budgets

BSBFIM501 Manage budgets and financial plans

Assessment Task 1 Case Study

Task A

From the master budget and cost centre budgets, the information about interest is not given as the profit after tax is calculated without the any information about interest given. In addition, the information related to sales commission is not clear as budget is showing 2% of commission on sales, but firm will provide 2.5% commission.

Along with this, there is no clarity on the costs of goods sold. The sales in the 1, 3 and 4 quarters should be 30% less than quarter 2 but there is equal distribution of sales in each quarter. it is also ot given that costs  of goods sold is equal in each quarter.

Based on the given information, it is required to make changes in the budget. Sales mentioned in the budget are 750,000 in each quarter but in reality, the sales should be 700,000 in each quarter excepting 2 quarter with 1,000,000.

Apart from this, total sales will also change from 3,000,000 to 3,100,000. Along with this, it is also necessary to make change in commission as 2% commission on sales is given that should be 2.5% on sales. Total commission for the year will be 77,500 rather than 60,000.

Changes in sales and commission will also change gross profit that will also make change in net profit for the firm. The possible changes in budget can be presented in the newly prepared budget as below:

Big Red Bicycle
Master Budget FY 2011/2012
  FY Q1 Q2 Q3 Q4
REVENUE
  Commissions                 77,500          17,500        25,000       17,500       17,500
  Direct wages fixed               200,000          50,000        50,000       50,000       50,000
  Sales            3,100,000        700,000  1,000,000    700,000    700,000
  Cost of Goods Sold               400,000        100,000      100,000    100,000    100,000
Gross Profit            2,422,500        532,500      825,000    532,500    532,500
EXPENSES
General & Administrative Expenses
  Travel                 20,000             5,000          5,000         5,000         5,000
  Legal Fees                    5,000             1,250          1,250         1,250         1,250
  Bank Charges                       600                150              150            150            150
  Office Supplies                    5,000             1,250          1,250         1,250         1,250
  Postage & Printing                       400                100              100            100            100
  Dues & Subscriptions                       500                125              125            125            125
  Telephone                 10,000             2,500          2,500         2,500         2,500
  Repairs & Maintenance                 50,000          25,000        25,000
  Payroll Tax                 25,000             6,250          6,250         6,250         6,250
Marketing Expenses
  Advertising               200,000          50,000        50,000       50,000       50,000
Employment Expenses
  Superannuation                 45,000          11,250        11,250       11,250       11,250
  Wages & Salaries               500,000        125,000      125,000    125,000    125,000
  Staff Amenities                 20,000             5,000          5,000         5,000         5,000
Occupancy Costs
  Electricity                 40,000          10,000        10,000       10,000       10,000
  Insurance               100,000          25,000        25,000       25,000       25,000
  Rates               100,000          25,000        25,000       25,000       25,000
  Rent               200,000          50,000        50,000       50,000       50,000
  Water                 30,000             7,500          7,500         7,500         7,500
  Waste Removal                 50,000          12,500        12,500       12,500       12,500
TOTAL EXPENSES            1,401,500        362,875      362,875    337,875    337,875
NET PROFIT (BEFORE INTEREST & TAX)            1,021,000        169,625      462,125    194,625    194,625
Income Tax Expense (25%Net)               255,250          42,406      115,531       48,656       48,656
NET PROFIT AFTER TAX               765,750        127,219      346,594    145,969    145,969

Task B

Contingency Plan

Contingency Plan

Company name: Smith’s Auto Pty Ltd

Person developing the plan:

Name Tom Copeland                     Position

 

Risk identified:

Economic downturn causing sales decline by 20% below target

Possible decline in profit projects (10% variance is tolerable)

Reduction in ability to pay obligations and invest

Increases in expenses such as wage expenses.

Strategies/activities to minimise the risk By when By whom
To increase motivation level of the sales force through financial and non-financial rewards including commission, incentives, bonuses, etc.

 

3 quarter Sales General Manager (Sam Gellar) & HR manager  (Holly Burke)
 

To provide training regarding sales tactics to enhance sales

2 quarter HR manager
 

To review and develop better marketing strategies including pricing

3 quarter Marketing manager & sales manager
 

To introduce advanced technologies to reduce the cost

4 quarter Managing director (Tom Copeland)  and operational general manager (Stuart LaRoux) and Production Manager (Charles Pierce)
To diversify the business to compensate the loss of a product 4 quarter CEO an managing director and production manager

 Assessment Task 2 Role play

Task A

There is need to access the required budget information related to previous sales trends, marketing budgets, costs of goods sold, sales per day/week/month/year and records of seasonal sales, compensation and bonus structure.

All this information will be helpful for the sales team to set better sales strategies and get motivated to perform well to handle the issues related to declining sales in future. In addition, annual or quarterly gross revenues, revenues by territory, sales by distribution channel and product and cost of sales and price setting decisions are also required to be known by the sales team.

