Malwina Mroczkowska BTEC National Diploma in Business Studies

Unit 7, Introducing Management Accounting Assignment 4

Malwina Mroczkowska

How accounting and statistical information would have been used to create the budgets?

A budget is a plan for the future based on the figures that we know and the estimations. It is useful because with this we can forecast the position of the business, set targets and monitor performance toward those targets. Business could analyse the achievement to make decisions and take appropriate actions for improvement. Budgets should be managed over set timescales that are realistic and, ideally, fit in with business funding arrangements allowing finance staff to complete their tasks in time for grant claims, for instance. Budget helps managers to measure whether they are achieving what they set out to achieve. If they are under or over budget they can take steps to correct position. The information should be reliable, otherwise business would comes up with false findings and the real situation of the business would still not be know.
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How accounting and statistical information would have been used to create the budgets?

Budget helps managers allocate resources at start of a period like: In which areas is business going to invest How much will be spent on marketing & promotional activities this year How many employees does the business need what will they be paid? Provide a way of allocating responsibility among employees Managers are given their own budgets and are responsible for controlling how the budget is spent or achieved. There are many different types of budgets that businesses use: Sales Purchases of materials Debtors and creditors Cash Overheads Capital Expenditure Master budgets (forecast)
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State the purpose of each budget and explain them.

There are many different budgets businesses uses to look at the performance and to forecast the future which are explained below:

http://www.answers.com/topic/capital-expenditure-budget

Sales budget( other name sales forecast)

Shows the expected sales for the budget period; typically, it is expressed in both pounds and units of production. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time. In other words, it is a break-down of how many products business aims to sell and how much revenue it will get from those sales

Purchases of materials This type of budget would only be prepared by manufacturing businesses. This budget will use the figures proposed on the Production budget to determine the amount of raw materials needed to compensate for manufacturing the required number of units. At this time, it may be useful to research your suppliers to determine that the quality of the material supplied reflects what you are currently paying: it does not always involve looking for the cheapest supplier.

Debtors and creditors This budget is useful for businesses because by the end of the month it is possible to check whether expected figures are the same as ours actual. It is crucial that debtors are managed effectively, so that the money will comes in quickly and that business will not will not finished with bad debts. Debtors budget include: opening balance, sales, subtotal of the previous two, receipts, bad debt and our closing balance.

Capital Expenditures budget Plan prepared for individual capital expenditure projects. The time span of this budget depends upon the project. Capital expenditures to be budgeted include replacement, acquisition, or construction of Malwina Mroczkowska 4 plants and major equipment

State the purpose of each budget and explain them.

Marketing budget

Describes how business intends to achieve budgeted sales (e.g. how much advertising, sales promotion)

Production budget Volume of production (units) and production costs to achieve it Used to help schedule work, order raw materials and manage capacity

Cash budget:
The cash budget is the link between all the individual budgets and the master budget. For those small businesses that can budget through a single document, this is what they will use. It forms an overview of how money will be moved to and from the business bank account. This cash budget will then form the proposed cash flow forecast for the budgeted period.

Cash flow budget Ties all other budgets together Helps understand what money is coming in (sales) and what money is going out (production and departmental

Overheads budget It is a schedule of all expected manufacturing costs except for direct material and direct labor. Factory overhead items include indirect material, indirect labor, factory rent, and factory insurance. Factory overhead may be variable, fixed, or a combination of both.
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Describe how these budgets would affect the cash budget and why its important to use this for target-setting.

All of the budgets that are explained in the previous slides make a cash budget. This is used to determine how much money the firm is likely to have every month. Smaller businesses would use the cash budget because it include the opening balance, which is the money that the business has at this moment, income which is taken from the debtors budget and any cash sales, together with the creditors sales from the capital expenditure sales. This would show them what they will use and what they can expect in the future. Expenditures would come from all other budgets. Those budgets would affect the overall cash budget because if they will be incorrect the whole budget will be wrong and misleading. It is important for target-setting because the business could compare previous findings and results, and set new target for the business.
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http://www.accountingformanagement.com/the_master_budget.htm

Describe how the budgets drown up so far can be used to drawn up departmental and master budget.

