Cameron is the Managing Director of PL Ltd, a UK company that manufactures components for the car manufacturing industry. The company accountant has historically used a ‘traditional’ incremental approach tocreating their budgets. However, the company accountant has suddenly resigned at a time of significant political and economic uncertainty. As a result, Cameron has approached you to prepare the functional budgets for the forthcoming financial quarter. Each of the departmental managers has provided Cameron with the following information in respect to the forthcoming 3-month period: Sales information Sales in units are forecast as follows: Average selling price per unit: £120 August 6,100 September 7,425 October 6,900 November 6,030 December 5,250 Production information Opening stock of finished goods at 1stAugust are 4,000 units. In order to always meet customer demand, the sales manager demands that the closing stocks at the end of each month should equal 1.2 times the following month’s expected sales level. Raw materials information Each unit produced requires 3 kgs of material which they estimate will be £5 per kg, they have been purchasing all their raw materials from the same Frenchsupplier for the past 6 years. Opening stocks of raw materials at 1stAugust are 12,200kgs.The company also has a long-standing policy of increasing closing stock levels by 10% each monthin order to ensure they have enough raw materials. Labour information Each unit produced requires 3 skilled labour hours and 2 unskilled labour hours. Each skilled labour hour costs £15 per hour, and each unskilled labour hour costs £5 per hour. Production overheads information Absorbed on the basis of £3 per direct labour hour. Administration overheads information Administration overheads are forecast at £25,000 for August, but expected to rise by 7% each month. Selling overheads information Selling overheads have historically run at 15% of sales revenue for each month. The sales manager believes that the current average selling price per unit of £120 per unit is as high as the firm’s customers can bear at this time. Required: Prepare a report for Cameron in which you: Part 1: Prepare the functional budgets for the financial quarter August to Octoberfrom the information provided above. Comment on your findings. Part 2: As previously mentioned, the company has always used a ‘traditional’ incremental approach towards building its budgets to plan for the future. Cameron is now concerned that this may not be appropriate in the current turbulent politicaland economic environment which he believes may last for a number of years. As a result, he has also asked you for advice about how he might adopt a more flexible planning approach without losing financial control. Critically review the current budget preparation process Critically analyse the potential advantages and disadvantages of adopting a ‘beyond budgeting’ approach instead Provide Cameron with a recommendation(s) for the future based on your findings
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Cameron is the Managing Director of PL Ltd, a UK company that manufactures components for the car manufacturing industry. The company accountant has historically used a ‘traditional’ incremental approach tocreating their budgets. However, the company accountant has suddenly resigned at a time of significant political and economic uncertainty. As a result, Cameron has approached you to prepare the functional budgets for the forthcoming financial quarter.
Each of the departmental managers has provided Cameron with the following information in respect to the forthcoming 3-month period:
Sales information
Sales in units are
Average selling price per unit: £120
August 6,100
September 7,425
October 6,900
November 6,030
December 5,250
Production information
Opening stock of finished goods at 1stAugust are 4,000 units.
In order to always meet customer demand, the sales manager demands that the closing stocks at the end of each month should equal 1.2 times the following month’s expected sales level.
Raw materials information
Each unit produced requires 3 kgs of material which they estimate will be £5 per kg, they have been purchasing all their raw materials from the same Frenchsupplier for the past 6 years.
Opening stocks of raw materials at 1stAugust are 12,200kgs.The company also has a long-standing policy of increasing closing stock levels by 10% each monthin order to ensure they have enough raw materials.
Labour information
Each unit produced requires 3 skilled labour hours and 2 unskilled labour hours. Each skilled labour hour costs £15 per hour, and each unskilled labour hour costs £5 per hour.
Production
Absorbed on the basis of £3 per direct labour hour.
Administration overheads information
Administration overheads are forecast at £25,000 for August, but expected to rise by 7% each month.
Selling overheads information
Selling overheads have historically run at 15% of sales revenue for each month.
The sales manager believes that the current average selling price per unit of £120 per unit is as high as the firm’s customers can bear at this time.
Required:
Prepare a report for Cameron in which you:
Part 1:
- Prepare the functional budgets for the financial quarter August to Octoberfrom the information provided above.
- Comment on your findings.
Part 2:
As previously mentioned, the company has always used a ‘traditional’ incremental approach towards building its budgets to plan for the future. Cameron is now concerned that this may not be appropriate in the current turbulent politicaland economic environment which he believes may last for a number of years. As a result, he has also asked you for advice about how he might adopt a more flexible planning approach without losing financial control.
- Critically review the current budget preparation process
- Critically analyse the potential advantages and disadvantages of adopting a ‘beyond budgeting’ approach instead
- Provide Cameron with a recommendation(s) for the future based on your findings
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