Moreover, sales team also needs to know promotional budgets to contribute in sales growth of the company. Apart from this, information related to all the reimbursements, travel expenses, accommodation expenses and meals will also be required for the sales team members.

Organizations need are as below in relation to handling issues of poor sales due to economic downturn and increases in expenses such as wage expenses:

  • To appoint skilled and talented sales team members
  • To set appropriate financial policies to decide employee benefits
  • To provide training to enhance skills and knowledge of sales team members
  • To decide performance based wage expenses

In order to improve sales and enhance the productivity of the sales team members, it is required for the firm to provide coaching or training. With the help of this, firm can improve the skills and knowledge of the team members and increase the sales. for this, company needs to focus on performance appraisal technique and survey technique to know the weak areas of the team members and identify the training needs.

In order to plan coaching or training session, the following plan can be followed by the firm: 

  • Identify the training needs
  • Develop training objectives
  • Align sales training methods with business objectives
  • Prepare the training materials, schedules and other needed tools
  • Provide training
  • Evaluation and control

The below training session plan can be followed by the company to train its sales team:

Collection of individual data
Week 1 Evaluate behavioural tendencies and motivation to employees
Week 2 Baseline selling skills and determine strong and weak areas
Week 3 Review performance metrics and current pipelines
Conduct training
Week 4 Product demonstration
Week 5 Provide training on sales tactics
Week 6 How to deal with customers’ concerns and issues
Week 7 Presentation training and forecasting
Week 8 Main competitors
Week 9 USP and objection handling
Week 10 Sales tools and techniques (sales tracker, SAP, etc.)

Training will be provided once a week for one hour during the working time.

Task B

The below spreadsheet is developed to keep track of actual expenditure by account:

EXPENSES FY Actual Q1 Actual Q2 Actual Q3 Actual Q4 Actual
General & Administrative Expenses
Travel             20,000          22,000             5,000             4,000          5,000          6,000         5,000         6,000         5,000         6,000
Legal Fees               5,000             4,500             1,250             1,050          1,250          1,150         1,250         1,150         1,250         1,150
Bank Charges                   600                700                150                200              150              200            150            150            150            150
Office Supplies               5,000             4,000             1,250             1,000          1,250          1,000         1,250         1,000         1,250         1,000
Postage & Printing                   400                500                100                125              100              125            100            125            100            125
Dues & Subscriptions                   500                600                125                150              125              150            125            150            125            150
Telephone             10,000          11,200             2,500             2,800          2,500          2,800         2,500         2,800         2,500         2,800
Repairs & Maintenance             50,000          45,000          25,000          20,000        25,000        25,000
Payroll Tax             25,000          25,000             6,250             6,250          6,250          6,250         6,250         6,250         6,250         6,250
Marketing Expenses
Advertising           200,000        208,000          50,000          52,000        50,000        56,000       50,000       50,000       50,000       50,000
Employment Expenses
Superannuation             45,000          45,000          11,250          11,250        11,250        11,250       11,250       11,250       11,250       11,250
Wages & Salaries           500,000        500,000        125,000        125,000      125,000      125,000    125,000    125,000    125,000    125,000
Staff Amenities             20,000          23,000             5,000             6,000          5,000          5,000         5,000         6,000         5,000         6,000
Occupancy Costs
Electricity             40,000          38,000          10,000             8,000        10,000        10,000       10,000       10,000       10,000       10,000
Insurance           100,000        100,000          25,000          25,000        25,000        25,000       25,000       25,000       25,000       25,000
Rates           100,000        100,000          25,000          25,000        25,000        25,000       25,000       25,000       25,000       25,000
Rent           200,000        200,000          50,000          50,000        50,000        50,000       50,000       50,000       50,000       50,000
Water             30,000          35,000             7,500          10,000          7,500        10,000         7,500         7,500         7,500         7,500
Waste Removal             50,000          60,000          12,500          15,000        12,500        15,000       12,500       15,000       12,500       15,000

Assessment Task 3 Report (Monitor and Control Finances)

Task A

A budget variation report

From the above table, It can be determined that there are some elements of the budget are not achievable. It can be evaluated that budget projections for sales, cost of goods sold and gross profit are not achievable as there is a decline in their values in actual than expected values.

The budget for some of general and administrative expenses like travel, bank charges, postage and printing, dues and subscriptions and telephone are not achievable. In addition, marketing expenses like advertising and employment expenses such as staff amenities, and occupancy costs like water and waste removal are not achievable.

