Preparing Budgets And Overhead Allocation

Capital expenditure budget

1. There are various kinds of companies, which utilize distinct types of budgets within their operations in order to enhance the availability of their financial resources. Such budget may be either a fixed budget or a flexible budget. A flexible budget can be referred to as the budget wherein a company is capable of making in a budget based on the volume of its operations (Robinson & Last, 2009). For instance, if a manufacturer ascertains that the cost of his supplies and electricity is $20 per hour. He is also well aware of the fact that the depreciation, supervision, and other fixed costs of the factory is $50000 per month. Moreover, the production inventories operate around 4000 and 7000 hours every month. Therefore, from this situation, it can be determined that the flexible budget of the manufacturer is $50000+$10 per month. The major goal of evaluation of performance is to offer an equitable measurement of the contribution of employees to the workforce, safeguard both the employees and employers and produce appropriate appraisal documents (Venanci, 2012).
2. It can be noted that apart from the cash budget of a company, it is also under an obligation to prepare several other kinds of budgets. Furthermore, the budgets that are required to be prepared before the preparation of cash budget are as follows:

Expenses related to such budget can only be recorded in the tenure in which these have incurred. Furthermore, if a capital asset is purchased by the company, then the same is required to be reflected on the payment side of the financial statement whereas if a capital asset is sold by the company, then the amount attained in relation to the same must be reflected on the receipts side (Robinson & Last, 2009).

Expenses associated with such kind of budget are always recorded in the period in which the same are already paid. Furthermore, expenses that are outstanding in nature does not form part of such budget.

When the company attains successful sales within its operations, the same are recorded in the cash budget or sales budget when the amount related to the same are adequately attained from the debtors or customers respectively (Robinson & Last, 2009).

1. Operating cycle can be referred to as the average period of time that is necessary for a business enterprise to facilitate an initial cash outlay so that production of goods can be undertaken, the same goods can be successfully sold to the consumers, and cash in respect of the same is properly attained from those customers. Such operating cycle is very relevant for making an estimate of the amount of working capital that is required by a company to enhance or develop its operations in the market (Shim & Siegel, 2009).

Cash cycle, on the other hand, can be defined as the computation of cash flow that plays a key role in measuring the time that is consumed by a company to transform all its investments into inventories, and other resource inputs into liquid cash. Furthermore, the reason why it is important to understand the elements of cash cycle and operating cycle can be attributed to the fact that it assists in evaluating all the requirements of a company and also plays a vital role in evaluating the working capital requirements as well.

There are different kinds of ratios that can be used to evaluate the management effectiveness of working capital. Some of them are as follows:

This ratio is the ratio that plays a key role in reflecting how many times the company has replaced or sold its inventories within a period of time.

The ratio of current assets divided by current liabilities is called the working capital ratio of a company.

1. Accounting is a very significant practice for all types of enterprises including government enterprises. The reason behind this can be attributed to the fact that even if a government company does not carry out its activities for the objective of attaining profits, yet it is under an obligation to prepare and maintain effective financial statements so that the users can be reasonably informed of the transactions taking place in the books of accounts. Besides, such accounting practice can assist the enterprises to reflect all the significant details like profitability, liquidity, and financial position of an enterprise. Nevertheless, such accounting can be regarded as a service activity because it assists in offering quantitative details of financial nature to all the stakeholders that can further be utilized in making relevant economic decisions. Therefore, it cannot be stated that government enterprises are under an obligation to discard preparation and maintenance of accounting practices just because of the fact that they undertake their operations, not for the purpose of attaining profits. In order to modify and enhance the flow of operations within an enterprise, every enterprise including government enterprises must prepare accounting system so that they can easily pave a way for developing their future effectiveness. Overall, even though there are no profits occurring to a government enterprise, yet they are responsible to reflect the transactions taken place for the benefit of the general public (Needles & Powers, 2013). Hence, without preparation of accounting system, government enterprises cannot penetrate the market effectively because the users of financial statements want proper disclosure of every transaction accruing within the enterprise.
2. There are various types of objectives of a costing system that plays a key role in smoothening the operations of an entity. These objectives are as follows:

