Management Accounting - Assigment 2

BANKING ACADEMY, HANOI
BTEC HND IN BUSINESS (FINANCE)
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Unit 9: Management Accounting: Costing and Budgeting
Budgetary Planning and Control
2 of 2
Mr. JUN ALEJO BATHAN
04 December 2011
06 February 2011

We, __________________________ hereby confirm that this assignment is our own work and not copied
or plagiarized from any source. We have referenced the sources from which information is obtained by us
for this assignment.

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Unit Outcomes
Outcome

Prepare
forecasts
and
budgets for
a business
(3)

Monitor
performance
against
budgets
within a
business
(4)

Evidence for
the
criteria

Feedback

Assessor’s
decision

Explain the
purpose and
nature of the
budgeting
process

a

Select
appropriate
budgeting
methods for the
organisation
and its needs

b

Prepare
budgets
according to the
chosen
budgeting
method

c

Prepare a cash
budget

d

Calculate
variances,
identify possible
causes and
recommend
corrective action

a

Prepare an
operating
statement
reconciling
budgeted and
actual results

b

Internal
Verification


Evidence for
the

criteria

Outcome

Assessor’s
decision

Feedback

Report findings
to management
in accordance
with identified
responsibility
centres

Internal
Verification

c

Merit grades awarded

M1

M2

M3

Distinction grades awarded

D1

D2

D3

Comments by Assessor - Common Skills
A

B

C

D

E

F

G

Assignment
( ) Well-structured; Reference is done properly / should be done (if any)
Overall, you’ve
Areas for improvement:

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VERIFIED
YES
NO
DATE

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VERIFIED BY : ...........................................................................
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COMMON SKILLS & COMPETENCIES ASSESSED (indicated by X)
A. MANAGING & DEVELOPING SELF

D. MANAGING TASKS & SOLVING PROBLEMS

1. Managing own roles & responsibilities

12. Use information sources

2. Manage own time in achieving objectives

13. Deal with a combination of routine & non-routine tasks

3. Undertakes personal and career development

14. Identify & solve routine & non-routine problems

4. Transfer skills gained to new/changing situations & contexts

B. WORKING WITH & RELATING TO OTHERS

E. APPLYING NUMERACY

5. Treat others beliefs and opinions with respect

15. Applying numerical skills and techniques

X

6. Relate & interact effectively with individuals & groups

7. Work effectively as a team member

F. APPLYING TECHNOLOGY

C. COMMUNICATING

16. Use a range of technological equipment and systems

8. Receive and respond to a variety of information

G. APPLYING DESIGN AND CREATIVITY

9. Present information in a variety of visual forms

X

10. Communicate in writing
11. Participate in oral & no-verbal communication

18. Use a range of thought processes

X


Title Page
Management Accounting
Transmitted to: Mr. Jun Alejo Bathan

Prepared for:
Mr. Jun Alejo Bathan (Lecturer)

Unit 9: Management Accounting
Banking Academy, Hanoi
BTEC HND in Business (Finance)

Prepared by:
Triple F Group
Phạm Minh Hoàng – Peter, F03C-065
Đỗ Ngọc Vương Anh – King, F03D-007
Lê Hoàng Long – Dragon, F03D-099
Hồ Ngọc Minh – November, F03D-111
Nguyễn Ngọc Thiện – Unstoppale, F03C- 137


Executive Summary
As a role of a management accountant of a group of companies and the managing
director has asked to explore the possibilities of introducing appropriate budgeting methods is
one of the operating companies. Base on the information which is given in the scenario, this
report will cover the following tasks:
•

Explain the purpose and nature of the budgeting process which should normally be taken

•
•
•
•
•
•

in the preparation of budgets in a manufacturing company.

Select appropriate budgeting methods for the organization and its need.
Prepare budget according to the chosen budgeting method.
Prepare a case budget.
Calculate variances, identify possible causes and recommend corrective action.
Prepare an operating statement reconciling budgeted and actual results
Report findings to management in accordance with identified responsibility centers.


