Advanced Management Accounting - Example

Accounting Financial Plan The financial plan comprises of input data, sales budget, production budget, direct material budget, direct labor budget, overhead budget, ending inventory budget, selling and administrative budget, proforma income statement, and cost-volume analysis. Each of these elements are covered in the following sections along with the accompanying assumptions and details. Basis Assumptions The location of the business is Remah, UAE. The business processes include sales, inventory, purchasing, accounting, and production. The financial projections covers six quarters starting from January 2016 to June 2017. The company will sell Qenwa seeds in a packaging of 25-kg bag. The selling price per 25-kg bag of Qenwa seeds will be $ 875. The price per kg is $ 35. The number of units expected to be sold in each quarter s 100 bags. The growth rate for the basic model is set at zero for the first six quarters. The production of each kg of Qenwa seeds will require chargers including seeds (2), fertilizing (2) and plastic bag (1). The cost per unit of these chargers is provided in the following table.   Cost per Unit Charger ($) Seeds (per cm) 0.10 Fertilizing 1.50 Plastic bag 7.00 The number of hours of direct labor per charger is 5. The variable overhead per direct labor hour is $ 2.00. The allocation of fixed overhead per department of the business is 20%. The total fixed overhead amount per year is $ 7,000. The variable selling and administrative expenses per charger is $ 25. The fixed selling and administrative expenses per year estimated are $ 41,000, details of which are provided in the following table. $ Advertising ‏2,000.00 Executive Salaries 20,000.00 Cleaning Fees 2,000.00 R&D Costs 10,000.00  Total 41,000.00 The company benefits from 0% tax rate in the UAE. The company will maintain inventory of direct materials equal to 30% of the next quarter’s production needs. The company will maintain inventory of chargers equal to 25% of the next quarter’s sales needs. Sales Budget The sales budget is estimated for the first six quarters of business from January 2016 to June 2017. The sale revenues per quarter are determined by applying the price per charger to the number of sale units of basic charger forecasted. The revenues per quarter are estimated to be $ 87,500 (0% growth expected for the next six quarters). The total sale revenues estimated for the first year’s operations are $ 350,000. 2016 2017 Q1 Q2 Q3 Q4 Year Q1 Q2 $ $ $ $ $ $ $ 87,500.00 87,500.00 87,500.00 87,500.00 350,000.00 87,500.00 87,500.00 Production Budget The production budget provided below indicates the budgeted sales, desired ending inventory (25% of the next quarter’s sales), and desired ending inventory (Dugdale & Lyne, 2010). The resulting figure indicates the required normal charger production. Since projections are made up to the second quarter of 2017, therefore ending inventory is not indicated.   2016 2017  Basic charger: Q1 Q2 Q3 Q4 Year Q1 Q2  Budgeted Sales 100 100 100 100 400 100 100  Desired Ending Inventory 25 25 25 25 25 25  Required Normal charger Production 75 75 75 75 375 75 100 Direct Material Budget The first input that could be traced to the manufacturing process is the direct material. The basic assumptions section indicated the cost of direct material required for the production of Qenwa seeds and their packaging. The table below provides details of direct material budget on quarterly and yearly bases as estimated by the business. Direct Materials Budget                               2016 2017       Q1 Q2 Q3 Q4 Year Q1 Q2 $ $ $ $ $ $ $ Required Production                 Normal   75 75 75 75 375 75 100                     Direct Materials Needed                     Basic                                         Solid cable (per meter) 150 150 150 150 750 150 200     Plastic connectors 150 150 150 150 750 150 200     Small Neons (1 cm) 75 75 75 75 375 75 100     Rubber (meter) 0 0 0 0 0 0 0     Copper Soldering wire (per 4 grams) 0 0 0 0 0 0 0                                         Desired Ending Inventory                   Solid cable (per meter) 38 38 38 38 150         Plastic