The Master Budget Plan for the Company - Essay Example

Accounting Report Introduction: This report aims at presenting the master budget plan for the company – “The Crazy but Awesome Guide to London” (selling books). The business involves printing the pages, preparing the cover and putting them together to get the finished book. ‘XYZ’ will be registered as a ‘Limited Liability Company’ with owners including ABC, XYZ, and GHI. The initial operations of the company will be headquartered at XYZ, London and the books will be distributed throughout London. Target Markets: The company primarily focuses on the target market of tourists, children and student groups on trips to London and also the occasional visitors to London from different parts of the United Kingdom and Europe. This is a growing market as evident from the fact that £ 85 billion is spent annually on UK tourism, especially London. About 50 % of this is by overseas visitors and the rest are by UK residents in day trips and staying away from home (UK-Culture, 2007). The book will be marketed to both the tourists and business visitors alike, as business tourism is also becoming increasingly common. In 2005, business tourism accounted to about 8 million visits to London (UK-Culture, 2007). Capital Investment and Sources of Finance: The shareholders of the company will invest £ 5,000 for the company. Another £ 30,000 will be taken as a long term loan from the family with instalment payments starting from the third year with a standard rate of 0 % and in a period of 9 years. A loan of £ 25,000 from NatWest bank will be availed at an interest rate of 6.4 % APR. Contribution Statement: The selling price fixed for the guidebook is £ 19.99 per unit. The variable costs involved in the production of the book are listed as follows: Variable Costs Cost per unit Direct Materials   Printing £ 2.00 Cover £ 0.50 Paper £ 0.50 Glue £ 0.10 Direct Labor £ 0.50 Total Variable Expenses £ 3.60 Hence the total contribution per unit amounts to £ 16.39. The contribution statement is attached in the Appendix 1. Sales Volume Budget: The estimated sales for the initial year of operations are about 6,173 units. This amounts to an average sale of 515 units per month in the first year. The tourist industry in London is always active and the company estimates to sell all of the 515 units produced in the month irrespective of the season. The sales volume is presented in Appendix 2. Sales and Purchase Terms: The cash for the sales made in the month are collected within the end of the month (i.e., within a maximum period of 30 days). This way, the company will be able to maintain effective liquidity. The suppliers will be paid in two instalments, 50 % on purchase date and the remaining 50 % after 30 days. Inventory Management: The books will be made based on a just in time strategy, thus reducing the inventory to zero. This will enable the company to effectively safe on storage costs as well. A total of 6,173 units will be sold in the first year and there will not be any closing stock in the monthly budget, as all the 525 units manufactured in the month will be sold. The initial inventory will be zero at start up and the company will produce 515 units in the first month of its operations. The inventory budget is exhibited in Appendix 2. Production Budget: The variable cost involved per unit of the book is found to be £ 3.60. The schedule of purchase of raw materials and the labour budget are prepared based on the monthly sales estimate and the inventory management discussed above. The monthly purchases include printing costs, cover, paper and glue. The budget is prepared on the monthly production estimate of 515 units. The working hours are from 9 AM to 5 PM with one hour break for lunch. The estimated per unit labour cost is £ 0.50 as identified in the variable costs. The production budget attached in Appendix 2 is prepared based on the purchase and labour costs, and the number of books manufactured in a month, which are 515 units. This will amount to a total production cost of £ 1,852.20 per month. Capital Budget and Overheads: The fixed assets are estimated to cost about £ 2,271 (computer, safety box and furniture). The computer and the safety box will be depreciated using the straight line method whereas the furniture will not be depreciated as it is second hand. The computer purchased will be HP (Hewlett Packard) meant for design and printing purposes along with the necessary printing hardware. This computer will include the necessary software packages. The estimated useful life for the computer is 11 years whereas it is about 9 and half years for the safety box. The marketing budget for the first year is £ 1,000 and the total overheads amount to £ 42,827.71 for the first year. The costs are itemized and presented in Appendix 3. Break Even Analysis and the Margin of Safety: The break even analysis is performed to identify the minimum number of books that have to be sold so that the company recovers all the costs (Samuels et al, 2000). The contribution per unit was estimated as £ 16.39 per month. The number of items to be sold so that the total contribution covers the fixed costs indicates the break even volume. The break even volume is found to be 2,613 units. This amounts to total sales of £ 52,234.65. The next step is to identify the margin of safety which indicates the level that the sales estimates can fall without the company undergoing any losses (Emery, Finnerty and Stowe, 2007). The margin of safety has been computed as 