Budgeted Statement Of Profit Or Loss For The Year Ended 31 December

Working Notes 1

As evident from the above stated computation, it is understood that revenue derived from fees of 23 children for Creche stands €1,19,600 while the company also received payments from ECCE of 18 children that amounted to €47,196. The total revenues received for the year ended 31^st December stood €166,796. The business also reports incurring expenses of €1,14,822 for the income year ended 31^st December. Hence, the budgeted net profit or loss stands €51,974 for the income year ended 31^st December.

The aforementioned budget represents the revised budget for CompanyX Creche. The revised budget shows that fees from parents of 23 children stands €119,600 whereas the budgeted payment from ECCE for 18 children stands €47,196. The total budgeted revenue is €166,796. On the other hand, the total amount of expenses stands €150,134 for the year ended 31^st December and the budgeted net profit stands €16,662 for 31^st December.

Budget is regarded as a quantified anticipation that a business looks forward to achieve. Budget is regarded as a detailed representation of future results, financial positions and cash flows which management wants the business to attain during the certain period of time. A budget might only get updated once in a year. It is mainly dependent on how frequently the senior manager looks to revise the information (Maheshwari, Maheshwari and Maheshwari 2021). Budget involves comparing the actual results to ascertain variances from the anticipated performance. The management takes remedial steps to bring out the actual results back to line with budget. A business might require very well-defined budgeting procedure for approximating the forthcoming financial circumstances and make arrangement for suitable amounts of financing and personnel.   

Flexible budget on the other hand involves making adjustment to changes in actual level of revenue. The actual revenue or other activity measures is placed in the flexible budget soon when the accounting period comes to an end. The budget is later compared with the actual expense for the purpose of budget control (Eldenburg et al., 2020). A flexible can be formed which ranges in sophistication level. In other words, the flexible budget changes those expenses which varies directly with revenues. A percentage is built in the model that gets multiplied by actual expenditure to determine what expenses must be stated at revenue level. While in case of cost of goods sold, a cost per unit is used instead of sales percentage.

Working Notes 2

Formulating budget is important for Creche because budget is beneficial for effective business planning. The importance of Budgets and Flexed budgets to Creche is given below;

• Planning Orientation: The procedure involved in creating budget would take the management of Creche away from its short-term, daily business administration and would force them to think for long-term purpose.
• Review of Profitability: It may become very easy for Creche to lose sight of budget when it is making most amount of money, at the time of daily functioning of business. A business budget that is structured properly helps in pointing out the necessary aspects of business that will produce money and those that will not produce money (Dimitri? et al. 2016). This would force the management of Creche to consider dropping some parts of business if it is not necessary or expand in others.
• Evaluation of Performance: By developing budgets Creche can work with its employees for setting up their goals for budgeting period and also helps to tie bonuses or other incentives to show their performance. Later, Creche can create budget versus the actual reports to provide the employees with feedback concerning their progress towards their goal (Nair 2017). This method is commonly adopted to measure the financial goals; however, operational goals can be added as well to the budget for determining performance appraisals.
• Funds Planning: A budget that is structured in a proper manner must derive the amount of cash that will be spun off or those that is required for supporting the operations. This information is mainly used by treasurer of Creche to plan for the funding needs of company. Furthermore, this information can be used for the purpose of investment planning where the treasurer can take decision whether it wants to park the excess cash in a short-term or long-term investment instruments.
• Allocation of Cash: Budget is important for Creche because it is helpful in allocating cash. It must be noted that there is very limited sum of cash available for making investment in the fixed assets and working capital and the process of budgeting forces the management to determine which assets are worthy for making investment (Hanif 2019). In certain cases, the management might decide to sell certain assets to produce sufficient amount of cash for obtaining assets.

The flexible budget is considered as an appealing concept. The flexible budget is also beneficial for Creche in following ways and these are given below;

Useful in determining variable cost: The flexible budget is useful for Creche to determine the variable cost. The flexible budget is particularly very useful for Creche where cost is aligned in a close manner based on the level of its business activity (Taschner and Charifzadeh 2016). This involves the retail environment where the overhead can get segregated and can be treated as a fixed cost, whereas the cost of merchandise is directly related to revenues.

Measurement of Performance: Creche can use flexible to measure its business performance. As flexible budget restructures itself on the basis of activity levels, such as in case of Creche where the overhead can be easily segregated and it can be treated as the fixed cost, whereas the cost of merchandise is very much directly associated to revenues.

Efficient in framing budget: Creche can use flexible budget so that it can very easily update the budget regarding which the revenues or activity figures are not yet confirmed. Based on this approach, the managers can provide their approval for all types of fixed expenses, along with the variable expenses as the percentage of revenues or other measurement activity (Otley 2016). The budgeting staff can later finish up the remaining budget work that would flow through the formulas stated in flexible budget and it can automatically change the level of expenses.

Operational Realities: The flexible is important because it provides an operational realities and it is helpful in streamlining the control functions and helps in planning of profits. In case of Creche, the flexible budget is considered important because it provides a balanced perspective while making comparison of actual figures with the budgeted figures. When preparing flexible budget, the company can recognize the actual cost on the basis of actual activity by comparing the budgeted cost with the actual activity level.

Recognizes variability: The flexible is helpful for Creche because it can identify the actual concept of variability and it can also provide the logical comparison of expenses with actual expenditure as the means of control. The flexible budget is very useful for Creche because it would help the company in implementing budgetary control so that it can correspond with changes in activity level.

