Part A-
Master Budget’s Preparation
| Sales Budget: | ||||
| Particulars | October | November | December | January |
| Sales Volume (in units) | 64500 | 51600 | 58050 | 77400 |
| Selling Price (per unit) | $6,110.00 | $6,110.00 | $6,110.00 | $6,110.00 |
| Budgeted Sales Revenue | $394,095,000 | $315,276,000 | $354,685,500 | $472,914,000 |
Figure 1: (Image showing Sales Budget)
Source: (Created by Author)
| Production Budget: | ||||
| Particulars | October | November | December | January |
| Sales Volume in units | 64500 | 51600 | 58050 | 77400 |
| Add: Closing Inventory of Finished Goods | 30960 | 34830 | 46440 | |
| 95460 | 86430 | 104490 | ||
| Less: Opening Inventory of Finished Goods | 41300 | 30960 | 34830 | |
| Budgeted Production Volume | 54160 | 55470 | 69660 |
Figure 2: (Image showing Production Budget)
Source: (Created by Author)
| Direct Labour Budget: | |||
| Quarters | |||
| Particulars | October | November | December |
| Budgeted Production Volume | 54160 | 55470 | 69660 |
| Labor Hours required per unit | 8 | 8 | 8 |
| Total Direct Labor Hour Required | 433280 | 443760 | 557280 |
| Direct Labor Cost per Hour | $50.00 | $50.00 | $50.00 |
| Budgeted Direct Labor Cost | $21,664,000 | $22,188,000 | $27,864,000 |
Figure 3: (Image showing Direct Labor Budget)
Source: (Created by Author)
| Purchase Budget: | ||||
| Particulars | October | November | December | January |
| Budgeted Sales Volume | 64500 | 51600 | 58050 | 77400 |
| Budgeted Production Volume | 54160 | 55470 | 69660 | |
| Cups required per unit | 4 | 4 | 4 | |
| Total Cups Required | 216640 | 221880 | 278640 | |
| Add: Closing Inventory of Cups | 41280 | 46440 | 61920 | |
| 257920 | 268320 | 340560 | ||
| Less: Opening Inventory of Cups | 51600 | 41280 | 46440 | |
| Budgeted Purchase Volume (in units) | 206320 | 227040 | 294120 | |
| Cups Cost per unit | $77.00 | $77.00 | $77.00 | |
| Total Cost of Cups | $15,886,640 | $17,482,080 | $22,647,240 | |
| Vanes required per unit | 5 | 5 | 5 | 5 |
| Total Vanes Required | 270800 | 277350 | 348300 | |
| Add: Closing Inventory of Vanes | 51600 | 58050 | 77400 | |
| 322400 | 335400 | 425700 | ||
| Less: Opening Inventory of Vanes | 64500 | 51600 | 58050 | |
| Budgeted Purchase Volume (in units) | 257900 | 283800 | 367650 | |
| Vanes Cost per unit | $103.00 | $103.00 | $103.00 | |
| Total Cost of Vanes | $27,892,400 | $28,567,050 | $35,874,900 | |
| Budgeted Direct Material Purchase | $43,779,040 | $46,049,130 | $58,522,140 |
Figure 4: (Image showing Purchase Budget)
Source: (Created by Author)
| Direct Material Budget: | |||
| Particulars | October | November | December |
| Total Cups required for Production | 216640 | 221880 | 278640 |
| Cups Cost per unit | $77.00 | $77.00 | $77.00 |
| Total Cups Cost | $16,681,280 | $17,084,760 | $21,455,280 |
| Total Vanes required for Production | 270800 | 277350 | 348300 |
| Vanes Cost per unit | $103.00 | $103.00 | $103.00 |
| Total Vanes Cost | $27,892,400 | $28,567,050 | $35,874,900 |
| Budgeted Direct Material Cost | $44,573,680 | $45,651,810 | $57,330,180 |
Figure 5: (Image showing Direct Material Cost Budget)
Source: (Created by Author)
| Manufacturing Overhead Budget: | |||
| Particulars | October | November | December |
| Direct Labour Hour | 433280 | 443760 | 557280 |
| Indirect Labor Cost per DLH | $54.18 | $54.18 | $54.18 |
| Total Indirect Labor Cost | $23,475,110 | $24,042,917 | $30,193,430 |
| Power Cost per DLH | $5.16 | $5.16 | $5.16 |
| Total Power Cost | $2,235,725 | $2,289,802 | $2,875,565 |
| Variable Maintenance Cost per unit | $37.78 | $37.78 | $37.78 |
| Variable Maintenance Cost | $16,368,356 | $16,764,267 | $21,052,800 |
| Fixed Maintenance | $29,340,333 | $29,340,333 | $29,340,333 |
| Total Maintenance Costs | $45,708,689 | $46,104,600 | $50,393,133 |
