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INDEX

Introduction..............................................................................................................................11 Task 1 The purpose and nature of the budgeting process......................................................................11 Appropriate budgeting methods for the Sefton Limited and the preparation for budgets according to the chosen budgeting method..................................................................................................14 Task 2 Operating statement reconciling budgeted and actual results, the calculation of variances, the identifying causes and recommendation for corrective action.....................................................21 Report findings to management in accordance with identified responsibility centers.................27 Conclusion.................................................................................................................................... Reference list................................................................................................................................

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Introduction The purpose of management accounting in any organizations is to support competitive decision making by collecting, processing, and communicating information that helps management plan, control, and evaluate business processes and company strategy. A management system, therefore supplies reliable, accurate information to the management team of a company. These figures are used for planning for future goals of the company. Assigned as Management Accountant of Sefton Ltd, this paper has been prepared to analyze in two parts Part 1: The purpose and nature of budgeting process, budgeting methods and preparation for budgets through Budgeted Income Statement, Cash Budget, and Budgeted balance sheet Part 2: The calculation variances, the operating statement, possible causes in variances with recommendation, and report to identify responsibility centers Based on the information, Managing Director of Sefton can improve the budget through appropriate budgeting methods, and the standard costing system

Task 1 The purpose and nature of the budgeting process


A. Purpose of budgeting process In a business, making decisions, which affect the profitability of the company, are occurred every day. To make effective decisions and coordinate the decisions and actions of the various departments, a business needs to have a plan for its operations. Planning the financial operations of a business is called budgeting. (Purpose of budget, no date)

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A budget is A quantitative statement, for a defined period of time, which may include planned revenues, expenses, assets, liabilities, and cash flows [1] A budget has five main purposes: Communication In the budgeting process, managers in every department justify the resources to achieve their goals. They explain to their superiors the scope and volume of their activities as well as how their tasks will be performed. Thus, this communication between superiors and subordinates will help to Coordination Planning ensure the achievement of companys goals Different units in the company must also coordinate the many different tasks they perform to maximize integration of effort toward common goals A budget is ultimately the plan for the operations of an organization for a period of time. Many decisions are involved, and many questions must be answered. And the managers will decide the most effective ways to achieve Control the budget target for the operation under personal control Spending within the budget and having responsibility to achieve revenues specified within the budget are very important. Budgets and actual revenues and expenditures are monitored constantly for variations and to determine whether the organization is on target. If performance does not meet the Evaluation budget, action can be taken immediately to adjust activities. Evaluation can be provided by comparing the budget with actual performance. It is a part of controlling budget, and also provides an incentive for improving future performance. (Purpose of budget, no date) B. Nature of budgeting process The nature of budgeting process can be summarised by this graph:

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However, to prepare the budget effectively as a useful financial tool, business must implement the proper steps:
Step 1: Identification of the principal budget factor

Determining the principal budget factor is also the first task in the budgetary process of any businesses. This is also known as the key budget factor or limiting budget factor and is the factor which will limit the activities of an undertaking. This limits output, e.g. sales, material or labour. (Budgetary control, no date)
Step 2: Preparation of sales budget Step 3: Preparation of finished goods stock budget Step 4: Preparation of a production budget Step 5: Preparation of budgets of resources for production Step 6: Preparation of overhead cost budgets Step 7: Co-ordinate and preview of budgets

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Step 8: Preparation of a master budget

For example, if sales volumes are the principal budget factor, the stages involved in budget preparation can be:

Preparing sales budget and the finished good stock budget firstly to decide the planned increase or decrease in finished goods stock level.

Then, according to the information of sales, and stock budgets, the production budget can be prepared

Next, preparing the budget of production resources, which relate to materials usage budget, machine usage budget, and labour budget.

After that, the managers will prepare their draft budgets for the department overhead costs, which include maintenance, stores, administration, selling, research, and develop

From the above information, a budgeted profit and loss account can be produced Besides, several other budgets must be prepared to arrive at the budget balance sheet ( capital expenditure budget, working capital budget)

Appropriate budgeting methods for the Sefton Limited and the preparation for budgets according to the chosen budgeting method
A. Budgeting methods

A sales budget is a detailed schedule showing the expected sales for the budget period. Typically, it is expressed in both dollars and units of production. An accurate sales budget is the key to the

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entire budgeting in some way, because it helps determine how many units will have to be produced. (Sales budget, no date) Besides, it gives a direction to a company with regard to its targeted sales, and improves the profitability. Moreover, it can be called a financial plan with regard to the amount of goods and services that it plans to sell in a year and the price at which the goods and services are to be sold. By the way, it brings lots of detailed benefits for company such as:

Helps company achieve its sales targets Prevents sales losses and provides a basis for sales evaluation Helps to integrate all departments in a company because achieving a sales target is the secret of making profits

Helps each department to assess their performance and correct any mistakes in function Distributes goods and services in a cost effective way Keeps companys marketing expenditure within affordable limits

(What is sales budget, no date) Therefore, sales budget can be chosen as appropriate budgeting methods for Sefton Ltd. B. Preparation for budgets I. Budgeted Income Statement

