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TASK 1:
3a, Explain the purpose and nature of the budgeting process which should
normally be taken in the preparation of budgets in a manufacturing company.
A budget is a factor very important for organization, because it can estimate of costs,
revenues, and resources over a specified period, reflecting financial conditions and
goals in the future. Therefore, it helps company can be run smoothly in the future
through items that it has supplied. According to the course book, the budgeted is
definite as A quantitative statement, for definite period of time, which may include
planned revenue, expenses assets, liabilities and cash flows.
The main purpose of budget organization when used it:
According the CIMA Official Terminology about the budget purposes " Budgets may
help in authorizing expenditure, communicating objectives and plans, controlling
operations, co-coordinating activities, evaluating performance, planning and
rewarding performance. Often, reward systems involve comparison of actual with
budgeted performance." Through that, we can see that: the main purpose of using
budget is to make sure that company can be able to achieve objectives that they had
set up. Below are purposes for doing the main purpose effectively:
To compel planning: budgeting forces management to look ahead and make
detailed plans for each department to aim achieve goal. Furthermore, can
anticipate and solve problems.
To communicate ideas and plans: must be ensure that all of people who are
involved in plans know what they are doing. Communication might be one-
way or two ways, it can depends each person.
Coordinate activities: All activities of different departments need to be
coordinated to make sure everyone towards common goals. This means that ,
for example, that the purchasing department should base its budget on
production requirements and that the production budget should in turn be
based on sales expectations.
Creating the responsibility of budget manager: Require the managers more
focus on the achievement of budget targets. It there are problem, they will
make the adjustment immediately .
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To establishing a system of control: Company control the actual performance
by comparison the actual results against the budget plan. From that, if the
budget have problem we investigated and find out the reasons. It divided into
controllable and uncontrollable factors.
Motivate employees to improve their performance: The interest and
commitment of employees can be retained. If there is a system that lets staffs
will know how well they implement the tasks well or badly that they are
performing. So the manager can know how to provide the incentive for
improving the future performance.

Steps to prepare budget:
Step to prepare budget: In present, have various different company on market.
Therefore, each company we have a different procedures for preparing a budget.
Furthermore, the budget committee needs to meet several times and it can be taken
a couple of weeks or months before the master budget ( master budget includes:
budgeted profit and loss account and budgeted balance sheet) is finally accept. After
that, the functional budget (production budgets, sales budgets.....) are make
following the master budget.
Principle budget factor
The principal budget factor: It is the factor which limits the activities of an
organization. So, we can identify the budget factor is important in the budgetary
planning process, the stages of preparation of a budget can be done as follow:
To prepare sales budget, we need to prepared some figures such as unit of
product and sales value. Besides, the finished goods stock budget can be
prepare to decide whether if company should increase the finished good stock
levels.
Next, we depending on sales budget well as the production budget also is
prepared.
And then, will be prepared the resource budgeting for production such as:
machine usage budget, material usage budget and labour budget.
After that, we will be continuous prepared for the material budget and the
material stock budget to determine go up or go down level of stock. Besides
that, the quantity and value of raw material purchases budget also prepare.
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In addition, for preparation of sales and production budget, cost centers need
to calculate the draft budgets for department overheads costs.
Then the budgeted profit and loss account can be prepared.
Finally, some budgets must be prepared like capital expenditure budget,
working capital budget and cash budget in order to accomplish budgeted
balance sheet.

(3.2, 3.3, 3.4) Select appropriate budgeting methods for the Sefton Limited and
its needs. Prepare budgets according to the chosen budgeting method based
on the given information in the scenario including a cash budged.
All of manufacturing companies would like to achieve the expected sales
target that company had set out, and the Sefton also does. This proved that,
sales budget is one of the most effective tools for company to reach its target.
Thanks to sales budget, it will maximum integration of effort between cost
centres as well as helps them co-ordinate smooth and effect. Thus, when we
looking at the sales budget of companies, we can know that company can be
able know how many stock they have in warehouse, what kind of material the
production department need, how much resource company need to achieve
the target and so on.
Alpha Beta
Sales target $ 5,000 $ 1,000
Cost per units $ 182 $ 161
Total cost of sales $ 910,000 $ 161,000
Total revenue 1,071,000

After chosen the Sales budget method to make the sales budget, we depend
on it to make the following budgets below.




