Managing Costing & Budgeting

Prepare by:

Raju kumar saha(ID-2012121012) MD. Ismail Hossain(ID-2012121010)

Prepared to:Mr. Khwaja Arafat Abdullah Co-ordinator and Faculty, School of Business

Submission date: 20.09.2012

Contents
Task -1 (lo 9 .3.1) Explore the current budgeting process of the business. If the is no budgeting process, suggest a budgeting process. Explain the purpose of budgeting process to the owner ............................................................................................................. 1 Task 2 (lo 9.3.2) Assess the needs and nature of the business and recommend one of the standard budgeting methods. Prepare a raw materials budget for one week, one month and then one year using your chosen method and incorporate that budget information into a master budget. .................................................................................................................. 10 Task 3 (lo 3.3) Prepare a one-year cash budget for the enterprise. Show all assumptions, findings and recommendations ........................................................................................... 18 Task 4 (lo 4.1) Monitor and collect one weeks actual performance after you prepared the material budget in task 3. Calculate variances and identity the causes. Show positive and negative variances. Recommend how to improvise on positive variances. Also prepare a reconciled operating statement showing budgeted and actual results. ............................... 24 Task 5(lo 4.2) Incorporate the concept of responsibility within the chosen business. Identify the responsibility centers and cost of each responsibility centre. Evaluate the influence of each responsibility centre in successfully achieving the budgetary plan. ...... 26 Reference: ........................................................................................................................... 27

Task -1 (lo 9 .3.1) Explore the current budgeting process of the business. If the is no budgeting process, suggest a budgeting process. Explain the purpose of budgeting process to the owner.

Introduction
Budgeting or budgetary control is a key part of business planning for future. A budget is a essentially plan for future. Budgets are those set in advance as a way to quantify a firms objective. Actual performance is then monitored against budgeted performance. What we will do in future or how will we spend our money in future the process of planning is budgeting. Each and every organization has to budget about their expenses whit out budget the organization can be face some problems. Business and other organization needs to plan for future. In large business such planning, usually known as corporate planning, is very formal while, for smaller business, it will be less formal. Planning for the future falls into three times scale: Long - term: from about three years up to, sometimes, as far as twenty years ahead. Medium - term: one to three years ahead. Short term: for the next year.(Ref 1)

A budget is a financial planning for an organization, prepare in advance. In any organization the budget provides the mechanism by which the objectives of the organization can be achieved. In this way it forms a link between the current position and the position that the organizations managers are aiming for. By using a budget firstly to plan and then to monitor, the manager can ensure that the organizations progress is co-ordinate to achieve the objectives of the organization. (Ref 2) Process of expressing quantified resource requirements (amount of capital, amount of material, number of people) into time-phased goals and milestones. Read more: http://www.businessdictionary.com/definition/budgeting.html#ixzz1xI7qCnr9 My chosen organization is BROTHERS FURNITURE. Its a manufacture company they are producing world class furniture. Every day they are producing lots of furniture. They are following a particular budgeting system. A budgeting system is so important and it is do benefited. Benefits of using budget are given bellow.

Aspect/ process of budget:

Budget provides benefit both for business and also for its manager and others employ. Through a budget we can get maximum approximate forecast of our total expenses and revenue. Compels planning: By formalizing the agreed objectives of the organization through a budget preparation system, an organization can ensure that its plans are achievable. It will be able to decided what resources are required to produce the desired out pots, and to make sure that they will be able available

BROTHERS FURNITURE has 7 departments of production. Cost of one department for 100 units of furniture per month is given below. Daily Weekly Monthly

Direct material :
Wood 5,00,000 30,00,000 1,20,00,000

Glue

50,000

3,00,000

12,00,000

Mattress

1,00,000

6,00,000

24,00,000

Direct labor :
Wages of person) Wages of person) 1st man (20 4,000 24,000 96,000

2nd

man(10

2,000

12,000

48,000

Total direct cost

6,56,000

39,36,000

1,57,44,000

Daily

Weakley

Monthly

Over heads :
Rent Electricity bill Super visor salary Other production expenses 3,000 5,00 5,00 5,000 21,000 35,00 35,00 30,000 84,000 14,000 14,000 1,20,000

Selling over head:

Show room rent Salary of manager Other selling expenses Total over head: 2,000 1,000 3,000 11,500 14,000 7,000 18,000 80,500 56,000 30,000 72,000 3,45,000

Communicates and co- coordinating: The process of preparing budget provides a means for managers to communicate both upwards, downwards, and across the organization. Once budget have been prepared, they can be used as a means of communicating to the employee who will see how the objectives of the business affected their own job or department. Monitor and controlling performances: Through the budget the company or the organization can monitor their business. How they are going on? What is their position? Situation? They can control performance of their employ. They can teach them how they are working?