| Other Variable Cost per unit | $38.70 | $38.70 | $38.70 |
| Other Variable Cost | $16,767,936 | $17,173,512 | $21,566,736 |
| Other Fixed Cost | $12,900,000 | $12,900,000 | $12,900,000 |
| Other Manufacturing Costs | $29,667,936 | $30,073,512 | $34,466,736 |
| Supervision | $36,120,000 | $36,120,000 | $36,120,000 |
| Depreciation | $3,225,000 | $3,225,000 | $3,225,000 |
| Rates & Utilities | $2,665,100 | $2,665,100 | $2,665,100 |
| Budgeted Manufacturing Overhead | $143,097,560 | $144,520,930 | $159,938,965 |
Figure 6: (Image showing Manufacturing Overhead Budget)
Source: (Created by Author)
| Labor Hours | Total Maintenance Cost |
| 1244900 | $76,368,000 |
| 1419000 | $82,947,000 |
| 1302900 | $78,561,000 |
| 1186800 | $74,175,000 |
| Highest Labor Hours | 1419000 |
| Lowest Labor Hours | 1186800 |
| Difference | 232200 |
| Highest Maintenance Cost | $82,947,000 |
| Lowest Maintenance Cost | $74,175,000 |
| Difference | $8,772,000 |
| Variable Manufacturing Cost per unit | $37.78 |
| Fixed Maintenance Cost | $29,340,333 |
Figure 7: (Image showing Additional Calculations for Manufacturing Overhead Budget)
Source: (Created by Author)
| Cash Collection from Debtors: | |||
| Particulars | October | November | December |
| Total Sales Revenue | $394,095,000 | $315,276,000 | $354,685,500 |
| Collection in the month of Sales | $157,638,000 | $126,110,400 | $141,874,200 |
| Collection in the following month of Sales | $145,831,140 | $228,575,100 | $182,860,080 |
| Total Collection from Debtors | $303,469,140 | $354,685,500 | $324,734,280 |
Figure 8: (Image showing Total Collection from Debtors)
Source: (Created by Author)
| Cash Payment of Selling & Administration Expenses: | |||
| Particulars | October | November | December |
| Toatl Selling & Administrative Expenses | $82,334,250 | $65,867,400 | $74,100,825 |
| Due from Debtors | $251,433,000 | $394,095,000 | $315,276,000 |
| Bad Debts @2% | -$5,028,660 | -$7,881,900 | -$6,305,520 |
| Cash Payment for Selling & Administration Expenses | $77,305,590 | $57,985,500 | $67,795,305 |
Figure 9: (Image showing Total Collection from Debtors)
Source: (Created by Author)
| Cash Budget: | ||||
| Particulars | October | November | December | TOTAL |
| Cash Flow from Operational Activities: | ||||
| Collection from Debtors | $303,469,140 | $354,685,500 | $324,734,280 | $982,888,920 |
| Payment to Suppliers | -$43,779,040 | -$46,049,130 | -$58,522,140 | -$148,350,310 |
| Direct Labour Cost Paid | -$21,664,000 | -$22,188,000 | -$27,864,000 | -$71,716,000 |
| Indirect Labor Cost | -$23,475,110 | -$24,042,917 | -$30,193,430 | -$77,711,458 |
| Power Cost | -$2,235,725 | -$2,289,802 | -$2,875,565 | -$7,401,091 |
| Maintenance Charges Paid | -$45,708,689 | -$46,104,600 | -$50,393,133 | -$142,206,422 |
| Other Manufacturing Cost | -$29,667,936 | -$30,073,512 | -$34,466,736 | -$94,208,184 |
| Supervision | -$36,120,000 | -$36,120,000 | -$36,120,000 | -$108,360,000 |
| Rates & Utilities | -$2,665,100 | -$2,665,100 | -$2,665,100 | -$7,995,300 |
| Selling & Administration Expenses | -$77,305,590 | -$21,227,700 | -$26,442,780 | -$124,976,070 |
| Net Cash Flow from Operating Activities | $20,847,950 | $123,924,740 | $55,191,395 | $199,964,085 |
| Cash Flow from Investing Activities: | ||||
| Purchase of Land | -$33,540,000 | -$33,540,000 | ||
| Net Cash Flow from Investing Activities | $0 | -$33,540,000 | $0 | -$33,540,000 |
| Cash Flow from Financing Activities: | ||||
| Dividend Paid | -$1,141,650 | -$1,141,650 | ||
| Loan from Bank | $0 | |||
| Repayment of Loan | $0 | $0 | $0 | |
| Interest Paid | $0 | $0 | $0 | |
| Net Cash Flow from Financing Activities | $0 | -$1,141,650 | $0 | -$1,141,650 |
| Net Increase/(Decrease) in Cash Flows | $20,847,950 | $89,243,090 | $55,191,395 | $165,282,435 |