The master budget is a summary of company's plans that sets specific targets for sales, production, distribution and financing activities. It generally culminates in a cash budget, a budgeted income comprehensive complete statement, and a budgeted balance sheet. In short, this budget represents a expression of management's plans for future and how these plans are to be accomplished. It usually consists of a number of separate but interdependent budgets. One budget may be necessary before the other can be initiated. More one budget estimate effects other budget estimates because the figures of one budget is usually used in the preparation of other budget. This is the reason why these budgets are called interdependent budgets. Once the budgets are drawn up they will act as targets for the future can be compared with the actual figures to see how well the business is doing and where it is facing.
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Suggest why budgets need to be revised from time to time and why thought should be given to the relationship between costs and incomes at different activity level.

Main reason why budgets needs to be checking and redoing regularly is, that if they will occur a massive change in the short period of time this will mean that business should look at this closely and find out why does it change is occurring. Looking at the debtors budget we can see whether our bad debts are getting higher or not, the business might to consider to take an appropriate actions to improve. Another action that the business may consider while looking at the budgets is to change activity levels. Business may consider expanding or declining the fixed assets that are available like: Its pricing strategies Break-even point Purchasing policies Marketing expenditures Production or labour strategies Overheads Cash situation This would give to the business an opportunity to improve and to compare figures with previous years.

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http://basiccollegeaccounting.com/standard-costing-definitionuses-advantages-part-1/

Standard costing- definition

Standard costing involves using the predetermined costs to compare them with the actual to find the difference or variance. Variance can be adverse (actual result is worse then standard or predicted) or favourable (actual result is better than standard or predicted). Standard costing is for improving costs / cost control, simplify stock valuation and improving costing and pricing of products.

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Standard costing- usage Standard cost for Mr. Jones

Overheads Materials Labour Variable overheads Total Selling price amount used 0.5 meter 1 hour 1 hour price 12 per meter 4 labour hour 0.40 per hour standard cost 6.00 4.00 0.40 10.40 15.00

This means that the variance is favourable because selling price is 15 and to make a pair of shoes is costs 10,40.

Short term target setting can be monitored by the standard costing because we can look at the changes in the materials as well as looking at the time it takes to produce a product to provide the service. Then we can compare it with our previous one to see if it changed or not. We can also look at the prices and then conclude if we would like to change our supplier or change wages of our employers or not.
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http://www.bized.co.uk/educators/16-19/business/strategy/lesson/performance.htm

Sales and purchases variances

Variance analysis is used to monitor what is actually happening in the business such as costs, revenues and budgets in relation to our considerations. For example, a firm have worked out a cash-flow forecast and estimated quarterly revenues of 10 million. If the actual revenue shows a figure below that 10 million then this is referred to as negative variance and may trigger the need to take some curative action or to do investigations into what may be happening to have caused the negative variance.
Sales variance (Revenue) actual budget variance January 1150 1250 100 A
January
budget purchases Actual purchases variance

February 1219 1314 95 A

February 625 492 133F

March 1394 1688 294 A

April 953 1046 93 A

May 794 1050 256 A

May 523 393 130F 525 400 125F

June 1353 1712 359 A

June 856 607 249F
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Purchases variance March April 657 462 195F 844 564 280F

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Sales and purchases variances

Variance in sales ()
January February March April May June

budget sales
actual sales variance

18,750
18,400 350F

19,710
19,500 210F

25,320
23,700 1,620 F

15,690
16,200 510 A

15,750
14,300 1,450 F

25,680
25,700 20 A

Variance in purchases ()
January budget purchases February March April May June

7500

7884

10128

6276

6300

10272

Actual purchases
variance

5900 1600F

6000 1884F

7900 2228F

5500 776F

6000 300F

9100 1172F

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How sales and purchases variances can be used to monitor performance.

