Financial Accounting Report and Budget Recommendations for 2018

This accounting report analyzes the financial performance of Exhibition Furniture, focusing on budget recommendations for 2018. It examines revenue projections, cost of goods sold, and inventory management, particularly the impact of increasing prices for raw materials like oak tops and legs. The report highlights the company's use of the FIFO method and identifies key issues such as rising material costs and the need for efficient resource utilization. Recommendations include inviting quotations for raw materials, optimizing resource use, implementing an effective appraisal method for overhead costs, and adopting modern equipment to enhance production efficiency and customer satisfaction. The report aims to improve the company's financial performance and operational efficiency through strategic budgeting and cost control measures, as detailed in the memorandum to the CEO.

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Authors Note:

1ACCOUNTING
Table of Contents
Answer to Question 1......................................................................................................................2
a)...................................................................................................................................................2
b)..................................................................................................................................................2
c)...................................................................................................................................................2
d)..................................................................................................................................................7
e)...................................................................................................................................................8
f)...................................................................................................................................................9
g)................................................................................................................................................10
h)................................................................................................................................................11
i).................................................................................................................................................12
j).................................................................................................................................................13
k)................................................................................................................................................14
l).................................................................................................................................................15
Answer to Question 2....................................................................................................................16
Reference.......................................................................................................................................22

2ACCOUNTING
Answer to Question 1
a)
Statement showing Revenue budget
Particulars Units Unit price ($) Amount ($)
Revenue from sale 2000 desks 800 per desk 1600000
b)
Statement showing Production budget
Particulars Units
Expected sales (no. of desks) 2000
Add: Closing inventory 300
2300
Less: Opening inventory 200
No. of desks to be produced 2100
c)

3ACCOUNTING
Statement showing Direct material usage budget
Particulars Amount
Oak Tops required production 6300
Oak legs required for production 8400

4ACCOUNTING
Statement showing Direct material purchase budget (Units)
Particulars Units
Oak Tops required production 6300
Add: Closing inventory 24
6324
Less: Opening inventory 40
Oak Tops to be purchased (SQ. Mt) 6284
Oak legs required for production 8400
Add: Closing inventory 80
8480
Less: Opening inventory 100
Oak legs to be purchased 8380

5ACCOUNTING
Statement showing Direct material usage budget:
Oak Tops required production 6300
Oak legs required for production 8400
Direct material usage budget ($):
Particulars Units Amount
Oak Tops required production 6300 756000
Oak legs required for production 8400 58800

6ACCOUNTING
Statement showing direct material purchase budget ($):
Particulars Units Amount
Oak Tops required production 6300
Add: Closing inventory 24
6324
Less: Opening inventory 40
Oak Tops to be purchased (SQ. Mt) 6284 754080
Oak legs required for production 8400
Add: Closing inventory 80
8480
Less: Opening inventory 100
Oak legs to be purchased 8380 58660

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d)
Statement showing Direct manufacturing labour budget
Particulars Amount
No. of desks to be manufactured 2100
Direct manufacturing labour hour required 3 hours per desk
Total hours of direct manufacturing labour required 6300
Direct labour rate 55 per hour
Direct manufacturing labour cost ($) 346500

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e)
Statement showing Manufacturing overhead budget
Particulars Amount
Variable manufacturing overhead
Total hours of direct manufacturing labour required 6300
Variable manufacturing overhead rate $20 per hour
Variable manufacturing overhead 126000
Fixed manufacturing overhead 50000
Total manufacturing overhead 176000

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f)
Statement showing budgeted manufacturing overhead rate
Particulars Amount
Total manufacturing overhead 176000
Total hours of direct manufacturing labour required 6300
Budgeted manufacturing overhead rate 27.9365

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g)
Calculation of Budgeted manufacturing overhead cost per output unit in 2018
Particulars Amount
Total manufacturing overhead 176000
Total number of desks to be manufactured 2100
Budgeted manufacturing overhead cost per output unit in 2018 ($) 83.8095

