A Budgetary Control Systems Accounting Essay

A Budgetary Control Systems Accounting EssayI guard re-read my last courses HNC paper exercise and used my online years HND paperwork to help with the various aspects of the report. I used my HNC scatheing booklets and lecture notes, HND enthronisation appraisal literature, HND Business Tax literature, HND Capital Allowances literature and HNC Standard bell literature.I went to the library and used college resources such as ebray for information of much(prenominal) in-depth ciphering control systems. I used Cost and Management Accounting books which c all overed cost assignment of direct and indirect cost. They covered issues ab bring forth forward fixed, variable quantity and semi variable costs. I used Accounting Theory and Practice for in-depth work outary intend and variance analysis. I used an up to date Taxation book to allow me the most up to date tax percentages to be used, the correct summation Investment Allowances applicable and the written down assesss for Capital Allowance calculations.CASE STUDY ANALYSISThis formal report has been requested by the Managing handler by Ergo designHe requires a full business report which get out appraise the launch of a new quality ergonomic chair. As well as the appraisal, the managing director would like advice on how to set up and implement an efficient cipherary control system. Ergo Design already mention a different range of carrefours and atomic number 18 wanting to find out if it would feasible to undertake the making of anformer(a) new product. The caller-up currently has spare capacity and as they dont want spare capacity are looking into making a new chair. This however involves the purchase or consider of a new asset namely a new machine which go out be capable of making the new product. This asset is not cut-rate and cost 125,000. Ergo Design are guaranteed an order for 1 year amounting to 1800 chairs to be distributed evenly over the month. The factory is only open 48 weeks o f the year to allow for maintenance, secures and so forthand therefore leaves 12 periods of 4 weeks to evenly distribute 160 chairs per 4 weeks. The company engage had a trial period and all seems to be well. The MD awaits reports before committing final sanctions.APPENDICES 1-9Attached as appendices is the military action Based Costing comparison followed by the functional reckons then Capital Investment Appraisal and lastly a Break Even Analysis based on my figures.Appendix 1. Activity Based Costing comparison. I have used Activity Based Costing (ABC) to work out the costs of producing the new product. Ergo Design in previous years have recovered costs exploitation a blanket wide rate based on the number of machine hours. The last two years however they have changed to ABC. I have made a comparison using traditional overhead recovery and ABC. ABC was developed in order to more accurately reflect the factors which give birth overhead costs to arise. Overhead costs are attribu ted to products on the basis that it is activities that cause costs to arise. Each activity kitty be identified with a cost driver and the cost drivers I have used are machine hours, Labour hours, number of orders, production runs, set up hours and inspections. After the cost drivers have been identified then each cost drivers overheads are collected together. These collections of costs are called cost pools. Each pool is then divided by its driver, for example all overheads in the cost pool for the materials ordering process would be divided by the number of orders statusd to give a value for the cost of placing an order. The costs of all activities relating to a product would be added together to give the overhead element of the cost of production. Because activity based costing shares out overheads using cost drivers compared with the traditional costing systems which use departments, then a greater number of drivers contribute be used, reflecting all the different activities taking regularise in the manufacturing process. This leads to a fairer and more accurate way of charging overheads to the products. The traditional methods ignore the detail of many of the activities that actually take place. In my findings the cost of producing the new product using ABC is 167.95 per building block whereas the blanket method only 150.18 is allocated for cost, This would give a higher contribution and a higher profit.I have sour that we are going to be charging 195 per unit and at this price we are still making a profit of 63,975 for the first year. We can look at raising prices at the end of the initial 3 year period if the turnover is still constant.My creditors are to allow me credit purchases payable for Aluminium Sheets. 1 month Memory Foam.2 monthsFabric1 month Hardware3 monthsMy debtors are to be allowed 1 months credit sales.A new asset is to be purchased at a cost of 125,000, which lead gather depreciation over 10 years straight line method. The new mac hine go forth lead to be replaced after this time and will have a oddment value of 15,000. Maintenance will essential to be carried out regularly to allow for optimum usage and guarantee residual value. The maintenance cost will be estimated at 5% of the capital cost per annum. The asset is purchased with a long term contribute for the full 125,000. The loan will have a 3% fixed rate interest per annum. The interest is added to the original amount and not compounded yearly. This is to be repaid over 10 years with repayments and interest payments split. The total cost of the loan is 162,500 with repayments world 62500 every 6 months and Interest being 1,875. on that point is currently spare capacity in spite of appearance Ergo Designs production facilities and can therefore produce 2 batches of 20 chairs per week for the full 48 