Sales and purchases variances are useful because they can be used to monitor performances of the business and to conclude why these changes have occur. The business could compare his target sales with actual and see whether it is doing better or worst then it was predicted. Sales and purchases can change because of increase or decrease in demand, costs and prices like seasonal products. It also can be useful by the business to see if they are doing any better or worst over a time because they can compare those figures with one from previous years or competitors if they have an access to such a data.
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How a summary of operations that shows the overall variances for the year can assist with decision-making and informed actions

The summary of operations that shows the overall variances for the year can assist with decision-making in many different ways, for example we can use those data to analyse our performances. We could look at the summary of operations to find the variance in between our actual and predicted budget and by this we are able to drawn up a summary. If the sales are higher than expected we are saying that the variance is favourable, while if our figures would be lower we would say that the variance is adverse. The manager of the business would look at the reasons for variances and find out how it would affect other figures in our organisation. This would help us with many important decisions, like changing the price, quantities of goods or service sold, marketing strategies, wages, and our expenses or combination of all of them.
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Strengths and weaknesses of the budgetary techniques

Advantages
http://wiki.answers.com/Q/Limitations_of_standard_costing http://wiki.answers.com/Q/Advantages_of_variance_analysis

Disadvantages The major problem with a variance analysis approach to project monitoring is the amount of time it takes to establish actual costs. On the majority of large projects, supported by a typical accounts department, there will be a time lag of around 6 weeks before spend information can be accurately reported. The monitoring cycle can be so long that it renders the application of control impossible. Typically, by the time a problem has been identified through variance analysis it is too late to take corrective action Main disadvantage of standard costing is that it cannot be used in those organisations where nonstandard products are produced. If the production is undertaken according to the customer specifications, then each job will involve different amount of expenditures. The process of setting standard is a difficult task, as it requires technical skills. The time and motion study is required to be undertaken for this purpose. These studies require a lot of time and money. For instance, if the industry changed the technology then the system will not be suitable. In that case, we will have to change or revise the standards. A frequent revision of standards will Malwina 15 become costly. Mroczkowska

Variance analysis is intrinsically connected with planned and actual results and effects of the difference between those two on the performance of the entity or company. This variance analysis can lead to the identification of certain types of task that frequently overrun their budget whilst other tasks may be seen to regularly come in under their budget. Occurrences such as these require further investigation in order to identify potential efficiency gains. Standard costing provides the best basis for estimating future cost and contribute to the planning/budgeting function. It also assist in the comparison of the actual with the planned to evaluate managerial performance. By focusing on the variance whether adverse and favourable, it enable the management to identify and take action to correct or improve present and future planning and control. The setting of standards will require the looking at the methods and operations which will lead to improvement in efficiency by eliminating inefficiencies and provides a basis for estimating prices, costs and the effect of prices fluctuation on costs.

Analyse different types of information and explain importance of them.

Production data is an important piece of information that the business can use to asses the future and to compare it with the previous years. From the production data we can see if our business is expanding or not, we can also see in which months our production is higher and in which is it lower, and this may affect our future target . Sales, costs and profits in previous accounting periods is useful because the business can compare figures from the past and predict the future. It can also improve performance by monitoring regularly those figures. We can see in which way business is going and we can also compare our sales to indicate what would be the best price for product. We could compare our profits with the previous one and make changes which are needed to improve the performance. It is also easier to find and problems and decreasing and improve them.

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http://svais.edb.gov.hk/src/latest/manual/ma.asp

Analyse different types of information and explain importance of them.

Change over time- business can compare changes by monitoring frequently any variances that occur in the business and find out why they happen. Changes over time can be due to changing the price, suppliers etc. We can also compare the variance in between our budgeted and actual figures and by monitoring them frequently. Moving averages and seasonal variations- by analysing the seasonal variances, the business would simply see in which months the sales is higher and in which is it lower and then make steps to improve the sales in more quiet seasons e.g. Invest more in the advertisements. By looking at the moving averages and comparing them the business can set targets because it is easier to see changes in the sales and trends that occur and when they occur. One major advantage of moving average is to eliminate fluctuation in one single year when identifying the trend of data.