Re-computation of budgeted profit if staff wages increase by 5%

Cost behaviour is regarded as the way based on which expenditure gets effected due to the changes in business activity. The business manager of Creche must be aware regarding the cost behaviours at the time of constructing the yearly budget, to expect if any cost would increase or fall (Shields and Shelleman 2016). For instance, if the use of production line is approaching its maximum capacity, the relevant amount of cost behaviour is anticipated to increase in high amount, given that there is an increase in demand level by small amount.

There are three types of cost behaviour that falls in three categories. These cost behaviour are variable cost, fixed cost and the mixed cost. Under the heads of variable cost, these cost changes directly as a result of changes in business activity. For instance, there is a particular direct materials cost which is related with every product that is sold.

Secondly, there is a fixed cost that does not changes in regard to the activity of business levels. For instance, rent paid on building will not change, despite the fact that level of sales changes significantly. The third type of cost is mixed cost. This comprises of fixed and variable elements (Samuel 2018). For example, the internet fees involve a standard monthly access fee which is fixed and the fees for broadband usage which is considered free. Therefore, understanding the manner in which cost behaves is considered vital for managers. The cost behaviour is considered useful for planning and controlling purpose of its organization costs and also for cost cost-volume profit analysis.

The direct cost for Creche is premises rate, fuel cost and running cost of vehicles. Out of these cost, the premises rate is considered as fixed cost while the fuel and running cost is considered as a variable cost.

The indirect cost involves the depreciation expenses incurred for soft surfaces, play equipment, car and other equipment. All these cost are considered fixed cost and they are very likely to incur on annual basis (Mehta 2016). The indirect cost will also include running cost of vehicle, annual food bill, yearly food bills, subscriptions, bank charges, light and heating expenses. All these cost are classified as variable cost, except for insurance cost as it is very likely to incur on yearly basis at a fixed rate. The subscription charges should also be treated as fixed cost. The subscription cost that is identified in the present circumstances of Creche it can be stated that it is not a variable cost.

Explanation of term Budget and Flexed Budget

The business also reports incurring telephone, light & heat, back charges and subscriptions. These costs are considered as indirect cost and subscription is considered as fixed cost. While the telephone, light & heat and bank charges are considered as an indirect cost. It must be noted that these costs are treated as variable cost because they tend to vary on the basis of production level. Under the heads of indirect cost, the part-time salary of staffs, employees PRSI, accounting fees and annual training cost have also been considered. All these costs are considered as fixed cost for the business (Datar and Rajan 2018). This is because, the aforementioned cost is very likely to incur on monthly or annual basis and it is irrespective of the production level reported by Creche.

In order to improve the profitability of Creche, below stated are some of the suggestions;

Using Key Performance Indicators: By using the key performance indicators or the KPI, it will help Creche in keeping track of the below given elements;

1. Improvement in Revenue
2. Reduction in cost
3. Processing cycle-time improvement
4. Increasing the customer satisfaction

By taking into account deep look in the aforementioned elements, Creche will be able to understand what has already taken place in business and this will allow the company to know what it should do now.

Lowering customer acquisition costs: In the recent years, the overall cost of acquiring the new manufacturing customers has risen due to the rising marketing costs, customer anticipations and strong competition (Blocher et al. 2019). Creche is recommended to make investment in inbound marketing strategy that needs initial upfront investment. This will help in producing long-term benefits and will outweigh the traditional marketing.

Measuring Performance: In order to improve the profitability of Creche, the company is recommended to measure the performance of business so that it can identify inefficiencies. By simply measuring marketing performance, the business will have data for making smarter decisions which will help in driving improvements and growth

References:

Blocher, E.J., Stout, D.E., Juras, P.E. and Smith, S., 2019. Cost Management (A Strategic Emphasis) 8e. McGraw-Hill Education.

Datar, S.M. and Rajan, M.V., 2018. Horngren’s cost accounting: a managerial emphasis. Pearson.

Dimitri?, M., Škalamera-Alilovi?, D. and Duhovnik, M., 2016. Public cost and management accounting system implementation and performance: An integrative approach. International Journal of Public Policy, 12(3-6), pp.190-209.

Drury, C., 2018. Cost and management accounting. Cengage Learning.

Eldenburg, L.G., Brooks, A., Oliver, J., Vesty, G., Dormer, R., Murthy, V. and Pawsey, N., 2020. Management accounting. John Wiley & Sons.

Hanif, M., 2019. Modern Cost and Management Accounting. McGraw-Hill Education.

Maheshwari, S.N., Maheshwari, S.K. and Maheshwari, M.S.K., 2021. Principles of Management Accounting. Sultan Chand & Sons.

Mehta, B.K., 2016. Cost and Management Accounting: Latest Edition (Vol. 1). SBPD Publications.

Nair, S., 2017. Factors affecting management accounting practices in Malaysia.

Otley, D., 2016. The contingency theory of management accounting and control: 1980–2014. Management accounting research, 31, pp.45-62.

Samuel, S., 2018. A conceptual framework for teaching management accounting. Journal of Accounting Education, 44, pp.25-34.

Shields, J. and Shelleman, J.M., 2016. Management accounting systems in micro-SMEs. Journal of Applied Management and Entrepreneurship, 21(1), p.19.

Taschner, A. and Charifzadeh, M., 2016. Management and cost accounting: tools and concepts in a Central European context. John Wiley & Sons.