Cash Budget

Describe about the Financial Management for Production and Material Budget.

In this given project I have to check the budget of VGL Ltd, which is the Distributor Company, as well as Milbourn Manufacturer which happens to be the manufacturer of the new and exciting product. For Milbourn Manufacturer we have to create different budgets also such as Material, Production and Labour Budget.

While for VGL Ltd, we have make only the cash budget for the month of January, February, March, April. For the Milbourn Manufacturer we have to prepare the budget for the month of December, January, February and March.

Milbourn and VGL Ltd are expecting the sales to start from 220000 units and gradually falling up to 100000 units in the month of May. VGL Ltd is expecting the sale price to $ 510 in the first two month and then gradually decreasing.

Cash Budget for VGL Ltd.                                                                                                 (Amount in $)

Particulars	January	February	March	April
Beginning Cash	1900000	(12410000)	49690000	109612500
Add: Sources Of Cash
–     Accounts Receivable Collected	22440000	89250000	81472500	60084045
Total Cash Available (A)	24340000	76840000	131162500	169696545
Less: Uses Of Cash
–          Direct Material From Milbourn	35200000	25600000	20000000	19200000 (160 * 120000)
–          Cash Expense	1550000	1550000	1550000	1550000
Total Usage Of Cash (B)	36750000	27150000	21550000	20750000
Net Cash Position (A-B)	(12410000)	49690000	109612500	148946545

(Budgeting Topics, 2016)

Sale Price per unit of VGL Ltd.                                                                                                (Amount in $)

Particulars	January	February	March	April
Sale Price Per unit	510	510	464.10	422.33
% Fall in Price	–	–	9%	9%
Calculations	–	–	510 – (510 * 9%)	464.10 – (464.10 * 9%)

Calculation of Total Sales of VGL Ltd.                                                                                      (Amount in $)

Particulars	January	February	March	April
Sale price per unit (a)	510	510	464.10	422.33
Units sold (b)	220000	160000	125000	120000
Total Sales (a * b)	112200000	81600000	58012500	50679600

Total Sales amount received per month of VGL Ltd.                                                                  (Amount in $)

Particulars	January	February	March	April	Total Sales  for the month:
Total Sales	112200000	81600000	58012500	50679600
Payment Received from the Debtors
–          January	22440000 (112200000 * 20%)	–	–	–	22440000
–          February	72930000	16320000	–	–	89250000
–          March	16830000	53040000	11602500	–	81472500
–          April	–	12240000	37708125	10135920	60084045
–          May	–	–	8701875	32941740	41643615
–          June	–	–	–	7601940	7601940

Debtors will pay in the following way:

·         Current Month	20%
·         30 Days	65%
·         60 days	15%

1. Manufacturing Budget

Production Budget for Milbourn Manufacturing Ltd.

Particulars	December	January	February	March
Units forecasted to be sold	220000	160000	125000	120000
Add: Closing inventory of units	–	–	–	–
Less: Opening Inventory	–	–	–	–
Units to be produced	220000	160000	125000	120000

(Budgeting Topics, 2016)

Material Budget for Milbourn Manufacturing Ltd. (Material A)          

Particulars	December	January	February	March
Unit to be Produced	220000	160000	125000	120000
Material A required per unit	3 (220000*3)	3 (160000*3)	3 (125000*3)	3 (120000*3)
Total Material A needed	660000	480000	375000	360000
Add: Closing Inventory	–	–	–	–
Total Material A Required	660000	480000	375000	360000
Less: Opening Inventory	–	–	–	–
Material A Purchased (a)	660000	480000	375000	360000
Material A cost per Kgs (b)	$ 3.50	$ 3.50	$ 3.50	$ 3.50
Total Cost (a * b) ($)	2310000	1680000	1312500	1260000

Material Budget for Milbourn Manufacturing Ltd. (Material B)

Particulars	December	January	February	March
Unit to be Produced	220000	160000	125000	120000
Material B required per unit	6	6	6	6
Total Material B needed	1320000 (220000*6)	960000 (160000*6)	750000 (125000*6)	720000 (120000*6)
Add: Closing Inventory	–	–	–	–
Total Material B Required	1320000	960000	750000	720000
Less: Opening Inventory	–	–	–	–
Material B Purchased (a)	1320000	960000	750000	720000
Material B cost per Kgs (b)	$ 4.50	$ 4.50	$ 4.50	$ 4.50
Total Cost (a*b)	5940000	4320000	3375000	3240000

Material Budget for Milbourn Manufacturing Ltd. (Material C)

Particulars	December	January	February	March
Unit to be Produced	220000	160000	125000	120000
Material C required per unit	2	2	2	2
Total Material C needed	440000 (220000*2)	320000 (160000*2)	250000 (125000*2)	240000 (120000*2)
Add: Closing Inventory	–	–	–	–
Total Material C Required	440000	320000	250000	240000
Less: Opening Inventory	–	–	–	–
Material C Purchased(a)	440000	320000	250000	240000
Material C cost per Kgs (b)	$ 10.00	$ 10.00	$ 10.00	$ 10.00
Total Cost (a*b)	4400000	3200000	2500000	2400000

Particulars	December	January	February	March
Material A Cost	2310000	1680000	1312500	1260000
Material B Cost	5940000	4320000	3375000	3240000
Material C Cost	4400000	3200000	2500000	2400000
Total Cost	12650000	9200000	7187500	6900000

(Budgeting Topics, 2016)

Labour Budget for Milbourn Manufacturing Ltd.