Price indices and trends detected in previous accounting periods are other pieces of information, which are important for the business to monitor. Monitoring trends can be useful because by them, a business see if there are any variations or fluctuations. Trends can also help with determining future moves of the business or changes like expanding. Monitoring price indices can help to asses the price of goods, which the business is selling or whether is would be better to increase or decrease the price. Malwina Mroczkowska 17

Original break-even table from assignment 2

Units Fixed Costs () Variable Costs () 0 11,500 250 500 750 1000 1250 1500 1750 2000 2250 2500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 11,500 3,000 6,000 9,000 12,000 15,000 18,000 21,000 24,000 27,000 30,000

Total Costs () Sales Revenue () 11,500 14,500 17,500 20,500 23,500 26,500 29,500 32,500 35,500 38,500 41,500 7,500 11,250 15,000 18,750 22,500 26,250 30,000 33,750 37,500

Profit or Loss - 11,500 10,750 10,000 9,250 8,500 7,750 7,000 6,250 5,500 4,750 4,000 - - - - - - - - -

3,750 -

3834 4500
4950 5500 6123 7668

11,500 11,500
11,500 11,500 11,500 11,500

46,008 54,000
59,400 66,000 73,476 92,016

57,508 65,500
70,900 77,500 84,976 103,516

57,510 67,500
74,250 82,500 91,845 115,020

2 2,000
3,350 5,000 6,869 11,504
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Malwina Mroczkowska

Increase of variable costs by 11%.

Quantity Fixed Costs () Variable Costs () Total Costs () Sales Revenue () Profit or Loss 0 11,500 - 11,500 - - 11,500 250 11,500 3,330 14,830 3,750 - 11,080 500 11,500 6,660 18,160 7,500 - 10,660 750 11,500 9,990 21,490 11,250 - 10,240 1000 11,500 13,320 24,820 15,000 - 9,820 1250 11,500 16,650 28,150 18,750 - 9,400 1500 11,500 19,980 31,480 22,500 - 8,980 1750 11,500 23,310 34,810 26,250 - 8,560 2000 11,500 26,640 38,140 30,000 - 8,140 2250 11,500 29,970 41,470 33,750 - 7,720 2500 11,500 33,300 44,800 37,500 - 7,300 3834 11,500 51,069 62,569 57,510 - 5,059 4500 11,500 59,940 71,440 67,500 - 3,940 4950 11,500 65,934 77,434 74,250 - 3,184 5500 11,500 73,260 84,760 82,500 - 2,260 6123 11,500 81,558 93,058 91,845 - 1,213 7668 11,500 102,138 113,638 115,020 1,382
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Increase of selling price by 20%

Quantity Fixed Costs () Variable Costs () Total Costs () Sales Revenue () Profit or Loss 0 11,500 - 11,500 - - 11,500 250 11,500 3,000 14,500 4,500 - 10,000 500 11,500 6,000 17,500 9,000 - 8,500 750 11,500 9,000 20,500 13,500 - 7,000 1000 11,500 12,000 23,500 18,000 - 5,500 1250 11,500 15,000 26,500 22,500 - 4,000 1500 11,500 18,000 29,500 27,000 - 2,500 1750 11,500 21,000 32,500 31,500 - 1,000 2000 11,500 24,000 35,500 36,000 500 2250 11,500 27,000 38,500 40,500 2,000 2500 11,500 30,000 41,500 45,000 3,500 3834 11,500 46,008 57,508 69,012 11,504 4500 11,500 54,000 65,500 81,000 15,500 4950 11,500 59,400 70,900 89,100 18,200 5500 11,500 66,000 77,500 99,000 21,500 6123 11,500 73,476 84,976 110,214 25,238 7668 11,500 92,016 103,516 138,024 34,508
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Analysing the cause of changing selling price and costs, and how it affects of profit.

