Abbreviated Budgeted Income Statement Of Aluminium Windows Trading
Annual purchase budget
The case explains about the Asif Rahman, who is sole proprietor and trading the windows. Following is the calculations of the firm:
- Preparation of financial statements
- Annual purchase budget
|
Annual Purchase Budget |
|
|
Windows |
|
|
(Amt in $) |
|
|
Productions Required (2400*12) |
28800 |
|
ADD: Closing (2400*2) |
4800 |
|
Less: Opening (Given) |
1200 |
|
Units to be purchased |
32400 |
|
Purchase price (unit * $90) |
$ 29,16,000 |
(Arnaboldi, Lapsley & Steccolini, 2015)
It explains that the total purchase price of the company would be $ 31,32,000 in next year.
- Annual operating expenses budget
|
Annual Operating budget |
||
|
Windows |
||
|
(Amt in $) |
(Amt in $) |
|
|
Selling Expenses |
||
|
Advertising |
$ 46,080 |
|
|
Wages shop |
$ 1,44,000 |
|
|
Sales commission |
$ 4,60,800 |
|
|
Vehicle running expenses |
$ 30,000 |
|
|
Delivery truck expenses |
$ 60,000 |
|
|
Shop rent |
$ 43,200 |
|
|
$ 7,84,080 |
||
|
Distribution expenses |
||
|
Packaging and freight |
$ 3,45,600 |
|
|
Warehouse rental |
$ 60,000 |
|
|
$ 4,05,600 |
||
|
Administration expenses |
||
|
Power |
$ 9,600 |
|
|
Office salaries |
$ 2,40,000 |
|
|
Office rental |
$ 1,20,000 |
|
|
$ 3,69,600 |
||
|
Total Operating expenses |
$ 15,59,280 |
It explains that the total operating expenses of the company would be $ 15,59,280 in next year.
- Budget income statement for sole proprietor
Income statement of the company is as follows:
|
Income Statement |
|
|
Revenue |
2018 |
|
Sales revenue |
46,08,000 |
|
Closing stock |
4,32,000 |
|
Total Revenues |
50,40,000 |
|
Expenses |
|
|
Direct material |
29,16,000 |
|
Add: Opening stock |
1,08,000 |
|
Selling Expenses |
|
|
Advertising |
46,080 |
|
Wages shop |
1,44,000 |
|
Sales commission |
4,60,800 |
|
Vehicle running expenses |
30,000 |
|
Delivery truck expenses |
60,000 |
|
Shop rent |
43,200 |
|
Distribution expenses |
|
|
Packaging and freight |
3,45,600 |
|
Warehouse rental |
60,000 |
|
Administration expenses |
|
|
Power |
9,600 |
|
Office salaries |
2,40,000 |
|
Office rental |
1,20,000 |
|
Total Expenses |
45,83,280 |
|
Net Income Before Taxes |
4,56,720 |
|
Income tax expense |
1,41,637.6 |
|
Income from Continuing Operations |
3,15,082 |
It explains that the net profit of the company is $ 4,56,720 in which $ 1,41,637-6 has been paid by the company as tax expenses (Gooneratne & Hoque, 2016).
- Budget income for limited liability company
|
Revenue |
2018 |
|
Sales revenue |
46,08,000 |
|
Closing stock |
4,32,000 |
|
Total Revenues |
50,40,000 |
|
Expenses |
|
|
Direct material |
29,16,000 |
|
Add: Opening stock |
1,08,000 |
|
Selling Expenses |
|
|
Advertising |
46,080 |
|
Wages shop |
1,44,000 |
|
Sales commission |
4,60,800 |
|
Vehicle running expenses |
30,000 |
|
Delivery truck expenses |
60,000 |
|
Shop rent |
43,200 |
|
Distribution expenses |
|
|
Packaging and freight |
3,45,600 |
|
Warehouse rental |
60,000 |
|
Administration expenses |
|
|
Power |
9,600 |
|
Office salaries |
2,40,000 |
|
Office rental |
1,20,000 |
|
Total Expenses |
45,83,280 |
|
Net Income Before Taxes |
4,56,720 |
|
Income tax expense |
1,27,882 |
|
Income from Continuing Operations |
3,28,838 |
It explains that the tax amount of the company would be lesser. In case of LLC, the total tax of the company is $ 1,27.882.