Task B

Contingency plan for Task B

Contingency Plan

Company name: Smith’s Auto Pty Ltd

Person developing the plan:

Name : Tom Copeland                   Position: Managing Director

Risk identified: Profit for FY more than 10% less than budgeted
Strategies/activities to minimise the risk By when By whom
Produce quarterly variation reports to identify income/ expenditure and profit shortfalls over 10%. Q2 PR
 

Increase occupancy budget

Q2 PR
Implement more relevant sales training/coaching after identifying the training needs Q2 PR
 

Layoff short-term contract employees

Q2 HR
Implement incentives program. Q1 PR
Remove overtime & prevent threatening tone of email Q1 PR

Contingency Implementation Plan for Task B

Risk identified: Profit for FY more than 10% less than budgeted
Activity Monitoring activity and date Person/s
Monitor variance. Completion of report: Q2. PR
Analysis of report to identify issues. Management report: Q2. PR
Email to announce rise of commission from 2% to 2.5%. Monitoring of variation report results: Q3. PR
Email to inform employees that overtime will no longer be approved. Monitoring of variation report results: Q3. PR
Email to inform employees of more relevant or customized training: set program. Monitoring of variation report results: Q3. PR
 

Email to inform one-day training wearing off

Monitoring of variation report results: Q3. PR
 

Training effects should be monitored.

Monitoring of training results: Q4 HR
 

Email to inform employees to remove time wasting and distracting contract employees

Monitoring of variation report results: Q3.

Assessment Task 4 – Activities

Activity 1:

1)

  1. The average debtor days 4.268 Days
  2. The average creditor days 0.94 days
  3. The average stock turnover 20 times
  4. Show calculations and results on your response document for this assessment task.

Average debtor days: (Trade debtors÷ sales) × 365

Trade debtor: 36250

Sales: 3,100,000

= (3, 62, 50 ÷ 3,100,000) × 365

= 4.268 days

Average creditor days: (trade creditors ÷ annual sales) * 365

Trade creditor: 8000

= (8000÷3,100,000) ×365

= 0.94 days

Cost of goods sold:  400,000

Average inventory: opening stock + closing stock /2

Opening stock = 100,00

Closing stock = 300,00

= 1,00,00 + 3,00,00 / 2

= 2,00,00

Average stock turnover: Cost of goods sold / average inventory

= 400,000÷2,00,00

= 20 times

2) Recommendation

  • From the calculation, it is obvious that the firm pays the suppliers instantly. The company needs to hold the cash and pay the creditors after sufficient period to maintain the cash flow.
  • Company needs to improve its stock turnover as it needs to focus on sales force by encouraging them to perform well. For this, firm should adopt motivational tools including financial and non-financial rewards and provide training to increases sales and maintain the sufficient cash flow.

3) Source of information

  • Statement of financial performance
  • Ageing debtors budget
  • Scenario information

Activity 2:

  1. a) Profit can be calculated as below formula:

Profit = Sales –costs

Profit = (Selling price × unit) – (Fixed Cost + Variable Cost ×Unit)

1,000,000 = (500x) – (1,280,000+250x)

2280000 =250x

x = 2280000÷250

x = 9120 units

If Big Red bicycle produces 9120 units, it can get the target profit of $1000000.

  1. b)

Profit = (Selling price × Unit) – (Fixed Cost + Variable Cost×Unit)

1000000 = (500 × 8000) – (1280000 + 8000X)

100000 = (4000000) – (1280000 + 8000X)

3000000 = (1280000 + 8000X)

X = 1720000 / 8000

= $215 per unit

There is need for Big Red bicycle to maintain variable cost of $215 per unit to get target profit with 8000 units.

  1. Based on the responses, it can be recommended that BRB needs to focus on making cost volume profit analysis to determine the changes in profits and costs on changes in production units. Company should change its production units to achieve the target profit with current plant capacity and produce within the cost determined.
  1. Scenario information
  2. Ratios
  3. Ledger accounts

Activity 3:

1) For keeping the GST records, Big Red Bicycle Company requires at least four years so that company can satisfy its Australian Taxation Office (ATO) requirements.

2) Preparing GST budget

GST cash budget calculations
a)     Cash receipts 4,300 5,200 5,250
b)     Cash payments 29,300 35,200 30,250
c)      GST liability (10%) 3,360 4,040 3,550

Activity 4:

Activities Monitoring Timelines Accountabilities
Add incentives and performance based rewards Increase sales of the firm 2 quarter HR manager and sales manager
Provide training Increase productivity and sales growth 3 quarter HR manager

References

Bogsnes, B. (2016) Implementing beyond budgeting: unlocking the performance potential. USA: John Wiley & Sons.

Dash, J.W. (2016) Quantitative finance and risk management: a physicist’s approach. UK: World Scientific Publishing Co Inc.

Diebold, F. X., & Yılmaz, K. (2014) On the network topology of variance decompositions: Measuring the connectedness of financial firms. Journal of Econometrics, 182(1), pp. 119-134.

DRURY, C. M. (2013) Management and cost accounting. USA: Springer.

Horngren, C.T., (2009) Cost accounting: A managerial emphasis, 13/e. Pearson Education India.

Wilson, T.C. (2015) Value and Capital Management: A Handbook for the Finance and Risk Functions of Financial Institutions. USA:  John Wiley & Sons.

Zimmerman, J. L., & Yahya-Zadeh, M. (2011) Accounting for decision making and control. Issues in Accounting Education26(1), pp.258-259.

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