ABF205SL – Management Accounting

Budget Preparation

By

Name NSBM Student ID No: Plymouth ID No:

K.A.D.A. Maduhansi 10022003 10639220

P.A.K.Hansinie 10022438 10637920

A.W.G.Hansika 10022238 10639487

L.N.Lenaduwa 10022434 10637918

An Independent Research proposal

Submitted to the Plymouth University -UK

In partial fulfillment of the requirements for the module of

ABF205SL – Management Accounting

2018

BSc (Hons.) Accounting & Finance

Plymouth University

United Kingdom

i
Acknowledgement

We would like to take this chance to express a bottomless sense of appreciation to our
lecturer Miss. Maithri Vidanakariya Karanaga for her support and guidance which was a
boundless strength for us.

We would like to show our gratitude to the Director of the Sothern Smart PVT (Ltd)
Company who assisted us in several stages. We are obliged for his/their cooperation during
the period of the process.

Members of the group number 20 are to be thankful for completing this task by organizing
and putting together the parts, this preparing budget comes out as a yield of all the hard work
given by every member of our group.

ii
Declaration

I declare that all materials included in this report is the end result of our own work and that
due acknowledgement have been given in the bibliography and references to ALL sources be
they printed, electronic or personal.

Signed:

P.A.K.Hansinie

K.A.D.A.Maduhansi

L.N.Lenaduwa

A.W.G. Hansika

iii
Abstract

A budget is a future plan for short term of the business and budgeting is an important area for
a business. A business will prepare more than one budget for a particular period. There is a
process to preparing a budget. The budget -setting process has nine steps to follow. There are
establish responsibility for the budget -setting process, Communicate budget guidelines to
relevant managers, Identify the key or limiting factor, prepare the budget for the area of the
limiting factor, Prepare draft budgets for all other areas, Review and co- ordinate budgets,
Prepare the master budgets, Communicate the budgets to all interested parties and monitor
actual performance relate to the budget. (Drury, 2012)

First step is establishing who will take responsibility. The organization must communicate
details and policies about budgets to the person who responsible for this area. They have real
authority to preparing budgets. Companies appoint a budget committee and they are formed
to supervise and take responsibility for the budget -setting process. A budget officer is
appointed to get the technical tasks of the committee. Communicate budget guidelines to
relevant managers is the second step. Managers are person who responsible for the strategic
plans and achieve business objectives. So, they must aware about budgeting strategies also.
Hence, the budget committee communicates about budget lines with relevant managers.
Third step is identifying the key, or limiting, factor. Identifying the limiting factors is very
helpful to create budget easily. The limiting factors are depending on company. It will
determine the overall level of activity for the business. Then the business prepares the budget
for the area of the limiting factors. In fifth step, they need prepare draft budgets for all other
areas. In companies, they often have to redraft budgets for minor adjustments. Therefore, two
methods used to be approached to setting individual budgets. They are Top-down approach
and the Bottom-up approach. According to the Top-down approach, the budget is made by
the top-level management of the entity by getting information from the lower level
management and the employees. This method helps to include strategic plans into the
budgeted activities, management can use the knowledge of total resource utilization hence it
will reduce the time period to make the budgets and this method helps to increase the
coordination between department’s objectives and plans. Bottom-up approach is the process
that entity gives the chance to participate all the parties who are using the budgets to involve
the budget preparing process. The advantages of this method are more realistic, developing
more coordination between the departments and motivate the dedication and encouragement.

iv
But this method normally getting more time to gathering information and workers attempt to
set very relaxed tasks and targets for easy achievements. Because of that reasons, top-down
method is in practice. (Don R.Hansen, 2005)

Next step is review and co- ordinate budgets. The budget committee must, at this stage,
review the various budgets and satisfy itself that the budgets are consistent with one another.
If has a lack of co-ordination in one place, the steps must be taken to ensure that the budgets
mesh. In seventh step, the budget committee takes the task of preparing the master budgets.
The master budgets are budgeted income statement and budgeted statement of financial
position -and perhaps a summarized cash budget. After prepare master budgets, can
communicate the budgets to all interested parties. The senior management is one party has
interested in budgets, because they can formally communicate to the other managers about
the targets that they are expected to achieve. In end of the budget – setting process,
monitoring performance relative to the budget. The managers compare actual performance
with planned performance. (Charles T.Horngren, 2014)

v
 Table of content

1. INTRODUCTION .............................................................................................................. 1

