Reviewing Master Budget And Developing Contingency Plan For Managing Risk

Role of Sales Manager in Cost Allocation

The Sales General Manager, Sam Gellar has asked you to review the master budget and cost centre budgets prepared by the Senior Accountant. She would like you to meet with her to discuss whether the budget projections are achievable, accurate, understandable and fair.She would like you to look at the budget for your cost centre closely, note any changes you think are necessary, develop an argument for the changes and negotiate those changes with her.

It has come to the attention of the managing director, Tom Copeland, that due to the current economic climate, sales volume may be 20% below target this financial year. Tom is worried that this may severely impact profit projections. The company can accept as much as a 10% variance in profit projections; however, more than this could severely affect the company’s ability to pay obligations and invest. Reliable data to determine whether the risk has eventuated should be available by mid Q2, when sales data for the company’s product are in.As a special project, the managing director has asked you to perform a risk assessment and develop a contingency plan to manage the risk of sales falling 20%.As per organisational policy you should use the contingency plan template provided.

INTRODUCTION

Budget is a measurement and setting parameters to act in the according way as similar to such measurement or parameters. Budget is prepared to guide the operations of the organization. It is a way to keep a check on the activities of all the managers as well as staffs along with the variance reports. In the present scenario the ability to plan the financial management approaches and managing resources efficiently is the basic ingredient. Classifying the budget plan and negotiating the changes with the mangers is the need of the hour. Also the risk identification and its analysis of the budget are required. After the above we need prepare a contingency plan to prevent or minimize the risk. The areas of the budget are not only inaccurate and unclear but also not achievable, we need to identify it and prove the same. The usage of basic accounting principles is required to identify changes and negotiate the same with the manager. In the financial management of an organization its organizational requirements, its policies, its procedures all are need to be taken care of. Also the principles and techniques are involved in the preparation of the budget to a large extent. (Cost allocation, 2015)

In Task A the role played is of a manager of sales centre A, based in Adelaide. The cost allocation of this centre depicts $20,000 as commission, $100,000 as wages, $3,000 as telephone expense and $1,000 as the expense for office supplies. All in total the expense budget shows an expense of $124,000 for this centre. This centre has a larger employee base and higher number of sale staffs. It outsells the other two centres and expects to sell as much volume as put together by the two centres.

Importance of Efficient Cost Allocation

The cost allocations need to depict the needs and importance of the centres sales volume but in the budget all the centres are allocated with equal cost in same proportion. Cost allocation is a process of distributing the cost of the organization in such a manner that it shows the actual consumption of such cost in providing any product or services. Some direct costs which are only related to the particular centres are directly allocated to such centre without any sharing as it is directly allocable. Such expenses are solely consumed in the preparation of product or providing any services by one such particular centre. This type of cost need not to allocated, they are known as directly allocable cost. Some costs which are common in nature since more than one cost centre is consuming its benefits and cannot be directly allocable for example rent of the warehouse or the electricity of the factory. In this scenario the cost are allocated on some rational basis like the area of the warehouse used by each centre or the units consumed by each product of different centre. (Averkamp, 2015)

In the past years this allocation of indirect costs were done on an arbitrary basis but with the passing years new and more logical basis have been found to allocate these resources such as direct labour hours, machine hours, space usage, etc. An efficient allocation method will depict the correct cost requirement of that particular centre. It will help the manger to know what their cost recovery is. They will be encouraged to see that their sales volume is able to recover their cost. Not only that the mangers of the sales cost centre will also be informed about their actual contribution in the net profit of the organization and can accordingly negotiate their incentives and profit share if any. They can also make a trade off between their costs incurred and the products sold or services provided to set the benchmark between the internal costs and the outsourcings. (What are the steps in preparing a budget?, 2015)

The preparation of the master budget follows certain guidelines which can be discussed as follows:

The budget of the last fiscal year is update with certain necessary changes. This is generally done when the organization has no much change in its operations or structure.
Before the preparation of the master budget the bottleneck of the organization is identified on the basis of capacity level of all the essentials. Once the bottleneck is identified it gets easier to find the production level as well as purchase level.
Availability of funds is also very essential while preparing a budget since the application of fund cannot exceed the sources of funds.
Certain step costs arise when activity level is increased. These step costs need to be taken care of as these arise occasionally on certain level change.
Revenue forecast is quite essential as it is the basis for many of the centres and other budgets apart from the master budget so as to keep their sales volume determined.
After identifying the bottleneck and preparing the master budget all the department budgets are updated and followed accordingly.
If necessary sometimes the budget model are also updated or even changed if required.
The budget is reviewed for any discrepancies or biasness and then distributed to all the managers and recipients who are authorized to receive so.
The budget is loaded into the system i.e. the financial software so that a variance report is generated through system itself at the end of the period. (How to prepare budget, 2015)