To motivation: Budget helps to motivate their employs. It inspires to the employs top do their work.
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Benefits of budget
Gives you control over your money - A budget is a way of being intentional about the way you spend and save your money. It is said that with budgeting, you control your money and not your money controls you. Budgeting saves you the stress of suddenly having to adjust to lack of funds because you did not initially plan how to spend them. It also helps you decide if you want to sacrifice short term spending like buying coffee everyday in exchange for a long term benefit like a cruise vacation or a new HDTV.(Ref 3) Helps you organize your spending and savings By dividing your money into categories of expenditures and savings, a budget makes you aware which category of expenditure takes which portion of your money. That way, it is easy for you to make adjustments. Budget also serves as a reference for organizing your bills, receipts, and financial statements. When all of your financial transactions are organized for tax time or creditor questions, you save time and effort.(Ref-3) Makes you aware what is going on with your money With budgeting, you are clear on what money is coming in, how fast it goes out, and where it is going to. Budgeting saves you from wondering every end of the month where your money went. A budget enables you to know what you can afford, take advantage of buying and investing opportunities, and plan how to lower your debt. It also tells you what is important to you based on how you allocate your funds, how your money is working for you, and how far you are towards reaching your financial goals. (Ref3)

Budget manual
The planning of a budget is co-ordinate by a member of the finance department, often the management account. However budget holder prepare budget or subsidiary budget for their own section of the business and these must fit in with the overall objective of the business. Many large business and organizations take a highly formal view of planning the budget and make use of: Budget manual: Which provide a set of guide lines as to who is involved with the budgetary planning and control process and how the process is to be conducted? Budget committee: which organization the process of budgetary planning and control; comprises representative from the function of the organization production, sales, selling & distribution, administration together with a budget co coordinator whose job is to administer and over see the activities of the committee.

Coordinating the main types of budgeting process

Sales budget: A sales budget is a valuable tool that gives a direction to a company with regard to its targeted sales. It helps to improve the profitability of a company. The company makes a financial plan with regard to the amount of goods and services that it plans to sell in a year and the price at which the goods and services are to be sold. This plan is its sales budget. (Ref-4) Production budget: Based on the sales budget together with the anticipated finishing goods stock level. Production budget is a detailed plan showing the number of units that must be produced during a period in order to meet both sales and inventory needs. (Ref-5) Material usage budget: Based on production budget. Material purchase budget: Based on the material usage budget, together with the anticipated materials stock level. Labor functional budget: Also based on production budget. Functional budget: To support the operation (often based on the departments), for example administration budget, financial budget, this are may not be so depended upon the sale level as other budgets that are linked more closely. Capital expenditure budget: This would also have to be developed in conjunction with the revenue budgets to ensure that the agreed Cash flow budget: This would take account of the other entire budget and their affects on the organization liquidity. Administration budget: An official, detailed financial plan for an upcoming period for a business. An administrative budget is usually prepared on an annual or quarterly basis and identifies the costs of running an operation that are not tied to producing a product or service. Costs can include those associated with non-production and supervisory payroll, depreciation, amortization, consulting, sales, dues and fees, legal fees and marketing, rent and insurance. The budget enables management to exercise control of the day-to-day activities of the business. Master budget: The calculation from the entire revenue and capital budget contribute to the master budget which takes the form of a budgeted profit and loss account and balance sheet. The master budget is a summary of company's plans that sets specific targets for sales, production, distribution and financing activities. It generally culminates in a cash budget, a budgeted income statement, and a budgeted balance sheet. In short, this budget represents a comprehensive expression of management's plans for future and how these plans are to be accomplished. (Ref-6)

Draw backs of such process

Hear my selected organization is BROTHERS FURNITURE world class furniture. As every organization is follow different types of budgeting process in the same path BROTHERS FURNITURE is also following a budgeting process. Though BROTHERS FURNITURE is a manufacturer company but they are following production budgeting method because they are a manufacture /production based company and they budget that every day how ever they will produce 30 unit of sofa set. Budgeting processes I have describe here each and every budgeting process has some advantage and disadvantage. Like sales budget in this budget an organization can budget only their sales target. In this budget they have no idea about any think else. Similarly Production budget only for the production related information. Capital expenditure calculates only their capital. How they will use their capital? Basically a budget created by based on forecasted figure. Which can be change in future? Price can be change. Production level or productivity can be increases or decrees. Sales figure can be change. Once the budgeted figure meets up, no one wants to do more or achieved than budgeted figure. Some time a budget may be wrong. Because a budget made based on ides or fore casting figure so it may be change. Product can be faulty by following budgeted figure. To follow budgeted time any kind of accident can be occur.