• Costing system can play a key role in minimizing the costs because deviations or trends can be ascertained with the help of such system that can be taken into account to make proper decisions (Spiceland et. al, 2011).
• Costing system can play a vital role in the preparation of cost reports that further assists in the simplification of the procedure and refining of other operations.
• Costing system can assist in the preparation of various budgets for an enterprise so that they can analyze their inflow and outflow of cash (Spiceland et. al, 2011).
• Costing system can assist in assigning various costs to the work in progress, material, and finished goods as a whole.
• Costing system can also assist in controlling various kinds of costs so that the efficiency of an enterprise can be easily measured. In simple words, enhancement of an entity’s efficiency can be attributed to the fact that a proper costing system prevails within its framework.

Therefore, with the help of a costing system, costs can be properly allocated with flexibility and ease, thereby resulting in the attainment of the proper outcome.

1. Computation of Manufacturing overhead rate for wonder product

Manufacturing overhead for wonder product = 598,080

Machine hours = 7,000

            Manufacturing overhead rate = Manufacturing overhead / total machine hours

= 598080/7000

=85.44 per machine hour

1. Computation of Administrative overhead allocation rate

Administrative overhead for wonder product = 698,520

Direct labor hours = 14.000

Administrative overhead allocation rate = Administrative overhead / direct labour hours

             =695520/14000

1. Direct material = 19,000

Manufacturing overhead = 85.44 * 400

= $34176

Administrative overhead = 49.68 * 750

= $37260

Hence, total cost = sum of direct material, manufacturing overhead and administrative overhead

=19000+34176+37260 = $90436

Therefore, profit = 40% of 90436 = 36174

            Total sales value = $(90436+36174) = $126610

1. It is vital to allocate the overhead while quoting jobs or ascertaining the prices because it helps with the information related to the process of decision making. The prices need to be set up by the management. The prices are based upon the products cost that means the prices should not include direct cost along with overheads. Secondly, the use of resources is efficient in nature. There are many activities taken into consideration for producing a product that consists of setting up of production machinery, evaluating the final product and tracing the products that are defective in nature (Charles, 2012). If the products are chargeable for utilizing the activities then the manager will contain an incentive so that the activities can be efficient in nature.

There are various problems associated with the overhead allocation that needs to be corrected. The overhead allocation understates the business profitability that is above the budgeted volume. The assignment of this overhead is done irrespective of the volume. When the sales surpass the budgeted expectations, the accounting segment will charge such allocation to the individual product (Vanderbeck, 2013). This will be done considering the fact that the company has already produced enough business to grasp the actual overhead. Such false charges will be regularly added and the profits will be understated.

1. Predetermined rate can be stated as the rate that is utilized for the application of manufacturing overhead to work when the inventory is in progress. The computation of the predetermined overhead rate is done before the period starts. The initial step is to ascertain the activity base amount that is needed to back up the operations. The second step is to ascertain the cost of manufacturing at the level of activity. The third step lies in the computation of the predetermined rate by dividing the overhead that is estimated by the amount for the cost driver (Lanen et. al, 2008). It is essential and vital for every company to know the predetermined rate for the business as it helps in keeping track of the expenses and links with the sales and the production. The predetermined rate enables in ascertaining the approximate total cost of every job.

References

Lanen, W. N, Anderson, S & Maher, M. W 2008, Fundamentals of cost accounting, NY: Hang Loose press.

Needles, B. E.&  Powers, M 2013, Principles of Financial Accounting. New York Press

Robinson, M & Last, D 2009, Budgetary Control Model: The Process of Translation. Accounting, Organization and Society, NY Press

Shim, J. K & Siegel, J G 2009, Modern Cost Management and Analysis, Barron’s Education Series

Vanderbeck, E J 2013,  Principles of Cost Accounting, Oxford university press

Venanci, D 2012,  Financial Performance Measures and Value Creation , State of art . New York: Springer.

Spiceland, J, Thomas, W & Herrmann, D 2011, Financial accounting, New York: McGraw-Hill/Irwin University Press.