| Add: Opening Cash Balance | $3,225,000 | $24,072,950 | $113,316,040 | $3,225,000 |
| Closing Cash Balance | $24,072,950 | $113,316,040 | $168,507,435 | $168,507,435 |
Figure 10: (Image showing Cash Budget)
Source: (Created by Author)
| Cost of Goods Manufactured Statement: | ||||
| Particulars | October | November | December | TOTAL |
| Direct Material Consumed | $44,573,680 | $45,651,810 | $57,330,180 | $147,555,670 |
| Direct Labor Cost | $21,664,000 | $22,188,000 | $27,864,000 | $71,716,000 |
| PRIME COST | $66,237,680 | $67,839,810 | $85,194,180 | $219,271,670 |
| Manufacturing Overhead | $143,097,560 | $144,520,930 | $159,938,965 | $447,557,455 |
| COST OF PRODUCTION | $209,335,240 | $212,360,740 | $245,133,145 | $666,829,125 |
| Add: Adjustment for WIP | $0 | $0 | $0 | $0 |
| COST OF GOODS MANUFACTURED | $209,335,240 | $212,360,740 | $245,133,145 | $666,829,125 |
| Budgeted Production Volume | 54160 | 55470 | 69660 | |
| Cost of Goods Manufactured per unit | $3,865.13 | $3,828.39 | $3,518.99 | |
| Closing Stock of Finished Goods | 30960 | 34830 | 46440 | |
| Value of Finished Goods | $119,664,310 | $133,342,790 | $163,422,096 |
Figure 11: (Image showing Cost of Goods Manufactured Statement)
Source: (Created by Author)
| Income Statement: | ||||
| Particulars | October | November | December | TOTAL |
| Sales Revenue | $394,095,000 | $315,276,000 | $354,685,500 | $1,064,056,500 |
| Cost of Goods Manufactured | $209,335,240 | $212,360,740 | $245,133,145 | $666,829,125 |
| Add: Opening Finished Goods Inventory | $272,993,000 | $119,664,310 | $133,342,790 | $272,993,000 |
| Cost of Goods Available for Sale | $482,328,240 | $332,025,050 | $378,475,935 | $939,822,125 |
| Less: Closing Finished Goods Inventory | $119,664,310 | $133,342,790 | $163,422,096 | $163,422,096 |
| Cost of Goods Sold | -$362,663,930 | -$198,682,260 | -$215,053,839 | -$776,400,029 |
| GROSS PROFIT | $31,431,070 | $116,593,740 | $139,631,661 | $287,656,471 |
| Selling & Administration Expenses | -$77,305,590 | -$21,227,700 | -$26,442,780 | -$124,976,070 |
| Bad Debts | -$5,028,660 | -$7,881,900 | -$6,305,520 | -$19,216,080 |
| NET OPERATING INCOME | -$50,903,180 | $87,484,140 | $106,883,361 | $143,464,321 |
Figure 12: (Image showing Income Statement)
Source: (Created by Author)
Part B
Analysis of Production Plan
The company which is provided in the case study is Wittgenstein Pty ltd which is engaged in the manufacturing process and the business produces anemometers. Anemometers are used by many companies for generation of wind powered electricity in Australia. As per the requirement of the question, the production manager of the business is considering implementation of a new production plan which will be boasting the production process and generate more revenues for the business. The production manager is also considering the impact of such a program on the revenue and sales of the business which in his opinion will best to confirm with the help of forecasting which will be done with the help of master budget (Lawson et al. 2015). As per the management of the company, the plan of the management is to estimate all expenses and revenues which the business is likely to earns during the quarter which begins from October and ends on December. In order to analyze the estimated costs which are related to the investment in the program of production, both direct and indirect costs will be included in the budget of the business. In addition to this, the management of the company will be following flexible budgeting system which will be including cash budget, direct material budget, sales budget, production budget, direct labor budget, cost of goods manufactured expenses, income statement and cash which are collected from debtors of the business (Cox 2014).