In assignment 2 I have created the tables, which showed how changes of the costs and selling price would affect on the profit of the business. If we would like to look at the changes of variable costs, we see that if they would increased by 11% the business would make less profit because the costs would be higher and the business would have to sell more to make profit. If Mr. Jones would like to increase the selling price of his products by 20% this would means that to make profit business could sell less, however it could be dangerous because increase of price would affect that some of customers might not afford news price it and the business would loss some customers and money at the same time.
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http://www.answers.com/topic/cost-plus-pricing http://www.investorwords.com/6463/cost_plus_pricing.html

The impact of increase/decrease in costs on the selling price where the costs-plus pricing method is used.

There is also a huge impact of increase or decrease in costs on the selling price where the cost-plus method is used. Costs plus method is calculated by adding the total variable costs and fixed costs and then dividing by the total number of units to be produced. This will determine the true unit cost It is calculated as: (average variable cost + % allocation of fixed costs)*(1+ markup %). If the costs would increase the selling price would increase as well, while if the costs would decrease the selling price would drop.

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The effect on the break-even point that is affected by changes of the costs or sales.

As we can see the original break-even point for Mr. Jones business was 3843. If Mr. the variable costs would increase by 11%, the break even point of the business would be higher. The reason for this is that if the costs of sales will go up, profit would drop, so business would need to sell more to make a profit and to meet the new break-even point. Increase of the selling price by 20% would have a positive effect on the break-even point on the Mr. Jones business. The original break-even point would be higher then new break even point, which could be lower, so the business could sell less and still make a profit.
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How budget activities need to change to maintain profits when such changes occur.

If some activities would increase the costs of sales of the business, this would affect on the level of the budget activities. As we previously mention, increase of the costs could affect the break-even point and a profit of the business itself. Business would have to produce more trainers, which they could sell later and by this they may become more solvent. The selling price will affect on the level of trainers which are produced if the business needs to make a profit. Higher selling price means that organisation may sell less in the higher price, so business could produce less trainers and still make the profit if the price will be not too high, but at the same time if the increase would means more money that comes into the business.

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Summary of operations for Mr. Jones business.

Sales Materials Labour Variable overheads Total Variable costs Contribution Fixed overheads Profit

Mr. Jones summary of operations Gain or Actual Costs Budget: Actual Sales: Reduction in and 8060 6863 Profit Revenues 120,900 102,943 17,957 A 117,800 48,360 32,240 3,224 83,824 37,076 6000 31,076 41,178 13,686 2,745 57,609 45,334 6,000 39,334 8258 F 7,182 F 18,554 F 479 F 40,400 19,700 2,200 62,300 55,500 6,400 49,100

Variance 14857 F 778 F 6014 A 545 A 4691 A 10166 F 400 A 9766 F

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What does the summary of operations shows?

The 4th column in the summary of operations is gain or reduction in profit. This shows us the effect in costs and revenues when the business makes a different number of units than business has planned to do in the forecast budgets. Last column in the summary of operations is the variance. This demonstrate us the impact of changes in selling price, costs and finally if the profit which business planned to achieve in our estimations.
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What are possible reasons for all of the variances?

Variance Sales Materials Labour Variable overheads Total Variable costs Contribution Fixed overheads Profit 14857 F 778 F 6014 A 545 A 4691 A 10166 F 400 A 9766 F

As we can see our sales figures are higher than expected. This means that Mr. Jones business managed to sell at a higher price during the year. On the other hand, this could have an effect at the number of units that business sold. As we can see in the summary of operations it was lower than business expected in the forecast. Costs of materials which we used was also lower than we assumed. This can be due to this that we have sold less than it was predicted. Business could also change the supplier for cheaper, but this could affected on the quality of goods and decrease in quantity of goods sold or increase in the wastage. Labour was adverts, there are many reasons that could be responsible for this like over the year the staff could have changed, and the time new workers needed to produce goods was longer, and by this business needed to pay more for wages.
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What are possible reasons for all of the variances?

