In this report, an attempt has been made to draw your attention to the variances that have occurred in variable and fixed expenses with respect to the budgeted performance. Some significant variance can be noticed in the Cost of goods sold element. It turned out to be a lot less than we expected. Even our sales showed a lot of variance i.e. about 8 %. But as pour cost of goods sold % of variance was less than that of our sales it turned out that got an increased gross profit than our expectation. For future we must focus on increasing our sales efforts in order to enjoy the benefits of low COGS. Also we can see that entertainment expense was highly exaggerated in our budget. We must endeavour to take a more realistic approach towards this kind of fixed expenses in the future.
Thanking You
The issues involved in monitoring and controlling activities against plans are as follows:
1) Setting up realistic targets and levels of activities. The organisation must realise the potential of its employees and its production capabilities before setting up any budget.
2) Understanding the effect of any variance taking place. It is not always that variance prove to be bad for a business for instance if the budgeted costs are more than the actual costs then it is good for the company and vice versa (Chen et al. 2014).
3) Understanding the how, when, why and what concept related with variances. The organisation must understand how any variance is affecting it, then understand the reasons behind such variance, then move on to finding when did the events causing the variance occurred, and lastly what steps can be taken to minimise the variance if negative in the future.
It is quite easily observable that the cash balance in the first quarter is increasing by a fixed amount of 10000. After that point it has risen by 20000 and stabilising at 100000. It is recommended that the company must try to keep fixed or at least stable cash balance at the end of every month (Chu and Li 2015). If the entity is left with surplus cash at any point, it must invest it in some other avenues to get returns from it rather than keeping it with itself and increasing the working capital.
The cash budget clearly shows that the cash balance at the end of the month is decreasing leading to a negative cash balance in the month of April and thereafter. It is recommended that the entity must reduce its cash outflows like payment to creditors, ask for some credit period, and at the same time make regular collection from the debtors and reducing their credit period (Agarwalla et al. 2015).
|
Statement Showing bottles sold annually |
|
|
Particulars |
Amount |
|
Total Sales |
$320,000.00 |
|
Selling price per unit |
$20.00 |
|
Number of bottle sold |
16000 |
|
Statement Showing variable cost per bottle |
|
|
Particulars |
Amount |
|
COGS |
$192,000.00 |
|
Selling unit |
16000 |
|
Variable Cost per unit |
$12.00 |
|
Calculation of the Breakeven point |
|
|
Particular |
Amount |
|
Salaries & Wages |
$55,000.00 |
|
Power |
$7,500.00 |
|
Advertising |
$30,000.00 |
|
Cleaning |
$4,000.00 |
|
Telephone |
$6,000.00 |
|
Depreciation |
$3,000.00 |
|
Insurance |
$13,000.00 |
|
Rent |
$40,000.00 |
|
Sundry Expenses |
$5,000.00 |
|
Fixed Costs |
$163,500.00 |
|
Selling price per unit |
$20.00 |
|
Variable Cost per unit |
$12.00 |
|
Contribution per unit |
$8.00 |
|
Breakeven point |
20438 |
|
Calculation of the Required number of bottle |
|
|
Particular |
Amount |
|
Fixed Costs |
$163,500.00 |
|
Expected Profit |
$40,000.00 |
|
Required Contribution |
$203,500.00 |
|
Selling price per unit |
$20.00 |
|
Required number of bottle |
10175 |
|
Statement showing evaluation of the Capital Investment Proposal A |
|||||||
|
Particulars |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Total |
|
