Management Accounting-ABF205SL

Coursework

BY

Team 22

Binal Wijegunawardena BSC-PLY-MGT-16.2- 234 10601481

Suganthini Paramanathan BSC-PLY-MGT-16.2-213 10601421

Geethma Jayalthilake BSC-PLY-MGT-16.2 - 256 10602723

Shanika Priyadarshani BSC-PLY-MGT-15.1-076 10601431

Name

An independent Report

Submitted to the Plymouth University – UK

In partial fulfillment of the requirements for the module of

ABF204SL – Financial Institutions and Markets

2018

BSc (Hons.) Accounting and Finance

Plymouth University

United Kingdom

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Abstract

Budgeting process rationing is the procedure of arranging future business exercises by securing
execution objectives and executing or neglecting them under a formal arrange. Clinched
alongside other words, rationing is the methodology from claiming settling on money related
objectives Making a plan may be considerably more than management sitting down Also nearing
dependent upon with execution numbers that they need to help in the next quarter. A plan is by
any means arrangement to the company’s future. Administrators and table parts help
Furthermore examine the place they need to view the organization done a considerable length of
time on come, the thing that businesses they need to exploit, furthermore what items they need to
make. In place to attain at whatever from claiming these long-haul plans, the organization must
need an approach should make chances Also track the Advance along the lifestyle. That is
precisely the thing that a plan does. for an organization Furthermore making an arrangement
with attain the individual’s objectives.

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Table of content

1. Introduction

2. Developing Budgets

2.1 Sales Budget

2.2 Production budget

2.3 Material usage budget

2.4 Material Purchase budget

2.5 Labor Budget

2.6 Cash Budget

2.7 Comprehensive income statement

2.8. Other expenses

2.9 Non-currents assets

2.10. Non- current labilities

2.11 Current labilities

3. Findings

4. Suggestions and Recommendations

5. Conclusions

6. References

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 1. Introduction

The company that came in spotlight of this report is Duminda Enterprises where its primal
production is focused on production of Rubber and the conversion of rubber to hoses. It’s a
medium scale enterprise that of course consist of many comprehensive methods on focusing its
production, as they have 2 separate production lines for rubber hoses where water is used for one
type of hose which uses synthetic rubber manufacture, and the other which use RSS rubber
which is a naturally extracted rubber used for oil. The Direct materials used in this process is
primarily rubber, copper wire, canvas, soap, ropes and chemicals which are used to create the
rubber itself, and this industry comprises of 20 employees where 12 are used operations and
management in the rubber production and 8 which is used for the conversion stage of rubber to
hose. The reason why we picked this company is because it scaled a grand history for nearly 2
decades and not only that, the companies accounts are of course very much reliable as they
maintain many of there records of data both in books and software.

2. Developing budgets

This was a vital stage as we had to examine the financial budgets and master budgets in term of
the previous budgeted information, and so the stage where the budget is examined reveals us
what kind of a company is this and will it prevail to the values it stated on it own

2.1. Sales budget

Sales are the limiting factor of this company. Therefore we have started to forecast the budget
from the sales budget. The number of units sold by the company for the previous year was 9600
units. But due to the increase in the market demand, this company is expecting to obtain special
orders from the customers; therefore company is expecting to increase the number of sales units
by 11.45% to the previous year’s sales units, which are 1100 units higher than the previous year.
Therefore the budgeted sales units for the forecasting period will be 10700 units

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 The selling price per rubber hose is Rs.750/- which remain constant for the previous year
and for the forecasting period.

The total sales value for the previous year was Rs.7, 200,000/- but the total sales value
for the forecasting period is Rs.8, 025,000/- Because of the increase in the number of
sales units for the forecasting period , the total sales value for the forecasting period has
been expected to increase.

2.2. Production budget

The budgeted production units for the forecasting period are 11,200 which are 800 units higher
than the previous year. This is because due to the increase in the marked demand and the
increase in the number of sales units, the company is expecting to produce 800 units more than
the previous year.

Closing inventory for the budgeted period is 5460 units, which is 660 units higher than
the previous year. This is because, the company is expecting their will be an opportunities
for obtaining special orders for the next year, and also company is expecting that, due to
the maintenance services in the production department, company is expecting to close
down the production department for few days. Therefore in order to avoid the
inconvenience in the production department company is expecting to increase the closing
inventories for the budgeted period.

2.3. Material usage budget

This organization has rubber as their main raw material and compound, canvas, binding tape and
steel wire as their sub elements of raw material. Company will use 11,200 units of rubber (main
raw material) in order to produce 11,200 units of rubber hose and they will use 22,400 units of
other sub elements of material in order to produce 11,200 units of rubber hose. Because of
increase in the budgeted production units, the total budgeted requirement of the raw material for
both (rubber and other sub elements) is expected to increase compared to the previous year.

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 Rate per unit of raw material for both (rubber and other sub elements) has remained as
the same rate.

