The Operating Statement, Balance Sheet, Sales Budget of Compact Fittings Plc - Coursework Example

Report: Introduction: The report analyzes the operating ment, balance sheet, sales budget, purchase budget and cash flow ment of Compact Fittings Plc for the period of July 2011 to December 2011. a) Pricing policy that has been used in the preparation of the budgeted figures: The pricing policy is to charge mark-up over the cost per unit at which the goods were purchased. This mark-up is 25% in this case. The cost price on which this mark-up is added doesn’t directly take into account the other expenses like wages, rent , other expenses and depreciation.

The costing therefore is more like variable costing than absorption costing. The wages, rent and other expenses have been calculated as percentage of sales. The depreciation is calculated on the basis of written down value method. The costs of the goods are expected to increase in November and December. These costs increases are passed on to the customers in the form of a proportionate increase in selling price. The selling price has been calculated by adding a 25% mark-up over the per unit cost price.

From July to October the cost price per unit has been kept at £ 14.4 per unit. Cost price per unit ( from July to October ): £ 14.4 per unit Add 25% and selling price per unit will be : 14.4 + .25 * 14.4 = £ 18 per unit. The sales of each month from July to December has been calculated by adding up the cash sales ( 75% of the total sales for the month) and the cash received for the credit sale of the previous month. For instance, the total sales of August are £ 110,250. 6000 units are expected to be sold in August.

At selling price of £ 18 per unit, this will be equal to: 18*6000 = 108,000 75% of this will be cash sales i.e. .75 * 108,000 = 81000………………i The sales of July are expected to be 117000. 25% of these sales are expected to be made on credit, cash for which will be realized in the next month of August. So this is equal to: .25 * 117000 = 29250………………………………………………….ii Total sales of August : i + ii = 81000 + 29250 = 110,250. Similarly the sales of other months have been calculated.

After October, in the months of November and December, it is expected that the cost per unit will rise to £ 15.2 per unit. Therefore selling price per unit for the month of November and December has been estimated at: 15.2 + .25 * 15.2 = 19 per unit. The price increase in the costs of goods has been passed on to the customers. The total sales in the operating statement of the six month period - from July to December- have been calculated by adding up the total sales of the six months. From the sales of July, the 25% cash received for the cash sales of June have been removed.

Similarly in the sales of December, the 25% credit sales for which cash is expected to be received in January have been added up. Total Sales for the six month period = 124,650 + 110,250 + 110,700 + 119700+ 134, 625 + 150,100 – 36900 (cash for credit sales in June, received in July) + 38475 (cash received in January for the credit sales in December) = 751,600 The costs of sales have been calculated by adding up the opening stock at the beginning of the six month period with the purchases made during this period.

The closing stock was then deducted from them, because this stock was not sold and became part of the current assets of the company. The company makes monthly purchases. For every monthly purchase, 50% of the amount is paid in cash by the company. The remaining 50% payment is made in the next month by the company. For example, the purchase of July is £ 102,240. 6000 units were purchased in July at the cost of £ 14. 4 per unit. This is equal to: 14.4 * 6000 = 86400…………………………………….

i The total purchase of July also includes the 50% cash payments made for the purchases made in the month of June. The purchases made in the month of June were 118, 080. 50% of them were made on credit, payments for which were made in July. So the total value of purchases made in July is: 50% of 86400 + 59040 (for cash payments made for the purchases of June ) = 102,240. The purchase cost per unit is expected to rise to 15.2 per unit for the months of November and December. The total purchases have been calculated by adding up the purchases of the six months.

From the sales the cost of sales are deducted for calculating the gross profit. Gross profit is equal to: Sales – Costs of goods sold = 751,600 – 599,280 = 152, 320. From the gross profit, wages, rent, expenses and depreciation have been deducted for calculating the net profit. The wages have been estimated to be 5% of the total sales made. The expenses are estimated to be 2% of the total sales made by the company. Rent is estimated at 5% of the total purchases made by the company and not the cash purchases only.

The depreciation has been calculated on a written down basis. The rate of depreciation for motor vehicles is 10%. The Net Book value of motor vehicles on 30/06/2011 is 153000. For six months, depreciation at the rate of 10% per year will be equal to: .05 * 153000 = 7650……………i An addition of 9600 worth of motor vehicles was made in the month of September. This was charged for three months at the rate of 10/3= 3.3% or .33. Therefore total depreciation for the three month period on the additional motor vehicle of 9600 is equal to: 9600* .

33 = 320………………….ii Therefore total depreciation on motor vehicles for the six month period is equal to i + ii = 7650 + 320 = 7970 The net book value of plant & machinery on 30/06/2011 was 220,000. 10% depreciation for six months is equal to: .10/ 2 * 220,000 = 11000. ….iii Additions worth 50,400 were made to the plant & machinery in the month of November. Depreciation was charged on this at the rate of: 10*2/12* 50,400 = 857…..iv Total depreciation on the plant and machinery = iii + iv = 11000 + 857 = 11857 The depreciation on the fixtures has been calculated in a similar way. b) Policy with regard to purchases and stocks and ways in which they can be improved: The company makes monthly purchases.

For every monthly purchase, 50% of the amount is paid in cash by the company. The remaining 50% payment is made in the next month in the company. However the purchases for each month include the cash payments made only. This includes 50% cash payment made for the purchases of that month and 50% cash payment received for the credit purchases of the previous month. Compact Fittings Plc. should improve on this policy. The purchases of each month should include only the purchases in that month. It shouldn’t matter whether the purchases were made in credit or cash.

We are following here the accrual method of accounting and not the cash basis of accounting. The closing stock for each month has been calculated in the following way: Opening balance in the beginning of the month + Purchases made during the month – Units sold. The closing stock at the end of the six month per month is equal to the closing stock at the end of December. This is equal to 2500 units. These 2500 units are valued at the increased purchase price of £ 15.20 per unit. The closing stock is therefore worth: 25000 * £ 15.

20 = £ 38000 The opening stock for the six month period is the closing stock of June. This is equal to 3000 units. This has been valued at the prevailing cost in June i.e. £ 14.40 per unit. Therefore the opening stock is valued at: 3000 * 14.40 = 43200. The valuation of opening and closing stock is therefore done on the basis of last in last out (LILO). This seems to be the right policy for valuing the opening and closing stocks and it should be continued in the review. References: Gitman, Lawrence, 2003, Principles of Managerial Finance, 10th edition, Addison-Wesley.

Weston Fred, Brigham Eugene ,1972, Managerial Finance, Dryden Press, Hinsdale Illinois. Prasanna Chandra, 2006, Investment Analysis & Portfolio Management. McGraw-Hill I.M.Pandey, 2000, Financial Management, Vikas.