Suggestion
Though BROTHERS FURNITURE is following production based budgeting process. In this process they have face some advantage and disadvantage. Advantage of production based budgeting: They have a forecast figure about their production level. They have a forecast figure about the sales. They have a target how much they will produce? Similarly they have a target how they will sale? Each and every employee has a target to achieve their goal.

Disadvantage of production based budgeting: They have information only on about their production level. They have no idea about market situation. No idea about market position of their product. To achieve their production level their productivity can be defective. To achieve their goal they can make some faulty.

As BROTHERS FURNITURE they are following production based budgeting process, and as we knew every process has some strength and weakness as much as possible I have discus that. But in future my suggestion for them they can follow cash budget. In a cash budget they can calculate their all expenses and revenue.

Advantage of cash budget: It is easy to use. Easily understandable. All kind of expenses can be estimated. Purchases, rent, bill, travelling expenses can be calculated. Once we established a cash budget we can get idea how we will spend our money. We can control on our money spending limited. We can aware about out money transaction. We can plan for better profit. Can be get remove from loss.

Disadvantage of cash budget: As cash budget made on forecasting figure so currency rate can be fluctuate. Because of currency rate fluctuation loss may be occurring. Lack of flexibilities. May be needs to take loan from others. Financial factors can be lack. Non-financial factors also can be lacking.

Conclusion
In this task I have describe about budget, benefits of budget, and different types of budgeting process. After that now we knew about budget. And in this assessment my selected organization is BROTHERS FURNITURE. I have no idea which budgeting process they are following but from critical analyze and after talking with their employees I have find out which budgeting process they are following? They are following production based budgeting. But for in future I have recommended them to follow them cash budget. At present which method they are following it can be help full or faulty for them, but as much as possible I have find out their advantage and disadvantage. Not only this method which they are following but also that method whish I have suggested them. I have find out all advantage of my suggested process and criticize that too. So I think if they follow cash budgeting process they may be get some advantage.

Task 2 (lo 9.3.2) Assess the needs and nature of the business and recommend one of the standard budgeting methods. Prepare a raw materials budget for one week, one month, and then one year using your chosen method and incorporate that budget information into a master budget.

Introduction
The budget period is the period of time for which the budget is prepared and used. In most cases, the period of time chosen is the accounting period of the organization, since this period is usually sufficiently long to take care of seasonal variations that would occur in production and sales. In certain industries, which are characterized by significant seasonal variation, a shorter period of six-months or a quarter may be found more useful. In industries involving large capital outlay and long production cycles such as, shipbuilding or generation of electricity, the budget period is likely to extend beyond one accounting year. Generally, a Master Budget is prepared, which in turn, is broken into functional budgets. Budgets may be classified as follows.

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Different types of budget

Incremental budget: This is a budget prepared using a previous periods budget or actual
performance as a basis with incremental amounts added for the new budget period. The allocation of resources is based upon allocations from the previous period. This approach is not recommended as it fails to take into account changing circumstances. Moreover it encourages spending up to the budget to ensure a reasonable allocation in the next period. It leads to a spend it or lose mentality. (Ref-7) Advantage The budget is stable and change is gradual. Managers can operate their departments on a consistent basis. The system is relatively simple to operate and easy to understand. Conflicts should be avoided if departments can be seen to be treated similarly. Co-ordination between budgets is easier to achieve. The impact of change can be seen quickly.

Disadvantage Assumes activities and methods of working will continue in the same way. No incentive for developing new ideas. No incentives to reduce costs. Encourages spending up to the budget so that the budget is maintained next year. The budget may become out of date and no longer relate to the level of activity or type of work being carried out. The priority for resources may have changed since the budgets were set originally.

