Mudjimba Manufacturers Ltd and Inspire Ltd Distributors Financial Budgeting - Case Study Example

Mudjimba Manufacturers Ltd and Inspire Ltd distributor’s financial budget report Name Tutor Course Date Executive Summary The following report relates to ‘Mudjimba manufacturers Ltd’ and ‘Inspired Ltd’. It is divided into an introduction, the discussion segment, the Appendix section and referencing. The latter is the distributor while the former is the manufacturer. It contains the budgets for both the manufacturer and the distributor. Further, a cash management is discussed in-depth to help the financial controller of the manufacturer understand better the impacts on the organization. The last segment of the report is an analysis of quality cost control reports. Data provided shows that the company spends the highest amounts in the failure costs at 54% with prevention costs at 42%. The rest is detection costs. A cash budget for the distributor shows that the firm starts to gain positive cash flows after January, Between November and January; it was experiencing negative cash flows. On the other hand, the manufacturer only started experiencing positive cash flows in the month of February from the date when production began in the month of November. Mudjimba manufacturer’s Ltd has to engage in production effectively in order to meet the one month in advance as requested by the distributor in order to aid in planning the demand forecasts properly. In addition, Inspire Ltd offers the retailers a 30% discount on the purchase of their products to allow them make a necessary profit margin. Other reports outlined for Mudjimba Ltd include the cash budget, labor budget, production budget and the material budget. Attached in the appendix section are the workings of the report and necessary graphs to provide a keen analysis of the figures provided in the report. Contents Executive Summary ii Contents iii Table of Figures iv 1.0 Introduction 1 1.1Purpose 1 1.2Scope 1 1.3Limitations 1 2.0 Cash Budget Inspire 2 3.0 Mudjimba Manufacturers Budgets 2 3.1Production Budget 2 3.2Material Budget 3 3.3Labour Budget 3 3.4Cash Budget 3 4.0 Behavioral Aspects of Budgets 4 4.1Budgetary Slack 4 4.2Participative Budgeting 4 5.0 Cash Management 5 5.1Strategies to Avoid 5 5.2Consequences of Cash Shortage 5 5.3Consequences of too much cash 5 6.0 Environmental Performance 6 7.0 References 7 8.0 Appendix 8 Appendix A1 8 Appendix A2 9 Appendix B1 9 Table of Figures 1.0 Introduction 1.1 Purpose The following report contains a production, cash, labor and material budgets for the manufacturer and an overall cash budget for the distributor. Each of these budget analyses is essential to proper planning by the management to avoid stock outs or wastages from both the manufacturer and the distributor. In addition, budgets allow for timely management of cash flow balances to cater for any unforeseen expenditure without resulting into liquidity problems for the firm. The report has also outlined aspects of behavioral budgeting and participative budgeting explaining each into more details on its effects on the organization. The types of behavioral budgets discussed are the slack budget and participatory budget in order to determine the effect on the stakeholder behavior citing both the advantages and disadvantages. The report will be used by both the respective management to monitor on the progress of each of the organizations. This will enable them to point out any loopholes that may exist in the production or distribution process. The financial controller of the manufacturer will also benefit from the analysis. The breakdown of the environmental cost report has also been outlined which helps the public gain a positive perception towards the company as it engages in corporate social responsibility. 1.2 Scope The companies under investigation are a manufacturer and a distributor. They are Mudjimba Manufacturers and Inspired Ltd respectively, for the period between November and March. 1.3 Limitations The data provided neither reflected any figure of opening inventory nor closing inventories of finished goods. As a result, the production budget for the manufacturer has used an assumption that they were all at zero. Manufacturing direct materials also did not have any information regarding the opening or closing stocks by the manufacturer. They were also assumed to be zero for each month. The year of the data provided is also missing. Consequently, the titles of the reports do not reflect a specific date besides the month under investigation. 