1.1 Introduction to coursework ......................................................................................... 1

1.2 Introduction to the company (Southern Smart (PVT) Ltd) ......................................... 1

1.3 Budgeting process of the selected company .................................................................... 2

2.DEVELOPING BUDGETS .................................................................................................... 6

3.FINDINGS .............................................................................................................................. 8

4.SUGGESTIONS AND CONCLUTION............................................................................... 10

4.1 Suggestions..................................................................................................................... 10

4.2 Conclusion...................................................................................................................... 10

5.REFERENCES ..................................................................................................................... 11

6.APPENDICES ...................................................................................................................... 12

vi
 1. INTRODUCTION

1.1 Introduction to coursework

This is a second year 1st semester assignment of the Accounting & Finance. We are expected
to select one organization preferably a manufacturing organization and prepare different
types of budgets including the master budget to that company for a selected future period in
2019 where it should be for at least one quarter by applying the concepts they learnt under the
topic of budgeting.

The objective of the coursework is to provide students with an opportunity to update their
knowledge and skills on setting up different types of budgets for a selected organization after
considering actual budgeting practices, resource constrains, market demand and other
concerns. Further this would be an opportunity to us to understand how those budgeting
concepts are actually practiced in corporate world

1.2 Introduction to the company (Southern Smart (PVT) Ltd)

Our selected company is Southern Smart (PVT) Ltd. It started as a limited liability company
in small scale producer and they respectively expanded as a large scale manufacturer in the
island. This company establish in year 1997 as one of the leading manufacturers of quality
mosquito nets in Sri Lanka. It is situated in Kadawatha, Sri Lanka. They have been supplying
their products to hotels, villas, government departments, ministries, mansions, armed forces,
embassies, large super markets, sales outlets, houses and individuals, their nets are of high
quality , sweat free, durable, non-shrinking, washing machine washable, unique, strong and
long lasting netting material specially developed for the customer’s satisfaction after devoting
long years of research and effort put together for the entire satisfaction of their buyers spread
throughout globally.

They produce various standard sizes, types and colors of nets namely Smart Super Mosquito
Nets, Smart X Mosquito Nets, Smart King Size Mosquito Nets, Netmo Zip net Mosquito Bets

1
and Smart Tailor Made Mosquito Nets produced as per the customers required sizes, types
and colors. All above nets comes with handy circular types pvc Frames and Square types
Stainless Steel frame unbreakable, Rust free, light weight, so solid that it was developed up to
this stage under many years of hard work and research for the upgrading of machines with
advanced technology where necessary. (Anon., 2018)

1.3 Budgeting process of the selected company

Southern Smart pvt ltd. Is following Zero rated budgeting process. Zero rated budgeting
means organization starts each year completely blank sheet. That means
organization/company does not consider about the past information. So, Southern Smart pvt
ltd. has to justify each part of the company over again the budget it requires. Zero based
planning was concocted as a response to the conventional incremental methodology to
planning. (Weetman, 2010)

For doing this Southern Smart pvt ltd. Need to ask some stimulating questions;

 What is the requirement for this activity?

 Is there alternative cost effective way of doing it?
 How much is it needed?
 What are the benefits we can achieve by doing this activity?

Budgeting Process

1) Communicate objectives of the company and company strategies to those who

responsible for preparing budgets.

Company strategy document contained log-term plan which is spread within the
company. Strategy document should include clear and native description about the

2
 company objectives. Company objectives are expressed in non-finical terms. As an
example sales and production target by volume, workforce by quantity.

2) Communicate the procedures of budget preparation

Southern Smart pvt ltd. has a budget manual which is include budget preparation time
table, formats/methods to be used when preparing budgets, circulation lists for drafts
and negotiation procedure.

3) Determine the critical factor

Sales are the critical factor of our company. Because it is useless to produce goods
which do not sell. Demand for the goods is not a big deal but supply of materials or
labor resources is the problem. Because material prices can be increase due to
inflation, economic circumstances etc.