Fixed budget: Is the budget at the expected capacity level. Because static budget is fixed, it is usually
used by stable companies. Also, this type of budget can be used by departments with operations independent from capacity levels. For example, operations of administrative and general marketing departments usually does not depend on the level of production and sales and is rather determined by the departments management; as the result, static budget can be used by such departments. (Ref-8) Advantage A fixed budget allows you to prepare for expenses in advance. It works well for those on a limited budget. A fixed budget means your expense categories and income will not change from month to month. Many people on a fixed budget get the same amount of money each month because they work on salary or they are withdrawing a set amount from retirement accounts. (ref -16) No Need to Adjust Your Budget Each Month Allows to plan ahead. Easier to track and keep our budget.
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 Works for people for their income on fixed time.

Flexible budget: Is the budget at the actual capacity level. Because flexible budget is dynamic, it is
commonly used by companies. Flexible budget is adjusted to the actual activity of the company. It can be easily prepared using a computerized spreadsheet (e.g., Excel). At first, the relevant activity range is determined for the coming period. Next, costs that are expected be incurred over the relevant range are analyzed. These costs are then separated based on their cost 'margin-bottom. . (Ref-8)

Zero based budget: An illustration of a long term budget is the Zero base budget. Zero Base Budgeting process
looks at requirements/ plans anew each year irrespective of project continuity. These are necessarily long term project budgets (ref-9) Advantage of zero based budgeting: Efficient allocation of resources, as it is based on needs and benefits rather than history. Drives managers to find cost effective ways to improve operations. Detects inflated budgets. Increases staff motivation by providing greater initiative and responsibility in decision-making. Increases communication and coordination within the organization. Identifies and eliminates wasteful and obsolete operations. Identifies opportunities for outsourcing. Forces cost centers to identify their mission and their relationship to overall goals. Helps in identifying areas of wasteful expenditure, and if desired, can also be used for suggesting alternative courses of action.

Disadvantage of zero based budgeting: More time-consuming than incremental budgeting. Justifying every line item can be problematic for departments with intangible outputs. Requires specific training, due to increased complexity vs. incremental budgeting. In a large organization, the amount of information backing up the budgeting process may be overwhelming.

Activity based budget: A method of budgeting in which the activities that incur costs in every
functional area of an organization are recorded and their relationships are defined and analyzed. Activities are then tied to strategic goals, after which the costs of the activities needed are used to create the budget. Activity based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period's budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides opportunities to align activities with objectives streamline costs and improve business practices. (REF-10)

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Advantage of activity based budgeting: Allows the managers and business owners view the business as a system from start to finish, rather than individual departments. Produces a "culture of customer focus is reinforced, when employees understand they are in business to produce products and services for customers" (Strategic Costing Techniques: Activity-Based Budgeting). Strategic Planning is made easier when everybody knows that the consumer is the most important individual in the business. The money saved from removing unnecessary process steps can be used for future projects and new products. Promotes teamwork within and between departments. Bottlenecks-steps that slow down the complete process can be identified and removed Disadvantage of activity based budgeting:

Time consuming to set up - have to understand the activities that drives the budget Costly - buying, implementing and maintaining an activity based system Managers may be overwhelmed with information - may be de motivating, rather than looking at the bigger picture More effective methods such as, zero based budgeting and continuous budgeting

Rolling budget: A rolling budget is a forward looking budget. Its constantly looking n-periods into
the future. Rolling budgets are being adopted because it forces us to constantly look to the future and revise our estimates. The failure of traditional fiscal year budgeting is that as we progress through the fiscal year the number of periods in the budget decrease and make it harder to assess future prospects of the company(ref-11)

Raw material budget (master budget)

A material or substance used in the primary production or manufacturing of a good. Raw materials are often natural resources such as oil, iron and wood. Before being used in the manufacturing process raw materials often are altered to be used in different processes. Raw materials are often referred to as commodities, which are bought and sold on commodities exchanges around the world. (Ref-12) MASTER BUDGET formalizes the whole budget system into one single final document in which all the operational budgets flow; its goal is to draft the main economic and financial statements. However, dependent upon the individual or geographic location, is variously contains the cash budget only; or the income statement and the balance sheet combined; or the income statement and the balance sheet and the cash budget combined. (Ref-13)

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Cost report
A departmental cost of production report (CPR) shows all costs chargeable to a department. It is not only the source for summary journal entries at the end of the month but also a most convenient vehicle for presenting and disposing of costs accumulated during the month. A cost of production report shows: 1. 2. 3. 4. 5. 6. Total unit costs transferred to it from a preceding department. Materials, labor, and factory overhead added by the department. Unit cost added by the department. Total and unit costs accumulated to the end of operations in the department. The cost of the beginning and ending work in process inventories. Cost transferred to a succeeding department or to a finished goods storeroom.