Particulars	December	January	February	March
Unit to be Produced	220000	160000	125000	120000
Labour Hours per unit	0.50	0.50	0.50	0.50
Total Labour Hours Required (a)	110000 (220000*0.5)	80000 (160000*0.5)	62500 (125000*0.5)	60000 (120000*0.5)
Machine Operating Cost per hour (b)	36.00	36.00	36.00	36.00
Total Labour Cost (a*b)	3960000	2880000	2250000	2160000

 

(Budgeting Topics, 2016)

Cash Budget for Milbourn Manufacturing Ltd.                                                                (Amount in $)

Particulars	December	January	February	March
Beginning Cash	1550	(4890950)	17204050	30442475
Add: Sources Of Cash (A)
–          Cash Sales	–	–	–	–
–     Accounts Receivable Collected	–	35200000	25600000	20000000
–          Asset Sales	–	–	–	–
Total Cash Available	1550	30309050	42804050	50442475
Less: Uses Of Cash (B)
–          Direct Material	632500	9925000	9811575	7545625
–          Direct Labour	3960000	2880000	2250000	2160000
–          Manufacturing Overhead	300000	300000	300000	300000
–          Selling& Administrative	–	–	–	–
–          Asset Purchase	–	–	–	–
Total Usage Of Cash	4892500	13105000	12361575	10005625
Net Cash Position (A-B)	4890950	17204050	30442475	40436850

(Budgeting Topics, 2016)

Calculations of Payment made to the creditors                                                                             (Amount in $)

Particulars	December	January	February	March	Total Cost for the month:
Total Cost	12650000	9200000	7187500	6900000
Payment Made to the Creditors
–          December	632500 (12650000 * 5%)				632500
–          January	9465000	460000			9925000
–          February	2552500	6900000	359375		9811575
–          March		1840000	5390625	345000	7545625
–          April			1437500	5175000	6612500
–          May				1380000	1380000

Creditors will be paid in the following way:

·         Current Month                                                    5%
·         30 Days	75%
·         60 days	20%

Behavioural Problems faced by the company when they use budget as the performance target are as follows:

Dysfunctional Behaviour: Budgets are very important for organisations, as it provides a direction to them and also help them to achieve their goal by providing the same objective. People who are associated with the making and use of budget feels motivated and are eager to achieve their goal. But sometimes due to inappropriate carrying out of the budget and expectation of more than normal by the managers lead to a negative impact between the employees. Such a behaviour is known as dysfunctional behaviour, where the goal and objective of the organisation is not in line with the goal and objectives of the individual.

Excessive Pressure due to Budget: budget are used to command and organise the company. Too much pressure on the managers and other subordinates to achieve the goal of the budget creates a very bad environment, their motivation is longer high which puts the higher authority in an annoying mood as the subordinates are not showing and doing their work with enthusiasm.

Sale Price per unit of VGL Ltd.

It also happens that when the budget is not that hard to achieve, the subordinates lose their interest in achieving it. Their participation level turns out to be very low. So either way, a budget needs to be planned carefully or should be set accordingly as the objective of the organisation to prevent such problems.

(Agarwal, Rohit, 2016)

Participative budget is the budget where people of all level who are impacted by the budget participates for the preparation of that budget. It is more of a bottom up approach.

Advantage of Participative Budget

Participation of the employees and subordinates makes them feel motivated and more eager to achieve the budget

A Participative Budget make the environment a bit in a gaming spirit, it bridges the gap between higher and lower authority by making them contact on a regular basis,

It makes the subordinate increase their team spirit, execution and initiative. It brings out the creative side of the employees as they take it upon themselves to achieve their budget and solve any problem they are facing related to their execution. It makes them responsible too.

Since the managers and other level of people have the same goal as that of the organisation, it helps the organisation to achieve the goal more easily and in faster pace, with higher degree of goal congruence.

Disadvantage:

When all level of people are involved in the preparation of the budget, it creates too much havoc, as too much people are participated in the discussion of the budget, sometimes the difference in opinion among the people makes it impossible to form a budget.

(Question & Answers, 2010)

Strategies to overcome temporary shortage of cash:

Sell unwanted assets: In an organisation there some assets which is of no need to the organisation, it creates unwanted cost also in the name of insurance, overhead and maintenance. These costs will lead to loss of cash. IF the asset is sold, then it will not only remove unwanted cost, but will also bring in cash which are in need by the organisation.