4) Preparing an initial set of budgets

Sales budget, operational budget, production plan and master budget which containing
the budgeted profit and loss account, budgeted cash flow statement and the budgeted
balance sheet.

5) Negotiate budgets with line managers

The company negotiate budget using two methods called bottom-up budget and top-
down budget. In this process budgets will distribute to each department that is
responsible.

3
 6) Co-ordinate and review budgets

Separate budgets from separate departments brought together and meeting at the
budget committee. Co-ordination will check whether the all separate budgets serve the
company objectives and strategy.

7) Accept the budgets in final form

After the negotiation process all the managers from separate departments need to
discuss about the separate budgets. After them finalizing that they will accept the
budget for the particular budgeting period.

8) Ongoing review

Monitoring their subsequent actions against budget plan. So they can see what the
corrective actions are. If anything changed in actual outcome than the budget easily
they can revise the budget.

The first task of the budgeting process is identifying the principal budget factor for preparing
a budget it will take more time and before finalize the master budget the entity’s budget
committee should meet several times. The functional budgets that are adding to the master
budget can be mutated several times because of the results of department discussions during
the budget preparing time and the changes in market situations.

Normally key budget factor is the sales demand. According to the Southern (Pvt) Ltd, they
also considered the limiting budget fact as sales demand. Therefore, following steps are the
concluded procedure when preparing budget with key budget factor.

Sales budget is prepared with the sales units and the sales volume along with this budget we
can be identified the variance in the forecasted closing stock.

Using the sales budget and the DM budget then we can prepare the production budget that is
by adding or subtracting closing stock to the sales budget with units.

This will guide to logically forecast resources for the production.

4
After identifying the direct material requirements and direct material budget, the purchasing
department can access the purchasing budget using the relevant quantities and prices.

During the sales and production budget preparation time, the managers in the cost centers
estimate their budgets for overheads.

According to the above information the forecasted P&L can be prepared.

Further we also have to develop several budgets such as capital expenditure budget, operating
expenditure budget and the cash budget for forecasting the statement of budgeted financial
position.

5
2.DEVELOPING BUDGETS

6
Considering the sales budget, the entity will predict their sales demand will fluctuate time to
time accordingly, because of the seasonal fluctuations. The estimated highest sales are
expected in December (3555 units) and the lowest is in May (444units). In December, it is as
a percentage of total sales are 17.8%. In May, it is as a percentage as total sales are 2.22%.
Expected total sale demand is 20000 units and they intend to generate 91 800 000 rupees
revenue from it. The reason to have highest demand in December is the seasonal sales.

Further the entity produces their production according to the sales budget. The company
intended to maintain their closing inventory based on 60% of next month sales. The total
production units are will be 20 493 rupees. They will highly concern about quality of their
production.

Then deep examine about the direct material budget they will supposed to keep 90% of
closing stock base of the next month production. The total purchasing cost will be 656 542.08
rupees. The company will do all purchase direct material on credit basis. The company pays
salaries for their employees on monthly basis. They supposed to expand their recruitment
policy to 38. They have equal cost for labor because of this monthly payment policy. The
monthly cost will be 1 140 000 rupees and the total will be 13 6 80 000rupees.

According to the cash budget, they expect to do 15% of cash sale with the relevant month and
85% will based on credit. The debtor collection period of the entity is 45 days. The bank loan,
they will expect to get for the acquirement of new factory premises. That loan will be
received on June. Amount of the loan they expected to get is 20 000 000 rupees and the 17%
of the annual interest rate.

The credit purchases are purely based on the material purchasing. The credit settlement
period is one month. Fixed overhead expenses are consisting of electricity, water bill etc. The
cash budget will create negative cash flows because of their new property acquirement. That
30 000 000 rupees loan directly affect to next month cash flows. Because of that, the final
cash flows in last months in the budgeted cash flow depicts negatively. Taxes and rates are
paid by quarterly and they allocate 12 000 000 rupees for that. The company supposed to
purchase new machines in January, because they are highly concern about their quality. The
rent and advertisement expenses are fixed. They are respectively 67 000 rupees and 2 000
000 rupees.

