Financial Management Production and Material Budget

Question: Describe about the Financial Management for Production and Material Budget. Answer: Introduction In this given project I have to check the budget of VGL Ltd, which is the Distributor Company, as well as Milbourn Manufacturer which happens to be the manufacturer of the new and exciting product. For Milbourn Manufacturer we have to create different budgets also such as Material, Production and Labour Budget. While for VGL Ltd, we have make only the cash budget for the month of January, February, March, April. For the Milbourn Manufacturer we have to prepare the budget for the month of December, January, February and March. Milbourn and VGL Ltd are expecting the sales to start from 220000 units and gradually falling up to 100000 units in the month of May. VGL Ltd is expecting the sale price to $ 510 in the first two month and then gradually decreasing. Cash Budget Cash Budget for VGL Ltd. (Amount in $) Particulars January February March April Beginning Cash 1900000 (12410000) 49690000 109612500 Add: Sources Of Cash - Accounts Receivable Collected 22440000 89250000 81472500 60084045 Total Cash Available (A) 24340000 76840000 131162500 169696545 Less: Uses Of Cash - Direct Material From Milbourn 35200000 25600000 20000000 19200000 (160 * 120000) - Cash Expense 1550000 1550000 1550000 1550000 Total Usage Of Cash (B) 36750000 27150000 21550000 20750000 Net Cash Position (A-B) (12410000) 49690000 109612500 148946545 (Budgeting Topics, 2016) Sale Price per unit of VGL Ltd. (Amount in $) Particulars January February March April Sale Price Per unit 510 510 464.10 422.33 % Fall in Price - - 9% 9% Calculations - - 510 (510 * 9%) 464.10 (464.10 * 9%) Calculation of Total Sales of VGL Ltd. (Amount in $) Particulars January February March April Sale price per unit (a) 510 510 464.10 422.33 Units sold (b) 220000 160000 125000 120000 Total Sales (a * b) 112200000 81600000 58012500 50679600 Total Sales amount received per month of VGL Ltd. (Amount in $) Particulars January February March April Total Sales for the month: Total Sales 112200000 81600000 58012500 50679600 Payment Received from the Debtors - January 22440000 (112200000 * 20%) - - - 22440000 - February 72930000 16320000 - - 89250000 - March 16830000 53040000 11602500 - 81472500 - April - 12240000 37708125 10135920 60084045 - May - - 8701875 32941740 41643615 - June - - - 7601940 7601940 Debtors will pay in the following way: Current Month 20% 30 Days 65% 60 days 15% Manufacturing Budget Production Budget for Milbourn Manufacturing Ltd. Particulars December January February March Units forecasted to be sold 220000 160000 125000 120000 Add: Closing inventory of units - - - - Less: Opening Inventory - - - - Units to be produced 220000 160000 125000 120000 (Budgeting Topics, 2016) Material Budget for Milbourn Manufacturing Ltd. (Material A) Particulars December January February March Unit to be Produced 220000 160000 125000 120000 Material A required per unit 3 (220000*3) 3 (160000*3) 3 (125000*3) 3 (120000*3) Total Material A needed 660000 480000 375000 360000 Add: Closing Inventory - - - - Total Material A Required 660000 480000 375000 360000 Less: Opening Inventory - - - - Material A Purchased (a) 660000 480000 375000 360000 Material A cost per Kgs (b) $ 3.50 $ 3.50 $ 3.50 $ 3.50 Total Cost (a * b) ($) 2310000 1680000 1312500 1260000 Material Budget for Milbourn Manufacturing Ltd. (Material B) Particulars December January February March Unit to be Produced 220000 160000 125000 120000 Material B required per unit 6 6 6 6 Total Material B needed 1320000 (220000*6) 960000 (160000*6) 750000 (125000*6) 720000 (120000*6) Add: Closing Inventory - - - - Total Material B Required 1320000 960000 750000 720000 Less: Opening Inventory - - - - Material B Purchased (a) 1320000 960000 750000 720000 Material B cost per Kgs (b) $ 4.50 $ 4.50 $ 4.50 $ 4.50 Total Cost (a*b) 5940000 4320000 3375000 3240000 Material Budget for Milbourn Manufacturing Ltd. (Material C) Particulars December January February March Unit to be Produced 220000 160000 125000 120000 Material C required per unit 2 2 2 2 Total Material C needed 440000 (220000*2) 320000 (160000*2) 250000 (125000*2) 240000 (120000*2) Add: Closing Inventory - - - - Total Material C Required 440000 320000 250000 240000 Less: Opening Inventory - - - - Material C Purchased(a) 440000 320000 250000 240000 Material C cost per Kgs (b) $ 10.00 $ 10.00 $ 10.00 $ 10.00 Total Cost (a*b) 4400000 3200000 2500000 2400000 Particulars December January February March Material A Cost 2310000 1680000 1312500 1260000 Material B Cost 5940000 4320000 3375000 3240000 Material C Cost 4400000 3200000 2500000 2400000 Total Cost 12650000 9200000 7187500 6900000 (Budgeting Topics, 2016) Labour Budget for Milbourn Manufacturing Ltd. Particulars December January February March Unit to be Produced 220000 160000 125000 120000 Labour Hours per unit 0.50 0.50 0.50 0.50 Total Labour Hours Required (a) 110000 (220000*0.5) 80000 (160000*0.5) 62500 (125000*0.5) 60000 (120000*0.5) Machine Operating Cost per hour (b) 36.00 36.00 36.00 36.00 Total Labour Cost (a*b) 3960000 2880000 2250000 2160000 (Budgeting Topics, 2016) Cash Budget for Milbourn Manufacturing Ltd. (Amount in $) Particulars December January February March Beginning Cash 1550 (4890950) 17204050 30442475 Add: Sources Of Cash (A) - Cash Sales - - - - - Accounts Receivable Collected - 35200000 25600000 20000000 - Asset Sales - - - - Total Cash Available 1550 30309050 42804050 50442475 Less: Uses Of Cash (B) - Direct Material 632500 9925000 9811575 7545625 - Direct Labour 3960000 2880000 2250000 2160000 - Manufacturing Overhead 300000 300000 300000 300000 - Selling Administrative - - - - - Asset Purchase - - - - Total Usage Of Cash 4892500 13105000 12361575 10005625 Net Cash Position (A-B) 4890950 17204050 30442475 40436850 (Budgeting Topics, 2016) Calculations of Payment made to the creditors (Amount in $) Particulars December January February March Total Cost for the month: Total Cost 12650000 9200000 7187500 6900000 Payment Made to the Creditors - December 632500 (12650000 * 5%) 632500 - January 9465000 460000 9925000 - February 2552500 6900000 359375 9811575 - March 1840000 5390625 345000 7545625 - April 1437500 5175000 6612500 - May 1380000 1380000 Creditors will be paid in the following way: Current Month 5% 30 Days 75% 60 days 20% Behavioural Aspect Behavioural Problems faced by the company when they use budget as the performance target are as follows: Dysfunctional Behaviour: Budgets are very important for organisations, as it provides a direction to them and also help them to achieve their goal by providing the same objective. People who are associated with the making and use of budget feels motivated and are eager to achieve their goal. But sometimes due to inappropriate carrying out of the budget and expectation of more than normal by the managers lead to a negative impact between the employees. Such a behaviour is known as dysfunctional behaviour, where the goal and objective of the organisation is not in line with the goal and objectives of the individual. Excessive Pressure due to Budget: budget are used to command and organise the company. Too much pressure on the managers and other subordinates to achieve the goal of the budget creates a very bad environment, their motivation is longer high which puts the higher authority in an annoying mood as the subordinates are not showing and doing their work with enthusiasm. It also happens that when the budget is not that hard to achieve, the subordinates lose their interest in achieving it. Their participation level turns out to be very low. So either way, a budget needs to be planned carefully or should be set accordingly as the objective of the organisation to prevent such problems. (Agarwal, Rohit, 2016) Participative budget is the budget where people of all level who are impacted by the budget participates for the preparation of that budget. It is more of a bottom up approach. Advantage of Participative Budget Participation of the employees and subordinates makes them feel motivated and more eager to achieve the budget A Participative Budget make the environment a bit in a gaming spirit, it bridges the gap between higher and lower authority by making them contact on a regular basis, It makes the subordinate increase their team spirit, execution and initiative. It brings out the creative side of the employees as they take it upon themselves to achieve their budget and solve any problem they are facing related to their execution. It makes them responsible too. Since the managers and other level of people have the same goal as that of the organisation, it helps the organisation to achieve the goal more easily and in faster pace, with higher degree of goal congruence. Disadvantage: When all level of people are involved in the preparation of the budget, it creates too much havoc, as too much people are participated in the discussion of the budget, sometimes the difference in opinion among the people makes it impossible to form a budget. (Question Answers, 2010) Cash Management Strategies to overcome temporary shortage of cash: Sell unwanted assets: In an organisation there some assets which is of no need to the organisation, it creates unwanted cost also in the name of insurance, overhead and maintenance. These costs will lead to loss of cash. IF the asset is sold, then it will not only remove unwanted cost, but will also bring in cash which are in need by the organisation. Sell of Investment: Organisation invest not only on asset thought which they can manufacture or provide services, they also invest in investments. Once they invest in them, they dont keep a track on it much, if during such shortage of cash, they can calculate the worth of investment and sell them off to gain more cash. Call on your outstanding money: An organisation have debtors who have not yet paid the money, or other people from where the organisation is supposed to receive money. They can call them in to repay their money, so that they can overcome a situation of cash shortage. Sold Old stock: Many a times. Organisation keep old stocks thinking that they might need them in future, but they only increase their storage