Table of Contents
Evidence for the criteria..............................................................................................................................................2
B. WORKING WITH & RELATING TO OTHERS ................................................................................................4
E. APPLYING NUMERACY.....................................................................................................................................4
F. APPLYING TECHNOLOGY................................................................................................................................4
C. COMMUNICATING.............................................................................................................................................4
G. APPLYING DESIGN AND CREATIVITY..........................................................................................................4
Executive Summary........................................................................................................................................................6
Table of Contents............................................................................................................................................................7
Introduction.....................................................................................................................................................................8
Main body.......................................................................................................................................................................9
3a – The purposes and natures of the budgeting process............................................................................................9
3a.1. Budget and the importance of budget ...........................................................................................................9
3a.2. The purposes and benefits of a budget.........................................................................................................10
3a.3. Steps in the preparation of a budget ............................................................................................................11
3a.4. Preparing functional budgets........................................................................................................................12
3a.5. Cash budget..................................................................................................................................................13
3a.6. Budgeted profit and loss account and balance sheet....................................................................................13
3a.7. Flexible budgets...........................................................................................................................................14
3a.8. Cost estimation.............................................................................................................................................14
3a.9. Computers and budgeting.............................................................................................................................15
3a.10. Incremental and zero based budgeting system...........................................................................................15

3a.11. Budgeting, performance and motivation....................................................................................................16
3b - Select appropriate method to prepare budget....................................................................................................16
3b.1. Methods to prepare budgets.........................................................................................................................16
“Flexible budget is for variable cost for different levels of cost driver utilization which is expected in the
future” (Sithambaranathan Prithiviraj, 2008.) Thus, flexible budgeting process can identifies overhead cost
drivers of overhead cost and budgeting for the cost which relates to the cost driver for different utilization of
that cost driver.......................................................................................................................................................18
3b.2. Select and analysis about the appropriate method.......................................................................................20
3c. Prepare budgets according to the chosen budgeting method..............................................................................21
3d. Prepare a cash budget..........................................................................................................................................24
4a. Calculate variances identify possible causes and recommend corrective actions...............................................25
4a.1 Definition of variance....................................................................................................................................25
4a.2 Possible causes and recommend corrective actions......................................................................................30
4b. Prepare operating statements reconciling budgeted and actual results...............................................................31
4c - Report findings to management in accordance with identified responsibility centers .....................................31
4c.1. Responsibility centers .................................................................................................................................31
4c.2 REPORT........................................................................................................................................................33
Conclusion....................................................................................................................................................................34
Reference......................................................................................................................................................................35
Tutor2u (2010) Incremental Budgeting (Online) Available from: < [accessed 2010]...................................................................................................................................36
business knowledge source (2010) A comparison of top-down to bottom up budgeting (Online) Available from:
< />tml> [accessed 2010]....................................................................................................................................................36


Introduction
This report will go on to deal with budgetary planning and control, preparing forecasts
and budgets and then comparing them to the actual results. Through this report, it can easily to
see the differences between costing and budgetary systems and will discuss the resulting of
variances.
As the management accountants of a group of companies the researchers explore the

possibilities of introducing appropriate budgeting and costing methods in the operating
companies.
In the first part of this report, the purpose and nature of budgeting process will be shown
normally.
The second part of this report is going to mention about several budgeting methods The
main purpose is to prepare a master budget it also includes: sales budget, production budget,
direct materials budget, direct labor budget, manufacturing overhead budget, selling and
administrative budget. And also the preparation of a master budget such as actual sales during
the last quarter and the budgeted cost of goods sold, dividend that will be paid
The last part of this assignment is to prepare an operating system for control period 13,
reconciling budget and actual profit and also calculate variances, identify possible causes. The
entire ratios which will be used in this part will base on the information of Francis LTD.