connectors 38 38 38 38 150         Small Neons (1 cm) 19 19 19 19 75         Rubber (meter) 0 0 0 0 0         Copper Soldering wire (per 4 grams) 0 0 0 0 0                                             Total Needs                   Solid cable (per meter) 188 188 188 188 750         Plastic connectors 188 188 188 188 750         Small Neons (1 cm) 94 94 94 94 375         Rubber (meter) 0 0 0 0 0         Copper Soldering wire (per 4 grams) 0 0 0 0 0                                             Cost per unit of Direct Materials                       Solid cable (per meter) 15 15 15 15 15         Plastic connectors 2 2 2 2 2         Small Neons (1 cm) 4 4 4 4 4         Rubber (meter) 6 6 6 6 6         Copper Soldering wire (per 4 grams) 10 10 10 10 10                                             Cost of Direct Materials to be purchased                                           Seeds (per cm) 2812.5 2812.5 2812.5 2812.5 11250         Fertilizing 375 375 375 375 1500         Plastic bag 375 375 375 375 1500         Rubber (meter) 0 0 0 0 0         Copper Soldering wire (per 4 grams) 0 0 0 0 0                         Total Cost     3562.5 3562.5 3562.5 3562.5 14250     The total cost of direct material per quarter is estimated to be $ 3,562.50. The total cost of direct material for the first year of business is estimated to be $ 14,250. Direct Labor Budget The second input in the manufacturing is the direct labor that the business will employ for carrying out different steps involved in the product process. The estimated direct labor budget Direct Labor Budget                       2016       Q1 Q2 Q3 Q4 Year       $ $ $ $ $ Required Production                 Basic   75 75 75 75 375                 DL hours per charger                 Basic   5 5 5 5 5                 Total DL hours needed                 Basic   375 375 375 375 1,875                 Cost per DL Hour     10 10 10 10 10   Total DL Cost   3,750 3,750 3,750 3,750 18,750 The table indicates the required production level of 75 units per quarter. The total direct labor hours required for maintaining the production level are 375 hours The total direct labor cost per quarter is $ 3,750. The total labor cost for the first year ending 2016 is $ 18,750. Overhead Budget In addition to the direct labor and direct material costs related to the production, the business also estimates manufacturing overheads that it would incur in its product process (Hirsch, 2000). The details of manufacturing overhead are provided in the following table. Manufacturing Overhead Budget                   2016     Q1 Q2 Q3 Q4 Year     $ $ $ $ $ Budgeted DL hours 375 375 375 375 1,875 Variable OH rate 2 2 2 2 2   Total Variable OH 750 750 750 750 3,750 Fixed OH 1,750 1,750 1,750 1,750 7,000   Total OH 2,500 2,500 2,500 2,500 10,750               Total Manufacturing OH         10,750 Budgeted DL Hours         1,875   Predetermined OH         5.73 The business estimated direct labor in each quarter to be 375 hours. The total budgeted direct labor hours are estimated to be 1,875 hours. By applying the variable overhead rate, the business estimates total variable overhead to be $ 750. The total fixed overhead per quarter is $ 1,750. The total overhead expenses per quarter are $ 2,500. The business estimates total manufacturing overhead to be $ 10,750. The predetermined overhead rate is determined by dividing the total manufacturing overhead by the budgeted number of direct labor hours. Ending Inventory Budget The business will plan ahead and will maintain inventory of material and finished product for the next quarter’s production and sales requirements (Donovan, 2006). It will ensure that the company does not face any disruption in the production and there is continuity in the sales of the business. Table below provides details of ending finished goods inventory estimated by the business. Ending Finished Goods Inventory Budget                   Item Quantity Cost Total   $ Production Cost per Basic charger                 DM   Seeds (per cm) 2 units 0.10 each 0.20       fertilizing 2 set 1.50 each 3.00       Plastic bag 1 unit 7.00 each 7.00       Rubber (meter) 0 unit - each -       Copper