Cash budget
An estimation of the cash inflows and outflows for a business or individual for a specific period of time. Cash budgets are often used to assess whether the entity has sufficient cash to fulfill regular operations and/or whether too much cash is being left in unproductive capacities.

Limitation budgeting
It is true that each and every budgeting system have some their own plus point and minus point. In this part I have describe some appreciate able and avoid able limitation. 1. Budget provides only approximate estimates. Hence results cannot be measured accurately. 2. Another limitation of budgeting is "over-budgeting". This means the minor expenses are worked out in detail. This will not allow the managers to delegate even minor powers to their subordinates. 3. Budget may also be used to hide inefficiencies. Unnecessary boosting of certain expenditure and deliberately omitting needed items are quite a common practice. 4. Quick results cannot be achieved as it is prepared for a year. 5. One of the important limitations of budget is its inflexibility. The figures mentioned are not final. As prices change very often estimates mentioned in the budget may become absolute. Hence it may not provide any flexibility. 6. Budget has psychological reaction and restricts freedom of action. Dale viewed that, "While on the one hand, people like to know what they are working for and how they will be judged on the other, many of them are resentful of budget restrictions. This seeming incompatibility between the needs of the enterprise for system and the needs of individuals for elbowroom is as yet a largely unresolved problem".(ref -14)

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Whilst budgets are widely used to in business, you should appreciate that they have some important limitations. In particular (ref-15)
1. 2. 3. 4. 5. 6.

Budgets are only as good as the data being used to create them. Inaccurate or unreasonable assumptions can quickly make a budget unrealistic Budgets can lead to inflexibility in decision-making Budgets need to be changed as circumstances change Budgeting is a time consuming process in large businesses, whole departments are sometimes dedicated to budget setting and control Budgets can result in short term decisions to keep within the budget rather than the right long term decision which exceeds the budget Managers can become too preoccupied with setting and reviewing budgets and forgetting to focus on the real issues of winning customers

Budgets can also create some behavioral challenges in a business Budgeting has behavioral implications for the motivation employees Budgets are de-motivating if they are imposed rather than negotiated Setting unrealistic targets adds to de-motivation Budgets contribute to departmental rivalry - battles over budget allocation Spending up to budget: it can result in a use it or lose it mentality - spend up to the budget to preserve it for next year 6. Budgetary slack occurs if targets are set too low 7. A name, blame and shame culture can develop - but managers should be answerable only for variations that were under their control
1. 2. 3. 4. 5.

BROTHERS FURNITURE: At present BROTHERS FURNITURE they are following production based budgeting system because they are a production based organization. Every day they are producing around 30 units of furniture thats their minimum target. In future they are targeting to producing more than 50 units of furniture. Because day by day their market demand are getting high. At based on production based budgeting they can target their production cost.

As BROTHERS FURNITURE is following production based budgeting in this method they can only target of their production cost. Neither can they calculate their admin expenses nor their selling expenses. So they have not a very good idea about their other expenses. And thats way some time they had to face some unwanted loss. So they should follow any new method.

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Suggestion
From my point of view after knowing advantage and disadvantage of different types of budget I would like to suggest BROTHERS FURNITURE that they should follow zero based budgeting. As I have describe advantage and disadvantage of the method in this method they can easily achieved their goal. They can assume their all expenses and income. They can take a good decision. Daily Weekly Monthly Yearly

Direct material :
Wood 5,00,000 30,00,000 1,20,00,000 14,40,00,000

Glue Mattress

50,000 1,00,000

3,00,000 6,00,000

12,00,000 24,00,000

1,44,00,000 2,88,00,000

Direct labor :
Wages of person) Wages of person) 1st man (20 4,000 24,000 96,000 11,52,000

2nd

man(10

2,000

12,000

48,000

5,76,000

Total direct cost

6,56,000

39,36,000

1,57,44,000

18,89,28,000

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Daily

Weekly

Monthly

Yearly

Over heads :
Rent Electricity bill Super visor salary Other production expenses 3,000 5,00 5,00 5,000 21,000 35,00 35,00 30,000 84,000 14,000 14,000 1,20,000 10,08,000 1,68,000 1,68,000 14,40,000