weeks that the factory is open. This allows for tautological stock of (1920-1800)=120 chairs surplus at the end of the year. We will supply 150 chair s per month to the customer and fill 160 chairs to allow for full capacity, this will leave us a surplus of 10 chairs which will be opening stock for the month of Feb and the units will 10 more units every month compounded.The following budgets are ready for the first six months of the new multi-level chair and includeAppendix 2. Opening Balance at beginning of the month of Jan. This is the beginning of the month and lists the purchases made to modify the company to begin production and sell them at the end of the month.Appendix 3. Key Variables input. As the figures were given for batches I had to break them down into single units costs so that a uniform approach was taken across the board. The direct material costs have accounted for the biggest costs followed by the labour then the variable overheads.Appendix 4. Sales budgets- This is in like manner the main budget which has to be disposed(p) first. It shows that we are to sell 150 units per month at a cost of 195 creating a sales value of 29,250.Production budget- This budget is prepared after the sales budget and states the amount of units to be produced within the period. I have carried over profusion units in case of any unforeseen circumstances which will reduce production in later months e.g. machinery breaking down and staff absences etc. The machinery is also working at full capacity if I make the amount need as well as the excess.Direct Material usage budget is prepared future(a) and the figures are for 1 single unit which is obtained from the key variables sheet shown in Appendix 2.Direct material purchases budget is next with figures for the required production for each month and the cost of goods to be purchased. The cost figure is taken from the key variable appendix 2.Direct labour budget figures come from the production budget for the amount to be produced multiplied by the cost of the direct labour unit from key variables appendix 2.Overhead budget gives us monthly fixed overheads and depreciation figures taken from key variables in appendix 2.Variable cost budget.This budget takes the amount of units to be produced multiplied by the variable cost per unit. Both these figures are from the key variables sheet.Production cost budgetThis budget gives us a breakdown of how much each unit will cost to produce. It takes into consideration the material and variable costs and add the figure to the raw material costs.Debtors budget..We have been giving our debtors 1 month to pay after receiving their finished goods.Creditors budgetWe have 4 of these for each of the different raw materials we need. Each shows opening balances, purchases, payments and closing balances.Appendix 5. The Cash budget shows the inflows and outflows and gives a final figure for the bank balance to go into the Balance sheet.Appendix 6. The Operating statement lists the cost of sales when taken from sales will give us a profit. Expenses are then deducted leaving us with healthy discharge profit of 25,744.25Appendix 7. The Balance sheet is the 6 month balance sheet ending on 30th June 2013. Our current assets are a higher amount than our current liabilities and therefore give us net current assets to be added to the fixed assets. Once the long term liabilities come off then this leaves us with a balance of 25,844.25Appendix 8. Capital Investment appraisal. I have started this by working out the inflows for the first 3 years as we know the selling price and we know the change in production. After year 3, I have assumed that turnover will remain stable and have therefore carried out my Capital Allowance calculations over 10 years. I have deducted the Asset Investment allowance of 25,000 and written down value for each year at 18%. I have assumed a residual value of the machine to be 15,000 and added the balancing allowance figure to the capital allowances. Using the inflow figures and deducting capital allowances for each year, I was able to work out the taxable amount and tax it at this years appropriate amount. I carried out 2 Discounted Cash Flow (DCF) methods , 1 being Net Present Value (NPV) and the other is the Internal Rate of Return (IRR). The DCF includes all cash flows and the time value of money telling you what you 1 will be worth in X years ahead. The IRR also includes the time value of money and includes all cash flows but the IRR if far more easily understood. If the net present value is zero or positive, the project is accepted, I have used 15% and 45% discount factors and they are two returning a positive number so the project should be accepted. You can think of IRR as the rate of growth a projectis expect to generate and a higher IRR value would provide a much better chance of strong growth. The rate for this project is 59.93 so again promoting the word sense of this project..Appendix 9. I have put in an extra break even analysis chart for your perusal as break even charts work well with a single product. The break-even analysis is a calculation of the approximate sales volume required to just cover costs, above which production would be profitable or unprofitable break-even analysis focuses on the relationship between fixed costs, variable cost, and profit. The summary shows that the BEP in units 1058 and the margin of safety in units is 742. cost taken into account are distinguished by variable costs which change in according to the production level.BUDGETARY CONTROL SYSTEMSA budget is a financial plan for an organisation prepared in advance for a given period.Budgets can be prepared as a undivided or broken down into component departments e.g. sales and production or purchases or cash or capital etc.There can be many different