Accounting Report: Budgeting, Profitability, and Decision Making

This report delves into the critical aspects of financial management, focusing on budgeting, profitability analysis, and decision-making within a business context. It begins by evaluating the impact of purchasing decisions on a company's profitability, comparing scenarios where an assembly division either purchases from a production division or an external supplier. The report then explores the implications of these decisions on various stakeholders, including shareholders, management, and departmental heads. A significant portion of the report is dedicated to the preparation of different types of budgets, including a cost of sales budget, a cash budget, a sales budget, a production budget, a material purchase budget, and a labor cost budget. Each budget is meticulously prepared with supporting working notes and calculations, providing a comprehensive view of financial planning. The cash budget is prepared for both Joe and Debbie, highlighting the importance of accurate sales forecasting and the management of cash inflows and outflows. The report concludes by emphasizing the importance of budgeting in organizational success, ensuring efficient operations and the achievement of financial objectives. The report offers valuable insights into financial planning and control.

ACCOUNTING

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
QUESTION 7...................................................................................................................................1
a) Impact on company's profitability......................................................................................1
b) Implication of decisions.....................................................................................................1
QUESTION 9...................................................................................................................................2
Preparation of cost of sales budget.........................................................................................2
QUESTION 10.................................................................................................................................4
a) Preparation of cash budget.................................................................................................4
b) Manner in which difference shall be treated......................................................................5
QUESTION 11.................................................................................................................................5
a) Sales budget........................................................................................................................5
b) Production Budget..............................................................................................................6
c) Material purchase budget...................................................................................................6
d) Labour cost Budget............................................................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
In any business, there are many decisions which are to be taken by the management for
efficient and effective working (Turner, 2013). For this purpose, budgets are prepared in which
estimates are made which will be used to carry out different operations in an appropriate manner.
In this report, certain types of budgets will be made that are beneficial for organisations. Also,
decisions are made in respect of whether any product shall be purchased or manufactured.
QUESTION 7
a) Impact on company's profitability
Calculation of profits in two situations:
Particulars When assembly division purchased from
production division
When assembly division
purchased from outside
supplier
Sale to customers
Sale to assembly
division Sale to customers
No of units 50000 50000 50000
Selling price 15 12 15
Variable cost 10 10 10
Contribution per
unit 5 2 5
Contribution 250000 100000 250000
Total
contribution 350000 250000
Fixed cost 200000 200000
Profit 150000 50000
From the above calculation, it can be said that profits of Gallop Corporation will be
affected if the assembly division will be purchasing units from outside suppliers. Earlier, the
profits were 150000 which are now declined to 50000. This reduction is due to fixed cost which
will have to be incurred to assess whether production is done or not. So, the profitability of
company is affected in an adverse manner.
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b) Implication of decisions
The decision which is made by assembly division about purchasing of units from outside
will have impact on several persons and they are as follows:
Shareholder's: For any company, they are very important and it is needed that their
interest shall be considered in a decision. By the current decision, profits are declining and due to
this, less amount of dividend will be paid to them which will not be acceptable by them
(Zimmerman and Yahya-Zadeh, 2011). Also, the share price of company will be reduced and
shareholders will feel insecured and withdraw their funds.
Management: As all the major decisions are taken by management so, it will be the one
who will have to bear the impact of same. In the given case, the production will be reduced and
due to this, profits will also be affected. But then also, fixed cost will have to be incurred by
them and this will be a loss for corporation. Management will be demotivated as questions will
be raised on it if it will not be able to utilise resources of company in an effective manner and in
case they are being wasted. It will have to provide answers to issues of shareholders and other
parties.
Heads of production and assembly department: The divisional heads are provided
with incentives based on contribution made by them. In the present scenario, contribution will be
affected and so, its impact will be borne by them. There will be no impact on assembly division
head as contribution of that will remain same and is not modified due to decision. But in case of
