Budgets For September 2018 And Kaizen Budgeting

Answer:

Answer 1.

a.

Revenue Budget
Particulars Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper	Premium cabinets	De Luxe cabinets
Budgeted Sales Units	740	390
Budgeted Selling Price ($)	1020	1600
Budgeted Sales	754800	624000

 

b.

Production Budget (Units)
Particulars	Premium cabinets	De Luxe cabinets
Sales	740	390
Less : Opening Inventory	20	5
Add : Closing Inventory	30	15
Production Units	750	400

c.

Direct Materials Usage Budget (Units & $)
Particulars	Mirror	Softwood	Hardwood	Balsa Wood
Premium Cabinets : (750 Units)
Required per Unit	2	1	4	1
Total Required Units (a)	1500	750	3000	750
Cost per unit ($)	160	125	12	16
Total Cost ($)	240000	93750	36000	12000
De Luxe Cabinets : (400 Units)
Required per Unit	0	5	1	4
Total Required Units (b)	0	2000	400	1600
Cost per unit ($)	160	125	12	24
Total Cost ($)	0	250000	4800	38400
Total Required Units (a+b)	1500	2750	3400	2350

Direct Materials Purchase Budget (Units & $)
Particulars	Mirror	Softwood	Hardwood	Balsa Wood
Premium Cabinets :
Required	1500	750	3000	750
Add : Ending Inventory	24	6	80	4
Less : Beginning Inventory	40	10	100	4
Purchases to be made (Units)	1484	746	2980	750
Cost per unit ($)	160	125	12	16
Total Cost ($)	237440	93250	35760	12000
De Luxe Cabinets :
Required	0	2000	400	1600
Add : Ending Inventory	0	40	4	44
Less : Beginning Inventory	0	30	5	40
Purchases to be made (Units)	0	2010	399	1604
Cost per unit ($)	160	125	12	24
Total Cost ($)	0	251250	4788	38496

d.

Direct Manufacturing Labour Budget
Particulars	Premium cabinets	De Luxe cabinets
Planned Production (Units)	750	400
Direct Labour Hours Per Unit (hrs)	3	5
Budgeted Labour Hours	2250	2000
Manufacturing labour cost per hour ($)	30	30
Budgeted Labour Cost ($)	67500	60000

e.

Manufacturing Overhead Budget
Particulars	Premium cabinets	De Luxe cabinets	Total
Budgeted Labour Hours	2250	2000	–
Budgeted Variable Manufacturing Overhead Rate per labour hour ($)	35	35	–
Total Variable Overhead ($)	78750	70000	148750
Total Fixed Overhead ($)	–	–	42500
Budgeted Manufacturing Overhead ($)			191250

f.

Ending Inventories Budget
Finished Goods
Particulars	Premium cabinets	De Luxe cabinets
Direct Material per unit	509	733
Direct Labour per unit	90	150
Manufacturing Overhead :
Variable	105	175
Fixed	30	50
Total Cost per unit ($)	734	1108
Ending Finished Goods Units	30	15
Ending Finished Goods inventory ($)	22020	16620

Working Note 1 :
It has been stated in the sum that fixed overheads are to be allocated to the finished good units on the basis of direct labour manufacturing hours.
So,
Total Budgeted Fixed Overheads	=	$42,500
Total Budgeted Labour Hours	=	4250 hours
Fixed Cost per Labour Hour ($)	=	$10/hour

Working Note 2 :
Calculation Of Direct Material Cost Per Unit Of Finished Goods :
Particulars	Mirror	Softwood	Hardwood	Balsa Wood	Total ($)
Premium Cabinets :
Required per Unit	2	1	4	1
Cost per unit ($)	160	125	12	16
Total Cost per unit of finished goods($)	320	125	48	16	509
De Luxe Cabinets :
Required per Unit	0	5	1	4
Cost per unit ($)	160	125	12	24
Total Cost per unit of finished goods($)	0	625	12	96	733

Working Note 3 :
Calculation Of Direct labour & Manufacturing Cost Per Unit Of Finished Goods :
Particulars	Direct Labour Cost ($30/hour)	Variable Manufacturing Cost ($35/hour)	Fixed Manufacturing Cost ($10/hour)
Premium Cabinets :
Direct Labour Hours	3	3	3
Cost per unit	90	105	30
De Luxe Cabinets :
Direct Labour Hours	5	5	5
Cost per unit	150	175	50

Ending Inventories Budget
Direct Materials
Particulars	Mirror	Softwood	Hardwood	Balsa Wood
Premium Cabinets  :
Cost per unit	160	125	12	16
Ending Direct Materials Units	24	6	80	4
Ending Direct Materials ($)	3840	750	960	64
De Luxe Cabinets  :
Cost per unit	160	125	12	24
Ending Direct Materials Units	0	40	4	44
Ending Direct Materials ($)	0	5000	48	1056

g.

Cost Of Goods Sold Budget (in $)
Particulars	Premium cabinets	De Luxe cabinets
Materials Cost	381750	293200
Labour Cost	67500	60000
Manufacturing Overhead :
Variable	78750	70000
Fixed	22500	20000
Total Manufacturing Cost	550500	443200
Add : Opening Stock	10840	4850
Less : Closing Stock	22020	16620
Cost Of Goods Sold	539320	431430

Answer 2.

The process that the management of the company adopts to improve the procedures so that there is a reduction in costs is known as kaizen budgeting. This budgeting process shows slow improvements over a large span of time. It is basically used by the management to control costs on a continuous basis (Atkinson, 2012).