In the present case the master budget is prepared for the financial year 2011-2012 which is further bifurcated in quarterly details. Although the quarterly details of all the expenses and revenue items is given but it does not show a true and fair view of the quarterly activities. As we can see in the budget that the total expense or the revenue are equally divided in all the four quarters and this is absolutely abrupt. It is mentioned in the given case study that generally the in all the other three quarters the sales is 30% lower when compared with quarter 2. If such is the case then the sales of all the four quarters cannot be same as shown $750,000. This kind of practice will not show the true and correct view of that particular quarter’s achievement or failure. At the same time it is also mentioned that Q2 sales depends upon the completion of 90% of repair & maintenance but the uniform cost of $12,500 throughout the year in every quarter prevents the readers of the budget to know the actual sale of Q2. Few expenses which are constant throughout the year and are expended annually will be shown equally each quarter but the expenses which are directly related to the particular quarter and are related to sales directly should be shown particularly to that quarter. This will help us know the actual profit of that particular quarter and we can improve and work on our discrepancies from the next quarter. (Revenue Allocation, 2011)

Preparation of Master Budget

Although the tax is paid annually on the final profit figure at the yearend but the advance tax paid in the regular interval throughout the year can only be calculated on correct basis if the revenue and expenses are correctly deducted quarterly. This will allow the tax payer to avoid any delay or extra payments unnecessarily. (Definition of Revenue Allocation, 2015)

Risk is the probability of changing a threat into event resulting in a disaster depending upon the nature of its impact. The Managing Director, Tom Copeland wants us to identify and analyse the risk of Big Red Bicycle Pty ltd. so as to assess it and mitigate the same. He also wants us to prepare contingencies plan regarding those identified risks. (Team, 2012)

As per the given scenario of the enterprise it can be seen that the organization is selling only in the domestic market i.e. its sales are limited to the nation boundaries, but they are planning to outsource their production to the overseas industries so as to take advantage of the reduced costs. In this process the company might land up into a fiasco since the import duties of the product while bringing it back to Australia might even surpass the benefit of the reduced cost overseas. If the company really want to enjoy the reduced cost benefit they should find market overseas in that particular nation and complete their operating cycle in that nation itself. (Fry, 2014)The further analysis of the organization’s data mentions that it has the profit target of $1,000,000 which is not far from the present earnings before interest and tax i.e. $938,500. The problem is that this present figure is even before deducting interest which means the risk of higher interest expense will make it more difficult to reach the target. The forecast says that due to economic downturn the sales are going to fall also the wage expense are going to rise this all are the risk of impacting the net profit adversely. (Risk Management Process)

Organization wishes to diversify its product range in order to reduce the exposure of poor sales in one product but the organization must keep in mind that diversifying its product range will also distribute its concentration and focus over one product production. At the same time company might lose its core competency over one product and will incur extra CAPEX which will increase the cost. Despite all such cost incurred it is also possible that market does not accept the new product, this will adversely impact the profit figure. (Risk Management Approach to Budget Planning)It has been negotiated that the sales team are now going to get 2.5% as commission instead of 2%. Now if the sales volume does not compensate the same then it is again going to pull down the profit element.

The forecast of 20% lower sales volume is expected bring down the profit as mentioned above, it is also analysed that the enterprise can only bear the variance of 10% in the profit figure. Variance more than that, will affect the ability to meet its obligations or invest. As a result, if such happens then it will impact the goodwill of the organization and is going to hamper the credibility of the organization. (R. Craig Finley, 2015)As per the software applications used in the reporting purpose the organization is going to produce all its accounting information data from its system i.e. MYOB accounting system whereas generating its variance report from the excel format which is easily editable. (Summary of Directorate Based Budget Risk)

Contingency Plan Company name: Big Red Bicycle Pty Ltd Person developing the plan: Name Position
Risk identified: 1.Risk of high duties paid due to overseas production and domestic sale. 2Risk of higher interest expense. 3.Risk of losing core competency due to newly diversified product range. 4Risk of not recovering the increased sales commission. 5.Risk of losing goodwill and credibility due to unmet obligations. 6. Risk of tampering with important data of the organization.
Strategies/activities to minimise the risk	By when	By whom
1.Selling the product overseas along with its production overseas and completing the operating cycle there itself.	By the same accounting year	CEO MD & CFO
2.Funding should be made from the source which does not increase the interest expense, such as issuing equity shares after redeeming the interest bearing funding.	During the year, as soon as possible to reduce the interest expense.	CFO, Operations General Manager
3.Focusing on Total Quality Management and take proper steps to promote the new product so that customers are able to trust it and accept it.	Since the very beginning of the production process. Even before that will be good.	MD, Production Manager & Sales Manager
4.Increased sales commission will encourage the sales staff but still if it is not recovered then trying to reduce the other cost will save the impact on profit figure.	In the present accounting year.	Operations GM, Sales GM & HR Manager
5. Avoid investing at the period of economic downturn & poor sales scenario. Also try to cut down the extra obligations.	Throughout the downturn phase.	MD & CFO
6.Keep the data password protected and allow only in the authorized hands. Also some features in excel like Macros can be used to generate the reports.	At the time of preparing reports.	Operation GM & Senior Accountant