Bus106 Accounting For Business And Assessment Answer

Answers:

Requirement 1:

Workings:

Cash Budget:

Cash budget can be defined as the estimation of cash receipts and cash disbursements for a particular period in future. It includes the revenues, incomes and other sources of cash inflows and cash outflows, caused by expenses or debt repayments. Business firms prepare the cash budget to project the cash position and also to estimate the additional cash requirements for a certain period (Gitman et al. 2015).

The cash budget prepared for Smith & Co., exhibits that the company would face shortage of cash funds for the period from January to April. The cash receipts from sales would not be sufficient to cover its cash outflows for operation.

Material Budget:

Material budget is an estimation of the materials, which has to be purchased for completing the targeted production in a certain period. It provides both the volume of the materials, required, and the amount to be required for purchasing the budgeted volume of materials. It is very beneficial to maintain the stock levels properly so that the production would not be hampered for shortage of materials. Moreover, the management can also arrange the funds required for purchasing the required materials in advance accordingly.

Smith & Co. requires three different materials for manufacturing the final product. The material budget helps the company to ascertain the purchase cost of each material and the total purchase cost for every month. The material budget is also helpful for preparing the payment schedule for suppliers, which is, in turn, required for preparing the cash budget also.

Labor Budget:-

Labor budget is prepared for ascertaining the labor hours, required for producing a targeted volume of goods and the estimate the cost for obtaining the estimated labor hours. Certain organizations, which require different forms of direct labors, break down the direct labor hours and costs as per the different categories of labors to determine the labor costs for various labor categories (Klychova et al. 2014).

The labor budget of Smith & Co. would be very useful to prepare the cash budget and the master budget. It also indicates that the labor costs for manufacturing the budgeted production volume are very high than the projected sales revenue.

Recommended Changes:

It has been observed from the cash budget that Smith & Co. would have negative balance over the stated period. It indicates that the cash outflows for the stated period of the company are higher than the cash inflows. From further analysis of the budget, it has been noticed that the labor cost is too high in comparison to sales revenue and other expenses. The following recommendations are given to change the scenario:

Requirement 3:

Smith & Co. has received an order to sell 80,000 units at a special price of $25 per unit, whereas, the general selling price per unit of the product is $32 per unit. However, there are few factors, which should be considered to evaluate the proposal. The factors are discussed below

• Production Capacity: The management should measure its current production capacity and check whether the company can produce 80,000 units in addition to its current sales volume. If the production capacity is mower than the special order volume, then the order should not be accepted (Coates IV 2014).
• Affect on Normal Sales: The special order price per unit is lower than the normal selling price per unit. Hence, it must be ensured that the special order should not affect the current sales volume highly.
• Profit Volume: The management must compare its current profit volume with the expected profit, to be earned for accepting the order. If the profit for accepting order would be lower than the current profit volume, then it is better to avoid this offer (Anderson et al. 2015).

References:-

Anderson, D.R., Sweeney, D.J., Williams, T.A., Camm, J.D. and Cochran, J.J., 2015. An introduction to management science: quantitative approaches to decision making. Cengage learning.

Braun, K.W., Tietz, W.M., Harrison, W.T., Bamber, L.S. and Horngren, C.T., 2014. Managerial accounting. Pearson.

Coates IV, J.C., 2014. Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications. Yale LJ, 124, p.882

DRURY, C.M., 2013. Management and cost accounting. Springer.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Klychova, G.S., Faskhutdinova, ?.S. and Sadrieva, E.R., 2014. Budget efficiency for cost control purposes in management accounting system. Mediterranean journal of social sciences, 5(24), p.79.