Because of the increase the budgeted production the total cost for both raw materials has
expected to increase by 7.69% than the previous year.

2.4. Material Purchase Budget

Since the company is planning to increase the number of production units for the next year,
closing raw materials for the main elements has been expected to decrease by 24.29% and
closing raw material for sub element has been expected to decrease by 13.27%

Since the budgeted number of total material requirements is expected to increase

material purchase requirement for main elements has expected to increase by10.88% and
material purchase requirement for sub element also expected to increase by 18.86%

Rate per unit of raw material is expected to remain constant for the budgeted period as
well.

Total raw material cost is expected to increase by 15.36% than the previous year.

2.5. Labour budget

Wages per unit has expected to increase up to Rs.80/-which is Rs.20/- higher than the previous
year. This is because company is expecting there will be an opportunity for the company, to
obtain special orders from the customers. Therefore, if that occurs employees are expected to
produce extra units. Therefore the company is required to pay for those extra units as well.
Therefore the total labour cost is also expected to increase by 43.59% than the previous year.

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2.6. Cash budget

Cash sales are expected to decrease for the forecasted period by 8.53% than the previous year.
Cash from debtors for the forecasted period are expected to increase by 21.48% than the previous
year. This is because company has reduced the receivable period for the debtors. Total cash
receipt is expected to increase by 9.91& than the previous year. Cash payments to creditors are
expected to decrease by 17.29% than the previous year.

Wages for the forecasted period are expected to increase by 15% than the previous year.
Production payments for the forecasted period are expected to increase by 8.92% than the
previous year. Selling and administrative expenses for the forecasted period are expected
to increase by 80.63% than the previous year. Cash payments for the finance expenses
for the forecasted period are expected to increase by 38.33% than the previous year. Cash
payment for purchasing a building, equipment and motor vehicle for the forecasted
period is Rs.370110/- Total cash payments for the forecasted period are expected to
increase by 14.36% than the previous year.

2.7. Statement of comprehensive income

Sales

the total sales value for the forecasting period is Rs.8, 025,000/- Because of the increase in the
number of sales units for the forecasting period , the total sales value for the forecasting period
has been expected to increase.

Cost of sales

Since this is a manufacturing company cost of sales value is derived from the manufacturing
account.

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2.8. Other expenses

Salaries

Total salary is Rs.1322450/- from the total salary company allocates 56.41% for the
manufacturing department 43.59% for the income statement. Salaries for the budgeted period is
expected increase, because company is planning to increase the number of employees

EPF

Salaries for manufacturing department company is paying 12% as EPF and salaries for other
department company is paying 12% as EPF.

ETF

Company is paying 3% as ETF for all the employees on their total salary.

Lorry license

Lorry license expense is expected to be remaining as the same amount for the forecasted period
as well.

Van license

Van license expense is expected to remain as the same amount for the forecasted period as well.

Lorry insurance

Insurance expense for the lorry is expected to remain as the same amount for the forecasted
period as well.

Van insurance

Insurance expense for the van is expected to remain as the same amount for the forecasted period
as well.

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Electricity

Electricity expense for the forecasted period is expected to increase than the previous year. Due
to increase in the number of production units, company is expecting there will be an increase in
the electricity expense.

Water

Water expense for the forecasted period is expected to increase compared to the previous year.
Due to increase in the number of production units, company is expecting there will be an
increase in the water bill expense.

OD interest

OD interest expense is expected to increase by 6.04% compared to the previous year.

Bank charges

Bank charges for the budgeted period are expected to decrease by 17.25% than the previous year.

Vehicle maintenance

Vehicle maintenance expense is expected to remain as the same amount for the forecasted period
as well.

Fuel Expense

Fuel expense for the vehicle is expected to increase by 3.11% compared to the previous year.

Lease interest expense

Interest expense for the leases is expected to decrease by 14.01% compared to the previous year.

Telephone expense

Telephone expense for the forecasted period is expected to decrease by 2.91% than the previous
year.

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Income tax for the forecasted period is 12% Company will have a current liability to pay for the
Income tax

income tax for the budgeted period

2.9 Non-current assets

Land and buildings

Company is expecting to acquire a small building for Rs.26, 950/-

Equipment

Because of company is expecting to increase the production units in the future company is
expecting to acquire equipment for Rs.270, 280/-

Motor vehicle

Company is expecting to acquire a motor vehicle for rs.72, 880/-

Depreciation

Company depreciation policy for building is 10%, for equipment 20%, and for motor vehicle is
25%.

Goodwill

This organization has a goodwill worth of Rs.20, 700/-

Inventories

Closing inventories for the forecasted period is expected to be Rs.4, 095,000/-This is because,
company is planning to increase the production units for the next year, therefore the closing
inventories also expected to increase.

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Debtors

Debtors are expected to increase by 58.67% than the previous year.

