INTRODUCTION

Budget is a measurement and setting parameters to act in the according way as similar to such

measurement or parameters. Budget is prepared to guide the operations of the organization. It

is a way to keep a check on the activities of all the managers as well as staffs along with the

variance reports. In the present scenario the ability to plan the financial management

approaches and managing resources efficiently is the basic ingredient. Classifying the budget

plan and negotiating the changes with the mangers is the need of the hour. Also the risk

identification and its analysis of the budget are required. After the above we need prepare a

contingency plan to prevent or minimize the risk. The areas of the budget are not only

inaccurate and unclear but also not achievable, we need to identify it and prove the same. The

usage of basic accounting principles is required to identify changes and negotiate the same

with the manager. In the financial management of an organization its organizational

requirements, its policies, its procedures all are need to be taken care of. Also the principles

and techniques are involved in the preparation of the budget to a large extent. (Cost

allocation, 2015)

TASK A

In Task A the role played is of a manager of sales centre A, based in Adelaide. The cost

allocation of this centre depicts $20,000 as commission, $100,000 as wages, $3,000 as

telephone expense and $1,000 as the expense for office supplies. All in total the expense

budget shows an expense of $124,000 for this centre. This centre has a larger employee base

and higher number of sale staffs. It outsells the other two centres and expects to sell as much

volume as put together by the two centres.

The cost allocations need to depict the needs and importance of the centres sales volume but

in the budget all the centres are allocated with equal cost in same proportion. Cost allocation
is a process of distributing the cost of the organization in such a manner that it shows the

actual consumption of such cost in providing any product or services. Some direct costs

which are only related to the particular centres are directly allocated to such centre without

any sharing as it is directly allocable. Such expenses are solely consumed in the preparation

of product or providing any services by one such particular centre. This type of cost need not

to allocated, they are known as directly allocable cost. Some costs which are common in

nature since more than one cost centre is consuming its benefits and cannot be directly

allocable for example rent of the warehouse or the electricity of the factory. In this scenario

the cost are allocated on some rational basis like the area of the warehouse used by each

centre or the units consumed by each product of different centre. (Averkamp, 2015)

In the past years this allocation of indirect costs were done on an arbitrary basis but with the

passing years new and more logical basis have been found to allocate these resources such as

direct labour hours, machine hours, space usage, etc. An efficient allocation method will

depict the correct cost requirement of that particular centre. It will help the manger to know

what their cost recovery is. They will be encouraged to see that their sales volume is able to

recover their cost. Not only that the mangers of the sales cost centre will also be informed

about their actual contribution in the net profit of the organization and can accordingly

negotiate their incentives and profit share if any. They can also make a trade off between

their costs incurred and the products sold or services provided to set the benchmark between

the internal costs and the outsourcings. (What are the steps in preparing a budget?, 2015)

The preparation of the master budget follows certain guidelines which can be discussed as

follows:
  The budget of the last fiscal year is update with certain necessary changes. This is

generally done when the organization has no much change in its operations or

structure.

 Before the preparation of the master budget the bottleneck of the organization is

identified on the basis of capacity level of all the essentials. Once the bottleneck is

identified it gets easier to find the production level as well as purchase level.

 Availability of funds is also very essential while preparing a budget since the

application of fund cannot exceed the sources of funds.

 Certain step costs arise when activity level is increased. These step costs need to be

taken care of as these arise occasionally on certain level change.

 Revenue forecast is quite essential as it is the basis for many of the centres and other

budgets apart from the master budget so as to keep their sales volume determined.

 After identifying the bottleneck and preparing the master budget all the department

budgets are updated and followed accordingly.

 If necessary sometimes the budget model are also updated or even changed if

required.

 The budget is reviewed for any discrepancies or biasness and then distributed to all

the managers and recipients who are authorized to receive so.

 The budget is loaded into the system i.e. the financial software so that a variance

report is generated through system itself at the end of the period. (How to prepare

budget, 2015)

In the present case the master budget is prepared for the financial year 2011-2012 which is

further bifurcated in quarterly details. Although the quarterly details of all the expenses and

revenue items is given but it does not show a true and fair view of the quarterly activities. As

we can see in the budget that the total expense or the revenue are equally divided in all the
four quarters and this is absolutely abrupt. It is mentioned in the given case study that

generally the in all the other three quarters the sales is 30% lower when compared with

quarter 2. If such is the case then the sales of all the four quarters cannot be same as shown