Selling over head:

Show room rent Salary of manager Other selling expenses Total over head: 2,000 1,000 3,000 11,500 14,000 7,000 18,000 80,500 56,000 30,000 72,000 3,45,000 6,72,000 3,60,000 8,64,000 46,80,000

Overall evaluation Suggestion

In this task I have describe the different types of budget not only the different types of budget but also advantage and disadvantage of this types. And I have also prepared a raw material budget and it based on zero based budgeting system. Because I thing it is a very good policy to calculated your income and expenses. In this method each and every company can calculate their expenses and its automatically going on. So thats way I have calculated zero based budget and for BROTHERS FURNITURE I would like to suggested them to follow zero based budgeting system.

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Task 3 (lo 3.3) Prepare a one-year cash budget for the enterprise. Show all assumptions, findings and recommendations

Introduction
Cash budget basically is a budget plan for business owners and business managers, which is made in relation to set certain targets in regard to cost of production, sales and profit to achieve their goals with in a specific time period. However, it is very important to know certain aspects before preparing a cash budget. These may include the previous budget and the estimated profit and loss with the actual profit and loss, the contemporary market situation, as well as a calculated review of the competitions in market. At the same time a certain time period, the desired cash position, an estimation of sales and expenses as well as a blank worksheet is required while making a cash budget. Therefore, a cash budget is a planning tool that helps the management of a business company in making important decisions

Importance of cash budget

If some one working in the Finance Department of an organization, I believe he/ she would know how important the cash budget is. Every organization knows the significant of a cash budget and how it can determine the future directions of its business. In fact cash budget is one of the key components of a master budget. From my experience, it is the most difficult budget to prepare as compared to the rest. The rest of the components of a master budget are sales budget, purchase budget, operating budget and capital budget. Cash budget in reality is a forecast of cash inflow and cash outflow events which are anticipated to take place in the future. It can be a net cash surplus or net cash shortfall position. Cash budget is an effective tool of cash management and it may help the management in the following ways: a) Identification of the period of cash shortage so that the financial manager may plan well in advance about arranging the funds at an appropriate time. b) Identification of cash surplus position & duration for which surplus would be available so that alternative investment of this excess liquidity may be considered in advance. c) Better coordination of the timing of cash inflows & outflows in order to avoid chances of shortages or surplus of cash etc. In this task I have prepare one year cash budget for OTOIBI and in this task I have find some important find

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Advantage of cash budget

Balance Sheet: If your business needs to borrow money or obtain financing, one of the first documents the bank representative will ask for is a pro forma balance sheet. Creating a monthly cash budget makes it easier to prepare this important document. By estimating your monthly income and outgo, you will be much better equipped to predict the company income for the current month and the entire year. Once the pro forma balance sheet is in place, it will be easier to get the short term financing you need to make up for any temporary shortfalls in revenue. Being able to borrow money at an affordable rate is essential for any small business, no matter what their niche. Expenses: In many ways a business budget serves the same purposes as a personal budget. By letting you see in plain black and white where your firm money is going, a monthly cash budget puts you in a much better position to control those expenses going forward. For instance, if youre last monthly cash budget showed a large variance in office supply expenses, you can shop around for a more cost-effective supplier. If one department is burning through computer equipment at twice the rate of everyone else, a cash budget can help you track those problems and address them. Knowing where your money is going gives you better control over expenses and helps you trim the fat in your business. Provides Focus: It is important for every member of the management team, no matter what their other jobs, to focus on the company bottom line. Preparing and reviewing monthly cash budget forces members of the executive oversight team to focus on the cash resources of the business. (REF- 17)

Disadvantage of cash budget:

To maintain budgeted figure some time workers made some mistake. To reduce some expenses workers can be produce some faulty product. To follow budget some time employer inspire to use damage or less strong formula. Easily does not get good idea.

Cash budget of BROTHERS FURNITURE:

I have prepared a cash budget for BROTHERS FURNITURE. In this cash budge I have calculate their employs salary, managers salary, showroom rent, office rent, electricity bill, gas bill, telephone bill and etc.