Main body
3a – The purposes and natures of the budgeting process
The decisions of managers affect the profitability of the business; therefore in order to make
effective decisions, the company needs to have a plan for its operations. And planning the
financial operations of business is called “budgeting”.
3a.1. Budget and the importance of budget

In fact, the budget process is paramount in the practical world of government or any
organization. According to BPP Professional Education (2004), “budget is a quantitative
statement for a defined period of time”, which involves itemized estimates of anticipated income
and expenses, including a plan of operation based on such estimates each area of a business’s
operations typically has a separate budget.
In case study of Francis Ltd, the company has cost centre utilization budgets, conversion cost
budgets, material cost budget and so on.
In accounting, a budget is definitely important because it reveal values. Budgets link the
financial resources of a business with its purposes. Budgets force explicit choices among goals,

all of which cost money to implement and therefore compete.
The managers of a company will be lack a clear idea to reach the goal of business if their
company does not have a budget or a plan will make decisions that do not contribute to the


profitability of the business. A budget serves seven main purposes – ensure objectives,
planning, communication, coordination, providing framework, control and evaluation,
motivation.
3a.2. The purposes and benefits of a budget

In any implementation, a company has to consider about purposes, anticipate costs and benefits
of activities to reduce the risks and achieve the goals. Budgeting process relates to every business
activities of the company, therefore the reason for budget creation ought to be carefully
considered before doing anything else.
The first purpose and benefit of a budget is to ensure the achievement of the company’s
objectives. The organization’s objectives are quantified and drawn up as targets to be achieved
within the timescale of the budget plan. Therefore the managers will focus effort to reach
company’s goals. For example, the budget shows the sum of money, revenues and expenditures
of Francis Ltd in the period of time, as the company’s business performance so it will remind
the managers about the achievement they need to reach.
The 2nd purpose is to compel planning, a budget helps planning forces management to look
ahead, to set out detailed plans for achieving the targets for each department. When a budget is
created, the managers can decide the most effective ways to perform each task. This also
decreases daily operating disruptions while doing business.
The next one is communicating ideas and plans. It is very important to ensure that each person
affected by the plans is aware of what he or she is supposed to be doing. The communication
between superiors and subordinates helps affirm their mutual commitment to company’s goals.
For instance, in Francis Ltd, the production department and the marketing department have to
agree on how to coordinate their efforts about the need for services and the resources required.
Coordinate activities - The activities of different departments need to be co-ordinate. For

example, when Francis Ltd sells products, the number and types of products to be marketed
must be coordinated with the purchasing and manufacturing departments in the company to
ensure goods are available.


Provide a framework for responsibility accounting in sufficient details way. It means budgets
require that mangers of budget centres are made responsible for the achievement of budget
targets for the operations under their personal control. Deviations do not always suggest the need
for imposition of penalties.
Establish a system of control and evaluation can be seen, once a budget is finalized, it is the
plan for the operations of the company. It means budgets are controlled to determine whether the
company is following the targets. In fact, if the business activities do not meet the budget, the
company can immediately adjust implements before it is too late.
Last but not least, budgets play the role of motivating employees to improve the performance
which budgets are able to provide incentives to departments and every single employee in the
company to strive the common objectives.
3a.3. Steps in the preparation of a budget

Role of the budget is important to appreciate the co-coordinating for Francis Ltd. Therefore, the
preparation of the budget has significant process in making a budget, and it differ from business
to business. However, in order to prepare a reasonable and systematic budget, every business
follows given steps.
The preparation may take a period of time, meanwhile the budget committee can


“Functional budgets (sales budgets, production budgets, direct labor budget and so on) which are
amalgamated into the master budget, may need to be amended many times over as a consequence
of discussions between departments, change in market conditions and so on during the course of
budget preparation.” (BPP PROFESSIONAL EDUCATION 2004)
3a.4. Preparing functional budgets