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Production budget:

Production budget
Alpha Beta
$ $
Required for sales 5,000 1,000
Closing inventory 150 150
5,150 1,150
Less: opening inventory 100 200
Unit to be producted 5,050 950

The figures in this table is collected from the Production Budget table such as
5,050 and 950 units are the quantity that they want to be produced and some
numbers gathered in scenario.
Raw material usage:
Raw material usage
M N
$ $
Required for Alpha 60,600 30,300
Required for Beta 11,400 7,600

Total usage 72,000 37,900


In that:
Required for Alpha (M) = 5050 x 12 = 60,600 units
Required for Alpha (N) = 5050 x 6 = 30,300 units
Required for Beta (M) = 950 x 12 = 11,400 units
Required for Beta (N) = 950 x 6 = 7,600 units


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Raw material purchase budget:
Raw material purchase budget
M N
$ $
Raw material for production 72,000 37,900
Closed inventory 4,000 2,000
76,000 39,900
Opening inventory 3,000 4,000
73,000 35,900

The information and data of the table above comes from the Raw Material
Usage table and Scenario.
Direct labour budget
Direct labor budget
Labor hours Cost per hours Total cost
h $ $
Alpha 35,350 10 353,500
Beta 9,500 10 95,000
44,850 448,500

In that:
Alpha = 5,050 x7 = 35,350 hours
Beta = 950 x 10 = 9,500 hours

Production cost budget:
Production cost budget
$
Production over head absorption rate 4.46
Overhead for Alpha 157,637
Overhead for Beta 42,363

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In that:
The production overhead adsorption rate = 200,000 / 44,850 = 4.46
dollar per hour
Overhead for Alpha = 35,350 hours x $4.46 = $157,626
Overhead for Beta = 9,500 hours x $4.46 = $42,361
The information of this table comes from the Direct Labour Budget
table and Scenario.
Direct material budget:
Direct material budget
Alpha Beta
$ $
M 121,200 22,800
N 90,900 22,800
Direct labor 353,500 95,000
Overhead 157,637 42,363
Total production cost budget 723,237 182,963

In that:
M (Alpha) = 60,600 x $2 = $121,200
M (Beta) = 11,400 x $2 = $22,800
N (Alpha) = 30,300 x $3 = $90,900
N (Beta) = 7,600 x $3 = $22,800

The data in the table above is collected from Direct Labour Budget,
Production Cost Budget and Scenario.





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Cash budget (3d)







CASH BUDGET
For the year ended 31 December (year 3)
Quarter 1 2 3 5
$ $ $ $
Receipts 196,000 224,000 238,000 336,000
Payment:
Material 22,000 37,000 40,000 336,000
Direct way 100,000 110,500 121,000 60,000
Overhead 45,000 50,000 70,000 117,000
taxation 5,000 65,000
Machinery 120,000
Total payment 172,000 197,500 351,000 242,000
Net cash flow 24,000 26,500 (113,000) 94,000
Balance b/f 10,000 34,000 60,500 (52,500)
Balance c/f 34, 000 60,500 (52,500) 41,500

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BUDGET INCOME STATEMENT
For the year ended 31 December (year 3)
$ $
Revenue 1,071,000
Opening inventory raw material 20,000
Purchased raw material 253,700
273,700
Closed inventory of raw material 14,000
Material cost used for production 259,700
Direct wages 448,500
Production overhead 200,000
Production cost of goods completed 908,200
Opening inventory for finished goods 15,000
Finished goods available for sales 923,200
Less: closing inventory of finished goods 50,370
Production cost of goods sold 872,830
Gross profit 198,170
Selling and administration overhead 75,000
Net profit before tax 123,170
Less: tax 30% 36,951
Net profit after tax 86,219
Retained earnings b/f 81,000
Retained earnings c/f 167,219








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In that
Revenue = (sales volume of Alpha Sales price of Alpha) (sales
volume of Beta Sales price of Beta)
=(5,000 units $182) (1,000 units $161)= $1,071,000
Taxation which is 30% of net profit =123,170 0.3 =36,951

Budget balance sheet statement
For 31 December, year 3
Cost Depreciation Net
$ $ $
Non- current asset
land 50,000 50,000
Building& equipment 520,000 105,000 415,000
Total non- current
assets
570,000 105,000 465,000
Current assets
Inventory 14,000
Raw material 50,370 64,370
Finished goods 102,000
receivable 41,500
Cash at bank 207,870

