Budgeting and Forecasting
Budgeting ad Forecasting
There are several budgets within an organization for the management to use. Cash budget is one of the important budgets, which is concerned with planning and control of cash. It considers inflow and outflow of cash for a specific period. The cash budget plays a hugely significant role of helping the management in maintaining a rational cash balance in relation to its needs. This is important since it helps the management in eliminating idle cash a well as shortages. A cash budget has four sections, which are the receipts section that contains the cash received from customers among other receipts. The other section is the disbursement section, concerned with cash that is paid out by the company for several purposes. The following part is the cash surplus/deficit, which shows the difference between the cash paid and received. Then follows the last part, which is a financial section concerned with accounting for cash borrowing and repayments expected in the period.
The stakeholders in this decision are the mangers and employee in the marketing department considering it is the whole department that is supposed to make decisions on such matters. Therefore, all employees and managers within the marketing department are stakeholders in this decision and should be involved.
It is ethical for Judy to revise the costs as advised by the other manager, considering the decision is supposed to be for the whole department and having people contribute concerning ways of analyzing the project is right. However, if the company has clear indicating that such costs should be considered as fixed, Judy had no ethical right to revise the costs.
Judy should first consult the costing management concerning accounting for such costs as fixed or variable. In addition, she can place both methods for the overall management to consider whether to classify the costs as variable or fixed in order to make a decision concerning the project.
Part a) Payback period for project red
Initial outlay = $400,000
Cash flow yr 1 to 8 = $100,000
Cumulative cash flow at year 4 = $400,000.
The payback period for project red = 4 years.
Payback period for project blue
Initial outlay = $ 560,000
Annual cash flow =$150,000
Cumulative cash flow before payback = $450,000 at the third year
Pp = ($560,000- $450,000)/ $150,000 = 0.7 years
Payback period for project blue = 3.7 years.
Part B) Net present value project red
Cash flow $PVIFPVInitial outlay(400,000)1(400,000)Year 1100,0000.925992,590 2100,0000.857385,730 3100,0000.793879,380 4100,0000.734973,490 5100,0000.680568,050 6100,0000.630163,010 7100,0000.583458,340 8100,0000.540154,010NPV = 174,600
Net Present Value project blue
Cash flow $PVIFPVInitial outlay(560,000)1(560,000)Year 1150,0000.9259138,885 2150,0000.8573128,595 3150,0000.7938119,070 4150,0000.7349110,235 5150,0000.6805102,075 6150,0000.630194,515 7150,0000.583487,510 8150,0000.540181,015NPV = 301,900
Part c) Accounting rate of return
Average annual income = $50,000
ARR = 50,000 ? 100
Average annual income = $80,000
ARR = 80,000 ? 100
According to the calculation above, it is obvious that project blue should be taken, considering it has a higher Net Present Value, a shorter payback period, and a higher Accounting Rate of Return.
The expected receipts of October include 18% for sales of August, 50% for sales of September, and 30% sales for October.
August = $43,200
September =$ 135,000
October = $ 99.000
Total == $ 277,200
Sales volume variance
Sales volume variance using the formula, ((actual sale – budgeted sale) budgeted price)
Product a = (6,810 – 6,000) $8
== $6,480 favorable
Product b == (4,720 – 5,000) 10
== $ 2,800 unfavorable
Sales price variance
Budgeted revenue is 6,000 * 8 = $48,000
Actual revenues 6,810 * 7.80= $50,394
Price variance 50,394 – 48,000 = $2395
Budgeted revenue is 5000 * 10 = $50,000
Actual revenue 4720* 10.40= $49,088
Price variance 49,088 – 50,000= $912
Total sales variance
Budgeted total sales = $49,000+ $50,000 = $99,000
Actual total sales = $50,394 + $49088 = $99,482
Total variance sales = $99,482- 99,000 = $482 favorable
Highest cost = $2,900
Lowest cost = $ 2,000
2,900- 2000= $900
Calls for these months
2,500 – 1,500 = 1,000 calls
$900 ? 1,000 calls = $ 0.9 per call
Variable cast = $0.9
Fixed costs = total costs – variable costs
Variable costs for highest records = $ 0.9 ? 2,500 = $2,250
Variable costs for lowest records = $ 0.9 ? 1,500 = 1,350
Fixed costs for highest records = $2,900 – 2,250 = $650
Fixed costs for lowest records = $2,000 – 1,350 = $650
The fixed costs of the calls == $650