Background of the company
The paper analyzes Abu Dhabi National Energy Company (TAQA). The company was established in 2005. The headquarters of the company is in Abu Dhabi, UAE. The government owns the company, and the shares of the company are listed on the Abu Dhabi Securities Exchange with the ticker symbol TAQA. The company was established in 2005, and it operates in the oil industry. Currently, the company has two subsidiaries these are TAQA North and Britain. Further, the company has employed about 2,800 people. Oil and gas account for about 47% of the total revenue. The second product is power, while the third product is water. Water and power account for 53% of the total revenues. The total loss for the year that ended on 31 December 2013 amounted to AED1, 768 million. The paper seeks to prepare a master budget for the company.
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A master budget is a collection of various operational budgets. The components of the master budget are discussed in the subsequent section.
Sales budget and schedule of cash receipts
This section will show the expected number of units that will be sold, the selling price per unit and the total sales for each of the twelve months. The expected number of units will be estimated using percentages of total sales for the year. Based on the calculations, the budgeted sales for the year are AED11, 250,000. In addition, the amount of cash that will be collected during each month will also be presented in the table below.
Abu Dhabi National Energy Company
Sales budget For the year ended 31st December 2014.
|Percent of Annual Sales||10%||5%||3%||2%||5%||1%||2%||7%||5%||10%||15%||35%||100%|
|Expected sales in units||75,000||37,500||22,500||15,000||37,500||7,500||15,000||52,500||37,500||75,000||112,500||262,500||750,000|
|Selling price per unit||AED 15||AED 15||AED 15||AED 15||AED 15||AED 15||AED 15||AED 15||AED 15||AED 15||AED 15||AED 15||AED 15|
|Total Budgeted Sales||AED 1,125,000||AED 562,500||AED 337,500||AED 225,000||AED 562,500||AED 112,500||AED 225,000||AED 787,500||AED 562,500||AED 1,125,000||AED 1,687,500||AED 3,937,500||AED 11,250,000|
Activity-Based Systems determine the real cost of overhead before assigning the costs to such activities. Therefore, a company allocates costs to those units that require the activity. The approach appreciates the fact that at any point, the company’s activities will occasion cost, which will vary with production levels. Therefore, the costs should be assigned to the products that require such activities to arrive at a more accurate measure. The distinguishing feature of Activity Based Costing is that it links the output of the manufacturing entity to the cost of all activities involved in the production (Elton, Gruber & Brown, 2006).
The budget will give an estimate of the total production that is required during the year. The values will be arrived at by adding the estimated sales to the desired ending inventory. The sum of the two will give the required monthly production.
ABC would not be acceptable for external reports due to methods employed in determining the allocations. The use of interviews is likely to lead to costs, which are unrealistic or biased in the eyes of the external financial statement user. Objective and verifiable data should be used instead to increase the confidence of the user of such statements. The method used in arriving at costs using ABC is also not acceptable by outside parties. The calculation of activity-based costs may exclude some costs, which are not directly linked to the production process (Reilly & Brown 2007).
Overhead cost per unit is based on estimates. Therefore, it is almost unavoidable that at the end of the accounting period, an under-absorption or over-absorption occurs in the overhead actually realized. The estimated cost of overheads and the level of activity may not match what was actually realized in the period under consideration. The predetermined cost per unit is charged at the end of the period profit or loss. Hence, it is essential to check the amount under- or over-absorbed (charged) and make an adjustment in the accounts (Fama 2004).
Manufacturing overhead budget
The overhead manufacturing budget gives an estimation of the amount of cash disbursement for the manufacturing overhead. The fixed manufacturing overhead includes items such as training and development costs, taxes, salaries for supervisors, and depreciation of equipment, among others (Das, Markowitz & Scheid 2010).
The value of ending inventory will be arrived at through a multiplication of the unit cost of the product by the number of units of finished goods remaining unsold at the end of the year. It is worth mentioning that the two approaches will estimate the per unit product cost. These are absorption and marginal costing. The budgeted cost of sales will be estimated after the calculation of ending inventory (Liu & Wang 2010).
With activity-based costing, you take all activities required to produce an item into consideration. This can include R&D, testing, purchasing, set up machines, packaging, and cleaning and maintenance. These are all necessary to produce an item; however, they may not be taken into consideration when using the traditional method of costing.
Activity-Based Costing leads to the generation of activity rates. Activity rates are vital to management since they enable management to determine with great accuracy the cost involved in the production. The management can quickly estimate the cost of producing at a certain level using activity rates. Activity rates are also important in determining the efficiency of production. The management can use these rates to determine which activities add the most value to the production process. The production process can thus be improved by eliminating non-value add activities. This allows for a flexible process, which companies can modify to reduce the negative effects of some activities. Activity rates also offer management information, which greatly improves their decision-making ability. Hence, ABC can be instrumental to managers at a manufacturing plant, for example, car production.
Conclusion and Recommendations
The budgets used in this report are accurate since they are based on industry data and the company’s previous quarter. The negative sales variance caused by poor oil and gas sales affected all the other budgets. The company is spending too much on purchasing oil and gas, as shown by the negative purchase variance. Operating expenses did not vary much from the budgeted. This could be an indicator of the company’s proper expense management skills. Oil and gas contribute more to profit or loss than other products due to high sales volumes.
The company needs to focus on selling more oil and gas as they contribute to profit more than other products. There is potential for more sales. The company should raise its target from the current 15% of the market. Secondly, the company should re-think its cost allocation method and consider switching to ABC from the sales-volume based system. Finally, the company should consider negotiating with its creditors to allow for longer credit periods. This will enable the matching of the debtors and creditors’ policies.
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Das, S., Markowitz, H. & Scheid, J. (2010). Portfolio optimization with mental accounts. Journal of Financial and Quantitative Analysis, 45(1): 311-334. Web.
Elton, E., Gruber, M. & Brown, S. (2006). Modern portfolio theory and investment analysis. New York: John Wiley. Web.
Fama, E. (2004). Efficient capital markets: A review of theory and empirical work. Journal of Finance, 25(2): 383-417. Web.
Liu, Z. & Wang, J. (2010). Value, growth, and style rotation strategies in the long- run. Journal of Financial Service Professional, 4(1): 67-90. Web.
Reilly, K. & Brown, C. (2007). Investment Analysis and Portfolio Management. New York: Southwestern Thomson. Web.