Current liabilities
Payables 118,700
Taxation 36,951 155,651
52,219
Net assets 517,219
Financed by 350,000
Share capital 167,219
Retained earnings 517,219


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In that:
Building & equipment = opening cost balance purchase during year
= 400,000 120,000 = 520,000
Depreciation = opening depreciation balance production
depreciation selling depreciation
= 75,000 25,000 5,000 = 105,000
Receivable = opening balance sales receipts
= 25,000 1,071,000 994,000 = 102,000
Payable = closing payables balance material purchased
from budget overhead production overhead selling administration
payments
= 9,000 253,700 175,000 70,000 389,000 = 118,700
Taxation = opening taxation taxation payment taxation
occurred
= 5,000 -5,000 35,961 = 36,951
Task 2
(4.1, 4.2).Prepare an operating statement reconciling budgeted and actual
results and also calculate variances, identify possible causes and recommend
corrective action.
1. Material price variance = actual quantity (standard rate actual
rate)
= ( 2,300 x 4 ) 9,800 =$600 (A)
2. Material usage variance = standard rate ( standard quantity
actual quantity)
= 4 x [( 4850 x 0.5 ) 2,300 ] = $500 (F)
3. Labour rate variance =( actual hours rate x standard rate)
actual rate
= ( 8,500 x 2 ) 16,800 = $200 (F)
4. Labour efficiency variance = standard rate x ( standard hours
actual hours )
= 2 x [( 4,950 x 2 ) 8,000 ] = $3,400 (F)
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5. Labour idle time variance = standard rate x idle time
= 2 x ( 8,500 8,000) = 1,000 (A)
6. Variable overhead expense
variance
=( budgeted variable overheads actual
variable overhead)
= 8,000 x $ 0.3 2,600 = $200 (A)
7. Variable overhead efficiency
variance
= (Standard rate x standard hours)
actual hours
= 0.3 x[( 4,850 x 2 ) 8,000 ] = $510 (F)
8. Fixed overhead expense variance = budgeted fixed overheads actual
fixed overhead
=(5100 x 7400) 42300 = $4560 (A)
9. Fixed overheads volume variance = budgeted fixed overheads per unit x
(budgeted volume actual volume)
= 740 x (5,100 4,850) = $1,850 (A)
10. Fixed overheads efficiency
variance
Budgeted fixed overheads per hours x
( standard hours actual hours )
= 37 x (9,700 h 800h) = $ 6,290 (F)
11. Fixed overheads capacity variance = ( budgeted fixed over per hours x
budgeted capacity actual capacity)
= 37 x [(5,100 x 2) 8,000)= $8,140 (A)
12. Sale price variance = ( actual quantity x budgeted rate ) -
actual rate
= [( 4,580 x 20 ) 95,600 ] = $1,400 (A)
13. Sale volume variance = standard profit per unit x (budgeted
sales volume actual sales volume)
= 6 x ( 5,100 4,850 )= $1,500 (A)





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Opening statement
For the month ended 30
th
April 2010
$
Budget profit before selling administration
expense (5,100 x 6)
30,600
Sales volume 1,500
Budget profit from actual sales 29,100
Selling price 1,400
27,700
Cost variance Favorable Adverse
$
Material price 600
Material usage 500
Labor rate 200
Labor efficiency 3,400
Labor idle time 1,000
Variance overhead expense 200
Variance overhead efficiency 510
Fix overhead expense 4,560
Fix overhead efficiency 6,290
Fix overhead capacity 8,140
10,900 14,500 3,600
Actual profit before sales and administrative cost 24,100
Sales and administrative cost 18,000
Net profit 6,100
Cross check
$ $
95,600
Sales
Less:
- Cost of material 9,800
- Labor 16,800
- Variable overheads 2,600
- Fixed overhead 42,300
- Selling admin expense 8,000 89,500
- Net profit 6,100


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Variance Possible cause Solution

C
o
s
t

Material
price
Price is goes up
following the
economic situation
have many
fluctuation.
scarce goods
happens in some
period.

Competition in
process buying
material.
Negotiating about
material price with
suppliers to reduce cost.


Should sign long term
contracts with raw
material suppliers to
have the stable price.
Looking for new
suppliers to reduce the
monopoly in buy goods
process .
Material
usage
The company using
the material
effectively will avoid
wasted and save
costs.