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h)
Calculation of Unit cost of desk in closing inventory (FIFO)
Particulars
Direct material usage cost:
Oak Tops required production 6300 756000
Oak legs required for production 8400 58800
814800
Direct labour 3 hours per desk 2100 desks
Total direct labour (In hours) 6300
Rate $55 per hour
Direct labour cost 346500
Direct manufacturing overhead

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i)
Statement showing Ending inventory budget for both direct materials and finished goods
Direct material usage cost:
Oak Tops required production 6300 756000
Oak legs required for production 8400 58800
814800
Direct labour 3 hours per desk 2100 desks
Total direct labour (In hours) 6300
Rate $55 per hour
Direct labour cost 346500
Direct manufacturing overhead
Variable manufacturing overhead 126000
Cost of production 1287300

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j)
Statement showing cost of goods sold budget for 2018 (FIFO)
Opening inventory cost
200 Desks
Particulars Units Cost
Materials Oak tops 600 Sq. mt 60000
Oak legs 800 legs 4000
Labour 600 hours 30000
Variable manufacturing overhead 12000
106000
Add: Inventorial unit cost 4000
Add: Production cost of 1800 units 1103400
Cost of goods sold 1213400

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k)
Statement Budgeted income statement of the company:
Particulars Amount ($) Amount ($)
Sales 1600000
Less: Cost of goods sold 1213400
Gross profit 386600
Less: Expenditures
Fixed manufacturing overhead 50000
Marketing cost 2000
Fixed non-manufacturing costs 10000
62000
Net profit 324600

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l)
Amount ($) Amount ($)
Assets
Current assets
Cash 20000
Inventory :
Finished goods 183900
Oak Tops 2880
Oak Legs 560
Total current assets 207340
Non-current assets
Property, plant and equipment 550000
550000
Total assets 757340
Liabilities
Current liabilities 30000
Non-current liabilities 59340
Shareholders' equity 650000 650000
Suspense 18000
Total liabilities and equity 757340
Budgeted Balance sheet as of December 31, 2018

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Answer to Question 2
MEMORANDUM
To
CEO
Exhibition Furniture
Subject: Recommendation with respect to improvement in budget.
Sir,
This letter is written to bring the kind notice of the CEO on the above stated subject. In
pursuance of providing effective and appropriate recommendations a comprehensive analysis has
been undertaken. The analysis enabled us to understand the significant issues related to the
process of budgeting. The recommendations are made in respect of the issues that have been
identified as crucial and significant.
Analysis:
The company has around 200 finished desks in its inventory at the beginning of the year
2018 and it wants to have 300 finished desks at the end of the year 2018. The above requirement
is made clear by the company in pursuance of its efforts to maintain a steady stock of 200stocks
throughout the year (Otley, 2016). After taking into consideration the requirement stated by the
entity it will have to produce around 2100 desks as calculated in the table in the part A of the
question 1.

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The direct material to be used for the production that is the oak tops and oak legs have to
be in the same amount at the end of the year as at the beginning of the year. In order to maintain
he required opening and closing stock levels the purchase of the direct materials have to be made
judiciously.
For the purposes of calculating the cost of goods sold, the cost of raw materials and he
closing inventory the method that has been employed by the management for the purpose of
issuing raw materials to the production process and finished goods for sale have to be given
significant consideration (Fullerton et al., 2014). As mentioned the management has employed
the method of FIFO in issue of raw materials and finished goods. Consequently in order to
compute the cost of goods sold he cost of opening desks i.e. 200 desks and the cost of the
opening oak legs and oak tops have been considered first. The cost of goods sold and the cost of
closing inventory has been computed as below:

18ACCOUNTING
Cost of goods sold budget for 2018 (FIFO)
Opening inventory cost
200 Desks
Units Cost
Materials Oak tops 600 Sq. mt 60000
Oak legs 800 legs 4000
Labour 600 hours 30000
Variable manufacturing overhead 12000
106000
Add: Inventorial unit cost 4000
Add: Production cost of 1800 units 1103400
Cost of goods sold 1213400
The closing inventory are provided below:
Particulars Amount ($)
Per unit production cost 613
Unit cost if desk in closing inventory 613
No. of desks in closing inventory 300 desks
Closing finished desks 183900
The calculating the value of cost of goods sold the amount of manufacturing overheads
have not been considered as it is an indirect expense as well as fixed cost. However the fixed