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Daily

Weekly

Monthly

Yearly

Direct material :
Wood 5,00,000 30,00,000 1,20,00,000 14,40,00,000

Glue Mattress

50,000 1,00,000

3,00,000 6,00,000

12,00,000 24,00,000

1,44,00,000 2,88,00,000

Direct labor :
Wages of person) Wages of person) 1st man (20 4,000 24,000 96,000 11,52,000

2nd

man(10

2,000

12,000

48,000

5,76,000

Total direct cost

6,56,000

39,36,000

1,57,44,000

18,89,28,000

Daily

Weekly

Monthly

Yearly

Over heads :
Rent Electricity bill Super visor salary Other production expenses 3,000 5,00 5,00 5,000 21,000 35,00 35,00 30,000 84,000 14,000 14,000 1,20,000 10,08,000 1,68,000 1,68,000 14,40,000

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Selling over head:

Show room rent Salary of manager Other selling expenses Total over head: 2,000 1,000 3,000 11,500 14,000 7,000 18,000 80,500 56,000 30,000 72,000 3,45,000 6,72,000 3,60,000 8,64,000 46,80,000

Their budget is good but some of this we find some change can be made:
Their previous years cost was quite efficient. So, they can follow the previous years as an idol and they just have to reduce Other selling expenses and Other production expenses. Their monthly showroom budgeted rent is 56,000 but they want to go for a very good showroom but because of their budget they are scaring to move high quality showroom just because of their budgeted figure. They must increase the number of showrooms.

Master budget
They follow some methods of profit: Financial monitoring (quantitative) Cost : direct cost + total over head= total cost. Profit : 25%. Selling price : total cost +profit = selling price.
Direct cost for 1200 unit of furniture = 18,89,28,000

Total over head for 1200 unit of furniture = 46,80,000 Total cost for1200 unit of furniture = 18,89,28,000 + 46,80,000 = 1,93,60,8000 Profit = 1,93,60,8000 * 25% = 4,84,02,000 Selling price = 1,93,60,8000 + 4,84,02,000 = 24,20,10,000

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BROTHERS FURNITURE

Profit and Loss Statement

Sales Less: Cost of goods sold: Purchase: Wood Glue Mattress Direct labor: Wages of 1st man (20 person) Wages of 2nd man(10 person) Production Overheads: Rent Electricity bill Super visor salary Other production expenses Gross Profit Less: Expenses Selling over head: Show room rent Salary of manager Other selling expenses 6,72,000 3,60,000 8,64,000 (18,96,000) 24,20,10,000

14,40,00,000 1,44,00,000 2,88,00,000

11,52,000 5,76,000

10,08,000 1,68,000 1,68,000 14,40,000

(19,17,12,000) 5,02,98,000

Net Profit

48,40,2000

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BROTHERS FURNITURE

Balance Sheet
Fixed Assets: Goodwill Vehicle Building Current Assets: Debtors Cash on hand Bank Total Current Assets: 2,00,00,000 2,50,00,000 7,00,00,000

11,50,00,000

5,25,00,000 5,00,000 2,50,00,000 7,80,00,000

Current Liabilities: Creditors WORKING CAPITAL

10,80,00,000 (3,00,00,000) 8,50,00,000

Financed by: Capital (+) Net Profit Evaluation

3,65,98,000 48,40,2000

8,50,00,000

In this task I have prepare cash budget for BROTHERS FURNITURE and I have identify about their daily costs. I this task I have calculate their all expenses and the budget show their budgeted factors. At present they are investing lots of money to produce a sofa set but they can reduce their cost by increasing their total number of sales, increases the quality level. From my point of view this was a forecast of their daily expenses. Regular almost they are investing this money to produce their furniture.

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Task 4 (lo 4.1) Monitor and collect Two days actual performance after you prepared the material budget in task 3.
A measure of the dispersion of a set of data points around their mean value. Variance is a mathematical expectation of the average squared deviations from the mean. Variance measures the variability (volatility) from an average. Volatility is a measure of risk, so this statistic can help determine the risk an investor might take on when purchasing a specific security.

Reasons of variances
Business budget variances happen when the amount of projected income or planned expenses in the annual budget is different than what actually occurs. These differences can be attributed to a number of causes, including faulty budget forecasts, sudden changes in market prices, or other economic and environmental factors. Businesses should work to establish a solid budget and identify potential variance factors in order to correct budgeted cost estimates or revenue projections.