3,560 units which is about 136 % of the breakeven point. This indicates that the company will not undergo any losses if the sales fall by 3,560 units. The breakeven and margin of safety calculations are exhibited in Appendix 4. Income Statement: The income statement indicates the earnings of the company in the given period. All the costs incurred and the revenue generated are taken into account irrespective of their payment status and included in the income statement (Samuels et al, 2000). The company is VAT (Value Added Tax) exempted as indicated by UK Government (DirectGov-UK, 2010). The corporation tax rate is 21 % and is deducted from the earnings to arrive at the net income earned in the period (HMRC-UK, 2010). The net income is computed to be £ 49,438.80. The income statement is attached in Appendix 5. Cash Flow Statement: The cash flow statement, as the name indicates, includes all the cash transactions (both cash inflows and outflows) recorded in the particular period. All non cash expenses, such as depreciation, unpaid bills, etc., will not be included in the cash flow statement (Samuels at al, 2000). The cash flow budget is prepared on the cash collection and payment schedule discussed earlier. The budgeted cash balance at the end of the year is found to be £ 170,873.18 and the details are presented in Appendix 6. Balance Sheet: The balance sheet is a financial snap shot of the company and its performance in the particular period. It shows the value of the assets and liabilities of the company and indicates how the shareholders’ equity and the retained earnings are reconciled and accounted for (Samuels et al, 2000). The balance sheet includes the fixed assets, current assets, current and long term liabilities. The shareholders’ capital and the retained earnings are also included. The detailed balance sheet is presented in Appendix 7. Summary: In the first year of operations, the company is estimated to generate a net income of £ 49,438.80. The company will expand its operations based on the market conditions to publish more guide books and tourist magazines from the second year. Guidebooks based on the age range of the tourists will also be published from the third year. Long term plans include publishing a website where the tourist destinations in London and the UK are presented and the users share their experiences. Based on the website, a magazine is also in the line where advertisers can promote their tourism related products. Bibliography DirectGov-UK, 2010. Value Added Tax. Accessed on 20 March 2010. Available at http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_4015895 Emery, R.D., Finnerty, J.D. and Stowe, J.D. 2007. Corporate Financial Management. Prentice Hall Publishers. HMRC-UK, 2010. Corporation Tax Rates. Accessed on 20 March 2010. Available at http://www.hmrc.gov.uk/rates/corp.htm Samuels, J. M.; Wilkes, F. M.; Brayshaw, R. E. 2000. Management of Company Finance. Thomson Learning. London. UK-Culture, 2007. A Tourism Strategy for 2012 and Beyond. September 2007. Accessed on 20 March 2010. Available at www.culture.gov.uk Appendix – 1: Contribution per Unit Statement £ per Unit   £ £ Selling Price   £19.99       Less Variable Costs :           Direct Materials :     Printing £2.00   Cover £0.50   Paper £0.50   Glue £0.10   Direct Labour : £0.50               Less Total Variable Costs   £3.60       Contribution per Unit (CPU)   £16.39 Appendix – 2: Appendix – 3: MARKETING OVERHEADS p/y ADVERTISING £1,000.00 OVERHEADS YEAR VALUE SALARIES: LEGAL £1,600.00 SALARIES: ACCOUNTANT £1,200.00 SALES ASSISTANT SALARY £15,000.00 RENT £16,095.00 ELECTRICITY £169.00 MISC. £600.00 WATER £350.00 SECURITY £180.00 PHONE-LINE £523.21 INSURANCE £280.00 STATIONARY £370.00 DEPRECIATION £134.00 COUNCIL TAX £687.62 LOAN £3,638.88 DISTRIBUTION COST £2,000.00 TOTAL £42,827.71 CAPITAL EXPENDITURE COMPUTER £1,100.00 SAFETY BOX £320.00 FURNITURE £851.55 TOTAL £2,271.55 Appendix – 4: BREAK EVEN ANALYSIS UNIT TERMS Break Even = Fixed Costs Contribution per book             VALUE TERMS Break Even = Fixed Costs X £ SELLING PRICE Contribution per book           BREAK EVEN ANALYSIS SELLING PRICE FIXED COSTS CONTRIBUTION PER UNIT £ UNITS £19.99 £42,827.71 £16.39 £52,234.65 2613 MONTHLY B/E POINT 218 MARGIN OF SAFETY UNIT TERMS M.S. = EXPECTED SALES - BREAK EVEN POINT PERCENTAGE TERMS M.S. = (EXPECTED SALES - BREAK EVEN POINT) BREAK EVEN POINT UNIT TERMS M.S. 3560 PERCENTAGE TERMS M.S. 136.24% Appendix – 5: BUDGETED INCOME STATEMENT FOR Y/E 18/02/2011   £ SALES 123,398.27     LESS COST OF GOODS SOLD:   OPENING STOCK 0.00 PURCHASES 18,339.00 CLOSING STOCK -349.20   17,989.80     GROSS PROFIT 105,408.47     LESS EXPENSES 42,827.71     PROFIT FOR THE YEAR 62,580.76         CORPORATION TAX (21%) 13,141.96     PROFIT AFTER TAX 49,438.80 Appendix – 6: Appendix – 7: BUDGETED BALANCE SHEET OF BACK TO SCHOOL AS AT 18 FEBRUARY 2010   £ £ £ FIXED ASSETS COST DEPN PROVN NBV         FURNITURE (a) 851.55 0.00 851.55 COMPUTER 1,100.00 100.00 1,000.00 SAFETY BOX 320.00 34.00 286.00       2,137.55 CURRENT ASSETS               STOCKS       FINISHED GOODS (b)   22,222.80           DEBTORS   10,284.86           BANK AND CASH   115,000.00 147,507.66       149,645.21 LESS CURRENT LIABILITIES       TRADE CREDITORS   797.35   TAX   13,141.96 13,939.31         LESS LONG TERM LIABILITIES       LOANS   55,000.00 55,000.00               80,705.90         FINANCED BY:       SHAREHOLDERS CAPITAL       OWNERS EQUITY     60,000.00 RETAINED PROFITS     3,143.09       63,143.09         Read More