Abbreviated Budgeted Income Statement Of Aluminium Windows Trading

Annual purchase budget

The case explains about the Asif Rahman, who is sole proprietor and trading the windows. Following is the calculations of the firm:

Preparation of financial statements
Annual purchase budget

Annual Purchase Budget
	Windows
	(Amt in $)
Productions Required (2400*12) Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	28800
ADD: Closing (2400*2)	4800
Less: Opening (Given)	1200
Units to be purchased	32400
Purchase price (unit * $90)	$ 29,16,000

(Arnaboldi, Lapsley & Steccolini, 2015)

It explains that the total purchase price of the company would be $ 31,32,000 in next year.

Annual operating expenses budget

Annual Operating budget
	Windows
	(Amt in $)	(Amt in $)
Selling Expenses
Advertising	$ 46,080
Wages shop	$ 1,44,000
Sales commission	$ 4,60,800
Vehicle running expenses	$ 30,000
Delivery truck expenses	$ 60,000
Shop rent	$ 43,200
		$ 7,84,080
Distribution expenses
Packaging and freight	$ 3,45,600
Warehouse rental	$ 60,000
		$ 4,05,600
Administration expenses
Power	$ 9,600
Office salaries	$ 2,40,000
Office rental	$ 1,20,000
		$ 3,69,600
Total Operating expenses	$ 15,59,280

It explains that the total operating expenses of the company would be $ 15,59,280 in next year.

Budget income statement for sole proprietor

Income statement of the company is as follows:

Income Statement
Revenue	2018
Sales revenue	46,08,000
Closing stock	4,32,000
Total Revenues	50,40,000
Expenses
Direct material	29,16,000
Add: Opening stock	1,08,000
Selling Expenses
Advertising	46,080
Wages shop	1,44,000
Sales commission	4,60,800
Vehicle running expenses	30,000
Delivery truck expenses	60,000
Shop rent	43,200
Distribution expenses
Packaging and freight	3,45,600
Warehouse rental	60,000
Administration expenses
Power	9,600
Office salaries	2,40,000
Office rental	1,20,000
Total Expenses	45,83,280
Net Income Before Taxes	4,56,720
Income tax expense	1,41,637.6
Income from Continuing Operations	3,15,082

It explains that the net profit of the company is $ 4,56,720 in which $ 1,41,637-6 has been paid by the company as tax expenses (Gooneratne & Hoque, 2016).

Budget income for limited liability company

Revenue	2018
Sales revenue	46,08,000
Closing stock	4,32,000
Total Revenues	50,40,000
Expenses
Direct material	29,16,000
Add: Opening stock	1,08,000
Selling Expenses
Advertising	46,080
Wages shop	1,44,000
Sales commission	4,60,800
Vehicle running expenses	30,000
Delivery truck expenses	60,000
Shop rent	43,200
Distribution expenses
Packaging and freight	3,45,600
Warehouse rental	60,000
Administration expenses
Power	9,600
Office salaries	2,40,000
Office rental	1,20,000
Total Expenses	45,83,280
Net Income Before Taxes	4,56,720
Income tax expense	1,27,882
Income from Continuing Operations	3,28,838

It explains that the tax amount of the company would be lesser. In case of LLC, the total tax of the company is $ 1,27.882.

Recommendation:

As given in the case, Asif Rahman is the sole proprietor. Name of the firm of Asif Rahaman is Aluminium windows trading. The above calculations about the firm expresses that net profit of the company would be positive in near future. Though, the case explains that the company is in growth phase. the calculations and the analysis further explains that the Aluminium windows must be form into the limited liability company as if the firm would be form into limited liability company than the following benefits would be enjoyed by the company:

Financial benefits:

Owners are not responsible for the company debts. They have the limited liability and only liable for their shares.
It is also easier for the company to raise the funds. It could admit new members by selling the membership interest and it could create the new class of the members with the voting right and profit characteristics (Dunk, 2011).

Non financial benefits:

In case of limited liability Company, it is easier for the company to sell the interest and the ownership of the company to third party without making and changes or disturbing the functions and the operations of the company.
Limited Liability Company is a formal structure of business. It sets some corporate rule and policies so that it becomes easy for the business to maintain the operations and the reports.

It explains that if the sole proprietor firm would be form as a limited liability company than it would offer more benefits to the company.