Kaizen budgeting involves huge time and resources and therefore the management has to plan in great details before the execution process is carried out. It has to look upon various business aspects such as its location and the possible improvement projects before implementation. These projects will be successful only when the management plans it with great efficiency (Berry, 2009). The expected savings and the costs that will be involved in these improvement projects must be taken into consideration while preparing this project.

The cost reductions that have occurred because of the occurrence of Kaizen activities can be budgeted on the basis of planned improvement projects. It is difficult for the management to relate particularly few improvements to entire period and therefore the investment projects has shorter period but the normally the budget is prepared for once a year.  The management can also enter percentages of cost reduction in the budget and then rely on the basis of kaizen activities that are carried out by the management (Boyd, 2013).

The kaizen budgeting helps to compare between the performance of the management and the budgets taking into consideration the reduction in cost that has occurred over time. Such information can also be useful while taking decisions in relation to promotion and issuance of bonus.

The two main problem of adopting kaizen budgeting is as follows:

• It is easier for the management to reduce costs in the initial years. However, it becomes difficult to reduce costs in the subsequent years. There is a pressure build on the management when it is observed that the percentage of kaizen triggered cost reduction has also fallen.
• There might be unfavourable variances found in the budget if there is no cost reduction in relation to kaizen budgeting. As a result the management is unable to achieve profits and expected cash flows (Case, 2012).

Traditional budgeting is a technique of preparing different kind of budgets using the forecasted or estimated data whereas the Kaizen budgeting is a method of budgeting in which the activities are revaluated after the budget has been already set. The traditional form of budgeting usually focuses on the past expenditure level but in case of Kaizen it focuses on the new economic appraisal.  Traditional budgeting is accounting oriented and therefore there is no requirement of the justification of the current period whereas Kaizen budgeting is a judgemental process as it includes decision making (Datar, 2015). In this case, a proper justification in relation to benefits and cost is required. If there is any kind of justification provided in the traditional budgeting system then it is given by the top management but in case of kaizen budgeting justification is provided by the manager of that particular unit. The clarity as well as responsiveness is lower in traditional budgeting when compared to Kaizen budgeting. Traditional budgeting is a routine approach whereas Kaizen budgeting is a straight forward approach.  Traditional budgeting gives priority firstly to past expenditures, secondly to demand for inflation and then to the new programs. Kaizen budgeting involves decision units that is divided into comprehensive packages and is ranked as per their relevance (Holtzman, 2013).

Manufacturing Overhead Budget

As already familiar with the kaizen theory, where the aim is to reduce cost and maximize profits, Sweden Company is done with the preparation of budgets. However, due to absence of certain information such as market rate, substitutes in the market, make or buy conditions, etc it is difficult to give an appropriate answer for how the company can adopt a cost effective approach towards its operations (Paul, 2014).

As already known from the prepared budget, the company specializes in two products (Paul, 2014). If we individually assess the profit derived from each product, we understand that the profit coming from the first product, that is, premium cabinet is $286 while the profit from De Luxe cabinet is $492. Though the number of units sold in first product is 740 and in case of another product, it is 390 units, the profit derived from the second product is more than the first one. Also, as we do not know the limiting factor or the target sales of the company, we can make a suggestion of producing more of the Deluxe cabinet than premium cabinet or the company can also choose the option of shutting down the first product and producing only the second one (Seal, 2012).

However, it is difficult to make plans for the cost reduction due to constraints on information. We can still consider hypothetical situations that can be used for cost reduction:

Use of market price in the market: the company can consider the price of the direct materials or the product itself provided through other substitutes and can switch to some other source if that happen to be cheap. In the same way, the company can adopt buy the product from market and use the same finance in some other productive manner.

Make or buy: the company can produce the parts required to prepare its products, that is, premier cabinets and de luxe cabinets. In that way, it can compare the production cost and purchase cost and accordingly make the best decision tha contributes towards the cost reduction objective.

Use of marginal costing: the company can use the marginal costing where the fixed costs are absorbed in total and not allocated. This would somewhere give the real cost as fixed cost has to be incurred no matter what. Also, decisions are taken better by using marginal or volume based method as in that case the products are compared on the basis of contribution from each unit and not on the basis of profits from each unit.

As evident from the above, the fixed costs are absorbed or allocated to each unit which can be changed into marginal costing method as they would help Sweden Ltd to take a better decision of producing which product or producing what number of each product (Siciliano, 2015).

Thus, It is recommended to adopt the kaizen theory in the budget so as to have a better approach and the company could use the saved costs in some other fruitful ways.

References

Atkinson, A. A. (2012). Management accounting. Upper Saddle River, N.J.: Paerson.

Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.

Boyd, W. K. (2013). Cost Accounting For Dummies. Hoboken: Wiley.

Case, P. (2012). Environmental Risk Management and Corporate Lending: A Global Perspective. Boca Raton, Fla.: CRC.

Datar, M. S. (2015). Cost accounting. Boston: Pearson.

Datar, S. (2016). Horngren’s Cost Accounting: A Managerial Emphasis. Hoboken: Wiley.

Holtzman, M. (2013). Managerial Accounting For Dummies. Hoboken, NJ: Wiley.

Paul, K. (2014). Managing extreme financial risk. Oxford: Academic Press, Elsevier.

Seal, W. (2012). Management accounting. Maidenhead: McGraw-Hill Higher Education.

Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.