This is the calculation for the Budgeted Income Statement for the year ended 31/12/year3
a) Sales revenue

b) Material purchase value

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c) Closing inventory of raw material

d) Direct wages

e) Closing inventory of finished goods

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This is the Budgeted Income Statement of Sefton Ltd for the year ended 31/12/year3, according to the calculation above SEFTON Income Statement For the year ended 31 December, Year 3 Revenues Opening inventory of raw materials Purchases of raw materials Less: Closing inventory of raw materials Material costs used for production Direct wages Production overhead (given) Production cost of goods completed Opening inventory of finished goods Finished goods available for sales Less: Closing inventory of finished goods Production cost of goods sold
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$1,071,000 $20,000 $ 253,700 $ 14,000 $ 259,700 $ 448,500 $ 200,000 $ 908,200 $ 15,000 $ 923,200 $ 50,370 $ 872,830

Gross profit Selling and administration overhead Net profit before taxation Taxation (33, 33% of net profit before tax) Net profit after taxation Retained earnings b/f (opening) Retained earnings c/f II. Cash budget This is the Cash budget of Sefton Ltd for the year ended 31/12/year3 $ 36,951 $ 75,000

$ 198,170 $ 123,170 $ 86,219 $ 81,000 $ 167,219

III. Budgeted Balance sheet This is the calculation for the Budgeted Balance sheet at 31/12/year3 Non-current assets Opening cost Machinery purchase Total Less: Opening depreciation balance Production depreciation
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Buildings and Equipment $ 400,000 $ 120,000 $ 520,000 $ 75,000 $ 25,000

Selling depreciation Total depreciation Buildings and Equipment Current assets Raw materials Material M (4000 units*$2) Material N (2000units *$3) Total Finished goods

$ 5,000 $105,000 $415,000

Inventories $8,000 $6,000 $14,000

Inventories = Finished goods + Raw materials = $64,370 Receivables Opening balance Sales Less: Receipts (cash budget) Total receivables
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$ 25,000 $ 1,071,000 $ 994,000 $102,000

Current liabilities

Payables Closing payables balance Opening balance of payables Material purchases from budget Over head production ($200,000 - $25,000) Over head Selling & Administration ($75,000 - $ 5,000) Total Less: Material payments (cash budget) Overhead payments (cash budget) Total payments Total payables Taxation Opening taxation Less: Taxation Payment Taxation occurred Total taxation $ 5,000 $ 5,000 $ 36,951 $36,951 $159,000 $230,000 $389,000 $118,700 $ 9,000 $ 253,700 $ 175,000 $ 70,000 $507,700

Basing on this calculation above, this is the balance sheet of Sefton Ltd at 31 December, year 3 SEFTON Balance sheet 31 December, Year 3 Assets Non-current assets Land Buildings and Equipment Total non-current assets Current assets Inventories
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$50,000 $ 415,000 $465,000 $ 64,370

Receivables Cash at bank (cash budget) Total current assets Liabilities Current liabilities Payables Taxation Total current liabilities Net assets Financed by Equity Share capital Retained earnings (income statement) Total financed by Equity

$ 102,000 $ 41,500 $207,870

$ 118,700 $ 36,951 $155,651 $517,219

$ 350,000 $ 167,219 $517,219

Task 2 Operating statement reconciling budgeted and actual results, the calculation of variances, the identifying causes and recommendation for corrective action

Calculation of Variances:

(A)= Adverse; (F) Favorable $ 9,200 9.800 600 (A) 2,425 kg 2,300 kg 125 kg (F) x $4 $ 500 (F) $
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a) 2,300 kg of material should cost (x $4) But did cost Material price variance b) 4,800 units should uses But did use Material usage variance in kgs X standard cost per kg Material use in variance

c) 8,500 hours of labour should cost (x $2) But did cost Labour rate variance
d) 4,850 units should take (x 2hrs)

17,000 16,800 200 (F)

9,700 hrs 8,000 hrs 1,700 hrs (F) x $2 $3,400 (F) $1,000 (A) $

But did take (active hours) Labour efficiency variance in hours X standard cost per hour Labour efficiency variance in $
e) Idea time variance 500 hours (A) x $2

f) 8,000 hours incurring o/hd expenditure should cost (x $0.03) 2,400

But did cost Variable overhead expenditure variance

2,600 200 (A)

g) Variable overhead efficiency variance in hours is the same as the labour efficiency variance: 1,700 hours (F) x $0.03 per hour $510 (F) $ h) Budgeted fixed overhead (5,100 units x 2hrs x $3.70)37,740 Actual fixed overhead Fixed overhead expenditure variance i) Actual production volume Budgeted production volume Fixed overhead volume variance in units x Standard hours x standard fixed overhead absorption rate Fixed overhead volume variance 4,850 units 5,100 units 250 units (A) x 2hours x $3.70 1,850 (A) j) Fixed overhead efficiency variance in hours is the same as the labour efficiency variance: 1,700 hrs (F) x $3.70 per hour $6,290 (F) 42,300 4,560 (A)

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k) Budgeted capacity (5,100 units x 2hrs) Actual hours of work Capacity variance in hours x standard fixed overhead absorption rate per hour Fixed overhead capacity variance