$750,000. This kind of practice will not show the true and correct view of that particular

quarter’s achievement or failure. At the same time it is also mentioned that Q2 sales depends

upon the completion of 90% of repair & maintenance but the uniform cost of $12,500

throughout the year in every quarter prevents the readers of the budget to know the actual sale

of Q2. Few expenses which are constant throughout the year and are expended annually will

be shown equally each quarter but the expenses which are directly related to the particular

quarter and are related to sales directly should be shown particularly to that quarter. This will

help us know the actual profit of that particular quarter and we can improve and work on our

discrepancies from the next quarter. (Revenue Allocation, 2011)

Although the tax is paid annually on the final profit figure at the yearend but the advance tax

paid in the regular interval throughout the year can only be calculated on correct basis if the

revenue and expenses are correctly deducted quarterly. This will allow the tax payer to avoid

any delay or extra payments unnecessarily. (Definition of Revenue Allocation, 2015)

TASK B

Risk is the probability of changing a threat into event resulting in a disaster depending upon

the nature of its impact. The Managing Director, Tom Copeland wants us to identify and

analyse the risk of Big Red Bicycle Pty ltd. so as to assess it and mitigate the same. He also

wants us to prepare contingencies plan regarding those identified risks. (Team, 2012)

As per the given scenario of the enterprise it can be seen that the organization is selling only

in the domestic market i.e. its sales are limited to the nation boundaries, but they are planning

to outsource their production to the overseas industries so as to take advantage of the reduced
costs. In this process the company might land up into a fiasco since the import duties of the

product while bringing it back to Australia might even surpass the benefit of the reduced cost

overseas. If the company really want to enjoy the reduced cost benefit they should find

market overseas in that particular nation and complete their operating cycle in that nation

itself. (Fry, 2014)

The further analysis of the organization’s data mentions that it has the profit target of

$1,000,000 which is not far from the present earnings before interest and tax i.e. $938,500.

The problem is that this present figure is even before deducting interest which means the risk

of higher interest expense will make it more difficult to reach the target. The forecast says

that due to economic downturn the sales are going to fall also the wage expense are going to

rise this all are the risk of impacting the net profit adversely. (Risk Management Process)

Organization wishes to diversify its product range in order to reduce the exposure of poor

sales in one product but the organization must keep in mind that diversifying its product

range will also distribute its concentration and focus over one product production. At the

same time company might lose its core competency over one product and will incur extra

CAPEX which will increase the cost. Despite all such cost incurred it is also possible that

market does not accept the new product, this will adversely impact the profit figure. (Risk

Management Approach to Budget Planning)

It has been negotiated that the sales team are now going to get 2.5% as commission instead of

2%. Now if the sales volume does not compensate the same then it is again going to pull

down the profit element.

The forecast of 20% lower sales volume is expected bring down the profit as mentioned

above, it is also analysed that the enterprise can only bear the variance of 10% in the profit

figure. Variance more than that, will affect the ability to meet its obligations or invest. As a
result, if such happens then it will impact the goodwill of the organization and is going to

hamper the credibility of the organization. (R. Craig Finley, 2015)

As per the software applications used in the reporting purpose the organization is going to

produce all its accounting information data from its system i.e. MYOB accounting system

whereas generating its variance report from the excel format which is easily editable.

(Summary of Directorate Based Budget Risk)

CONTINGENCY PLAN TEMPLATE

Contingency Plan

Company name: Big Red Bicycle Pty Ltd

Person developing the plan:

Name Position

Risk identified:

1. Risk of high duties paid due to overseas production and domestic sale.

2. Risk of higher interest expense.

3. Risk of losing core competency due to newly diversified product range.

4. Risk of not recovering the increased sales commission.

5. Risk of losing goodwill and credibility due to unmet obligations.

6. Risk of tampering with important data of the organization.

 Strategies/activities to minimise the risk By when By whom

By the CEO

same
1. Selling the product overseas along with its production MD &
accounting
overseas and completing the operating cycle there
CFO
year
itself.

During the CFO,

year, as
2. Funding should be made from the source which does Operations
soon as
not increase the interest expense, such as issuing equity General
possible to
shares after redeeming the interest bearing funding. Manager
reduce the

interest

expense.

3. Focusing on Total Quality Management and take Since the MD,

proper steps to promote the new product so that very

Production
customers are able to trust it and accept it. beginning
Manager &
of the
Sales
production
Manager
process.

Even before

that will be

good.
 4. Increased sales commission will encourage the sales In the Operations

staff but still if it is not recovered then trying to reduce present GM,

the other cost will save the impact on profit figure. accounting
Sales GM
year.
&

HR

Manager

5. Avoid investing at the period of economic downturn & Throughout MD &

poor sales scenario. Also try to cut down the extra the
CFO
obligations. downturn

phase.

6. Keep the data password protected and allow only in the At the time Operation

authorized hands. Also some features in excel like of preparing GM &

Macros can be used to generate the reports. reports.

Senior

Accountant

Bibliography
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