Soldering wire (per 4 grams) 0 unit - each -                       Total DM           10.20   DL     5 hours 10.00 per hour 50.00   OH     5 hours 5.73 per DL hour 28.67       Unit Production Cost         88.87       Ending finished goods inventory in units - Basic chargers           25     Ending finished goods inventory in dollars - Basic chargers           2,221.67 It could be indicated that the business will maintain inventory of finished goods at the end of each quarter. The quantity of finished goods inventory will be 25 units. The cost of finished good inventory is determined by including costs of direct labor, direct material, and overhead expenses that the business estimates for the production. The cost of finished goods inventory at the end of each quarter will be $ 2,221.67. Selling and Administrative Budget The selling and administrative budget is provided in the following table. Selling and Administrative Budget                       2016       Q1 Q2 Q3 Q4 Year Budgeted sales (by Charger)                 Basic   100.00 100.00 100.00 100.00 400.00                 Variable S&A Expense                 Basic   25.00 25.00 25.00 25.00 25.00                 Total Variable S&A                 Basic   2,500.00 2,500.00 2,500.00 2,500.00 10,000.00                 Budgeted Fixed S&A Expenses                 Advertising   500.00 500.00 500.00 500.00 2,000.00   Executive Salaries   5,000.00 5,000.00 5,000.00 5,000.00 20,000.00   Property Taxes   - - - - -   Office Rent   - - - - -   Cleaning Fees   500.00 500.00 500.00 500.00 2,000.00   R&D Costs   2,500.00 2,500.00 2,500.00 2,500.00 10,000.00   Total Budgeted Fixed S&A Expense   8,500.00 8,500.00 8,500.00 8,500.00 34,000.00                 Total S&A Expense     11,000.00 11,000.00 11,000.00 11,000.00 44,000.00 The table indicates that the business will incur variable and fixed amounts of selling and administrative expenses. The variable selling and administrative expenses vary with the number of units the business estimates to sell every quarter (Hope & Fraser, 2003). The total variable selling and administrative expenses for the year 2016 are estimated to be $ 10,000. The business does not expect any change in both variable and fixed selling and administrative expenses over four quarters of 2016. The total fixed selling and administrative expenses for the year 2016 are estimated to be $ 34,000. The total selling and administrative expenses estimated by the business are $ 44,000 for 2016. Proforma Income Statement The proforma income statement for the year ending 2016 is provided in the following.   UAEUs Chairs   Pro Forma Income Statement       For Year ended March 31, 2016       $ $ Sales     350,000.00   Cost of Goods Sold     38,678.33     Gross Profit     311,321.67           Less Selling and Administrative     44,000.00     Income from operations     267,321.67 Less Income Taxes Expense     0.00     Net Income     267,321.67 The gross profit margin is estimated to be 89% for the year ending 2016 (Chandra, 2008). The net profit margin is estimated to be 76% for the year ending 2016 (Chandra, 2008). The cost of goods sold is calculated by adding direct labor and material costs to the beginning inventory costs and deducting the ending inventory costs for the year ending 2016 (Donovan, 2006). Cost-Volume Analysis The Cost-Volume Analysis indicates that the business breakeven units are estimated to be 2,085 units and the breakeven revenues are estimated to be $ 333,750 (Dugdale & Lyne, 2010). Breakeven Units           CMu = sales - VC 160 32 128   CM%= CM\SP 128 160 0.8   BEu 267,000 128 2085.93 Units           Breakeven Revenue           FC+Units/Cmu 267,000 0.8   333,750.00 References Dugdale, ‎D., & Lyne, S. (2010). Budgeting Practice and Organisational Structure. Oxford: Elsevier. Hope, ‎., & Fraser, R. (2003). Beyond Budgeting: How Managers Can Break Free from the Annual Performance Trap. Massachusettsst: Harvard Business Press. Chandra, P. (2008). Financial Management. New Delhi: Tata McGraw-Hill Education. Donovan, S. (2006). Budgeting. Minneapolis: Lerner Publications. Hirsch, M. L. (2000). Advanced Management Accounting. Mason: Cengage Learning EMEA. Read More