Part A Master Budget and Its Components
Part B Analysis of the Production Plan
As per the case study which is provided, Wittgenstein Pty ltd is engaged in the production of anemometers used in the production of wind powered electricity generating equipment. The sales manager of the company is concern that the market is changing and there is significant uncertainty. Therefore, the sales managers want to implement a strategy which can address such an issue in an effective manner. The production manager is thinking of implementing his plan of building high automated manufacturing facility for power. The management needs to incorporate plans and also review the same whether the revenues and costs which are generated from the plan is appropriate or not.
For the purpose of this plan the management has decided to follow budgeting practices by formulating a master budget which can effectively estimate the costs and revenues which are associated with a project (Cox 2014). The management will consider the quarterly profits which are generated due the implementation of the plan. A master Budget is an aggregate of all the significant budgets of an organization and includes additional statements such as financial plans, cash budgets and statement of Income. The budget thus prepared will estimate whether the investment in the production plan of the management is worthwhile or not (Antfolk et al. 2014).
As per the sales Budget which is included in the master budget shows that the sales volume will be increasing significantly in the month of March which is 60300 units. The estimated sales volume of March is also very which is shown to be 80400 units. The budgeted sales revenue of the company for the month of march shows that it is $ 3732,57,000 which is further estimated to increase in the month of April as shown as $ 4976,76,000. The production budget shows that the production volume is also anticipated to increase as this was the main purpose of implementing the production program (Weygandt, Kimmel and Kieso 2015). The production volume which is shown in the budget for the month of March is 72360 which has significantly increased from previous month which was $ 57620.
The direct labour budget which is prepared shows that the due to the increase in the production volume of goods, the costs relating to direct labour and also direct labout hours will also increase ashon in the Budget. The direct labour hours has increased from 460960 hours in the month of February to 578880 hours in the month of March. The budgeted direct labour cost has also significantly increased in comparison between January and March. The Budgeted labour cost is shown as $ 289,44,000 for the month of March as per the budget prepared by the management. The purchase budget which is prepared by the management shows the materials which are required by the company in day to day basis for completing its product. The materials which are required by the company are cups and vanes.
As per the budget, the cost of Budgeted direct materials is the aggregate of these two costs. The direct material budget shows that the cost which is estimated by the business for the product for the month of March is estimated to be $ 618,67,800. The direct materials costs which the management estimates to incur in the month of February is $ 492,65,100 which is less than what is estimated in the month of March.
The manufacturing overhead budgets shows that the business has certain indirect costs which are associated with the manufacture of the product of the business (McLellan 2014). The indirect costs mostly comprise of indirect labour costs, manufacturing costs which are not directly related to production, power costs and maintenance costs. As per the nature of the product ands the structure of the organization it is anticipated that the new production program will be mostly labour intensive and therefore the management estimates increase in both direct labour cost and indirect labour costs (Crosson and Needles 2013).
The budgeted manufacturing overhead as estimated by the business is shown as $ 1683,37,895 for the month of March which is the highest and its is quite natural as the production volume of the company has increased due to the production plan implementation by the management. The budgeted manufacturing overhead for the month of February is shown to be $ 1518,74,166. The sales of the business are mostly in credit therefore this makes the collection of debtors the major source of revenue for the business. The collection of debtors is done partly for the sales during a month and partly for the sales in previous month. This the policy which the management of the company has been following during the quarter (Roberts 2014).
The total collection of debtors which is done for the month of March is shown as $ 3500,32,120 which is bit less than what is estimated to be collected in the month of February. This may be due to the fact that a major portion of the month’s sale is due to be collected in the month of April. The cash budget is an important part of the master budget as it displays the cash expenses which the management expects to incur during the quarter (Brigham and Ehrhardt 2013). The cash generated from operating activities show that positive results, however the cash generated has reduced in the month of March in comparison to the month of April as estimated in the budget. The closing cash balance of the business is however more favorable and highest during the quarter. The closing cash balance is shown as $ 1638,41,714 for the month of March.