Variance Sales Materials Labour Variable overheads Total Variable costs Contribution Fixed overheads Profit 14857 F 778 F 6014 A 545 A 4691 A 10166 F 400 A 9766 F

Another reason could be that change to cheaper supplier could cause more wastage for the business, so there could be increase of the time of the labour and this could linked to the increase of variable overheads. We also see that our fixed overheads were higher by 400 than expected. As we know fixed overheads don't change due to the level of goods produced. Overall, we are able to see that out businesss profit has increased by 9766 , even though we sold less than expected.
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Suitable management decisions/ actions which might be taken based upon the variances discovered.

Looking at the summary of operations we can see that manager should take actions, which will improve the performance of the business and to minimise the variances in between budgeted and actual costs. The sales of the business were lower than predicted. Manager should look at the pricing strategies as well as its marketing, that the business uses. Amount of materials that business used was lower, however this can be due to the lower sales. Business could produce less or there could be less wastage of materials. Labour was as twice lower as business predicted. This could be because there was less staff needed as sales were lower or staff was more qualified so it took them less time to produce trainers. Manager could link this to the decrease of sales, then again if staff would be more trained they could produce even more trainers and the selling price could goes down so more people would buy goods. Malwina Mroczkowska

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Suitable management decisions/ actions which might be taken based upon the variances discovered.

List of things that manager should consider to improve business performances: pricing strategies Marketing strategies like advertisements etc. quality of materials Quantity of materials business is purchasing level of qualified staff Decrease of wastage Costs of variable overheads Costs of fixed overheads, for example cost of rent, insurance, delivery vehicle etc.
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http://en.wikipedia.org/wiki/Variance_analysis_%28accounting%29

The importance of a variance analysis

Variance analysis, in budgeting is a tool of budgetary control by evaluation of performance by means of variances between budgeted amount, planned amount or standard amount and the actual amount incurred/sold. Variance analysis can be carried for both costs and revenues. Variance analysis allows managers to identify problems, which need deeper investigation with a view to implementing remedial action.

The value of variance analysis lies in managers being able to isolate where costs that increased are actually occurring and take remedial action in that specific area.
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Importance of a variance analysis

1. Useful control information is provided by the standard: actual comparison and the resulting variances. Standards provide a yardstick against which to compare actual costs. 2. The variances allow management by exception to be practised. 3. The technical analysis necessary to set standards may lead to better methods, greater efficiency and lower costs; after considering materials, manning, methods and machinery. 4. Motivation and cost consciousness may be stimulated. It is a target of efficiency towards which employees may strive. 5. Variance analysis may help to define areas of responsibility. 6. The standards set are a useful aid to establishment of budgets, prices and production schedules. Standard costs may rationalise pricing policy. 7. Standard costs simplify record keeping and stock valuation because standards are used throughout the system, which can be used to calculate the variances
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http://idari.cu.edu.tr/sempozyum/bil55.htm

http://wiki.answers.com/Q/Advantages_of_variance_analysis

Advantages and disadvantages of a variance analysis

Advantages of variance analysis: Variance analysis is intrinsically connected with planned and actual results and effects of the difference between those two on the performance of the entity or company. This variance analysis can lead to the identification of certain types of task that frequently overrun their budget whilst other tasks may be seen to regularly come in under their budget. Occurrences such as these require further investigation in order to identify potential efficiency gains. The major problem with a variance analysis approach to project monitoring is the amount of time it takes to establish actual costs. On the majority of large projects, supported by a typical accounts department, there will be a time lag of around 6 weeks before spend information can be accurately reported.

Disadvantages of variance analysis: The monitoring cycle can be so long that it renders the application of control impossible. Typically, by the time a problem has been identified through variance analysis it is too late to take corrective action. This is a major shortcoming of variance analysis and highlights the need for a monitoring system that depicts the current status of the project more effectively.

Malwina Mroczkowska

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