Budgeting Questions and Issues

Management accountability to stakeholders first requires consideration of who those stakeholders are. When considering financial accountability, the primary defined stakeholders for annual reports are the shareholders or owners of the firm (Elliott and Elliott, 2013). Therefore, this establishes the need for management accountability towards this group of stakeholders, the process which is satisfied not only for annual accounts, but also from quarterly earnings as well as other statements. However, there are other stakeholders which will have a direct impact on the firm, and either directly or indirectly influence their performance. This includes, but is not limited to, government, customers, and suppliers.

Government accountability requires a firm to demonstrate for compliance with regulation, and where governments are not fully satisfied that firms are acting in an appropriate manner, they are likely to introduce more legislation. Customers will have needs regarding the products and services they purchase, this will not only be related to the product's features and characteristics, but the perceptions of the firm and way in which they provide those products. For example, when Shell chose to dispose of the Brent Spar oil platform in the North Sea, the company faced a backlash from customers refusing to buy their products believing the company was acting in an irresponsible manner, causing environmental pollution (Chyssides and Kaler, 1999). Therefore, management accountability can extend to aspects such as corporate social responsibility, firm values, as well as firm image, and the way in which this is displayed to and demonstrated to all stakeholders, including customers.

Part B

An organisation such as GDC needs to ensure they keep the most important stakeholders happy, otherwise they will suffer. However, it should be noted that not all stakeholders will have an equal level of influence over the firm's operations and performance. To retain sales, it is essential that the organisation satisfy customer needs, regarding products, as well as values and operational decisions (Chyssides and Kaler, 1999). To continue operating, it is essential that the organisation is able to satisfy government requirements and regulations, otherwise they will face significant financial consequences such as fines, and may even be shut down (Mintzberg et al., 2008). If the company does not satisfy supplier needs, they may lose a supplier, but here there is also the potential for the organisation to use their own power, as this is a bilateral relationship, and suppliers may also need the company. Secondary stakeholders, such as local residents, may be able to exert influence over the organisation, but it may be less direct, for example it may be felt if the organisation seeks to extend the offices, as local residents may object using local planning processes.

Question 2

To calculate the cost of goods manufactured it is necessary to assess the costs have been incurred during the period. The calculation for costs of goods manufactured is the cost of the direct materials used added to the direct labour used, added to the manufacturing overhead, which will give the manufacturing costs that have been incurred during that period. The figure there needs to be adjusted allowing for work in progress levels, adding the level of work in progress which was present at the beginning of the period, and deducting the work in progress that was present at the end.

First we calculate materials used

Purchased

Plus beginning inventory

Less ending Inventory

Materials used

Materials

154,000

58,000

64,000

148,000

This can now be used to calculate cost of goods manufactured

Materials used

148,000

Direct labor

174,000

Overhead

90,000

Manufacturing costs for current period

412,000

Plus opening work in progress

88,000

Less closing work in progress

74,000

Cost of goods manufactured

426,000

Using cost of goods manufactured it is possible to calculate cost of goods sold. The formula for this is opening finished goods inventory, plus cost of goods manufactured, less finished goods closing inventory.

Opening finished goods inventory

38,000

Cost of goods manufactured

426,000

Closing finished goods inventory

48,000

Cost of goods sold

416,000

Base on the information provided, assuming all the revenue recorded is the same period as the goods manufactured, the gross profit can be calculated. The formula is the total revenue less the cost of goods sold.

Revenue

512,000

Cost of goods sold

416,000

Gross profit

96,000

Question 3

Part A To calculate the break even point it is necessary to calculate the contribution of each unit (that is the revenue less the direct costs), and then calculate how many units need to be sold to cover the indirect or overhead costs.

The first we calculate the contribution per unit.

Direct materials

24

Direct labor

70

Total direct costs

94

Revenue per unit

Contribution per unit

36

Now we add together the total overheads, and divide those by the contribution per unit to assess the number of units needed to be sold to breakeven.

Factory fixed overheads

120,000

Selling and distribution overheads

160,000

Administration overheads

80,000

Total overheads

360,000

Contribution per unit

36

Unit sales to cover overhead (Breakeven point)

10,000

Part B

Contribution

36

Selling price

Contribution margin

27.69%

Part C

Contribution for 20,000 units

720,000

Overheads

360,000

Profit

360,000

Part D

Here the calculation is reversed, and the required profit is added to the overheads, and used to calculate the number of units should be sold to reach the desired contribution level to cover the overheads and reach the desired profit.

Required profit

720,000

Overheads

360,000

Total level of contributions required

1,080,000

Contribution per unit

36

Number of units to be sold

30,000

Part B

Question 1

Sales budget

The sales forecast assumes that there are no discounts or allowances being given to purchasers, otherwise these would need to be deducted from the gross sales.

Quarter 1

Quarter 2

Quarter 3

Quarter 4

Forecast unit sales

4,000

4,800

9,600

9,200

Price per unit

1,000

1,000

1,000

1,000

Gross sales

4,000,000

4,800,000

9,600,000

9,200,000

Production budget

The production is based on the sales forecast, and the assumption that the organisation wishes to ensure there is a buffer in inventory 25% of units needed ready for the following quarter.

Quarter 1

Quarter 2

Quarter 3

Quarter 4

Forecast unit sales

4,000

4,800

9,600

9,200

Plus buffer (ending units)

1,200

2,400

2,300

2,600

Total units required

5,200

7,200

11,900

11,800

Less opening inventory

1,200

2,400

2,300

Units to be manufactured

4,600

6,000

9,500

9,500

Question 2

Return on investment is a ratio that indicates the level of return is (profit) that is created through the use of an investment, in this case the investment are the assets.

Operating income

Average total assets

Return on investment

Division A

225,000

2,250,000

10.00%

Division B

250,000

2,000,000

12.50%

Division C

450,000

4,000,000

11.25%

Question 3

Return on investment has a number of advantages and disadvantages.

Advantages

Return on investment allows for an effective measure profitability, allowing an organisation to assess performance based on the assets they are using to create a profit (Elliott and Elliott, 2013). This helps to ensure investment decisions are made so that assets can be maximized (Bodie et al., 2014).

Return on investment can help with decision-making and internal assessment, by facilitating a comparative analysis, even within the organisation across different products or divisions, or for benchmarking within an industry (Seal et al., 2011).