Base on statistic which was informed in the case such as budgeted sales, rejected rate in order to
calculate the gross production as well as the increase in work in process, the following budget is
prepared. In case study of Francis Ltd, we will learn about the production budget, cost centre
utilization budgets, conversion cost budgets, material cost budget, product costs budget a profit
and loss budget. Budgets are different kinds of budgets what are divided basing on their function
in business.
Production Budget
Product
Budgeted sales
Budgeted finished stocks increase
Good finished output required

Workings
(1)
(2)

F03
£
9,400
100
9,500

F04
£
12,200
400
12,600

Good yield from cost center 15

(3)

Gross production needed from
cost center 15
Good yield from cost center 14

9,500
(95%)
10,000

12,600
(90%)
14,000

(4)

10,000
(80%)
12,500

14,000
(70%)
20,000

Good production needed from cost
center 14
Add increase in
WIP: 56= 80%

63= 70%
Summary of production budget
Cost center 14
Cost center 15

70
90
12,570
10,000

20,090
14,000

3a.5. Cash budget

According to the definition of BPP (2004,) cash budget is a statement which is prepared after the
operating budgets (including sales, manufacturing expenses or merchandise purchases, selling
expenses, and general and administrative expenses) and the capital expenditures budget are
prepared Francis Ltd is the manufacturing company, so the cash budget starts with the
beginning cash balance to that is added the cash inflows to get cash available.
The cash balance before budgeted is adjusted by the financing activity to calculate the closing
cash balance. The closing cash balance is the cash balance in the budgeted or performed in the
balance sheet.

3a.6. Budgeted profit and loss account and balance sheet

The budgeted profit and loss account and balance sheet contains all of the line items found in a
normal profit and loss account and balance sheet, except that it is a projection of what the profit
and loss account balance sheet will look like during future budget periods. It is compiled from a
number of supporting calculations, the accuracy of which may vary based on the realism of the

inputs to the budget model.


In the case of Francis Ltd, the budgeted profit and loss account and balance sheet is useful for
testing whether the projected financial position of the company appears to be reasonable. It also
reveals scenarios that are not financially supportable (such as requiring large amounts of debt),
which management can remedy by altering the underlying budget.
This would involve the preparation of a budgeted profit and loss account and balance sheet,
both of which form the master budget (BPP PROFESSIONAL EDUCATION 2004.)
3a.7. Flexible budgets

Flexible budgets are one way companies deal with different levels of activities. According to
Dennis Caplan (2009) “the flexible budget is a performance evaluation tool. It cannot be
prepared before the end of the period. A flexible budget adjusts the static budget for the actual
level of output.”
Flexible budgets are also a number of static budgets. “The static budget is the budget that is
based on this projected level of output, prior to the start of the period. In other words, the static
budget is the “original” budget” (Dennis Caplan, 2009.)
Thus, the manager must use a budget prepared for the actual level of activity to evaluate the
company's performance in controlling costs.
Flexible budgets has two advantages are planning and control procedure. In planning stage,
flexible budget may helpful to know what the effects would be if the actual outcome differ from
the prediction. And at the end of each period, actual results may be compared with the relevant
activity level in the flexible budget as a control procedure (BPP PROFESSIONAL
EDUCATION 2004.)
3a.8. Cost estimation

Cost estimation is defined as an approximation of the probable cost of a product,
program, or project, computed on the basis of available information. The important goal of cost
estimation is to determine the amount of fixed and variable costs so that a cost equation can be

used to predict future costs.


