BBA 4002 BUDGETING AND CONTROL (INDUSTRIAL PROJECT PAPAER)

YAP XIAO YING 920606106064 STUDENT ID: 200571

LACTURER NAME:

JULY 2013

1.0 CONTENT NO: ITEMS: 1.0 2.0 3.0 4.0 5.0 6.0 Content Task 1 Task 2 Task 3 Referents Coursework PAGES

2.1 Pushpack and Co, a glass manufacturing company requires you to calculate and present the budget for the next year from the following information: Toughened glass Bent toughened glass Direct material cost 60% of sales Direct wages 10 workers @ $100 per month Factory overheads Indirect labour: Work manager Foreman Stores and spares 2% on sales Depreciation on machinery Light and power Repairs and maintenance Other sundries 10% on direct wages Administration, selling and distribution expenses $7000 per year. $6000 $2000 $4000 $300 per month $200 per month $200000 $300000

Answer: Particulars Sales(as per sales budget) Toughened glass Bent toughened glass Less: Cost of production: 200000 30000 Amount Amount

(as per cost of production budget) Direct materials Direct wages Prime cost Add: Factory overhead: 300000 12000 312000

Variable: Stores and spares Light and power Repairs and maintenance 10000 2000 4000 16000 Fixed: Work Managers salary Foreman salary Depreciation Sundries Works cost Gross profit Less: Administration, Selling & distribution expenses Net profit 3600 2400 6000 1200 13200 341200 158800 7000 151800

2.0 Task 2
2.2 Prasad and Co. wishes to prepare cash budget from January. Prepare a cash budget for the first six months from the following estimated revenue and expenses:

Month

Total sales($)

Materials($)

Wages($)

Production overheads($)

Selling and distribution overheads($)

January February March April May June

10000 11000 14000 18000 15000 20000

10000 7000 7000 11000 10000 12500

2000 2200 2300 2300 2000 2500

1600 1650 1700 1750 1600 1800

400 450 450 500 450 600

Additional information 1. Cash balance on 1st January was $5000. New machinery is to be installed at $ 10000 on credit, to be repaid by two equal installments in March and April. 2. Sales commission @ 5% on total sales is tobe paid within a month of following actual sales. 3. $ 5000 being the amount of 2nd call may be received in March. Share Premium amounting to $ 1000 is also obtainable with the 2nd call. 4. Period of credit allowed by suppliers 2 months. 5. Period of credit allowed to customers 1 month. 6. Delay in payment of overheads 1month. 7. Delay in payment of wages -1/2 month. 8. Assume cash sales to be 50% of total sales.

Answer: Particulars Opening balance Estimated cash receipts: Cash sales Credit sales Second call Share premium Total cash Receipts(A) Estimated cash payments: Materials Wages Production Overheard Selling & Distribution overheads Purchase of machinery Total cash Payment(B) Closing Balance (A-B) 1000 9000 4600 14900 5000 19900 13500 5000 17150 12350 12300 16550 16050 18000 1000 2100 1600 400 500 10000 19500 5000 5500 5000 7000 5500 5000 1000 33400 10000 2250 1650 450 550 29500 7000 2300 1700 450 700 28850 7000 2150 1750 500 900 34050 11000 2250 1600 450 750 9000 7000 7500 9000 10000 7500 January $ 5000 February $ 9000 March $ 14900 April $ 13500 May $ 12350 June $ 16550

3.0 Task 3 3.2 Prepare a flexible budget for overheads on this basis of the following data. Ascertain the overhead rate at 50%, 60% and 70% capacity. Variable overheads: Indirect material Indirect labour Semi- variable overheads: Electricity (40% fixed 60% variable) Repairs (80% fixed 20% variable) Fixed overheads: Depreciation Insurance Salaries Total overheads Estimated direct labor hours 8250 2250 7500 46500 93000 15000 1500 At 50% capacity ($) 3000 9000

Answer: Particulars overheads: 50% Capacity Variable Overheads: Indirect materials Indirect labour Semi-variable overheads: Electricity Repairs and maintenance Fixed overheads: Depreciation Insurance Sales Total Overheads Estimated direct labour hours 8250 2250 7500 46500 93000 9900 2700 9000 55800 111600 11550 3150 10500 65100 130200 15000 1500 18000 1800 21000 2100 3000 9000 3600 10800 4200 12600 60% Capacity 70% Capacity