Make or buy decision:

Company should make the component. As the given case briefs that if the company buys the product from outside than the total cost of the product would be $ 40 and in the case of make, it would be $ 30 only. And company has spare capacity as well. It depicts that if the company would make the components than the cost of the company would be lesser and company could utilize its resource (Weygandt, Kimmel & Kieso, 2015).

Make or buy decision:

Company should buy the component. As the given case briefs that if the company buys the product from outside than the total cost of the product would be $ 40 and in the case of make, it would be $ 55 ($ 30 variable cost + $ 25 opportunity cost) only. And company don’t have any spare capacity as well. It depicts that if the company would make the components than the cost of the company would be higher and thus, it is recommended to the company to buy the components (Otley, 2015).

Variance analysis

	This quarter	This quarter	This quarter		Year to date	Year to date	Year to date
	Budget ($)	Actual ($)	Variance	Favourable/ Adverse	Budget ($)	Actual ($)	Variances ($)	Favourable/ Adverse
Expenses
Cost of sale	28750	31938	-3188	U	54688	58125	-3437	U
Electricity	1875	2000	-125	U	3750	3666	84	F
General expenses	5563	5979	-416	U	10625	11038	-413	U
Consultancy fee	3125	3125	0	F	6250	6250	0	F
Advertising	5563	5131	432	F	10125	9619	506	F
Wages	15938	17400	-1462	U	31250	33419	-2169	U
Total expenses	60814	65573	-4759	U	116688	122117	-5429	U

Flexible budget

	This quarter	This quarter	This quarter		Year to date	Year to date	Year to date
	Budget ($)	Actual ($)	Variance	Favourable/ Adverse	Budget ($)	Actual ($)	Variance ($)	Favourable/ Adverse
Expenses
Cost of sale	35424	31938	3486.11	F	67383	58125	9258.4286	F
Electricity	2310	2000	310.268	F	4621	3666	954.53571	F
General expenses	6854	5979	875.411	F	13092	11038	2053.5179	F
Consultancy fee	3850	3125	725.446	F	7701	6250	1450.8929	F
Advertising	6854	5131	1723.41	F	12475	9619	2856.4464	F
Wages	19638	17400	2237.89	F	38504	33419	5085.4643	F
Total expenses	74932	65573	9358.54	F	143776	122117	21659.286	F

Annual operating budget

(Gesimba, Alvar & Mante, 2014)

Explanation

If a variance is favourable then it simply means that the variance of the company is in the favour of the organization and explains that the cost of the company is even lesser than the expected cost. Such as in above calculation, budgeted cost of goods sold of the company is 35,424 whereas the actual cost of the company is 31,938 which explains about a favourable variances as well as it explains that the cost of the company is lesser than the expected cost (Mohamed, Kerosi & Tirimba, 2016).

Recommendation

It is highly recommended to David Trading limited to prepare a flexible budget as a flexible budget enables the administration to evaluate the deviation of expected output from actual output. On the basis of flexible budget, management could compare the actual cost of the company with the actual volume along with the budgeted volume and the budgeted cost. Flexible budget would also make it easier for the company to compare the actual and expected cost for an actual activity of the company. Thus, it is recommended to David Trading limited to prepare a flexible budget.

Accounts receivable cash collection schedule

Accounts receivable cash schedule
For the year 2017
	Jan	Feb	March	April	May	June
Total sales	96000	102000	108000	$ 1,26,000	$ 1,32,000	$ 1,32,000
Cash received 70%				$ 75,600	$ 88,200	$ 92,400
Cash received 15%				$ 15,300	$ 16,200	$ 18,900
Cash received 10%				$ 9,600	$ 10,200	$ 10,800
Total cash received				$ 1,00,500	$ 1,14,600	$ 1,22,100

Accounts payable cash payment schedule

	April	May	June
Total purchase	$ 27,300	$ 28,600	$ 1,32,000
Cash paid 90%	$ 21,060	$ 24,570	$ 25,740
Total cash received	$ 21,060	$ 24,570	$ 25,740

(Hassan, 2015)