Cost estimation involves the measurement of historical costs to predict future cost which
including three main techniques are account-classification method (engineering method),
high-low method and scatter graph.
Account-classification method is the only method the manager can use to estimate costs when
only one data point is known. And this technique depends on the subjective judgement of each
manager and estimating costs. Therefore, just only approximate accuracy can actually be
expected.
The high-low method uses the highest and lowest activity it help the company to estimate the
portion of a mixed cost that is variable. The high low method may be misleading if the high and
low activity levels are not representative of the normal activity.
The last method is creating a scatter graph; it is another method of estimating fixed and variable
costs. It provides a good visual picture of the costs at different activity levels. However, it is
often hard to visualize the line through the data points especially if the data is varied ( Elizabeth A.
Minbiole, 2007)
3a.9. Computers and budgeting

According to BPP (2004,) functional budgets will be out of balance with each other and will
require modification so that they are compatible. The computer is helping the company to
process and store a totally larger volume of data so that’s using computer will help the company
to do the budget to manage their strategy.
In case of Francis Ltd, Computer and budget have the role of manufacturing and selling
company, therefore the budgeting process is daunting to say every least to make manual
preparation of a master budget and a cash budget in the real world. It totally needs a help of
computer to reduce time and effort of employees.
3a.10. Incremental and zero based budgeting system

In the real situation of any company, both zero-based budgeting and incremental

budgeting are popular financial methods used by successful business activities. Each method
works differently and they both have their advantages and disadvantages associated with them.


The incremental budgeting starts out with a budget from a previous period. The business uses
this previous budget as a basis for calculating the new budget. They take the old budget and add
to or subtract from the totals to come up with a budget for the upcoming period.
We analyse the result from scenario and calculate: in year 12, Francis Ltd did $1,522,400 in
sales revenue for both F03 and F04 products. For year 13, they expect an increase in sales of 10
percent. Therefore, their new budget will be $1,674,640 for the year 13.
Zero-based budgeting always begins the new budget from an established point of zero. Instead of
starting off with last period's budget and adding or subtracting from it, the company begins with
zero, and then goes through every expense that they will incur during the course of business. In
case study of Francis Ltd, this budgeting method utilizes much more detail and makes every
department accountable for their necessary expenses.
3a.11. Budgeting, performance and motivation

The purpose of budgets seems to staff motivation which springs from budget related issues. For
instance, Francis Ltd might provide a reward scheme for the sole purpose of lifting morale - staff
motivation - but a scheme such as this would be impossible to perform if the budget does not
allow for it. In that case, what led to staff motivation is actually directly or indirectly related to
budget.

3b - Select appropriate method to prepare budget
For every company, selecting a most appropriate budgeting method is very important what
decided the success of budgeting process. There are some approaches of budgeting such as
master budget, fixed budget, flexible budget, incremental budgeting, zero-based budgeting,
imposed budget and participatory budget.
3b.1. Methods to prepare budgets

With the purpose of understanding about different kinds of budgeting methods, the project will
mention about the master budget. It is a summary of a company's plans that sets specific targets
for sales, production, distribution and financing activities. The master budget generally
culminates in a cash budget, a budgeted income statement, budgeted profit and loss account and
budgeted balance sheet, what noticed in above part. In details, the master budget illustrates a


comprehensive expression of management's plans for future and how these plans are to be
accomplished.
At first, fixed budget refers to remaining unchanged regardless of the level activity (BPP,
2004.). The companies use it when it might have low variable costs. In fact, there is not many
company which use this and those that do rely on it are pretty certain that their business isn’t
going to have many variations.

Advantages of fixed budget

Disadvantages of fixed budget

The advantage of fixed budget is allowing

- If the company has not contributed for

the company to prepare for expenses in

inflation and rise in costs, the fixed budget will

advance (Miriam C, n.d).

not be far as the previous years.

- It allows the company to plan ahead
- It is easy to track and keep the company’s
budget
- A fixed budget works best for the company
on a fixed income

- The company does not have any flexibility to
deal with change in the environment, such as
emergencies, personnel, competitive pressure
and so on.
- It is very dangerous for the company if the
competitors know about the weak points.