2.0 Cash Budget Inspire *Assumption made is that ‘’… in the first two months’’ statement meant to start from the month of December. Inspire Ltd Cash budget '000' Receipts Nov Dec Jan Feb Mar Current month 15,000 20,000 10,400 7,040 70%-30 days 52,500 70,000 36,400 10%-60 days 7,500 10,000 Total sales receipts   15,000 72,500 87,900 53,440 Payments Payments-Purchases 22,500 30,000 19,500 16,500 Discount allowed 22,500 30,000 15,600 10,560 General expenses 2,000 2,000 2,000 2,000 Total payments   47,000 62,000 37,100 29,060 Cash flow for the month   (32,000) 10,500 50,800 24,380 Bal b/f 1,000 (31,000) (20,500) 30,300 Bal c/f 1,000 (31,000) (20,500) 30,300 54,680 Table 1 1 3.0 Mudjimba Manufacturers Budgets 3.1 Production Budget Mudjimba Manufacturers Ltd Production budget '000' Nov Dec Jan Feb Mar Expected unit sales 150 200 130 110 90 Add closing finished goods 0 0 0 0 0 Total required units 150 200 130 110 90 Less beginning finished goods 0 0 0 0 0 Required production units 150 200 130 110 90 Table 1 2 3.2 Material Budget Mudjimba Manufacturers Ltd Material budget '000' Nov Dec Jan Feb Units to be produced 150 200 130 110 Direct material A per unit 3 3 3 3 Direct material B per unit 6 6 6 6 Direct material C per unit 1 1 1 1 Total Direct materials per unit 1,500 2,000 1,300 1,100 Add desired closing stock 0 Total required materials 1,500 2,000 1,300 1,100 Less beginning opening stock 0 Direct materials purchases 1,500 2,000 1,300 1,100 Cost per kg A 3 3 3 3 Cost per kg B 6 6 6 6 Cost per kg C 12 12 12 12 Total cost of production 31,500 42,000 27,300 23,100 Table 1 3 3.3 Labour Budget Mudjimba Manufacturers Ltd Labor budget '000' Nov Dec Jan Feb Units to be produced 150 200 130 110 Direct labor hrs./unit 0.6 0.6 0.6 0.6 Total required labor hrs. 90 120 78 66 Direct labor cost /hr. 35 35 35 35 Total direct labor cost 3,150 4,200 2,730 2,310 Table 1 4 3.4 Cash Budget Mudjimba Manufacturers Ltd Cash budget '000' Receipts Nov Dec Jan Feb Current month 15,000 20,000 10,400 70%-30 days 45,000 60,000 10%-60 days 15,000 Total cash sales receipts 0 15,000 65,000 85,400 Total receipts Overhead costs 200 200 200 200 Labor costs 3,150 4,200 2,730 2,310 Material costs 31,500 42,000 27,300 23,100 Total payments 34,850 46,400 30,230 25,610 Cash flow for the month (34,850) (31,400) 34,770 59,790 Bal b/f 2,000 (32,850) (64,250) (29,480) Bal c/f (32,850) (64,250) (29,480) 30,310 Table 1 5 4.0 Behavioral Aspects of Budgets 4.1 Budgetary Slack Budgetary slack is also known as padding the budget. A budget preparation affects many key stakeholders in an organization; the users, those responsible for its preparation, the employees evaluated on its basis and finally the decision makers management segment. Budgetary slack is commonly explained in terms of overestimation of costs and underestimating revenues. It’s a major disadvantage of the budgetary process since the personnel in charge of their preparation will deflate or inflate budget estimates in anticipation of the actual amounts in order to appear favorable to the top management. For instance, a sales manager may provide underestimated sales figures for a period, so that when the actual revenue outweighs the budget by a huge amount, the manager will gain favor as hardworking. There have been theories as to why a budget slacker is a common phenomenon in organizations; to cope with unforeseen future, appear hardworking to top management and due to the vicious cycle of cutting costs in resource allocation. 4.2 Participative Budgeting A participative budget improves the company’s performance as the employees feel involved in decision making. Nevertheless, in instances where there arise irreconcilable differences among the participative individuals, a downfall of the sole purpose of a budget commences. It also creates contempt among the employees as well due to too much familiarity with the budget implements departments. In addition, participative budgeting creates avenues for bureaucracies which eventually results to delay. Consequently, the Budgets are not implemented as and when due to the organization. 