Financial Analysis Homework: Budgeting, Costing, and Overhead

This finance homework assignment delves into various aspects of financial analysis and cost accounting. It addresses the creation and importance of financial budgets, differentiating between static and flexible budgets, and examining the relationship between sales, production, and material budgets within a cash budget framework. The assignment further explores the concepts of operating and cash cycles, emphasizing their role in working capital management. It also critiques the statement regarding the importance of accounting in government organizations, asserting its equal significance compared to private enterprises. Additionally, the assignment discusses the purpose and benefits of costing systems, covering overhead allocation methods and the use of budgeted versus actual rates. The solution provides calculations for overhead allocation rates, cost analysis, and pricing, along with a bibliography of supporting resources.

Answer 1
Answer a
The approximate forecast of the company which it looks to obtain in the future with regard to its
financial results is provided in a financial budget. This financial budget can be created on
different basis it may be annually, monthly or quarterly. At the end of the period the budget is
thoroughly checked for finding out the various reasons for delegation in financial results.
During the period actual results of the company is compared with the budget as it has been
forecasted for the purpose of taking actions on the actual results which is derived by the
company. The purpose of comparison between the budget and the actual results is to understand
the issues faced by the departments of the company and hence to act for the purpose of resolution
of those issues.
If the company opt for a static budget then assumption of the budget is make as per output of the
business and in case there is deviation of actual output with respect to the budgeted numbers the
static budget would not be good. So for the purpose of evaluation of the profit centre the
company realizes the importance of flexible budget which helps in understanding the line items
wise details of the income statement considering the same number of outputs and hence helps to
take actions on the issues identified.
For ex If a company budgeted 2000 units @ variable cost of $ 4/unit totaling to $ 8000 costs
while if actual production decreased to 1700 units @ variable cost of $ 4.1/unit ,total cost
amounting to $6970.Hence overall cost is lower , however, there is per unit cost has increased
has company has to identify the reason for increase in variable cost.

Answer b
The purpose of the cash budget is understood the sources and uses of estimated cash
requirement. Hence sales budget provides sources while production budget will provide the uses
and for the purpose of production budget direct material budget is also required.
Sales budget
The sales budget estimates the expected sales revenue for a particular period. Estimated sales
revenue helps in understanding and estimating the cash inflows within the company. Favorable
of unfavorable change in economic scenario will affect the estimated sales budget and hence the
cash budget as well.
Production budget
The base on which production budget is created in the sales projection. Sales revenue used to
project the output quantity required production budget provides the estimate with regard to
finished goods to be kept hence change in production budget would eventually affect the cash
budget as cash outflow is linked to production budget.
Material budget
Production budget is the base for material budget as the output quantity required determines the
requirement of the direct material estimate. In case of change in economic condition impacting
direct material cost would result in change in material budget and hence cash budget as well.
Answer C

Operating cycle refers to the time that has been taken by the company from acquisition of
inventory and receipt of cash after sale of that inventory purchased. On the other hand, cash
cycle refers to the number of days that has been to convert the resources into cash. The operating
cycle and the cash conversion cycle are same but the operating cycle tests the operating
efficiency of the company. On the other hand the cash conversion cycle tests the company’s
ability in managing the cash flow of the company.
The operating and cash cycle helps in managing the working capital of the company in an
efficient manner. Through the help of these cycles, the management can determine the time
frame within money needs to be collected from the debtors and when the same needs to be paid
to the creditors, Ratios like working capital ratio, cash conversion ratio, debt to equity ratio are
used for better working capital management.
Answer D
“Accounting isn’t as important in the government organizations as it is in private enterprises,
since the government does not have to worry about earning a profit”. We do not support the
above statement. Similar to a private organization, accounting is equally important for
government organizations as well. The government and its organizations are equally responsible
and answerable to the stakeholders i.e. the public for their activities. The profit that has been
earned by the government is used by them for the welfare activities and for developing the
economy. It is important for them to stay competitive in the market; however they are not
supposed to run behind profit earning at the cost of the society. The funds that are collected by
the government are used for developing infrastructure and for the purpose of providing various
subsidies to the general public. Thus, the profit that has been earned by the government is

indirectly being spent on the welfare of the society. Overall, it is important for them to keep a
check on the profit that has been earned by them on their activities and should follow all the
accounting standards that are applicable on a normal company functioning in the country.
Answer E
The main purpose behind setting up a costing system is to ensure that the same provide adequate
valuation of cost for the products. A costing system helps the firms to make proper estimates of
the cost which is being used by them for determining the profitability of the products, for the
purpose of inventory valuations and cost control. For manufacturing organizations, an adequate
costing system is used for keeping a control check on the cost factor being the same is important
determining the profitability of the firm.
The essential purpose of a good costing system is as follows:
 It helps in subdivision and classification of cost.
 A costing system helps in better management of material, labor and overhead cost.
 Through the help of the costing system, management can very well do the budgeting
exercise for the company.
 It helps in placing better standards which will help in judging the production efficiency
 It helps in determining whether the price of the final products that has been decided by
the management is adequate or not.
 The costing system that has been used by the management has been treated as an
instrument of control through which the management exercise control over the
manufacturing exercise.

 It provides information to the management about special factors like seasonal variations
in the volume and prices of the products.
Answer 2
Answer A
The manufacturing overheads allocation rate for Wonder Products is calculated as follows:
Manufacturing overheads for the
year $ 598,080
Total machine hours for the year 7,000
Allocated cost per hour $ 85.44
Answer B
The administrative overhead allocation rate for Wonder Products is calculated as follows:
Administrative overheads for the
year $ 695,520
Direct labor hours for the year 14,000
Allocated cost per hour $ 49.68
Answer C
Direct materials
$
19,000
Manufacturing overheads (400
hours*85.44)
$
34,176
Administrative overheads (750
hours*49.68)
$
37,260
Total Cost
$
90,436
Profit $

36,174
Price
$
126,610
Answer D
In the current world, overhead cost is a very important portion of the total cost of a product. It is
not possible to determine the exact overhead cost that can be allocated to the product. In this
scenario, the total overhead cost is allocated based on some allocating cost factor. Once the
overhead cost is allocated we can reach out to the actual cost price of the product which is
important in determining the sales price of the product.
We generally face trouble in determining the actual cost drivers which are used in allocating the
overhead cost of the product. There are different techniques that has been by the management
with includes the traditional approach and the ABC costing techniques.
Answer E
The companies prefer using the budgeted rate for overhead allocation rather than using actual
rate of overhead. The budgeted rate that has been determined by the management is majorly
based on the actual overhead rate for the last years. Due to time frame, the actual rates of
overhead is available at year end, and the cost of the product is determined in the very beginning
being the company is required to make regular sales of its products. In this scenario, the
management prefers budgeted rates for overhead allocation rather than using the actual rates.
Bibliography

Lodha, A., 2015. Top 11 Advantages of Good Cost Accounting System. [Online] Available at:
http://www.yourarticlelibrary.com/cost-accounting/top-11-advantages-of-good-cost-accounting-
system/55229/ [Accessed 27 Sept 2017].
Nordmeyer, B., n.d. The Difference Between Operating & Cash Conversion Cycles. [Online]
Available at: http://smallbusiness.chron.com/difference-between-operating-cash-conversion-
cycles-24738.html [Accessed 17 Sept 2017].
Ori, J., 2017. Difference Between Operating Cycle & Cash Cycle. [Online] Available at:
https://pocketsense.com/difference-between-operating-cycle-cash-cycle-1763.html [Accessed 17
Sept 2017].