19ACCOUNTING
overhead costs have been deducted from the revenue of the firm in order to obtain the net profit
of the firm for the year 2018.
Issues:
The financial information pertaining to the entity in respect of its production process
sheds light on the increased cost of various items used in the production process of the entity.
The prices of the oak legs and oak tops are expected to rise in the year 2018. The entity was able
to acquire oak tops for $100 per square metre in the year 2017 but the same will cost the
company around 10 % more in the current year of 2018 i.e. $120. Significant attention must be
paid by the management in respect of the hike in the price of the raw materials as these are of
pivotal importance for the production process (Quattrone, 2016). Similar to the trend of oak tops
the price of oak legs is expected to increase about 40 % i.e. from $5 in the year 2017 to $7 in the
year 2018. The increase in the cost of raw materials of the entity will consequently increase the
production cost of the entity and thereby reducing the profitability of the entity. A substantial
increase of 20% and 40% respectively in the prices of oak tops and oak legs will significantly
increase the cost of production of the company. Hence certain recommendations are being made
to the management in respect of necessary steps to be taken by it (Quinn, 2014).
The main motive of the management of any entity is to maximise the operating efficiency
of its business operations in order to improve the financial position and financial performance of
the organisation. In case of Exhibition Furniture too the management is trying to streamline its
efforts in the areas where there is a possibility of improving its operational efficiency and
thereby the financial performance of the organisation in the near future (Coad et al., 2015).

20ACCOUNTING
The financial statement of the entity reflects the financial position and financial
performance of any organisation. The management must endeavour to make a budgeted
statement that will enable it to find the key areas in respect of which management can take
remedial steps in order to improve the performance in the future. The evaluation or the
assessment of the statement shall be done very carefully and efficiently (Van der Stede, 2016).
Recommendations
In order to acquire the oak legs and oak tops the management shall invite quotations. This
will enable the organisation to get competitive prices from the suppliers as they will be
concerned about the competitive price of other suppliers. After getting the quotations the
selection of that supplier or suppliers shall be made who made the lowest quotation for supplying
the required raw material. The management by implementation of this method would be able to
harp on the benefits of lower prices for its raw materials and also will be able to assess the
various types of products in terms of quality being provided by different suppliers in the market.
In order to reduce the fixed manufacturing overhead and the variable manufacturing
overhead the organisation should make optimal use of the resources of the organisation. In order
to promote continuous appraisal of the operating efficiency of the production process the
management need to implement an effective and efficient appraisal method within the
organisation. The method will enable the organisation to ensure that the fixed and variable
manufacturing overheads are within certain limits which are deemed reasonable. This will enable
the organisation to reduce the effective overall cost of manufacturing and thereby increasing the
profitability of the organisation.

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In order to improve the operating efficiency of the entity the management needs to adopt
all the modern equipment for the purpose of carrying out the production process of the entity.
The adoption of the new and improved technology will not only improve the revenue generating
capacity of the organisation but also quality of the finished product developed by the
organisation and delivered to the end consumer. This will significantly increase the customer
base of the company.
Thanking you

22ACCOUNTING
Reference
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potential for management accounting research. Qualitative Research in Accounting &
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Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2014). Lean manufacturing and firm
performance: The incremental contribution of lean management accounting
practices. Journal of Operations Management, 32(7-8), 414-428.
Otley, D. (2016). The contingency theory of management accounting and control: 1980–
2014. Management accounting research, 31, 45-62.
Quattrone, P. (2016). Management accounting goes digital: Will the move make it wiser?.
Management Accounting Research, 31, 118-122.
Quinn, M. (2014). Stability and change in management accounting over time—A century or so
of evidence from Guinness. Management Accounting Research, 25(1), 76-92.
Van der Stede, W. A. (2016). Management accounting in context: Industry, regulation and
informatics. Management Accounting Research, 31, 100-102.