Cash budget

Cash budget
For the year 2017
	April	May	June
Begining cash balance	$ -10,000	-47860	-87730
Add: sales	$ 1,00,500	$ 1,14,600	$ 1,22,100
Add: Loan	$ 1,50,000
Total cash available for use	$ 2,40,500	$ 66,740	$ 34,370
Less: cash disbursements
Purchasse	$ 21,060	$ 24,570	$ 25,740
Wages	$ 49,500	$ 51,500	$ 51,500
Other expenses	$ 17,800	$ 18,400	$ 18,100
Dividend payment		$ 10,000
Purchase of equipment	$ 1,50,000
Loan	$ 50,000	$ 50,000	$ 50,000
Total disbursements	$ 2,88,360	$ 1,54,470	$ 1,45,340
Cash surplus	$ -47,860	$ -87,730	$ -1,10,970
budgetd ending cash balance	$ -47,860	$ -87,730	$ -1,10,970

(Hama, Romle & Ezzat, 2015)

Recommendation

According to the calculations of cash budget and the equipment purchase, it is recommended to the company to pay the loan into more EMIs rather than 3 EMIs as it has impacted the cash flow of the company at a huge level. Though, it has also been found that the June cash position of the company is quite better than the March cash position when the bank balance of the comapny was on overdraft. It explains that the loan EMIs amount should be lesser and EMI must be paid by the company in 6 months.

Annual net cash flows of project X

Annual Net cash flow of Project X

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Machinery cost	$ 1,20,000
Installment cost		$ 15,000
Varibale cost		$ 5,000	$ 6,000	$ 7,000	$ 8,000	$ 9,000
Fixed cost		$ 5,000	$ 5,000	$ 5,000	$ 5,000	$ 5,000
Total cash outflow	$ 1,20,000	$ 25,000	$ 11,000	$ 12,000	$ 13,000	$ 14,000
Total cash inflow	$ –	$ 50,000	$ 60,000	$ 70,000	$ 80,000	$ 90,000
Profit	$ -1,20,000	$ 25,000	$ 49,000	$ 58,000	$ 67,000	$ 76,000

(Mukherjee, Al Rahahleh & Lane, 2016)

Capital budgeting techniques of project X

Calculation of Net present value
Year	Cash outflow	Cash inflow	Net cash flow	PV Factor	Present value
0	$ -1,20,000		$ -1,20,000	1.000	$ -1,20,000
1	$ -25,000	$ 50,000	$ 25,000	0.909	$ 22,727
2	$ -11,000	$ 60,000	$ 49,000	0.826	$ 40,496
3	$ -12,000	$ 70,000	$ 58,000	0.751	$ 43,576
4	$ -13,000	$ 80,000	$ 67,000	0.683	$ 45,762
5	$ -14,000	$ 90,000	$ 76,000	0.621	$ 47,190
Net present value = cash inflow – cash outflow	$ 79,751

Calcculation of payback period
Year	Cash outflow	Cash inflow	Net cash flow	CF
$ –	$-1,20,000		$ -1,20,000	$ -1,20,000
$ 1	$ -25,000	$ 50,000	$ 25,000	$ -95,000
$ 2	$ -11,000	$ 60,000	$ 49,000	$ -46,000
$ 3	$ -12,000	$ 70,000	$ 58,000	$ 12,000
$ 4	$ -13,000	$ 80,000	$ 67,000	$ 79,000
$ 5	$ -14,000	$ 90,000	$ 76,000	$ 1,55,000
Payback period	2.79

Calcculation of payback period
Year	Cash outflow	Cash inflow	Net cash flow	PV Factor	Present Value	CF
0	$ -1,20,000		$ -1,20,000	1.000	$ -1,20,000	$ -1,20,000
1	$ -25,000	$ 50,000	$ 25,000	0.909	$ 22,727	$ -97,273
2	$ -11,000	$ 60,000	$ 49,000	0.826	$ 40,496	$ -56,777
3	$ -12,000	$ 70,000	$ 58,000	0.751	$ 43,576	$ -13,201
4	$ -13,000	$ 80,000	$ 67,000	0.683	$ 45,762	$ 32,561
5	$ -14,000	$ 90,000	$ 76,000	0.621	$ 47,190	$ 79,751
Payback period			3.29

(Andor, Mohanty & Toth, 2015)

Annual net cash flows of project Y

Annual Net cash flow of Project Y
		Year 1	Year 2	Year 3
Machinery cost	$ 1,20,000
Installment cost		$ 10,000
Varibale cost		$ 5,000	$ 8,000	$ 10,000
Fixed cost		$ 5,000	$ 5,000	$ 5,000
Total cash outflow	$ 1,20,000	$ 20,000	$ 13,000	$ 15,000
Total cash inflow	$ –	$ 50,000	$ 80,000	$ 1,00,000
Profit	$ -1,20,000	$ 30,000	$ 67,000	$ 85,000