Recommendation: In fact, it works well for those on a limited budget. A fixed budget means
that the company’s expense categories and income will not change monthly. Thus, they work on
salary or they are withdrawing a set amount from retirement accounts so employees on a fixed
budget get the same amount of money each month. In contrast, a fixed budget approaches
variance by trying to work in excess resources beforehand for any possible changes in demand
down the road which lead to the issues with inventory.


“Flexible budget is for variable cost for different levels of cost driver utilization which is
expected in the future” (Sithambaranathan Prithiviraj, 2008.) Thus, flexible budgeting process
can identifies overhead cost drivers of overhead cost and budgeting for the cost which relates to
the cost driver for different utilization of that cost driver.
Advantages of flexible budget
- Providing management with real-time data
on projected versus actual outcomes in product
versus costs
- Offering much greater cost control over a

business operation

Disadvantages of flexible budget
- It is difficult to predict
- It cannot be created until some sales figures
have first been generated.
- The budget may be more complicated and
take longer to prepare than a static budget.

- Targets more accurately
(Michael Wolfe, 2001)
Recommendation: The flexible budget is only created when the actual sales volume is known,
which reduces problems with variance such as inefficiencies in available labor. However, at the
same time, makes the flexible budget a more immediate
As presented in the above part, incremental budgeting is concerned mainly with the increments
in costs and revenues which will occur in the coming period (BPP, 2004.) This approach is not
recommended because it does not take into account changing circumstances. However, this
method has some advantages and disadvantages:
Advantages of incremental budgeting
- The incremental budgeting is stable
- The system is relatively simple to operate
and easy to understand.
- Co-ordination between budgets is easier to
achieve.
- The impact of change can be seen quickly.
- Conflicts should be avoided if departments
can be seen to be treated similarly.

Disadvantages of incremental budgeting
- Assumes activities and methods of working

will continue in the same way.
- There is none incentive for developing new
ideas
- Encourages spending up to the budget and
therefore the budget is maintained next year.
- The budget may become out of date
- The priority for resources may have changed


since the budgets were set originally.
Recommendation: this budgeting method is the easiest way of budget to put in business.
However, it really does not provide employees with much reason to be creative. With the
flexibility of incremental budgeting, this allows the company to see change very quickly when
they implement a new policy or budget. However, many employees view this as a "use it or lose
it" system.
The zero-based budgeting (ZBB) also was noticed in the above part. Unlike the traditional
budgeting method, it involves preparing a budget for each cost centre from a zero base..
Advantages of ZBB

Disadvantages of ZBB
- Difficult to define decision units

-

and decision packages, as it is

Increases staff motivation by providing greater

initiative and responsibility in decision-making.
Increases communication and coordination within

the organization.
Identifies opportunities for outsourcing.
Forces cost centers to identify their mission and their

time-consuming and exhaustive.
- In a large organization, the
volume of forms may be so large
that no one person could read it
all.

relationship to overall goals.
Recommendation: Zero based budgeting approach requires considerable documentation.
Moreover, the manager must prepare a series of decision packages in which all of the activities
of the department are ranked. Higher level managers can then review the decision packages.
Another budgeting method is participatory budget what known as the bottom-up budgeting.
The company uses bottom-up budgeting, it means they begin by identifying all of the different
tasks and steps that are involved in a particular project. “Then go through and write down all of
the different resources and all of the money that will be needed for each step”.

Advantages of bottom-up budgeting

Disadvantages of bottom-up budgeting

- The budget can be quite accurate for - It can lead those who are in charge of tasks


-

individual tasks.
Bottom-up budgeting involves all members

of a particular project

and also project managers to ask for more
funding than will actually be needed.
- It is difficult to actually draw up a complete
and thorough list of every step and
- It is easy to overlook a step of a project or a
task

Imposed budget or Top-down budgeting works the opposite direction of bottom-up budgeting.
Top-down budgeting begins by estimating the costs of higher level tasks, and then those
estimates will constrain the estimates for costs of lower level tasks.
Advantages of top-down

