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
 FYQ1Q2Q3Q4
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 riskBy whenBy whom
To increase motivation level of the sales force through financial and non-financial rewards including commission, incentives, bonuses, etc.

 

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

To provide training regarding sales tactics to enhance sales

2 quarterHR manager
 

To review and develop better marketing strategies including pricing

3 quarterMarketing manager & sales manager
 

To introduce advanced technologies to reduce the cost

4 quarterManaging director (Tom Copeland)  and operational general manager (Stuart LaRoux) and Production Manager (Charles Pierce)
To diversify the business to compensate the loss of a product4 quarterCEO 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 1Evaluate behavioural tendencies and motivation to employees
Week 2Baseline selling skills and determine strong and weak areas
Week 3Review performance metrics and current pipelines
Conduct training
Week 4Product demonstration
Week 5Provide training on sales tactics
Week 6 How to deal with customers’ concerns and issues
Week 7Presentation training and forecasting
Week 8Main competitors
Week 9USP and objection handling
Week 10Sales 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:

EXPENSESFYActualQ1ActualQ2ActualQ3ActualQ4Actual
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 riskBy whenBy whom
Produce quarterly variation reports to identify income/ expenditure and profit shortfalls over 10%.Q2PR
 

Increase occupancy budget

Q2PR
Implement more relevant sales training/coaching after identifying the training needsQ2PR
 

Layoff short-term contract employees

Q2HR
Implement incentives program.Q1PR
Remove overtime & prevent threatening tone of emailQ1PR

Contingency Implementation Plan for Task B

Risk identified: Profit for FY more than 10% less than budgeted
ActivityMonitoring activity and datePerson/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: Q4HR
 

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 receipts4,3005,2005,250
b)     Cash payments29,30035,20030,250
c)      GST liability (10%)3,3604,0403,550

Activity 4:

ActivitiesMonitoringTimelinesAccountabilities
Add incentives and performance based rewardsIncrease sales of the firm2 quarterHR manager and sales manager
Provide trainingIncrease productivity and sales growth3 quarterHR 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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