types of budgets and for a variety of departments such as sales or production or financial items such as capital, expenditure, manpower, purchase etc.The budgeting process is a vital part of a businesss planning and control.The overall objective of the company is prepared in advance an d agreed with cooperation and detailed into a feasible plan of action.It is about planning, monitoring, reviewing and amending budgets to suit anxiety objectives.When the long term strategies are written down everyone is starting from the like place and it will not matter if new people come and go, the long term plans will still be there.Long term objectives after being decided need to be broken down into manageable chunks of short term objectives. A constricting factor needs to be distinguished and a budget is prepared solely for this. The most common limiting factor is sales and this needs to be as accurate as possible as all other budgets will be based on the limiting factors budget.Once all the budgets are prepared a master budget is drafted and given to all of the budget holders for agreement. Once any tweaks or changes are made and an agreement reached then the master budget is presented to senior management.When the budgets need to be prepared again for the next period the n actual figures are measured against budgeted figures and there are favourable and adverse variances produced showing management what areas need attention and where money is being lost, it may be efficiency problems that are highlighted for attention etc.There is actually an 8 step plan involved in advanced forwardness budgeting.Step 1 is agreeing long term goalsStep 2 Changing long term goals to short term goalsStep 3 Identify limiting factorStep 4 Prepare limiting factor budgetStep 5 Prepare all other budgetsStep 6 tote up all budgets together to prepare the master budgetStep 7 Agree with all budget holdersStep 8 Present to the managementThere are many benefits to having financial planning and good budgetary control to name a few, by doing extensive planning there is a much clearer picture on where the business is going. It will reduce stress in the work place with all staff knowing where, when and how things are to done. Management can keep on top of things and have peace of m ind. With budgeting control there is a more detailed structure of how the business is organised. With all the planning, organising and controlling it is easier for management to keep on top of changes and variances and make it easier to quickly adapt to the said changes. There is co-ordination with everyone working in the same direction. Budgets can be used to make communication and motivation more effective using them to exchange information concerning ideas, goals, achievements etc. thus giving staff a sense of togetherness and teamwork with everyone working towards the same goal.There is however barriers with a lack of knowledge, resources or motivation making the planning extremely difficult to start. Maybe not knowing where to start or even how to start. Maybe needing to sacrifice some things for others. Budgets are a time consuming job and to draw up each individual budget is a laborious task but it is still worthwhile as the benefits usually outweigh the efforts. If there is no co-ordination then the planning will fall apart. Preparing budgets is extremely subjective and they are based on predicted assumptions.ADDITIONAL AND ALTERNATIVE APPROACHESThe company has taken out a loan for the CNC machine perhaps they could have leased it for a year or so, see how the product is doing then maybe buy it later on. Leasing equipment means there is not maintenance or repair costs to consider.Instead of keeping the CNC machine for 10 years with a value of 15,000, Ergo designs can sell it sooner when it is worth more money.The company have adequate production facilities at this time and are therefore not considering contracting out however with proper budgetary controls in place it will be easier to spot any variance changes with efficiency or cost and it may be that in the future it may well be cheaper to contract certain parts of the process out to someone else. They do not run at full capacity in the other products they make and look at contracting out some of that work instead.The company should put in place an advertising campaign for when they believe sales will stabilize to generate renewed interest in the product which can be researched by potential drop buyers now as it has been on the market for 3 years.As Direct material has accounted for the biggest cost maybe Ergo Design can look around for cheaper suppliers or substitute certain ingredients for others.A price increase could be implemented in later years.CONCLUSIONSThe launch of this new product is feasible. It is returning a good profit and there is lots of potential for increasing profitability in the coming next few years and there is room for selling price increases. The new asset can be used for its economical life, sold off earlier or can be hired out to other companies so more room for change magnitude profitability.RECOMMENDATIONSA proper budgetary control system should most definitely be put in place.Future advertising is also a must. They need to do this sooner rathe r than later as they have only projected increases in turnover for the next 2 years.As the cost of materials are so high, I would recommend that the buyers look around for alternative materials or try to negotiate more with the current suppliers for larger discounts.Lets be aware of the future, this can be done easier with the budgetary control in place. We need to be aware of what our competitors are up to and trends in markets. We need to be aware of what the brass is changing and how it will affect the business e.g. Higher corporation taxes, inflation rates etc.