production division, less units will be sold and by the same, margin will get reduced which will
thereby lead to decrease in amount of bonus incentive that is to be received by him.
QUESTION 9
Preparation of cost of sales budget
In any company, it is needed that proper estimates shall be made with respect to expenses
and for this, cost of sales budget is prepared in which expenditure that are incurred for sales shall
be determined (How to budget for inventory, 2017). For this, other budgets such as material,
labour and overheads are required to be prepared which will be shown as working notes. This
will be used for the preparation of income statements by the help of which profit that can be
made are identified.
Art and craft direct limited
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Cost of sales Budget
Particulars
Inventory of Finished goods on 1st
June
$10030
Inventory of Work in process on 1st
June
$2900
Cost of material used for production
(Note 1)
$129360
Cost of direct labour (Note 2) $142300
Factory overheads (Note 3) $69100
Total coat of manufacturing $340760
Work in progress for period $343660
Less: Inventory of WIP on 30th June $1350
Cost of produced goods ($342310)
Finished goods cost that are for sale $352340
Less: Inventory of finished goods on
30th June
($10290)
Cost of sales $342050
Working notes:
Note 1: Calculation of cost of material used:
Particulars Amount
Opening stock of material 8190
Add: Material purchased 130320
Less: Closing stock -9150
Total amount of material used $129360
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Note 2: Calculation of cost of labour:
Particular Amount
Kiln department 36500
Decorating department 105800
Total labour cost $142300
Note 3: Calculation of total factory overheads:
Particulars Amount
Depreciation for plant and machinery 14600
Indirect factory wages 45800
Indirect material 3400
Power and lighting 5300
Total amount of overheads $69100
QUESTION 10
a) Preparation of cash budget
Cash budget is required as by the same, estimates in relation to expenses and revenue will
be made and that will be used to make arrangement of funds in a proper period of time (Shim,
Siegel and Shim, 2011). The balance that shall be maintained will be determined and steps will
be taken to ensure that it is made. If there is any shortfall then it will be avoided with the use of
loans and borrowings. By the help of this, management will be able to perform activities in the
most appropriate manner and also resources are utilised in a judicious way as wastage will be
avoided.
Cash budget for July to September by Joe:
Particulars July August September
Opening balance $5000 $5000 $5000
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Cash from Sales $80000 $100000 $150000
Total cash inflows $85000 $105000 $155000
Outflows:
Cash paid for purchases $105000 $119000 $112000
Fixed expenses $30000 $30000 $30000
Variable expenses $1000 $1500 $1700
Total cash outflows $136000 $150500 $143700
Net cash flows ($51000) ($45500) $11300
Cash from loan (b/f) $56000 $50500 -
Closing balance $5000 $5000 $11300
Cash budget for July to September by Debbie:
Particulars July August September
Opening balance $5000 $5000 $5000
Cash from Sales $80000 $90000 $200000
Total cash inflows $85000 $95000 $205000
Outflows:
Cash paid for purchases $140000 $210000 $280000
Fixed expenses $30000 $30000 $30000
Variable expenses $900 $2000 $3000
Total cash outflows $170900 $242000 $313000
Net cash flows ($85900) ($147000) ($108000)
Cash from loan (b/f) $90900 $152000 $113000
Closing balance $5000 $5000 $5000
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b) Manner in which difference shall be treated
The estimation is made by two persons and sales which is determined by them is
different. So, owner will be required to decide that which of them shall be used. For this, he shall
see the trends which are followed in past and also future aspects will be considered. After that,
estimates that are more appropriate to them are identified and the same shall be selected and
implemented.
QUESTION 11
a) Sales budget
Particulars Basic backyard model Deluxe master model
Units
per unit
price
Total sales
value Units
Per
unit
price
Total sales
value
Total sales
of BBQ
Sydney 3500 550 1925000 1800 1300 2340000 4265000
Hobart 2800 500 1400000 1500 1200 1800000 3200000
Perth 4000 600 2400000 2900 1500 4350000 6750000
Total 10300 5725000 6200 8490000 14215000
b) Production Budget
Particulars Basic model Deluxe model
Sales 10300 6200
Add: Closing stock 1200 500
Less: opening stock 1500 400
Production units 10000 6300
c) Material purchase budget
Particulars Grates Stainless Burner sub Shelves Total
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steel assembly
For basic model
Production units 10000 10000 10000 10000
Material per unit 2 units 25 Kg 1 unit 2 units
Total required material 20000 250000 10000 20000
For Deluxe model
Production units 6300 6300 6300 6300
Material per unit 6 units 65 Kg 4 units 3 units
Total required material 37800 409500 25200 18900
Material required in
both models 57800 659500 35200 38900
Add: Closing stock 800 1900 800 480
Less: opening stock 1000 2500 600 400
Budgeted material
purchases(units) 57600 658900 35400 38980
Cost per unit 15 3 72 7
Total purchase cost 864000 1976700 2548800 272860 $5662360
d) Labour cost Budget
Particulars Basic backyard model Deluxe master model
per unit
hours
Per hour
rate
Total
labour cost
per unit
hours
Per
hour
rate
Total
labour
cost
Total
labour
cost of
BBQ
Prefabrication 0.5 12 6 0.6 12 7.2 13.2
Forming 0.75 10 7.5 1.5 10 15 22.5
Assembly 1.5 9 13.5 2.5 9 22.5 36
Total 2.75 27 4.6 44.7 $71.7
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CONCLUSION
From the above report, it can be concluded that budgeting is an important process for any
organisation as through that, estimates are made. It has been assessed that by the same, proper
functioning is made possible in business and all set targets and objectives are achieved. Also,
such decisions will be made by which maximum returns will be earned.
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