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Contents
3. Be able to participate in the budgetary process of an organisation.......................4
3.1 select appropriate budgetary targets for an organisation.................................4
3.2 participate in the creation of a master budget for an organisation...................7
3.3 compare actual expenditure and income to the master budget of an
organisation.......................................................................................................... 11
3.4 evaluate budgetary monitoring processes in an organisation.........................14
4 Be able to recommend cost reduction and management processes for an
organisation.............................................................................................................. 16
4.1 recommend processes that could manage cost reduction in an organisation. 16
4.2 evaluate the potential for the use of activity-based costing...........................18
2011
Actual
15820
9520
6300
1458
2012
Budgeted
18193
10758
7435
1603
expenses
Administrativ
537
550
e expenses
Other
268
3511
Revenue
Cost of Sales
Gross profit
Selling
&
Variance
2373
1238
1135
146
15
13
18
10
565
15
275
270
(5)
(2)
4017
4997
980
24
1004
1249
245
24
3013
3748
1225
41
distribution
administrative
expenses
Profit before
tax
Taxation
@ 878
25%
Profit after tax
2633
Revenue
Over the two year period the revenue of the company has grown by 10% annually and therefore
taking into consideration the past trend and the future opportunities by the management the
revenue is expected to increase more that previous years. According revenue is expected to be
grown by 15% compared to previous years.
Cost of sales
Even though the revenue has increased by 10% in the past cost of sales has increased only by
9% due to the improvement taken place in the organisation and due to the economies of scales
experienced by the company. Therefore with the aim of further improving these benefits the
company has budgeted a 13% increase in cost of sales which will further improve the gross
profit margin.
Gross profit margin
With the increase in the revenue and the increase in the cost of sales lower than revenue the
company is expected to increase the gross profit margin in the financial year 2012.
Selling and Distribution expenses
The company expects to increase the selling and distribution expenses same as previous years
by 10%. Though the revenue is expected to increase only by 15% selling and distribution
expense in expected to increase only by 10% by improving efficiency and the effectiveness of
the marketing activities.
Administrative expense
The company is targeting to maintain the same administrative expenses level in the current year
by way of cost reduction activities to compensate the expenses increased due to the general
inflation prevail.
Other expenses
The company expects to maintain same level of other expenses by means of cost reduction
activities.
Profit after tax
The company is expecting a increase in the profit after tax by 41% compared to the previous
year by increasing sales and increasing the efficiency and effectiveness of manufacturing
process.
2011
Actual
15820
9520
6300
1458
2012
Budgeted
18193
10758
7435
1603
expenses
Administrativ
537
550
e expenses
Other
268
3511
Revenue
Cost of Sales
Gross profit
Selling
&
Variance
2373
1238
1135
146
15
13
18
10
565
15
275
270
(5)
(2)
4017
4997
980
24
1004
1249
245
24
3013
3748
1225
41
distribution
administrative
expenses
Profit before
tax
Taxation
@ 878
25%
Profit after tax
2633
The budgeted cash flow statement of the company for the financial year 2012 is as follows,
XYZ manufacturing company budget for the financial year 2012
2010
2011
Cash balance at the beginning
2012
Actual
Actual
Forecasted
625
450
796
Add Receipts
Collection from customers
10,750
14,750
17,350
11,375
15,200
18,146
Direct material
3,345
3,755
4,506
direct labour
2,300
2,530
3,036
manufacturing overhead
2,893
3,434
4,121
selling
1,300
1,430
1,716
537
555
570
2,000
500
1,500
800
1,100
1,250
Total disbursements
13,175
13,304
16,699
Excess or
(1,800)
1,896
1,447
Less: Expenses
and
distribution
expenses
Administrative expenses
Purchase of Property Plant &
Equipments
Tax
Deficiency over
disbursements
Financing
Borrowings
2,500
2,000
8
payments
Interest
Total financing
Cash balance at the end
1,000
500
250
100
200
2,250
(1,100)
450
796
1,300
147
It is assumed that the customer collection will be taken place in the same manner which took
place in the past two year of 2010 and 2011.
Further a capital expenditure of 1500 is expected in the year of 2012 to ensure that the
manufacturing facilities are operates in most effective and efficient manner using cutting edge
technology that the industry has.
All the other manufacturing related expenses such as direct material, direct labour and
production overheads are assumed to pay as an when they incur.
Operating expenses such as selling and distribution expenses, administrative expenses also
paid when they incurred.
Accordingly a borrowing of 2000 is expected to bridge the gap between the available cash
balance and required cash balance.
At the financial year end 147 cash balance is expected to prevail with the company.