cost and money. To increase their shortage in cash they can sold these stocks in market and increase their cash. 5.2 Cash Shortage Effects: If there is a cash shortage in business it will tie up the hands of the company, which will make it impossible for them to overcome any situation. Proper investment to make the best product for customer will not take place as there will shortage of cash. Such Cash Shortage will create aggression in the debenture holder, as they will not be paid there interest, they might out of such aggression ask for full redemption. Any payment to be made to the Creditors who is asking to make good of his credit, will create a bad relationship between the company and the creditors. Such Problems will not only create a bad reputation of the company, but will also make the lender or creditors against them, which will hamper the business badly. Consequences of carrying too much cash: There are many consequences on having excess cash these are: Decrease in Cost of Capital: It can be well explained with an example, Suppose a business has a total asset of $ 1000,000, out of which your cash is around $ 100,000, which is to be appropriate 10%, if we have a Return on asset of about 10% and the cost of capital is 13% then it might so happen that the company will bleed eventually due to such excess cost of capital. If the company use these extra cash to reduce their equity, this will eventually bring down the Cost of capital, which will make the Return on asset higher than the cost of capital. Over Confidence in Management: Management are over confident when they have excess in cash with them, they try to deal with any problem by using that excess cash they have, instead of actually solving it they pay more money to come out of that problem easily. For example, during mergers when they are having a problem relating to deciding the terms, they pay more cash for acquisition to make it easier. Which ultimately reduces the value of the company paying such huge amount of cash. Environmental Performance Environmental Report Milbourn Manufacturers Ltd. Environmental Cost Report For the year Ended Particulars Environmental Cost (Amount $) Percentage of Selected Operating Cost/Total Costs (%) Percentage of Selected Operating Cost/Total Sales (%) Prevention Costs: Initial evaluation of environmental standing of new suppliers 2100 Performing environmental studies 7500 Training employees 1400 11000 0.27 0.21 Detection Costs: Testing for contamination 28000 28000 0.68 0.53 Internal Costs: Treating and disposing of toxic waste 215000 Maintaining pollution equipment 39000 Operating pollution equipment 19000 Revising evaluation of some existing suppliers 700 Inefficient material usage 70000 343700 8.38 6.48 External Costs: Cleaning up chemically contaminated soil 260000 260000 6.34 4.91 Total: 642700 15.68 12.13 (Technical Articles, 2010) Total Cost = $ 4100,000 Total Sales = $ 5300,000 Strategy to reduce negative outcome by prioritizing some environmental costs: There are many environmental saving cost which is being incurred by the company to reduce their effect on the environment, if we follow a proper strategy we can reduce these cost by decreasing their impact on the environment. These costs are: Treating and disposing of toxic waste: IF we go through the cost incurred in this, we will surely find this the 2nd highest cost incurred to control environmental damage. These can be reduced, by making sure that the waste disposal is minimising. If these are not minimised then they can create huge cost. Cleaning up chemically contaminated soil: This is the highest environmental cost incurred by Milbourn Ltd., these can be reduces if chemicals used are prevented from getting into the soil. If these are reduced, then the soil will not be required to be cleaned, and the cost will also reduce. References Budgeting Topics (2016). Cash Budget [online] Accounting Tools. Available at: https://www.accountingtools.com/cash-budget [Accessed 27 Sept. 2016] Budgeting Topics (2016). Production Budget [online] Accounting Tools. Available at: https://www.accountingtools.com/production-budget [Accessed 27 Sept. 2016] Budgeting Topics (2016). Material Budget [online] Accounting Tools. Available at: https://www.accountingtools.com/material-budget [Accessed 27 Sept. 2016] Budgeting Topics (2016). Production Budget [online] Accounting Tools. Available at: https://www.accountingtools.com/direct-labor-budget [Accessed 27 Sept. 2016] Agarwal, Rohit (2016). Behavioural Implications of Budgeting [online] Your Article Library. Available at: https://www.yourarticlelibrary.com/accounting/budgeting-accounting/behavioural-implications-of-budgeting-6-implications/52800/ [Accessed 27 Sept. 2016] Question Answers (2010). What is Participative Budget? [Online] Accounting Tools. Available at: https://www.accountingtools.com/questions-and-answers/what-is-participative-budgeting.html [Accessed 27 Sept. 2016] Technical Articles (2010). Environmental Management Accounting [Online] Acca Global. Available at: https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/Env-MA.html [Accessed 27 Sept. 2016]