- Recommendation:
As given in the case, Asif Rahman is the sole proprietor. Name of the firm of Asif Rahaman is Aluminium windows trading. The above calculations about the firm expresses that net profit of the company would be positive in near future. Though, the case explains that the company is in growth phase. the calculations and the analysis further explains that the Aluminium windows must be form into the limited liability company as if the firm would be form into limited liability company than the following benefits would be enjoyed by the company:
Financial benefits:
- Owners are not responsible for the company debts. They have the limited liability and only liable for their shares.
- It is also easier for the company to raise the funds. It could admit new members by selling the membership interest and it could create the new class of the members with the voting right and profit characteristics (Dunk, 2011).
Non financial benefits:
- In case of limited liability Company, it is easier for the company to sell the interest and the ownership of the company to third party without making and changes or disturbing the functions and the operations of the company.
- Limited Liability Company is a formal structure of business. It sets some corporate rule and policies so that it becomes easy for the business to maintain the operations and the reports.
It explains that if the sole proprietor firm would be form as a limited liability company than it would offer more benefits to the company.
- Make or buy decision:
Company should make the component. As the given case briefs that if the company buys the product from outside than the total cost of the product would be $ 40 and in the case of make, it would be $ 30 only. And company has spare capacity as well. It depicts that if the company would make the components than the cost of the company would be lesser and company could utilize its resource (Weygandt, Kimmel & Kieso, 2015).
- Make or buy decision:
Company should buy the component. As the given case briefs that if the company buys the product from outside than the total cost of the product would be $ 40 and in the case of make, it would be $ 55 ($ 30 variable cost + $ 25 opportunity cost) only. And company don’t have any spare capacity as well. It depicts that if the company would make the components than the cost of the company would be higher and thus, it is recommended to the company to buy the components (Otley, 2015).
- Variance analysis
|
This quarter |
This quarter |
This quarter |
Year to date |
Year to date |
Year to date |
|||
|
Budget ($) |
Actual ($) |
Variance |
Favourable/ Adverse |
Budget ($) |
Actual ($) |
Variances ($) |
Favourable/ Adverse |
|
|
Expenses |
||||||||
|
Cost of sale |
28750 |
31938 |
-3188 |
U |
54688 |
58125 |
-3437 |
U |
|
Electricity |
1875 |
2000 |
-125 |
U |
3750 |
3666 |
84 |
F |
|
General expenses |
5563 |
5979 |
-416 |
U |
10625 |
11038 |
-413 |
U |
|
Consultancy fee |
3125 |
3125 |
0 |
F |
6250 |
6250 |
0 |
F |
|
Advertising |
5563 |
5131 |
432 |
F |
10125 |
9619 |
506 |
F |
|
Wages |
15938 |
17400 |
-1462 |
U |
31250 |
33419 |
-2169 |
U |
|
Total expenses |
60814 |
65573 |
-4759 |
U |
116688 |
122117 |
-5429 |
U |
- Flexible budget
|
This quarter |
This quarter |
This quarter |
Year to date |
Year to date |
Year to date |
|||
|
Budget ($) |
Actual ($) |
Variance |
Favourable/ Adverse |
Budget ($) |
Actual ($) |
Variance ($) |
Favourable/ Adverse |
|
|
Expenses |
||||||||
|
Cost of sale |
35424 |
31938 |
3486.11 |
F |
67383 |
58125 |
9258.4286 |
F |
|
Electricity |
2310 |
2000 |
310.268 |
F |
4621 |
3666 |
954.53571 |
F |
|
General expenses |
6854 |
5979 |
875.411 |
F |
13092 |
11038 |
2053.5179 |
F |
|
Consultancy fee |
3850 |
3125 |
725.446 |
F |
7701 |
6250 |
1450.8929 |
F |
|
Advertising |
6854 |
5131 |
1723.41 |
F |
12475 |
9619 |
2856.4464 |
F |
|
Wages |
19638 |
17400 |
2237.89 |
F |
38504 |
33419 |
5085.4643 |
F |
|
Total expenses |
74932 |
65573 |
9358.54 |
F |
143776 |
122117 |
21659.286 |
F |
Annual operating budget
(Gesimba, Alvar & Mante, 2014)
- Explanation
If a variance is favourable then it simply means that the variance of the company is in the favour of the organization and explains that the cost of the company is even lesser than the expected cost. Such as in above calculation, budgeted cost of goods sold of the company is 35,424 whereas the actual cost of the company is 31,938 which explains about a favourable variances as well as it explains that the cost of the company is lesser than the expected cost (Mohamed, Kerosi & Tirimba, 2016).