Actual budget
Daily

Direct material :
Wood Glue Mattress 5,00,000 50,000 1,00,000

Direct labor :
Wages of 1st man (20 person) Wages of 2nd man(10 person) Total direct cost 4,000 2,000 6,56,000

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Monitor and collect Two days actual performance

Day 1 Day 2

Direct material :
Wood Glue Mattress 4,00,000 60,000 1,20,000 6,00,000 50,000 90,000

Direct labor :
Wages of person) Wages of person) 1st man (20 4,400 3,000

2nd

man(10

2,000

1,600

Total direct cost

5,86,400

7,44,600

Day 1 has positive variance(69,6000) because of less use of wood. That day 2 extra 1st man worked
for mattress fixing. Day 2 has negative variance(-88,600) because of more use of wood. Though less use of mattress 1st man and 2nd mans wages was reduced.

Possible reasons of variances

When price of product increase or decreases. Currency rate fluctuated. Loss project. Unwanted loss.

If the budgeted price was estimated, therefore in real life the budgeted price was a bit lower

Evaluation
In the cost report of BROTHERS FURNITURE I have one year cost and in this we can see variances. It is usually like that.
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Task 5(lo 4.2) Incorporate the concept of responsibility within the chosen business. Identify the responsibility centers and cost of each responsibility centre. Evaluate the influence of each responsibility centre in successfully achieving the budgetary plan.

Introduction
Each and very organization have some separated responsibilities centers. And these responsibilities centers are playing very important role for every organization. They divide it up a huge organization. They distribute their work among them.

Cost centers
A department or other section of a company where managers are directly responsible for costs. For example, consider a company that has a manufacturing department, a research and development department, and a payroll department. Each department could be a cost center, and the directors of each department would be responsible to keep costs to as low a level as possible. The company thus accounts for each cost center separately, which allows managers to take immediate responsibility for cost growth and credit for cost cutting.

Revenue centers
Distinctly identifiable department, division, or unit of a firm that generates revenue through sale of goods and/or services. For example, rooms department and food-and-beverages department of a hotel are its revenue centers. See also cost center and profit center

Profit centers
A branch or division of a company that is accounted for on a standalone basis for the purposes of profit calculation. A profit center is responsible for generating its own results and earnings, and as such, its managers generally have decision-making authority related to product pricing and operating expenses. Profit centers are crucial in determining which units are the most and least profitable within an organization.

Benefit of having responsibilities centers of BROTHERS FURNITURE

Because of having responsibilities centers all task are complete on time. Finance department center they can calculate their all responsibilities. They can calculate their all expenses. They can calculate all income. HRM department observe their responsibilities among them. Through this department they can get best employee for their organization.

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Set back of having responsibilities centers

Some it has high managing cost. It is not sure that always all the investment will be benefited. Sometime if can be proved a loss project. If there is any department rivalry it may be proved wrong. While creating the budget it is possible that individual departments may give importance to their Owen expense.

Conclusion
Here I have explained the responsibilities of cost centered, benefit center, and many more. And this thing is very important for every organization. So an organization should follow these centers and they will face a lots of advantage for the organization.

Reference: 1. Cox, David. Far don Michael. Management of finance. Worcester: bath press, 2000. 2. 3. 4. 5. 6. 7. 8. 9. Brammer, Janet. Penning, Aubrey. Managing cost & resources. Worcester: bath press, 2002. http://budgetingincome.com/making-your-budget/21-personal-budgeting-basics/49-10-benefits-of-budgeting-your-money http://www.ehow.com/about_4699902_what-sales-budget.html http://www.accounting4management.com/production_budget_definition.htm http://www.accounting4management.com/the_master_budget.htm http://tutor2u.net/business/accounts/incremental-budgeting.htm http://simplestudies.com/what-are-budget-types-in-accounting.html http://www.scribd.com/doc/26306332/Types-of-Budget

10. http://www.investopedia.com/terms/a/abb.asp#ixzz20CRYhhuB 11. http://in.answers.yahoo.com/question/index?qid=20080128212724AA69E9r 12. http://www.investopedia.com/terms/r/rawmaterials.asp#ixzz20CXgGL6G 13. http://www.ventureline.com/accounting-glossary/M/master-budget-definition/ 14. http://www.preservearticles.com/2012051932652/6-main-limitations-of-budget.html. 15. http://tutor2u.net/business/accounts/budget_limitations.html 16. http://www.ehow.com/info_7747158_advantages-using-fixed-budget.html 17. http://smallbusiness.chron.com/advantages-preparing-monthly-cash-budget-4517.html

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