Working notes: 1. Electricity $15000 is the cost of electricity at 50% capacity, of which 40% are fixed overheads, i.e. $6000 and variable is $9000:

For 50% capacity variable overheads= $9000 For 60% capacity variable overheads= $10800 = 9000/50 x 60% = $10800 Therefore electricity cost at 60% capacity = $10800+ $6000= $16800 For 70% capacity variable overheads= $12600 = 9000/50 x 70%= $12600 Therefore electricity cost at 70% capacity =$12600+$6000=$18600

2. Repairs and maintenance : $ 1500 is the cost of repairs and maintenance at 50% capacity, of which 80% is fixed overheads, i.e. $1200 and variable is $300:

For 50% capacity variable overheads= $300 For 60% capacity variable overheads= $360 = 300/50 x60%=$360 Therefore the total cost of repairs and maintenance at 60%= $360+$1200=$1560 For 70% capacity variable overheads=$420 =$300/50 x70%=$420 Therefore the total cost of repairs and maintenance at 70%= $420+$1200=$1620

Coursework 1. Explain carefully the steps in budgetary control. The procedure to be followed in the preparation and control of budget may differ from business to business. But a general pattern of outline of budget preparation and control may go a long way to achieve the end results. The steps are as follows:

Formulation of policies The business policies are the foundation stone of budget construction. Function policies should be formulated in advance. Long-range policies with short term projections should be made for the functional areas such as sales, production, inventory, cash management, capital expenditure.

Preparation of forecasts Based on the formulated policies, forecast should be made in respect of each function. Activity based concepts should be introduced at the micro level for each function Forecasts should not be considered as a mere estimates. Scientific methods should be adopted for forecasting. Analysis of various factors based on past, and present, future forecast should be made.

Preparation of budgets Forecasts are converted into written codified document. Such written documents can be used for coordination purposes. Function budgets will act as guidelines for implementation.

Forecast combinations While developing the budgets, through a Master Budget various permutations and combination processes are considered and developed. Based on this, establishment of the most preferred one which will yield optimum benefits should be considered. All the factor components should

2. The budgets are normally classified according to their nature. There are (a) Fixed Budget. (b) Flexible Budget. (c) Functional Budget. Explain carefully each of them.

(a) Fixed Budget It is also known as static budgets. It is prepared for a fixed or standard volume of activity. They do not change with change in to the volume of activity. They are prepared well in advance Due to this, there are bound to be variances at the time of comparison. Hence, the budgets become unsuitable for the purpose of comparison. Wide deviations are noticed due to changes in the volume of activity. (b) Flexible Budget It is prepared with a view to take into account the periodic changes in the level to activity attained. In this case, the revenues and costs targets are set in respect of different levels of activity even from zero to 100% of product ion volume. Such mechanism helps to change revenues and cost targets for the actual level of activity and thus makes the comparison more logical and scientific. (c) Functional Budget These are also known as subsidiary budgets. There are prepared on the basis of approved forecasts for individual department. Since departments are created based on the functions, they are known as functional budgets. The functional budgets may vary in number from business. The functional budgets include sales budget. Production budget, selling and distribution overhead budget, plant budget, research and development budget, overheads budget, financial budget such as cash budget and capital expenditure budget.

3. List and explain the limitation of budgeting. The main limitations of budgeting are as under: Budget plan Since budget a plan are based on estimates, the success or otherwise depends on the accuracy of basic estimates or forecasts. Due to this while making estimates, judgmental decision may accrue. The results need to be interpreted very cautiously. Rigidity Since the estimates are quantitative expression of all relevant data, there is likely that finality attachment may become very clear. Such consideration may result in rigidity. Rigidity may become a setback for the changing business conditions. Replacement: Budgeting is not a substitute for management. It is essentially a tool of management. Under no circumstances, it should be concluded that the budgeting is alone sufficient to ensure success and to guarantee future profits. Costly The installation of budgeting system to an organization involve too much of costs. Its scientific approach will definitely call for huge cost allocation. Small concerns cannot afford to take over huge costs for the establishment of business systems. Since the costs and revenues and operational activities do not match in many occasions, the entire exercise will become costly. The system should be adopted be adopted only when benefits exceed the costs.