- Recommendation
It is highly recommended to David Trading limited to prepare a flexible budget as a flexible budget enables the administration to evaluate the deviation of expected output from actual output. On the basis of flexible budget, management could compare the actual cost of the company with the actual volume along with the budgeted volume and the budgeted cost. Flexible budget would also make it easier for the company to compare the actual and expected cost for an actual activity of the company. Thus, it is recommended to David Trading limited to prepare a flexible budget.
- Accounts receivable cash collection schedule
|
Accounts receivable cash schedule |
||||||
|
For the year 2017 |
||||||
|
|
Jan |
Feb |
March |
April |
May |
June |
|
Total sales |
96000 |
102000 |
108000 |
$ 1,26,000 |
$ 1,32,000 |
$ 1,32,000 |
|
Cash received 70% |
$ 75,600 |
$ 88,200 |
$ 92,400 |
|||
|
Cash received 15% |
$ 15,300 |
$ 16,200 |
$ 18,900 |
|||
|
Cash received 10% |
$ 9,600 |
$ 10,200 |
$ 10,800 |
|||
|
Total cash received |
|
|
|
$ 1,00,500 |
$ 1,14,600 |
$ 1,22,100 |
- Accounts payable cash payment schedule
|
|
April |
May |
June |
|
Total purchase |
$ 27,300 |
$ 28,600 |
$ 1,32,000 |
|
Cash paid 90% |
$ 21,060 |
$ 24,570 |
$ 25,740 |
|
Total cash received |
$ 21,060 |
$ 24,570 |
$ 25,740 |
(Hassan, 2015)
- Cash budget
|
Cash budget |
|||
|
For the year 2017 |
|||
|
|
April |
May |
June |
|
Begining cash balance |
$ -10,000 |
-47860 |
-87730 |
|
Add: sales |
$ 1,00,500 |
$ 1,14,600 |
$ 1,22,100 |
|
Add: Loan |
$ 1,50,000 |
||
|
Total cash available for use |
$ 2,40,500 |
$ 66,740 |
$ 34,370 |
|
Less: cash disbursements |
|||
|
Purchasse |
$ 21,060 |
$ 24,570 |
$ 25,740 |
|
Wages |
$ 49,500 |
$ 51,500 |
$ 51,500 |
|
Other expenses |
$ 17,800 |
$ 18,400 |
$ 18,100 |
|
Dividend payment |
$ 10,000 |
||
|
Purchase of equipment |
$ 1,50,000 |
||
|
Loan |
$ 50,000 |
$ 50,000 |
$ 50,000 |
|
Total disbursements |
$ 2,88,360 |
$ 1,54,470 |
$ 1,45,340 |
|
Cash surplus |
$ -47,860 |
$ -87,730 |
$ -1,10,970 |
|
budgetd ending cash balance |
$ -47,860 |
$ -87,730 |
$ -1,10,970 |
(Hama, Romle & Ezzat, 2015)
- Recommendation
According to the calculations of cash budget and the equipment purchase, it is recommended to the company to pay the loan into more EMIs rather than 3 EMIs as it has impacted the cash flow of the company at a huge level. Though, it has also been found that the June cash position of the company is quite better than the March cash position when the bank balance of the comapny was on overdraft. It explains that the loan EMIs amount should be lesser and EMI must be paid by the company in 6 months.