As per the sales budget of the business, the management anticipates that the volume of sales will be slightly falling for the first quarter. The sales volume of the business for the month of January is estimated to be highest but January does not fall in the quarter which is being considered for the analysis (Ahmad 2013). The highest sales volume which the management anticipates to get is in the month of October which is 64500 units. Due to the fall in the sales volume of the business for the month of November and December will result in low sales revenue as shown in figure 1 which is shown to be $ 3546,85,500 for the month of December. The sales revenue for the month of October is shown to be $ 3152,76,000. The budgeted revenue which is earned during the quarter fall can also be attributed to the constant selling price. As per the production budget, the volume of production is also anticipated to increase as to increase due to the production plan of the business. The business anticipates that the production plan will be promoting the efficiency of the business in terms of production volume (Andersen 2013). The direct labour budget shows that as the production volume of the business increases the total direct labour hour which is anticipated by the business is also expected to increase (Kamp, Morandi and Østergård 2016). The total direct labour hour required for the month of December is expected to be the highest which is shown in the budget as 557280 hours which has significantly increased from the previous month. The budgeted direct labour cost for the month of December is anticipated to be highest which is shown as $ 278,64,000 which has increased from previous month which was $ 221,88,000. The purchase budget of the company shows that the main materials which are used in the production of anemometer is cups and vanes (Pazarceviren and Celayir 2014). The budgeted direct material which are expected to be required by the business for the month of December is shown to be $ 585,22,140. The same has increased from the previous year’s estimate which is shown to be $ 460,49,130. The direct material budget shows that the total numbers of cup which are required for the month of December is 278640. The total number of vanes which are required for the month of December is shown to be 348300. The budgeted direct material cost for the month of December is shown to be $ 573,30,180 which is highest during the quarter. The Manufacturing overhead of the business shows that the business has certain indirect costs which are power costs, maintenance costs, other manufacturing and variable costs and indirect labour costs. The budgeted manufacturing overhead which is shown in the master budget of the business is shown to be $ 1599,38,965 which is for the month of December and the same has increased from previous month which is shown to be $ 1445,20,930. The increase in the indirect costs of the business can be related to the increase in the production volume of the business. Therefore, it is quite natural for any business to face a rise in the indirect cost of the business due to increase in the production volume of the business.
The collection from debtors shows that the business has been involved in credit sales which is fact as mentioned in the case study all sales of the business is on credit which makes the collection from debtors as the main source of revenue for the business (Vella 2016). The business has also anticipated that the business might be facing bad debt risks which are estimated to be at 2%. As per the budget, the amount which is due from the debtors of the business is estimated to be $ 3152,76,000. The cash budget forms an important part of the master budget which is prepared by the business. The cash budget shows all the cash revenues and cash expenses are recorded which the business anticipates to earn or incur during the quarter (Cotter and Fritzsche 2014). The net cash inflows from operation is shown in the budget as $ 551,91,395 for the month of December and the same has reduced from the previous month estimate which is shown as $ 1239,24,740. The business also anticipates that the business will be purchasing a property during the quarter which is included in the cash budget under cash from investing activities of the business. The business also expects to declared and pay dividend during the quarter. The closing cash balance for the month of December is shown to be $ 1685,07,435 which is highest cash balance which is estimated for the quarter. The income statement of the business which is drafted in the master budget shows that the business is anticipated to generate profit on an overall basis during the quarter which shows that the production program of the business is profitable (Bartov and Mohanram 2014). Therefore, the business should accept and implement the production program for increasing the overall production volume of the business.
Part C
Participative and Imposed Budget
In case of Participative budget, the management considers the views and opinions of the employees and the lower level management of the business and integrates the same in the budget which is being prepared by the management (Walther and Skousen 2014). The most basic benefit which such a budget offers to the management is that it brings about a lot of views and ideas which can be implemented or incorporated in the budget, thereby making the budget prepared with some contribution from everyone in the company. The budget brings about a string sense of unity for achieving the business goals and promotes collaboration among different functional department of the business (Lavarda and Almeida 2013). The budget is mostly used in businesses where the management considers the employees as an asset of the business and involves them in the decision-making processes.
In case of an imposed budget, the major decisions which are policy setting, goal setting, objectives of the business, departmental functions are all set by the top-level management of the business and the lower level employees and staff have no role in the same (Macintosh 2013). In such a case, the top-level management basically imposes the elements of the budget on to the lower level sub ordinates without taking any views and opinion from them. The task of the departments and lower level employees and staff is to be follow the policies which are set by the senior management of the company.
In the case of Wittgenstein Pty ltd, the management of the business should follow participative budget as this will ensure that the employee and staff of the business plays an active role in day to day management of the company and also strive to achieve the goals which are related to the business. In addition to this, the master budget which is formed should also incorporate the ideas of the lower level staffs if such ideas are useful so that the business is able to produce an effective budget.
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