2011
Actual
2012
Budgeted
10350
10500
12,500
Plant
&
equipments
Current assets
9
trade receivables
2300
1893
2,789
inventory
750
847
2,194
450
796
147
3500
3536
5133.2
Total assets
13850
14036
17630
Share capital
6500
6500
6,500
reserves
1000
4013
7,761
Borrowings
2500
1500
2,500
350
2023
869
10350
14036.08
17630
cash
and
bank
balance
current liabilities
Trade payable
Total
liability
equity
and
The budgeted income statement, budgeted cash flow statement and budgeted balance sheet for
the financial year 2012 has prepared in a consistent basis.
2011
2012
2012
Variance
10
Revenue
14,375
15,820
18,193
18,668
475
Cost of sales
8,734
9,520
10,758
11,043
286
Gross Profit
5,641
6,300
7,435
7,624
189
1,325
1,458
1,603
1,647
44
537
550
565
590
25
Other expenses
268
275
270
290
20
3,511
4,017
4,997
5,097
100
Tax @25%
(878)
(1,004)
(1,249)
(1,274)
(25)
2,633
3,013
3,748
3,823
75
expenses
Administrative
expenses
Revenue
The actual revenue of the company for 2012 was 18,668 while the budgeted amount was
18,193 which is an increase of 475 than budgeted. This has resulted in the significant increase
in the volume due to the higher demand prevailed for certain product categories backed by the
weather condition.
Cost of sales
Cost of sales has increased by 286 than those budgeted due to the increase in the demand for
certain product which is evidenced by the increase in revenue. However gross profit of the
company remains in the same position of 41% as budgeted. Though the company expected to
increase the cost of sales to be increased by 13% actual increase accounted to 16% due to the
11
Certain lapses faced by the manufacturing facilities. Furthermore certain direct manufacturing
expenses such as electricity and overhead costs also increased along with the increase in
revenue.
Gross profit
Gross profit also increased by 189 than budgeted for the financial year 2012. However the
gross profit margin shows flat at 41% with the budgeted while it has improved by 1% from
previous year of 40%.
Selling and distribution expenses
Selling and distribution expense was amounted to 1647 while the budgeted expense was stood
at 1603 which shows a increase of 44 than budgeted. This is mainly due to the increase in sales
volume and this has resulted in slight increase in distribution expenses of the company.
Moreover sales commission expense has also increased due to the increase in the revenue.
Administrative expenses
Administrative expense were budgeted at 565 where as actual amount was stood at 590.
Accordingly administrative expense has increased by 25 than budgeted. This is mainly due to
the increase in the salary expenses resulted in due to the new recruitments taken place in the
company.
Other operating expense
Other operating expenses also increased slightly by 20 compared with actual other operating
expense.
Profit before tax
The profit before tax has increased 100 than budgeted amount due to the increase in the sales
volume. However the company was unable to obtain the full benefit from such increase due to
the increase in the cost of sales and several other operational expenses.
12
The following advantages can be obtained through a budgetary monitoring and control system,
13
Budgetary control system helps the management of the organisation to carry out its
etc.
Budgetary control system helps the organisation to identify the current trends and to
Budgets are based on estimates of the future activities and therefore such estimates can
be wrong and budgets may not be able to achieve giving a wrong picture.
Budgetary controls may affect to the quality of the product and services of the
organisation due to the high concentrate on the expenses of the production activities.
Budgetary control can gives a wrong impression that achieving budgets of the
14
reduction etc.
Implement the cost reduction activities
15
The company must implement the cost reduction activities in the areas where they have
identified in the previous steps. Due attention needs to be given to the areas where there
eliminate the bargaining power of the suppliers and obtain the most favourable prices.
To minimise the wastage in the production process the company can use the latest
16
Activity based costing gives more accurate information about the product cost rather
everyone.
Activity based costing take in to account unit cost rather than the total cost of the product
such as scorecards.
Activity based costing can be used for benchmarking.
By using activity based costing the organizations can identify losses incurred in the
production process and is able to identify activities or processes which will not add value
17
Activity based costing asses the cost of individual activities based on its utilisation of
resources.
Implementing activity based costing system to the organization can be involved high cost
as such costing system needs significant amount if resources such as sophisticated
checked and feed to the system which incur high labour cost
Activity based costing system produce various information which are significantly
difference from information generated by other costing techniques. Owing to this reason
the management may tend to use information provided by existing costing technique.
Further when evaluating the performance of the management information produced by
existing costing technique may used. Therefore the management will pay their attention
making decisions
Activity based costing is not in line with the Generally Accepted Accounting principles
GAAP) which leads to prepare another set of accounts to comply with Generally
18