7
3.FINDINGS

This entity has no previous experiences in budgeting because they are mainly focusing on
R&D for past few years. Now they are mainly doing their promotion and advertising
campaign for improve customer awareness about the product.

The entity’s sales demand is fluctuating time to time. The highest demand normally expects
in December and the least demand expect in May.

The current economy situation directly affected to the overall business activities. Because of
the increase of the dollar the expected purchasing cost would be increased.

The entity maintains good quality throughout their production. Therefore, they are expected
to expand their production. Therefore, they are expected to expand their product range and
enter to the export market.

Company’s all purchases of direct material on credit.

Cash sales are 15% of the relevant month and the credit sales policy is 45 days.

The company supposed to allocate 3% of provision for obsolete inventory.

The organization is doing the monthly salary payment for their employees.

The company’s tax policy is on quarter.

The forecasting year finance cost will increase because of the bank loan interest payments.

The company distribution costs are mainly including the promotion and advertising
campaigns and Administrative expenses will be increased because of new recruitments of
employees.

The units that entity supposed to produce will be mainly depending on the sales demand.

Suppliers of direct materials are paid after one month’s credit.

The company intends to sell each unit for 4590 rupees and has estimated that it will have to
pay 180 rupees per unit for direct material is needed for each unit of finished product.

8
The company supposed to maintain 60% of next month sales for the base of finished goods
closing inventory and 90% of next month production for the base of direct material is closing
stock.

Cash from a loan secured on the land and buildings of 20 million at an annual interest rate of
17% is due to be received on June.

The loan interest is payable monthly from September onwards.

The entity supposes to acquire new factory premises closely to the town. That cash outflow
can be directly affected to next month’s cash flows.

9
4.SUGGESTIONS AND CONCLUTION

4.1 Suggestions
The customer credit period of Southern Smart Pvt Ltd. Company is 45 days in next year; we
suggest improving credit period as 75 days. (2.5 months) Then the customers motivate to get
their products. Because of that, the sales will be increasing.

The entity’s sales have shortage, so the investments are must be short term investments.

Their budgeting policy is zero based budgeting because this is the first time of budget
preparation of this company. In future, the budgeting policy changes can happen, and it will
be good decision for the company.

4.2 Conclusion

Our project was preparing a budget for manufacturing company. We selected Southern Smart
Pvt Ltd.as our company and we prepared the budget of this company to year 2019.From
doing this project, we always try to identify budgeting process and budgeting policies. This
project provides us with an opportunity to update our knowledge and skills on setting up
different types of budgets. In preparing the budget, we always try to image about future of the
company and we got great knowledge about company achievements. We addressed reasons
behind Effects of the Sri Lankan economy changes and the company future plans and how
affect these things to budgeting process. We got challenges in step by step through doing our
project.

10
5.REFERENCES

Anon., 2018. Mosquito Nets Sri Lanka. [Online]

Available at: http://smartlk.com/

Charles T.Horngren, G. L. J. O. D. B., 2014. Introduction to Management Accounting. 16th

edition ed. India: Dorling Kindersley PVT(Ltd).

Don R.Hansen, M. M., 2005. Management Accounting. 7th edition ed. New Delhi, India:
Centage Learning India PVT(Ltd).

Drury, C., 2012. Management and cost accounting. 8th edition ed. India: Centage Learning
India PVT(Ltd).

Weetman, P., 2010. Management Accounting. UK: Pearson education limited.

11
6.APPENDICES

Master Budget
(2).xls

12
 Group Report Marks Comments

awarded

Very good introduction about all the

1 Introduction to the coursework. 10% 8 aspects.

Analysis of the budgeting process of

the organization and identifying
main budgets to develop I don’t see a very good analysis, but
considering their resource comparatively you have discussed the
2 constraints and other aspects. 30% 18 budgeting process and related areas.

Developing a budget to the selected Have done a good job. You have
organization taken the practical application to
3 40% 28 your work.

Identifying issues of the budgeting

process and your suggestions for its I don’t see major issues that you
4 development 10% 5 have identified to be addressed.

Mostly you have followed them

5 Adherence to provided guidelines 5% 4 properly.

Overall structure and the

6 presentation 5% 4 Good presentation.

of the report including

spreadsheets

Total Marks = 67%

13