Cash and cash equivalents

Cash in hand for the forecasted period is expected to decrease by 44.3% than the previous year.
This is because company is planning to acquire non-current assets.

2.10 Non-current liabilities

Leasing

Company has taken a lease from a people’s leasing company for an interest rate of 33.84% for
the last year.

Lease liability for the forecasted period is expected to decrease by 5.10% than the last year.

Bank loan

Company has obtained a bank loan for the previous year at an interest rate of 4.51% Bank loan
is expected to decrease by 26.45% than the previous year

2.11 Current liabilities

Bank OD

Company is expecting that, bank OD will be reduced for the budgeted period

Creditors

Creditors are expected to decrease by 23.81 % than the previous year.

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3. Findings

In our findings we can observe the post observations of what we can see in the budget of how
they use their budget in there daily lies and how they generally create it for managerial purposes.
A lot of the company’s information is confidential, therefore to get proper accurate information
from the company. However, the data we extracted from the company led us to the following
findings we see below.

 Inventory policy

Inventory policy is a policy that use to maintaining the inventory in their company. Basically in
this company they have a policy to keep 50% of their productions as the final inventory. The
stock handling mechanism they use FIFO method, which is known as First In First Out, where
the company will use the initially received raw materials to manufacture

 How labors are recruited

The labors are mostly recruited for the production process therefore most of them are not skilled
but for the administration purposes they are recruiting labors that are very knowledgeable and
educated and also who has an experience. It is also clear that since the company runs in the
production line mechanism the labors must be well aware of how the production line works and
they cannot afford to make mistakes.

 Cost of the production

The companies main target is to maintain their gross profit margin around 60% to maintain their
net profit margin around Just like in any other company of manufacturers they too face expenses

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which can be either adequate or inadequate and some of them can be briefed as purchases
expenses, manufacturing expenses, overheads, labor expenses, maintenance on production unit
and so on.

However when the company uses options on managing their cost, they use it by maintain
their resources and the costs are handle by the owner of the company. Not to mention he
recently removed 2 of his employees in just manner to reduce variable cost incurred. And
for the steaming purposes and at the same time to reduce their water expenses by taking
water from their own well. For one of the main elements in the production line they
manufacture rubber by themselves.

 Suppliers

Mainly the materials such as rubber compounds, binding tapes, rubberized canvas so on, are
purchased from several suppliers however the main element ,75% of the compound rubber are
manufactured by themselves and rest of it purchased from a major supplier known as huge mark
and Ariyadasa, which their rubber compound cost Rs 50 per unit if purchase in bulk. It is also
expected the company plans to pay the creditors within 3 or 4 months and the same applies for
the debtors as the company receives their payments within averagely around 3 months.

 Budgeting method

As a company they have their own specialized budgeting method like traditional budgeting
method and the incremental or the zero based budgeting method. But in here the company itself
is using traditional budgeting method. Traditional budgeting is accepted rationing is a system for
preparation of the plan clinched alongside which most recent year’s plan will be made
Concerning illustration those build. Present year’s plan will be readied by making progressions
with past year’s plan.

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4. Suggestions and recommendations

Even though the company operates prior to a proper standard it doesn’t necessarily mean there is
no error. In our context we had to faced many challenges prior on our every move in
coordinating with the company. To erase those errors the company should

 Available of information- in clear simple words any companies financial

information as to budgeting in of course confidential as the sole purpose of budgeting
is for the companies internal administration, and not to be publicized in public,
however we sometimes faced issues when we’re acquiring financial account
information, the figures which are actually supposed to be delivered to the public.
The main challenge we had to face was recreation of a trial balance based on the
information of balance sheets. To cover up this weakness they must without a doubt
maintain every type of account they can possibly make as even the smallest detail
can be easily judged among the public eye.
 Appointment of a proper board of management – this can be a major flaw of the
company as the companies major finances and management decisions are handled by
the owner of the company, there by it is a major weakness as they will have trouble
on taking major and risky decisions which not only held the companies finances at
risk, but also have a potential of bankrupting the company even with the slightest
wrong move. So its recommended that they appoint a set of highly experienced
members in the firm to coordinate and manage its operations and finance.
 Stick to budget. There are many moments that the company would take risky
decision sometimes beyond its current usual budgets, it turn we speculated that
company would have a cash deficiency in the next year and the only prior solution to
avoid these circumstances is to stick to the budget and make sure not to diverge the
plan.

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5. Conclusion

By observing the above budgets, which includes the data of both past and future budgets we can
clearly observe there are some weaknesses in the company that improvements must be done.
However in the perception we consider the company as of now, it has a potential to expand its
activities considering the amount of potential sales they receive, but only small barriers exists
that prevents the improvement of the company such as excessive risk taking and diverging there
receipts and payments per budgets, and if so they erased these weaknesses they would have the
potential to expand their budget plans and expand the firm as well.

6. References

enterprise, d., 2016. annual report, s.l.: s.n.

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