Karate Budgeting - Assignment Example

?Karate - Budgeting Introduction This report has been developed to capture the various product budgeting aspects of a sports related good d as “Karate”. Karate is actually a kind of belt, which is awarded to the players who win the final championship. Since the product is being produced by the company for the first time, therefore, its future projections have been carried out in order to check whether the product is going to provide better financial results to the organization. Various kinds of budgets and projected financial statements have been projected through utilizing cost and management accounting techniques in order to provide a basis to the owners of the business regarding the financial progress of the product in the first year of business operations. Under the following sections, each of the budget and projected financial statements are briefly discussed along with the assumptions taken to complete these projections. Assumptions 1. There are two types of raw materials to produce the final product named as Kungfu and Jodu respectively. 2. As far as the labour is concerned, two types of labour, is used according to their level of skills namely as skilled and non-skilled labour. 3. The company has invested in two types of capital expenditures such as furniture and equipment. Other non-current assets are acquired on rentals by the company. 4. Two selling prices are set by the company for first and last six months of the year such that the selling price for first six months is set to be ?300 and for the last six months, it is set as ?320 per unit. 5. For material and labour prices, it is assumed that these prices will remain same in the whole year. 6. For overheads, it is assumed that they are going to be 60% of the labour cost. 7. Closing stock is estimated to be 15% of the sales volume of the upcoming month. 8. Collection for sales is to be completed in such a manner that around 70% of the sales are to be obtained in the month of sales whereas the remainder of the collection is going to be completed in the next month. 9. For purchases, the company has estimated that around 80% of the purchases are going to be made in their corresponding months whereas the remaining amount will be paid in the next month. 10. For other expenses like labour and overheads, the payments are to be made the moment they arise. 11. Around ?2,500 is going to be taken out in the form of drawings every month by the owners. 12. Income tax rate is going to be applied at 30% of the income before tax. 13. The rate of depreciation is set to be 30% with the straight-line method Discussion Unit Cost The unit cost of the product “Karate” consists of three basic ingredients such as direct material cost, direct labour cost and overheads (Kinney and Raiborn, 2009). The total unit cost of Karate is expected to be ?221. If this per unit cost is split in all three components, direct material consumes around ?165, direct labour consumes around ?35 and overheads constitutes around ?21. Budgets The product budgeting purpose is served with the preparation of six kinds of budgets namely as Fixed Expenditure, Sales, Purchases, Production, Direct Labour, and Cash Budget. Comprehensive figures are accounted for the preparation of these budgets such that each budget consists of, not only having the annual figures but also monthly figures. Since this is the first year of the operations of the business, therefore, it is assumed that the start-up capital of the business is ?50,000. The following discussion takes into account each budget briefly: The fixed expenditure budget consists of ?50,000 cumulatively such that the business has planned to spend ?45,000 at the start and ?5,000 after six months of the start of the business. For furniture, ?10,000 amount is reserved and for equipment, ?40,000 will be used. As far as the sales budget is concerned, 300 units are anticipated for the sale purpose in the 1st three months, followed by 365 units in the next six months and in the last quarter, the sales unit are expected to be 400 units. The total sales, for the first year of business are expected to be around ?1.33 million. The production budget is prepared in anticipation of the sales volume of the business in the first year of operations. The total sales volume is expected to remain at around 4,290 units, for which around 4,350 units are to be generated sparing the capacity for closing inventory as well. The total production is estimated to be around ?961,350 in the first year of the business. Likewise, it is expected that closing inventory would be valued at ?13,260 at the end of first year. The purchases budget of the business mainly contains two raw materials namely as Kungfu and Judo such that around 13,050 kg of Kungfu would be required at a price of ?25 per kg and 8,700 kg of Judo at a price of ?45 per kg. The total cost purchases of both these raw materials, is anticipated to be around ?717,750. Direct labour budget is prepared taking into account two types of labour differentiated based on their skill levels. Skilled labour is to be paid around ?65,250 at the rate of ?30 per hour. On the other hand, semi-skilled labour would be charged at the rate of ?10 per hour amounting to ?87,009 for the whole year. The most significant budget among all is the cash budget, which demonstrates the comprehensive picture of the future projections in the form of receipts and disbursements. From the cash budget, it can be observed that around ?1.29 million are to be collected in the form of receipts. Conversely, the total disbursements amount to ?1.16 million. The total cash balance of the business at the closing of the year is expected to be around ?177,432. Budgeted Financial Statements There are two budgeted financial statements have been prepared i.e. income statement and balance sheet. If the income statement is taken observed, it can be noted that the business is expected to earn around ?384,810 in the form of gross profits and ?232,910 in the form of net profits. The projected balance sheet of the business provides the expected financial position of the business at the end of the year. The total assets of the business are expected to remain at ?266,120. Total liabilities of the business are expected to be merely ?13,200 with the equity of ?252,920. Breakeven and Margin of Safety Analysis The breakeven point of the business is expected to be 614 units such that the business will not be earning nor gaining anything at this level of sales. The total breakeven sales in nominal terms, is expected to be ?458,900. Margin of safety of the business will remain inside 3,676 units. The amount of MOS is expected to be around ?874,000 and the percentage of MOS is expected to be around 65.57%. Conclusion During the first month of the business, the business underwent a deficit, which is recovered by obtaining a bank loan of ?5,000. However, after the first quarter, the bank loan is repaid by the business. Overall, the financial projections of the business are quite smooth and healthy indicating prosperous signs of the business. Appendices References Kinney, Michael R. and Raiborn, Cecily A, 2009. Cost Accounting: Foundations and Evolutions.7th ed. United States of America: Cengage Learning Inc. Read More