After tax net cash inflows |
$30,000.00 |
$80,000.00 |
$100,000.00 |
$90,000.00 |
$80,000.00 |
||
|
Residual Value |
$30,000.00 |
||||||
|
Total Cash flow |
|
$30,000.00 |
$80,000.00 |
$100,000.00 |
$90,000.00 |
$110,000.00 |
|
|
PV Factor |
0.909090909 |
0.826446281 |
0.751314801 |
0.683013455 |
0.62092132 |
||
|
Discounted Cash flow |
|
$27,272.73 |
$66,115.70 |
$75,131.48 |
$61,471.21 |
$68,301.35 |
$298,292.47 |
|
Initial Investment |
$230,000.00 |
||||||
|
Net Present Value |
|
$68,292.47 |
|||||
|
Accumulated Cash flow |
-$230,000.00 |
-$200,000.00 |
-$120,000.00 |
-$20,000.00 |
$70,000.00 |
$180,000.00 |
|
|
Pay Back Period Years |
3.22 |
||||||
|
After tax net cash inflows |
$30,000.00 |
$80,000.00 |
$100,000.00 |
$90,000.00 |
$80,000.00 |
||
|
Less: |
|||||||
|
Depreciation |
$40,000.00 |
$40,000.00 |
$40,000.00 |
$40,000.00 |
$40,000.00 |
||
|
Accounting Net Profit |
|
-$10,000.00 |
$40,000.00 |
$60,000.00 |
$50,000.00 |
$40,000.00 |
|
|
Average Net Profit |
. |
$36,000.00 |
|||||
|
Initial Investment |
$230,000.00 |
||||||
|
Accounting rate of return |
|
|
|
|
|
|
16% |
|
Statement showing evaluation of the Capital Investment Proposal B |
|||||||
|
Particulars |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Total |
|
After tax net cash inflows |
$120,000.00 |
$170,000.00 |
$110,000.00 |
$90,000.00 |
$60,000.00 |
||
|
Residual Value |
$50,000.00 |
||||||
|
Total Cash flow |
|
$120,000.00 |
$170,000.00 |
$110,000.00 |
$90,000.00 |
$110,000.00 |
|
|
PV Factor |
0.909090909 |
0.826446281 |
0.751314801 |
0.683013455 |
0.62092132 |
||
|
Discounted Cash flow |
|
$109,090.91 |
$140,495.87 |
$82,644.63 |
$61,471.21 |
$68,301.35 |
$462,003.96 |
|
Initial Investment |
$450,000.00 |
||||||
|
Net Present Value |
|
$12,003.96 |
|||||
|
Accumulated Cash flow |
-$450,000.00 |
-$330,000.00 |
-$160,000.00 |
-$50,000.00 |
$40,000.00 |
$150,000.00 |
|
|
Pay Back Period Years |
3.56 |
||||||
|
After tax net cash inflows |
$120,000.00 |
$170,000.00 |
$110,000.00 |
$90,000.00 |
$60,000.00 |
||
|
Less: |
|||||||
|
Depreciation |
$80,000.00 |
$80,000.00 |
$80,000.00 |
$80,000.00 |
$80,000.00 |
||
|
Accounting Net Profit |
|
$40,000.00 |
$90,000.00 |
$30,000.00 |
$10,000.00 |
-$20,000.00 |
|
|
Average Net Profit |
. |
$30,000.00 |
|||||
|
Initial Investment |
$450,000.00 |
||||||
|
Accounting rate of return |
|
|
|
|
|
|
7% |
|
Statement showing evaluation of the Capital Investment Proposal C |
|||||||
|
Particulars |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Total |
|
After tax net cash inflows |
$95,000.00 |
$95,000.00 |
$95,000.00 |
$95,000.00 |
$95,000.00 |
||
|
Residual Value |
$50,000.00 |
||||||
|
Total Cash flow |
|
$95,000.00 |
$95,000.00 |
$95,000.00 |
$95,000.00 |
$145,000.00 |
|
|
PV Factor |
0.909090909 |
0.826446281 |
0.751314801 |
0.683013455 |
0.62092132 |
||
|
Discounted Cash flow |
|
$86,363.64 |
$78,512.40 |
$71,374.91 |
$64,886.28 |
$90,033.59 |
$391,170.81 |
|
Initial Investment |
$300,000.00 |
||||||
|
Net Present Value |
|
$91,170.81 |
|||||
|
Accumulated Cash flow |
-$300,000.00 |
-$205,000.00 |
-$110,000.00 |
-$15,000.00 |
$80,000.00 |
$225,000.00 |
|
|
Pay Back Period Years |
3.16 |
||||||
|
After tax net cash inflows |
$95,000.00 |
$95,000.00 |
$95,000.00 |
$95,000.00 |
$95,000.00 |
||
|
Less: |
|||||||
|
Depreciation |
$50,000.00 |
$50,000.00 |
$50,000.00 |
$50,000.00 |
$50,000.00 |
||
|
Accounting Net Profit |
|
$45,000.00 |
$45,000.00 |
$45,000.00 |
$45,000.00 |
$45,000.00 |
|
|
Average Net Profit |
. |
$45,000.00 |
|||||
|
Initial Investment |
$300,000.00 |
||||||
|
Accounting rate of return |
|
|
|
|
|
|
15% |
|
Statement showing evaluation of the Capital Investment Proposal D |
|||||||
|
Particulars |
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Total |
|
After tax net cash inflows |
$60,000.00 |
$60,000.00 |