5.0 Cash Management 5.1 Strategies to Avoid Proper cash management is inevitable in any business. Cash flow problems may lead to a company being unable to operate in future, despite the fact that it could be the leading competitor in a line of business. Mudjimba Manufacturers would use the following strategies to overcome a short term cash shortage in the business as it creates a margin of safety against future expenditures. They include: a) Adhering to restrictions of the budgetary process b) Collections and disbursements evaluations c) Establishment of an effective system of billing and collection d) Creation of realistic cash flow budgets e) Consider discounts for payments that are made promptly f) Liquidation of superfluous stock g) Negotiation of better credit terms from creditors 5.2 Consequences of Cash Shortage A major cash shortage has very detrimental effects to a business and Mudjimba Manufacturers is no exception. If it experiences cash shortage it might fail to meet all liabilities, both short-term and long-term, as and when due. In addition, research and development segment of the business will be ignored, yet it’s the department that results in more innovations with potential for expansion of the business (Inc.com, 2014, para 2). Moreover, poor cash flow management is a leading cause of a high employee turnover. This is because a business with a cash shortage will not be in a position to retain and hire new employees. Lastly, creditors only extend their line of credit to good credit worthy customers. Therefore, a cash-starved business appears risky consequently avoided by lenders and credit banks. 5.3 Consequences of too much cash Usually, holding too much cash at a go is equated to holding too much debt. It creates opportunity costs that if otherwise utilized would lead to better company performance. An organization that has too much cash at its disposal, gives an implication that, there are few or nil investment opportunities. A sound cash flow is made up of operating activities, Investing activities and the Financing activities. They are all complimentary to each other; therefore, little activity in the investing and financing activity may be a red flag. In future, the organization may fail to sustain the large cash at hand due to lack of income generating investment activities. 6.0 Environmental Performance Mudjimba manufacturers Ltd Quality cost report Quality costs Total Percentage of sales Sales 4,200,000 Prevention costs Treating , disposing - toxic waste $230,000 Maintaining pollution equipment $30,000 Performing environmental studies $3,000 263,000 6.26% Detection costs Initial evaluation, env. standing , new suppliers $2,500 Testing, contamination $20,000 Training employees (environmental) $1,500 24,000 0.57% Internal failure costs Cleaning up- (chemically contaminated soil) $250,000 Revising evaluation, existing suppliers $1,000 Inefficient material usage $80,000 331,000 7.88% External failure costs Operating pollution equipment $15,500 $15,500 0.37% $633,500 15.08% Table 1 6 From the relative distribution of quality costs control report, (Refer to Appendix B1 attached in the appendices section), it’s evident that the company, Mudjimba manufacturers has a great room for improvement. This is due to the fact that detection costs amount to 4%, failure costs to 54% and Prevention costs are at 42%. The management should aim to reduce failure costs and increase detection and prevention costs to be positively perceived by the society as a stakeholder. 7.0 References Hilton, R. (2014). Behavioral Impact of Budgets. Retrieved September 11, 2014, from https://www.inkling.com/read/managerial-accounting-ronald-hilton-9th/chapter-9/behavioral-impact-of-budgets Inc.com. (2014). Budgetting; Cash Management. Retrieved September 11, 2014, from Mansueto Ventures: http://www.inc.com/guides/finance/cashmanagement.html Lamberton, G., & Harvey, D. (1991). Advanced Management Accounting. East Lismore: NSW: Southern Cross University. 8.0 Appendix Appendix A1 Table Showing Inspire Workings Inspire ltd Cash schedule '000' Receipts Nov Dec Jan Feb Mar Apr May Units sold 150 200 130 110 90 90 Price per unit 500 500 400 320 256 256 Total cash sales receipts   75,000 100,000 52,000 35,200 23,040 23,040 Appendix A2 Table Showing Mudjimba Workings Mudjimba Manufacturers Ltd Cash budget '000' Receipts Nov Dec Jan Feb Mar Units sold to inspire ltd 150 200 130 110 Price per unit 500 500 500 400 320 Total cash sales receipts 0 75,000 100,000 52,000 35,200 Appendix B1 Pie chart Showing Mudjimba relative distribution of quality cost Read More