10,200 hrs 8,000 hrs 2,200 hrs (A) x $3.70 $8,140 (A)

l) Revenue from 4,850 units should be (x $20) But was Selling price variance
m) Budgeted sales volume

97,000 95,600 1,400 (A)

5,100 units 4,850 units 250 units x $6 (A) $1,500 (A)

Actual sales volume Sale volume profit variance in units x standard profit per unit Sales volume profit variance in $ Reconciling budgeted & actual income statement $ Budgeted profit before sales and administration cost (5,100 units x $6) Sales volume variance Budgeted profit from actual sales Selling price variance Actual sales minus the standard cost of sales (F) $ Material price Material usage Labour rate Labour efficiency
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SEFTON LTD OPERATING STATEMENT 30th April 2010 $ 30,600 1,500 (A) 29,100 1,400 (A) 27,700 (A) $ 600 500 200 3,400

Labour ideal time Variable overhead expenditure Variable overhead efficiency Fixed overhead expenditure Fixed overhead efficiency Fixed overhead capacity 10,900 Actual profit before sales and admin costs Less: Sales and administration costs Actual profit, April 2010 Check Sales Materials Labour Variable overhead Fixed overhead Sales and administration Actual profit

1000 200 510 4,560 6,290 8,140 14,500 3,600 (A) 24,100 18,000 6,100 $ 9,800 16,800 2,600 42,300 18,000 89,500 6,100 $ 95,600

Identifying causes and recommendation for corrective action

In budgeting, a variance is the difference between a budgeted, planned or standard amount and the actual amount incurred/sold. Variances can be computed for both costs and revenues to know whether it is favorable (F) or adverse (A). [2]
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Favorable variance (F) shows that standard cost is less than actual cost or standard revenue is more than actual revenue. Adverse variance (A) shows that actual cost is more than standard cost or actual revenue is less than standard revenue

(Types of variance, no date) The classification of variance can be shown by this graph:
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According to the Calculation of Variances of Sefton above, the possible reasons for the occurrence of the variances and the recommendation for corrective action can be seen through this table below: Variance Material price Favorable Adverse Careless purchasing Corrective action Prepare a detail material schedule planning of purchasing raw materials in accordance scope of work to avoid the Material usage Storing good materials in warehouse Labour rate Use of apprentices or other workers at a rate of pay lower than standard redundancy Maintain and develop more and more good storage system conform to for material warehouse standards

storing Continue hiring apprentices or other workers with acceptable wages, and providing the standard entitlements (e.g. sick, annual, parental, leave, overtime etc) to not only make them satisfied but also maintaining the savings for company Maintain and invest in the best
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Labour

Output produced

efficiency

more quickly than expected because of work motivation, better quality of equipment or materials

equipments efficiency.

to

improve

overall

Develop better work environment and motivation activities (rewards, bonus, ) to make sure all employees feel Machine breakdown satisfied Identify the machines errors occurring frequently and provide faster electronics repair service to reduce machine breakdown time as well as diagnosis for the failure and guidance to avoid such failures in future. Find and chose the suitable type of services, but need to consider about the standard variable overhead expenditure to avoid increasing too much in actual variable overhead expenditure Changing in type of Find and chose the suitable type of services used services, but need to consider about the budgeted fixed overhead to avoid increasing too much in actual fixed overhead Increase in selling price but still provide the best qualitys products for customers. Create and develop lots of new advertising campaigns to attract lots of customers

Ideal time

Variable overhead expenditure

Changing in type of services used

Fixed overhead expenditure

Sales price

Price demand Increased

increase

following increased Sales volume sales

resulting from new advertisements

Report findings to management in accordance with identified responsibility centers


To: Managing Director
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From: Management Accountant Date: 12 Dec 2011 REPORT ON IDENTIFYING RESPONSIBILITY CENTERS 1. Executive summary 2. Methods of research 3. Findings 4. Recommendation EXECUTIVE SUMMARY This report highlights the responsibility accounting through controlling profit and cost centers. METHOD OF RESEARCH This report has been compiled from research findings designed to show: Cost center Revenue Profit center

FINDINGS Cost center Cost center is a division that adds to the cost of an organization, but only indirectly adds to its profit. In Sefton, the cost center include the

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REFRENCE LIST

Budgetary control, no date, 6th Dec 2011, < http://www.fao.org/docrep/W4343E/w4343e05.htm> Purpose of budget, no date, 6th Dec 2011, < http://accmana3d.tripod.com/id2.html> Sales budget, no date, 6th Dec 2011, < http://www.accountingformanagement.com/sales_budget.htm> Types of variance, no date. 6th Dec 2011, < http://www.svtuition.org/2011/06/types-ofvariance.html> What is sales budget, no date, 6th Dec 2011, < http://www.ehow.com/about_4699902_what-salesbudget.html>
[1]

: Management Accounting: Costing & Budgeting Course book, 2007, 1st edition, Great Britain:

BPP Professional Education, chapter 8, section 1, page 178


[2]

: http://en.wikipedia.org/wiki/Variance_(accounting), viewed 6th Dec 2011

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