Should recording all of
information about using
the material effectively to
apply it in the future.
Give out reward for
workers to maintain the
current situation and
improve it better.
Labor rate
Accept recruiting
apprentices and less
experience workers
to pay salary lower
than standard to
save money for
company.
However, need to
considering whether
these new workers work
effective or not. If they
dont work well , we
need to hire workers
have experienced
although we must to
spend more money.


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Labor idle
time
Machine occur
problem or
breakdown.
Don't have enough
material for
continuous produce
process.

Workers cannot go to
work.
So, regularly checking
and maintaining the
machinery.
Applying various method
the information
technology in produce to
control the warehouse
better like JIT, ERP...
Carrying out the health
checking for workers.
Labor
efficiency
Increasing of
productivity and rise
profit for company.

Workers dont work
effective.
Lack of material
Increasing the salary
and bonus for good
worker and have good
performance.
Should not retain staff
who dont work effective.
Warehouse need to be
checking carefully.
R
e
v
e
n
u
e

c
e
n
t
e
r
s

Fixed and
variable
overhead
expenditu
re
Salary of
administrator go up.
Need more office
staffs.
Must to manage tight
and effective.
Hiring right people in the
right position is office .
Sales
price
Stimulate market
demand by reduced
price strategy. To
compete with
competitor.
Price of labor and
raw material
increase.
looking for to create the
new products with lower
price in current but still
have the same function
with previous products.
Signing long term
contract with supplier
and labors.
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P
r
o
f
i
t

c
e
n
t
e
r
s

Sales
volume
Economic crisis lead
to affect the sale
volume.

Appear many strong
competitors.


Our product is not
suitable for current
demand.
Need to market research
to understand the
current situation to have
effective solution.
Implementing the
various marketing
campaign to attract
customer.
Innovate the products to
suitable and meet
customer demand.

4c, Report finding
REPORT ON BUDGETING ACTIVITIES
For the month ended (30
th
April 2010)
To : Managing Director, Sefton Company
From : Management Accountant, Sefton Company
Subject : Problem findings during implementing budgeting activities
Date : 29 April 2010
I. INTRODUCTION
The objective of prepare this report is give out general view about current financial
situation to submitted for Managing Director. Through it, we can see that the top
manager is the person who have wide knowledge. Thus, they can be able to
understand about the plans of organization as well as know clearly about whether
company are used the resource effectively or not and having solution on time.
II. METHOD
We will carried out compare the actual activities and budgeted to evaluate the
performance of company. We use flexible methods to calculate these numbers
above.
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III. FINDINGS
Through calculation above, we can see that the actual activities is different from
budgeted. Therefore, it will have some negative and positive effects to company.


At glance, The bar chart above indicated for we see that: the Adverse Variance is
higher than Favorable Variance about 3,600 respectively with 14,500 and 10,900
respectively. It means that company spends more money in practice than they do in
budget.
Besides, it also tells us that we can hardly predict exactly the same result of the
budget and actual activities. Therefore, It has to have a little difference between
budget and actual activities.
However, if it have the big gap between actual and budget. We must to have a
center who take responsibility for improving better performance as well as reward
them if performance effectively.



10,900
14,500
0
2000
4000
6000
8000
10000
12000
14000
16000
Favorable Adverse
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Some cost centers seemly dont work effectively. Their still have some Adverse such
as:
$600 labor time
$1,000 labor idle time
$200 variable overhead expenditure
$4,560 fixed overhead expenditure
$8,140 fixed overhead capacity
However, there are also have Favorable:
$500 material usages
$200 labor rate
3,400 labor efficiency
$510 variable overhead efficiency
$6,290 fixed overhead efficiency

IV. SOLUTION
To running the Sefton company effectively and better, The top management
of organization need to consider some solution following:
Negotiating the price with supplier, then we signing a long term contract with
them as well as finding new supplier to reduce the selling power of them.
Conducted recruiting fresh graduate student as well as permit final year
student have opportunities to practice in company.
Checking machinery regularly as well as maintained devices.
Applying high technology in manufacturing like ERP system, JIT system,
etcto help company operation more effective.
Monitoring and observation staffs who work ineffective to give out remedies.
Always updates and product innovation as well as focused on the market
research to more understand about current and future market.
Recording information and activities which make negative and positive effect
of company to find out solutions to resolve and improving in the future.
Support workers and staff in working and give out many reward for the people
work effective.

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REFERENCES:
http://www.fao.org/docrep/W4343E/w4343e05.htm
http://www.scribd.com/mustafa_khuwaja508/d/47064313/9-Budget-preparation