- Annual net cash flows of project X
|
Annual Net cash flow of Project X |
||||||
|
|
|
|
|
|
|
|
|
|
Year 0 |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
Machinery cost |
$ 1,20,000 |
|||||
|
Installment cost |
$ 15,000 |
|||||
|
Varibale cost |
$ 5,000 |
$ 6,000 |
$ 7,000 |
$ 8,000 |
$ 9,000 |
|
|
Fixed cost |
$ 5,000 |
$ 5,000 |
$ 5,000 |
$ 5,000 |
$ 5,000 |
|
|
Total cash outflow |
$ 1,20,000 |
$ 25,000 |
$ 11,000 |
$ 12,000 |
$ 13,000 |
$ 14,000 |
|
Total cash inflow |
$ – |
$ 50,000 |
$ 60,000 |
$ 70,000 |
$ 80,000 |
$ 90,000 |
|
Profit |
$ -1,20,000 |
$ 25,000 |
$ 49,000 |
$ 58,000 |
$ 67,000 |
$ 76,000 |
(Mukherjee, Al Rahahleh & Lane, 2016)
- Capital budgeting techniques of project X
|
Calculation of Net present value |
|||||
|
Year |
Cash outflow |
Cash inflow |
Net cash flow |
PV Factor |
Present value |
|
0 |
$ -1,20,000 |
$ -1,20,000 |
1.000 |
$ -1,20,000 |
|
|
1 |
$ -25,000 |
$ 50,000 |
$ 25,000 |
0.909 |
$ 22,727 |
|
2 |
$ -11,000 |
$ 60,000 |
$ 49,000 |
0.826 |
$ 40,496 |
|
3 |
$ -12,000 |
$ 70,000 |
$ 58,000 |
0.751 |
$ 43,576 |
|
4 |
$ -13,000 |
$ 80,000 |
$ 67,000 |
0.683 |
$ 45,762 |
|
5 |
$ -14,000 |
$ 90,000 |
$ 76,000 |
0.621 |
$ 47,190 |
|
Net present value = cash inflow – cash outflow |
$ 79,751 |
|
Calcculation of payback period |
||||
|
Year |
Cash outflow |
Cash inflow |
Net cash flow |
CF |
|
$ – |
$-1,20,000 |
$ -1,20,000 |
$ -1,20,000 |
|
|
$ 1 |
$ -25,000 |
$ 50,000 |
$ 25,000 |
$ -95,000 |
|
$ 2 |
$ -11,000 |
$ 60,000 |
$ 49,000 |
$ -46,000 |
|
$ 3 |
$ -12,000 |
$ 70,000 |
$ 58,000 |
$ 12,000 |
|
$ 4 |
$ -13,000 |
$ 80,000 |
$ 67,000 |
$ 79,000 |
|
$ 5 |
$ -14,000 |
$ 90,000 |
$ 76,000 |
$ 1,55,000 |
|
Payback period |
2.79 |
|
Calcculation of payback period |
||||||
|
Year |
Cash outflow |
Cash inflow |
Net cash flow |
PV Factor |
Present Value |
CF |
|
0 |
$ -1,20,000 |
$ -1,20,000 |
1.000 |
$ -1,20,000 |
$ -1,20,000 |
|
|
1 |
$ -25,000 |
$ 50,000 |
$ 25,000 |
0.909 |
$ 22,727 |
$ -97,273 |
|
2 |
$ -11,000 |
$ 60,000 |
$ 49,000 |
0.826 |
$ 40,496 |
$ -56,777 |
|
3 |
$ -12,000 |
$ 70,000 |
$ 58,000 |
0.751 |
$ 43,576 |
$ -13,201 |
|
4 |
$ -13,000 |
$ 80,000 |
$ 67,000 |
0.683 |
$ 45,762 |
$ 32,561 |
|
5 |
$ -14,000 |
$ 90,000 |
$ 76,000 |
0.621 |
$ 47,190 |
$ 79,751 |
|
Payback period |
3.29 |
(Andor, Mohanty & Toth, 2015)
- Annual net cash flows of project Y
|
Annual Net cash flow of Project Y |
||||
|
|
|
Year 1 |
Year 2 |
Year 3 |
|
Machinery cost |
$ 1,20,000 |
|||
|
Installment cost |
$ 10,000 |
|||
|
Varibale cost |
$ 5,000 |
$ 8,000 |
$ 10,000 |
|
|
Fixed cost |
$ 5,000 |
$ 5,000 |
$ 5,000 |
|
|
Total cash outflow |
$ 1,20,000 |
$ 20,000 |
$ 13,000 |
$ 15,000 |
|
Total cash inflow |
$ – |
$ 50,000 |
$ 80,000 |
$ 1,00,000 |
|
Profit |
$ -1,20,000 |
$ 30,000 |
$ 67,000 |
$ 85,000 |
(Rossi, 2015)
- Capital budgeting techniques of project Y
|
Calculation of Net present value |
|||||
|
Year |
Cash outflow |
Cash inflow |
Net cash flow |
PV Factor |
Present value |
|
0 |
$ -1,20,000 |
$ -1,20,000 |
1.000 |
$ -1,20,000 |
|
|
1 |
$ -20,000 |
$ 50,000 |
$ 30,000 |
0.909 |
$ 27,273 |
|
2 |
$ -13,000 |
$ 80,000 |
$ 67,000 |
0.826 |
$ 55,372 |
|
3 |
$ -15,000 |
$1,00,000 |
$ 85,000 |
0.751 |
$ 63,862 |
|
Net present value = cash inflow – cash outflow |
$ 26,506 |
|
Calcculation of payback period |
||||
|
Year |
Cash outflow |
Cash inflow |
Net cash flow |
CF |
|
$ – |
$-1,20,000 |
$ -1,20,000 |
$ -1,20,000 |
|
|
$ 1 |