The high cash value in the month of march even the cash from operation was not significant shows that the business has engaged more in investing and financing activities during the quarter more. The income statement is also an important part of the master budget prepared by the business. The income statement aggregates all costs and revenues for the purpose of estimating whether the business has earned profit or loss on an aggregate basis during the quarter taking the results of all three months into consideration. As per the estimation, the business will be earning a profit on a net basis for an amount which is estimated to be $ 1576,78,243. This makes it clear that the new production strategy is favorable for the business and therefore it would be appropriate to implement the same and increase the profitability of the business.
Part C Analysis of Participative and Imposed Budget
A participative budget is special kind of budget which takes into consideration the inputs which are provided by the employees of the organization (Zainuddin 2013). The policies and standards which are set in a budget normally affects all the departments and its employees and therefore it is in their best benefits that the employee take part in the setting of goals and objectives of a business. The major advantage which such a budget provides is that it brings about a unity and sense of direction towards a common goal and also motivates the employees to take steps which are necessary towards accomplishment of such organization goals (Tivde 2015).
In many cases such types of budgets are also known as Bottom to top budgets and are really effective when it comes to bring in opinions and new ideas on the table. As the opinions of all departments are considered while preparing the budget, it may take a long time to finally prepare the budget effectively (Sponem and Lambert 2016).
In case of an impose budget the management of senior executives take all necessary decision regarding policy setting, objectives of the business and optimizing performances (Mutiganda 2013). This type of budget is also known as top to bottom budgets as the policies of the business are set by senior managers and the lower and middle level management do not have a say in the same.
In case of the company, the management should implement a participative form of budgeting system as this will bring about views and opinions of employee, middle level management and also facilitate flow of information effectively (Mah’d et al. 2013). With the new production plan, it is estimated that the business will be performing well and the adoption of participative budgets will allow smooth communication regarding polices with all other departments.
Reference
Antfolk, C., Kopta, V., Farserotu, J., Decotignie, J.D. and Enz, C., 2014, April. The WiseSkin artificial skin for tactile prosthetics: A power budget investigation. In Medical Information and Communication Technology (ISMICT), 2014 8th International Symposium on (pp. 1-4). IEEE.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning.
Cox, P., 2014. Master budget project: Analysis of cash budget report. Strategic Finance, 19(3), pp.52-54.
Crosson, S.V. and Needles, B.E., 2013. Managerial accounting. Cengage Learning.
Mah’d, O., Al-Khadash, H., Idris, M. and Ramadan, A., 2013. The impact of budgetary participation on managerial performance: Evidence from Jordanian university executives. Journal of Applied Finance and Banking, 3(3), p.133.
McLellan, J.D., 2014. Management Accounting Theory and Practice: Measuring the Gap in United States Businesses. Journal of Accounting, Business & Management, 21(1).
Mutiganda, J.C., 2013. Budgetary governance and accountability in public sector organisations: An institutional and critical realism approach. Critical Perspectives on Accounting, 24(7-8), pp.518-531.
Roberts, A., 2014. Doing borrowed time: The state, the law and the coercive governance of ‘undeserving’debtors. Critical Sociology, 40(5), pp.669-687.
Sponem, S. and Lambert, C., 2016. Exploring differences in budget characteristics, roles and satisfaction: A configurational approach. Management Accounting Research, 30, pp.47-61.
Tivde, J.K., 2015. The Impact of Participation in Budgeting On Work Motivation: A Study of Nigerian Breweries Plc, Guinness Plc and University of Nigeria, Nsukka (Doctoral dissertation).
Weygandt, J.J., Kimmel, P.D. and Kieso, D.E., 2015. Financial & managerial accounting. John Wiley & Sons.
Zainuddin, S., 2013. Distributive fairness and motivation in participative budgeting setting. ????????? ???????? ?????????, (1), pp.292-301.
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