently. The corporations are yet relying over
the preparations of the budgets in evaluating and observing the performance of the company with
respect to the value of the markets (Doye, 2016). There are several steps that are undertaken
while preparing the budgets and the same has been outlined below.
 Update the assumption of the budget
 Review of the bottle necks
 Availability of the funds
 Step costing
 Creation of the package of the budget
 Obtain the departmental and the capital budget
 Update the budget model
 The process of the iterations of the budget
 Issuance and the loading of the budget
Benefits of the Master Budget
A master budget collects all kinds of the resources and compiles them into one major budget
which is defined as the master budget. There are various kinds of the services which are
associated with the master budget such as the marketing and the accumulating the transactions of
the different departments.
Benefits of the Master Budget
 The master planning is equivalent to the master budget in which the main focus is not on
single department but on all departments. If any department makes use of the funds for

the non-potential reasons that it becomes easy to identify with the help of the master
budget (Porter & South-Winter, 2017).
 It acts the motivation key for the employees or the staff at the performance can be
evaluated and observed on the basis of the benchmarks set by the company before.
 The short term as well as long term goals of the firm and the organization can be pointed
out easily by using of the resources in the most appropriate manner.
 The master budgets role is to integrate the functional areas of the organization and makes
sure all the inputs are available at an easy cost (Radu, Dumiter, Dudas & Jimon, 2017).
 Not only has this had the real world of the master budget tended to bring the continuous
improvement in the style and the working of the organizations by improving the value of
the customer and reduction in the costs (Brusca & Labrador, 2016).
Investment Appraisal
These methods are used by the management in order to make the selection of the proposals or the
projects that are best feasible for the company. These techniques help in evaluating the
acceptability and the desirability of the project (Dinagar & Kamalanathan, 2015).
Payback period
The payback period is termed as the amount of time taken by the firm or the company to
reimburse the cost of an investment. The acceptability as well as the desirability of an investment
is straightly associated to its payback period. Shorter paybacks are called as attractive
investments and the reverse case is depicts the negative approach towards the investments. This
is required for assessing the long term financial stability (Doss, et al 2015).

Advantages
The main advantage of using the payback period that it is useful in making the short term
investments so there is no need to engage in more critical calculations. This method is easy to
calculate and use (Schmidgall & Kim, 2018).
Disadvantages
The major disadvantage of the payback period is that it ignores the time value of money.
Net present value
The NPV of is one of the technique used in the investment appraisal methodology where the
variance between cash inflows as well as cash out flows in terms of the present value. The net
present value of the company determines the acceptance or the rejection of the project. The best
feature of the Net present value is that it accounts for the concept of time value money.
Advantages
In case of the NPV the future value is much more valuable rather than the future value of the
dollars. The next best thing of the net present value is the cash flows are discounted by another
period of the capital cost.
Disadvantages
The major disadvantage of the NPV is that the cost of capital at times needs to be assumed.
Internal rate of return
The IRR is the measurement that is being used by the company to bring out the estimation of the
profit and gain of the investments. The IRR is known as the discounting rate which is also known
as the economic rate of return or also termed as the discounted cash flow rate.

Advantages
The major advantage of having the IRR is that it works on the concept of the time value of the
money and avoids the use of the hurdle rate.
Disadvantages
The different projects are having the different terms and that’s where the IRR is not useful. The
mutually exclusive project under this scenario is ignored.
Accounting rate of return
The accounting rate of return is also known as the ARR is a financial metric which is used while
evaluating the techniques of the investment appraisa. The calculation of the return, generated
from the net income of the proposed investment made (Tappura, Sievänen, Heikkilä, Jussila &
Nenonen, 2015).
Advantages
The major advantage of the ARR is the simplified way and the easy calculative manner. It also
helps in determining the profitability of the company.
Disadvantages
The concept of the TVM and the accounting rate of the return does not remain constant over the
various life projects.
The calculations of the ARR, of different projects and the same cannot be compared against each
other.
Alpha plc.
Income Statement
Particulars Units Production Price Amount

Sales 8200 9600 91.25 748250
Direct Materials 9600 30 288000
Direct labor 9600 25 240000
Variable overhead 8200 12 98400
Fixed Overhead 8200 6 49200
Net Profit 72650

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