$ -20,000 |
$ 50,000 |
$ 30,000 |
$ -90,000 |
|
$ 2 |
$ -13,000 |
$ 80,000 |
$ 67,000 |
$ -23,000 |
|
$ 3 |
$ -15,000 |
$ 1,00,000 |
$ 85,000 |
$ 62,000 |
|
Payback period |
2.27 |
|
Calcculation of payback period |
||||||
|
Year |
Cash outflow |
Cash inflow |
Net cash flow |
PV Factor |
Present Value |
CF |
|
0 |
$ -1,20,000 |
$ – |
$ -1,20,000 |
1.000 |
$ -1,20,000 |
$ -1,20,000 |
|
1 |
$ -20,000 |
$ 50,000 |
$ 30,000 |
0.909 |
$ 27,273 |
$ -92,727 |
|
2 |
$ -13,000 |
$ 80,000 |
$ 67,000 |
0.826 |
$ 55,372 |
$ -37,355 |
|
3 |
$ -15,000 |
$ 1,00,000 |
$ 85,000 |
0.751 |
$ 63,862 |
$ 26,506 |
|
Payback period |
2.58 |
(Meyer & Kiymaz, 2015)
- Recommendation
According to the above evaluation, it has been found that the Umang trading limited should accept the Project X as this project would offer higher return to the company in comparison with project Y. Net present value of project X is way higher than the project Y. Though, it has also been found that the discounted payback period and payback period of project X is lower than project Y but at the same time, the total life of project X is higher than project Y.
Thus, it is concluded and recommended to the Umang trading limited to invest into project X to manage and enhance the return.
References:
Andor, G., Mohanty, S. K., & Toth, T. (2015). Capital budgeting practices: A survey of Central and Eastern European firms. Emerging Markets Review, 23, 148-172.
Arnaboldi, M., Lapsley, I., & Steccolini, I. (2015). Performance management in the public sector: The ultimate challenge. Financial Accountability & Management, 31(1), 1-22.
Dunk, A. S. (2011). Product innovation, budgetary control, and the financial performance of firms. The British Accounting Review, 43(2), 102-111.
Gesimba, P. O., Alvar, M. R., & Mante, R. (2014). Organization Development Interventions on Procurement Practice and Budgetary Control at Nakuru Municipal Council in Kenya, Africa. International Journal of Business and Social Science, 5(4).
Gooneratne, T. N., & Hoque, Z. (2016). Institutions, agency and the institutionalization of budgetary control in a hybrid state-owned entity. Critical Perspectives on Accounting, 36, 58-70.
Hama, B., Romle, A. R., & Ezzat, N. S. (2015). Toward a unifying framework for budgetary control and accountability in the public sector. International Journal of Administration and Governance.
Hassan, I. M. (2015). Budgetary control system for University of Karbala Iraq based on adaptive budgetary control framework (Doctoral dissertation, Universiti Utara Malaysia).
Meyer, K. S., & Kiymaz, H. (2015). Sustainability Considerations in Capital Budgeting Decisions: A Survey of Financial Executives. Accounting and Finance Research, 4(2), 1.
Mohamed, I. A., Kerosi, E., & Tirimba, O. I. (2016). Analysis of the Effectiveness of Budgetary Control Techniques on Organizational Performance at DaraSalaam Bank Headquarters in Hargeisa Somaliland.
Mukherjee, T., Al Rahahleh, N., & Lane, W. (2016). The capital budgeting process of healthcare organizations: a review of surveys. Journal of Healthcare Management, 61(1), 58-76.
Otley, D. (2015). in Management Control. Critical Perspectives in Management Control, 27.
Rossi, M. (2015). The use of capital budgeting techniques: an outlook from Italy. International Journal of Management Practice, 8(1), 43-56.
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2015). Managerial accounting. Wiley..