Introduction
This report is based on budgetary forecasting is aimed at measuring the general performance of the company’s ability to generate revenue. The budget would help users to get an in-depth understanding of the company’s future profitability, cash generation, and efficiency with which it is utilizing its assets to generate sales revenue. For the management, their objective would be on how to improve on poor areas and maintain good performance. Its intended users are the management of the company. The sources of the figures used have been provided.
Budget Forecasting Report
I have carried out analyze of various budgets and find it viable for the firm to produce the said units but the price should not be adjusted downward. See the appendix for the budgets.
While preparing the budget a number of issues were realized. In the apportionment, all the departments were getting a portion of more than 50,000 before further apportionment. In the apportionment, the machine department received 125,728 of the total 1,012,150 while the assembly and treatment departments got 58,243 and 62,340 respectively. This is the key production department which is the core department s for the survival of the organization.
Out of the 1,012,150, the rest went to support departments and fixed cost departments like the central department, research and development, and marketing. Material handling, purchasing, and maintenance departments which support departments for all other departments were further sub-divided or rather apportioned among the department.This three department had received 62,868 ,87,716 and 145,686 respectively.
The figures for purchasing department were apportioned as follows:- 28,291, 3,143, 6,287, 18,860, 3,143, 1,886 and 1,257 for production control ,inspection ,maintenance, material handling ,central administration research and development and marketing respectively. The cost from material handling was also apportioned into a machine, assembly, treatment, production control, inspection, maintenance, material handling, central administration research and development, and marketing at 35086, 17543, 8772, 0,
4386, 8772, 0, 0, 7017, 4386 and 3509 respectively. While maintenance was apportioned into 39335, 24767,
32051,8741,13112,10198,10198 and 7284 for machine ,assembly ,treatment ,production control, inspection, central administration, research and development and marketing departments respectively.
Production control and inspection departments which had 1,083,85and 1,285,87 was apportioned into production departments. The inspection department was apportioned into equal in all departments of production because all the products were assumed to pass all departments. The production control department was apportioned into the production department as 38537,57805and 12043 for the machine, assembly, and treatment department. This overhead which was subdivided into this department was further apportioned into various products.i.e. product 1, product 2, and product 3.
After apportioning these overheads into various departments and taking into account costs associated with direct material and direct labor for each product. A unit cost of 105,148 and 187 was calculated. The unit cost as compared to the selling price is lower meaning that the firm wills make a profit if they take care of the operating cost. However, from the prices, we are given the firm makes a gross profit of 541624 for sales as shown by the information given.
However, trying to adjust the cost of production and selling prices by 10% will result in a loss. This means that the company will be comfortable producing at the current cost and selling at the current price.
Profitability will be realized if the prices are not tampered with negatively and the price of purchasing are kept at the same pace as the prices. In case of inflation in the market, the firm should try to look for places where the material is available at a cheaper price. This can be seen when we tried to de price changes. A small percentage change resulted in a large loss.
Forecasting of budgetary figures has always been a thorny issue for many companies including our company where losses have been made and budget control has not been followed. These budgets need to be reviewed from time to time to take care and change in the economy that will affect profitability and cash flows. In this report, I have not prepared the cash flow budget which is the backbone of company operation. This is because proper information has not been availed regarding the customer payment period and credit period. However, if all the sales are made on a cash basis and production was made on order then there would be no problem with cash flows.
In a nutshell, budgetary control for this company will take them to the next level of financial management where the use of company resources will be under control. Any company without a budget is like a ship without a captain. This ship will definitely sink with all the goods and human being it is carrying. This shows how serious the budget control is.
Conclusion
In order to keep better future results, better or close to the industrial average, the firm needs to cut down its operating expenses, increasing marketing, and production capacity. This would considerably improve the profitability. They also have to review their various policies.
References
Ask, U, Ax, C. and Johnson’s (1996); cost management in Sweden: from modern to post modern management accounting.
Drury c (1998):costing An introduction international ,business press Thomson Learning.
Demski, J.S.(1997) Analyzing the effectiveness of traditional standard costing variance model.
Drury C; (2000); Management and cost Accounting;5th edition ,business press Thomson Learning.
Simmonds,K,(1981) strategic management accounting, management accounting.
Wald J (2000) Biggs’s Cost accounting.; The English Language Book Society and MacDonald and Evans Ltd London & Plymouth.
Appendix Excel Attachment
On profitability/ performance, it can be noted that the profitability of the BP is fluctuating from time over time. This is shown by the Gross profit margin, Return on Assets (ROA), Return on Equity (ROE) and the operating profit margin. In 2000, the ROE increased to 12.6% from 11% in 1999 before declining further to 1.1% in 2001 again it went up to 8.2% in 2002 and year 2003 it settled at 17.8%. The net profit margin also increased to 8.2% in 2000 from 6% in 1999. In 2001, it declined to -0.8% and then went up to 5.9% in 2002 before settling at 12.8% in year 2003. In 2000, the ROA inclined to 10% from 8.1% in 1999 before declining further to 0.8% in 2001 before going down to 6% in 2002 and settled at 13.4% in year 2003.
The Gross profit margin also inclined to 49.9% in 2000 from 48.4% in 2004. In 2001, it declined to 49.7% and before going up to 52.8% in 2002 and settling on 56.8% in 2003. Even though profitability of the company has been fluctuating, it is still positive results but if the management does not take care, the operating costs will affect the company’s profitability. this because although there are fluctuations they are associated with operating costs as the gross profit seems to be stable.
There is no change of the debt/assets ratio it fairly stable with slight fluctuations that is 26.2% , 22.3%, 24.7%, 26.7% and 24.2% in years 1999 to 2003 respectively. From this, I deduce that on average for every 24 cent of debtors there is $1 from the assets.
There is constant fluctuation of the debt/equity percentage although it stable that is 35.6%, 28.7%, 32.9%, 36.4% and 32% in years 1999 to 2003 respectively. These percentages are indicators of the how many times the shareholders funds can pay total liabilities expressed in percentages.
From this, I deduce that on average for every 35.6 cent of debtors they will get $1 from the shareholders funds in year 1999. in year 2000 on average for every 28.7 cents of debtors they will get $1 from the shareholders funds. In year, 2001 on average for every 32.9 cent of debtors they will get $1 from the shareholders funds. in year 2002 on average for every 36.4 cent of debtors they will get $1 from the shareholders funds and in year 2003 on average for every 32 cent of debtors they will get $1 from the shareholders funds.