$60,000.00 |
$60,000.00 |
$60,000.00 |
||
|
Residual Value |
$40,000.00 |
||||||
|
Total Cash flow |
|
$60,000.00 |
$60,000.00 |
$60,000.00 |
$60,000.00 |
$100,000.00 |
|
|
PV Factor |
0.909090909 |
0.826446281 |
0.751314801 |
0.683013455 |
0.62092132 |
||
|
Discounted Cash flow |
|
$54,545.45 |
$49,586.78 |
$45,078.89 |
$40,980.81 |
$62,092.13 |
$252,284.06 |
|
Initial Investment |
$230,000.00 |
||||||
|
Net Present Value |
|
$22,284.06 |
|||||
|
Accumulated Cash flow |
-$230,000.00 |
-$170,000.00 |
-$110,000.00 |
-$50,000.00 |
$10,000.00 |
$110,000.00 |
|
|
Pay Back Period Years |
4.22 |
||||||
|
After tax net cash inflows |
$60,000.00 |
$60,000.00 |
$60,000.00 |
$60,000.00 |
$60,000.00 |
||
|
Less: |
|||||||
|
Depreciation |
$50,000.00 |
$50,000.00 |
$50,000.00 |
$50,000.00 |
$50,000.00 |
||
|
Accounting Net Profit |
|
$10,000.00 |
$10,000.00 |
$10,000.00 |
$10,000.00 |
$10,000.00 |
|
|
Average Net Profit |
. |
$10,000.00 |
|||||
|
Initial Investment |
$230,000.00 |
||||||
|
Accounting rate of return |
|
|
|
|
|
|
4% |
Based on the above calculation it can be said that proposals that satisfies all the three capital budgeting criteria are:
The company should accept the proposal that is more beneficial because the funds are limited and the projects are mutual exclusive. On comparing the Proposal A with Proposal C it can be seen that payback period of Proposal C is less than the proposal A. On comparing the Accounting rate of return, it can be seen that ARR of proposal A is 16% whereas the ARR of proposal C is 15%. On the other hand, NPV of Proposal C is higher than that of Proposal A. Based on the above discussion it can be said that Proposal C should be accepted as it is better in more criteria than proposal A.
The report is efficiently showing that there are certain variances that have positively affected the entity and some variances have affected the entity in a negative way. The income variance report is helping us to understand that our sales effort have to increased significantly and at the same time will have to work on improving the stock turnover ratio (Burger et al. 2015).
The recommendations for the next 3 months would be as follows:
The income variance report for the December quarter indicates that there have been significant variances in the performances of the entity. It is found that most of the variances have significantly and negatively affected the entity. The cost of goods sold in more than we expected (Webb 2016). The entity has been able to achieve more sales than expected but is still incurring more advertisement costs than budgeted. This should be checked so as to save on the cost of advertising. In order to sustain its operations it immediately needs to reduce its employee costs too.
The recommendations for the next three months will be as follows:
Reference
Agarwalla, S.K., Barua, S.K., Jacob, J. and Varma, J.R., 2015. Financial literacy among working young in urban India. World Development, 67, pp.101-109.
Burger, R.H., Kaufman, P.T. and Atkinson, A.L., 2015. Disturbingly weak: The current state of financial management education in library and information science curricula. Journal of Education for Library and Information Science, 56(3), p.190.
Chen, G.G., Weikart, L.A. and Williams, D.W., 2014. Budget tools: Financial methods in the public sector. CQ Press.
Chu, L. and Li, D., 2015. Research on College Financial Budget Performance Evaluation. In LISS 2013 (pp. 673-678). Springer, Berlin, Heidelberg.
Finkler, S.A., Smith, D.L., Calabrese, T.D. and Purtell, R.M., 2016. Financial management for public, health, and not-for-profit organizations. CQ Press.
Webb, A., 2016. Budget Management. In Handbook of Intensive care: Organization and Management (pp. 339-357).
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