(Rossi, 2015)

Capital budgeting techniques of project Y

Calculation of Net present value
Year	Cash outflow	Cash inflow	Net cash flow	PV Factor	Present value
0	$ -1,20,000		$ -1,20,000	1.000	$ -1,20,000
1	$ -20,000	$ 50,000	$ 30,000	0.909	$ 27,273
2	$ -13,000	$ 80,000	$ 67,000	0.826	$ 55,372
3	$ -15,000	$1,00,000	$ 85,000	0.751	$ 63,862
Net present value = cash inflow – cash outflow	$ 26,506

Calcculation of payback period
Year	Cash outflow	Cash inflow	Net cash flow	CF
$ –	$-1,20,000		$ -1,20,000	$ -1,20,000
$ 1	$ -20,000	$ 50,000	$ 30,000	$ -90,000
$ 2	$ -13,000	$ 80,000	$ 67,000	$ -23,000
$ 3	$ -15,000	$ 1,00,000	$ 85,000	$ 62,000
Payback period	2.27

Calcculation of payback period
Year	Cash outflow	Cash inflow	Net cash flow	PV Factor	Present Value	CF
0	$ -1,20,000	$ –	$ -1,20,000	1.000	$ -1,20,000	$ -1,20,000
1	$ -20,000	$ 50,000	$ 30,000	0.909	$ 27,273	$ -92,727
2	$ -13,000	$ 80,000	$ 67,000	0.826	$ 55,372	$ -37,355
3	$ -15,000	$ 1,00,000	$ 85,000	0.751	$ 63,862	$ 26,506
Payback period			2.58

(Meyer & Kiymaz, 2015)

Recommendation

According to the above evaluation, it has been found that the Umang trading limited should accept the Project X as this project would offer higher return to the company in comparison with project Y. Net present value of project X is way higher than the project Y. Though, it has also been found that the discounted payback period and payback period of project X is lower than project Y but at the same time, the total life of project X is higher than project Y.

Thus, it is concluded and recommended to the Umang trading limited to invest into project X to manage and enhance the return.

References:

Andor, G., Mohanty, S. K., & Toth, T. (2015). Capital budgeting practices: A survey of Central and Eastern European firms. Emerging Markets Review, 23, 148-172.

Arnaboldi, M., Lapsley, I., & Steccolini, I. (2015). Performance management in the public sector: The ultimate challenge. Financial Accountability & Management, 31(1), 1-22.

Dunk, A. S. (2011). Product innovation, budgetary control, and the financial performance of firms. The British Accounting Review, 43(2), 102-111.

Gesimba, P. O., Alvar, M. R., & Mante, R. (2014). Organization Development Interventions on Procurement Practice and Budgetary Control at Nakuru Municipal Council in Kenya, Africa. International Journal of Business and Social Science, 5(4).

Gooneratne, T. N., & Hoque, Z. (2016). Institutions, agency and the institutionalization of budgetary control in a hybrid state-owned entity. Critical Perspectives on Accounting, 36, 58-70.

Hama, B., Romle, A. R., & Ezzat, N. S. (2015). Toward a unifying framework for budgetary control and accountability in the public sector. International Journal of Administration and Governance.

Hassan, I. M. (2015). Budgetary control system for University of Karbala Iraq based on adaptive budgetary control framework (Doctoral dissertation, Universiti Utara Malaysia).

Meyer, K. S., & Kiymaz, H. (2015). Sustainability Considerations in Capital Budgeting Decisions: A Survey of Financial Executives. Accounting and Finance Research, 4(2), 1.

Mohamed, I. A., Kerosi, E., & Tirimba, O. I. (2016). Analysis of the Effectiveness of Budgetary Control Techniques on Organizational Performance at DaraSalaam Bank Headquarters in Hargeisa Somaliland.

Mukherjee, T., Al Rahahleh, N., & Lane, W. (2016). The capital budgeting process of healthcare organizations: a review of surveys. Journal of Healthcare Management, 61(1), 58-76.

Otley, D. (2015). in Management Control. Critical Perspectives in Management Control, 27.

Rossi, M. (2015). The use of capital budgeting techniques: an outlook from Italy. International Journal of Management Practice, 8(1), 43-56.

Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Managerial accounting. Wiley..

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