Disadvantages of top-down

- The company has to focus on using

-

The solution provides limited coverage

resources
- The first implementation becomes a

-

in the first phases.
A minimal percentage of user accounts

-

are managed in the first phases.
The support and overall business will

showcase for the identity management
solution.
- Operation and maintenance resources are

not realize the benefit of the solution

not initially impacted
Recommendation: With both bottom-up and top-down methods, it is important that those
managers who are in charge of determining the overall budget for a project have enough
experience. By that way, the company will be able to come up with an adequate and accurate
budget that will give enough money to each level of tasks, yet will not ask for too much money.

3b.2. Select and analysis about the appropriate method

In this case, Francis Ltd is a manufacturing and selling products company. It is necessary
to have a detailed budget because there are many activities such as purchasing material,
managing labor, producing and so on. It is quite simple to find absorption cost from conversion
cost because Francis Ltd has conversion cost. Whereas absorption cost belongs to fixed budget, it
is one of the reasons for choosing this method. Moreover, according to the advantages of this


method, it can lead the company to prepare a budget in right way. For instance, a fixed budget
will take into account all of Francis Ltd expenses and allow the company to plan caused by their
goals and needs. Especially, a fixed budget works is most suitable for people on a fixed income.
As a result of the income will not vary from month to month, people on a fixed income need to

plan their spending carefully for the entire year. A fixed budget will balance out to match each
month's income.

3c. Prepare budgets according to the chosen budgeting method
Production Budget
Ref to work
Product
Budgeted sales
Budgeted finished stocks increase
Good finished output required
Good yield from cost centre 15
Gross production needed from cost centre 15
Good yield from cost centre 14
Good production needed from cost centre 14
Add increase in:
WIP: 56 = 80%
63 =70%
Summary of production budget
Cost centre 14
Cost centre 15

1
2
3
4
5

F03
9,400
100

9,500
95%
10,000
80%
12,500

6
7

70

8

12,570
10,000

F04
12,200
400
12,600
90%
14,000
70%
20,000
90
20,090
14,000

Production budget is a detailed plan showing the number of units that must be produced during a
period in order to meet both sales and inventory needs.

( />According the table above show the sales budget for Year 12 shows 9,400 units of F03
for sales revenue of £705,000 and 12,200 units of F04 for sales revenue of £817,400. The stock
when the budgeting finish increases 100 in F03 and 400 in F04. The good yield from cost 14 and
15 are 80% and 95% respectively in F03 so that’s the good production needed from cost 14 and
15 are 12,500 and 10,000. The summary of production budget for cost center 14 is 12,570 in F03
and 20,090 in F04. While the production budget in cost 15 is 10,000 in F03 and 14,000 in F04.


Based on that’s the company will know the number of unit that must be produced during a period
in order to meet both sales and inventory needs.

Cost Centre Utilization Budget
Ref to working

Cost centre 14
Cost centre 15

1
2

F03

F04

hours
15,084
9,000

Hours
8,036

21,000

Cost centers, or revenue centers, keep multiple budgets organized. Cost centers are created by
management as a detailed segment of a master budget. The cost center may be number, letters or
a combination of numbers and letters. Each code appears at the top of a budget as a quick
reference

for

bookkeepers

or

filing.

( />
budget.html)
This cost center budget helps to track expenses and income. A department or project's goals
should stem from the overall budget goals outlined in the cost center. Each time an expense is
incurred for a project or department, the money is recorded as an expense of the cost center. At
the end of the year, the group can assess how close the project came to being within its projected
budget. Large discrepancies between cost center budgets and actual expenses may mean
revisiting operational strategies for a particular group within the business.

Conversion Budget

Cost centre 14
Cost centre 15
Total

Ref to working

Variable cost

Fixed cost

Total

1
2

£
150,280
147,000

£
104,040
123,000

£
254,320
270,000
524,320

This conversion budget help the company to fix their budget that’s may have bad affect for their
business activities. Based on the company can find the best strategy for their development.
According the table above, the variable cost for cost centre 14 and 15 are 150,280 and 147,000


respectively. While the fixed cost for cost 14 and 15 are 104,040 and 123,000. After that’s, we

can calculated the total cost that are 254, 320 and 270,000.

Material Budget
Ref to working
1
2

F03
F04
Total

£
439,950
401,800
841,750

Direct materials budget is prepared after computing production requirements by preparing a
production budget. Direct materials budget or materials budgeting details the raw materials that
must be purchased to fulfill the production requirements and to provide for adequate inventories.
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The table above, we can see that the ref to working of F03 and F04 is 439,950 and 401,800
respectively. The company can based on that’s they can prepare the budget to serve their
objectives in the present and in the future.

Product Cost Budget
Ref to working
Product cost
Based on 100 units into cost centre 14
Material cost centre 14
Conversion

Cost at the end of cost centre 14
Yield of good units
Cost per good units
Cost centre 15
Conversion cost
Cost centre b/f
Cost at the end of cost centre 15
Yield of good units
Cost per unit

1
2
3
4
5
6
7
8

F03
£

F04
£

3,500
1,320
4,820
80 (units)
60.25

2,000
440
2,440
70 (units)
34.86

721.8
4,820
5,468
76 (units)
71.95

1,129.5
2,440
3,385
63 (units)
53.73

Financial plan prepared for every major expense category, such as administrative cost, financing
cost, production cost.


( />The product cost budget help the company to calculate the cost to manufacturing their product
and predicts the strategy and the budget product in the future.

Profit & Loss Account
Ref to working

F03

F04

£

£

Profit & loss account
Sales production
705,000
817,400
Cost of sales
1
(676,330)
(655,506)
Production profit (unadjusted)
2
28,670
161,894
Opening stocks adjustment
WIP
3
3,599
2,311
FS
4
13,450
22,038
Production profit
5

45,719
186,243
The Profit and loss account help the company control their financial resource through calculate
sale production, cost of sales, production profit and opening stocks adjustment.

3d. Prepare a cash budget
Cash Budget
January
Cash receipts:
Sales
Sale in month
Account receivable
Commission
Total cash in
Cash payments:
Purchase
Telephone
Rent
Transport
Miscellaneous expense
Insurance
Total cash out
Net receipts
Opening balance
Closing balance

February

March

Total

160
780
50
990

190
640
50
880

200
760
50
1,010

550
2,180
150
2,880

370
84
75
100
50

240

480

75
100
50

679
311
1,200
1,511

465
415
1,511
1,926

75
100
50
500
1,205
(195)
1,926
1,731

1,090
84
225
300
150

500
2,349
531
1,200
1,731


The cash budget is an estimation of the cash inflows and outflows for a business or individual for
a specific period of time. Cash budgets are often used to assess whether the entity has sufficient
cash to fulfill regular operations and/or whether too much cash is being left in unproductive
capacities.
( />A cash budget is extremely important, especially for small businesses, because it allows a
company to determine how much credit it can extend to customers before it begins to have
liquidity problems.
For individuals, creating a cash budget is a good method for determining where their cash is
regularly being spent. This awareness can be beneficial because knowing the value of certain
expenditures can yield opportunities for additional savings by cutting unnecessary costs.

4a. Calculate variances identify possible causes and
recommend corrective actions
4a.1 Definition of variance

A variance is the ‘Difference between a planned, budgeted, or standard cost and the actual cost
incurred. The same comparisons may be made for revenues.’
The variance measure of the average distance between each of a set of data points and their mean
value; equal to the sum of the squares of the deviation from the mean value. In accounting, the
difference between the actual cost and the standard cost for direct material, labor and overhead.
There are three part in the total profit variance: sales variances, production variances and
non-production cost variance.