Sell of Investment: Organisation invest not only on asset thought which they can manufacture or provide services, they also invest in investments. Once they invest in them, they don’t keep a track on it much, if during such shortage of cash, they can calculate the worth of investment and sell them off to gain more cash.

Call on your outstanding money: An organisation have debtors who have not yet paid the money, or other people from where the organisation is supposed to receive money. They can call them in to repay their money, so that they can overcome a situation of cash shortage.

Production Budget

Sold Old stock: Many a times. Organisation keep old stocks thinking that they might need them in future, but they only increase their storage cost and money. To increase their shortage in cash they can sold these stocks in market and increase their cash.

5.2 Cash Shortage Effects:

If there is a cash shortage in business it will tie up the hands of the company, which will make it impossible for them to overcome any situation.

Proper investment to make the best product for customer will not take place as there will shortage of cash.

Such Cash Shortage will create aggression in the debenture holder, as they will not be paid there interest, they might out of such aggression ask for full redemption.

Any payment to be made to the Creditors who is asking to make good of his credit, will create a bad relationship between the company and the creditors.

Such Problems will not only create a bad reputation of the company, but will also make the lender or creditors against them, which will hamper the business badly.

Consequences of carrying too much cash:

There are many consequences on having excess cash these are:

Decrease in Cost of Capital: It can be well explained with an example,

Suppose a business has a total asset of $ 1000,000, out of which your cash is around $ 100,000, which is to be appropriate 10%, if we have a Return on asset of about 10% and the cost of capital is 13% then it might so happen that the company will bleed eventually due to such excess cost of capital. If the company use these extra cash to reduce their equity, this will eventually bring down the Cost of capital, which will make the Return on asset higher than the cost of capital.

Over Confidence in Management: Management are over confident when they have excess in cash with them, they try to deal with any problem by using that excess cash they have, instead of actually solving it they pay more money to come out of that problem easily. For example, during mergers when they are having a problem relating to deciding the terms, they pay more cash for acquisition to make it easier. Which ultimately reduces the value of the company paying such huge amount of cash.

Environmental Report

Milbourn Manufacturers Ltd.

Environmental Cost Report

For the year Ended

Particulars	Environmental Cost (Amount $)	Percentage of Selected Operating Cost/Total Costs (%)	Percentage of Selected Operating Cost/Total Sales (%)
Prevention Costs:
Initial evaluation of environmental standing of new suppliers	2100
Performing environmental studies	7500
Training employees	1400	11000	0.27	0.21
Detection Costs:
Testing for contamination	28000	28000	0.68	0.53
Internal Costs:
Treating and disposing of toxic waste	215000
Maintaining pollution equipment	39000
Operating pollution equipment	19000
Revising evaluation of some existing suppliers	700
Inefficient material usage	70000	343700	8.38	6.48
External Costs:
Cleaning up chemically contaminated soil	260000	260000	6.34	4.91
Total:		642700	15.68	12.13

(Technical Articles, 2010)

Total Cost = $ 4100,000

Total Sales = $ 5300,000

Strategy to reduce negative outcome by prioritizing some environmental costs:

There are many environmental saving cost which is being incurred by the company to reduce their effect on the environment, if we follow a proper strategy we can reduce these cost by decreasing their impact on the environment. These costs are:

Treating and disposing of toxic waste: IF we go through the cost incurred in this, we will surely find this the 2^nd highest cost incurred to control environmental damage. These can be reduced, by making sure that the waste disposal is minimising. If these are not minimised then they can create huge cost.

Cleaning up chemically contaminated soil: This is the highest environmental cost incurred by Milbourn Ltd., these can be reduces if chemicals used are prevented from getting into the soil. If these are reduced, then the soil will not be required to be cleaned, and the cost will also reduce.

References

Budgeting Topics (2016). Cash Budget [online] Accounting Tools. Available at: https://www.accountingtools.com/cash-budget [Accessed 27 Sept. 2016]

Budgeting Topics (2016). Production Budget [online] Accounting Tools. Available at: https://www.accountingtools.com/production-budget [Accessed 27 Sept. 2016]

Budgeting Topics (2016). Material Budget [online] Accounting Tools. Available at: https://www.accountingtools.com/material-budget [Accessed 27 Sept. 2016]

Budgeting Topics (2016). Production Budget [online] Accounting Tools. Available at: https://www.accountingtools.com/direct-labor-budget [Accessed 27 Sept. 2016]

Agarwal, Rohit (2016). Behavioural Implications of Budgeting [online] Your Article Library. Available at: https://www.yourarticlelibrary.com/accounting/budgeting-accounting/behavioural-implications-of-budgeting-6-implications/52800/ [Accessed 27 Sept. 2016]

Question & Answers (2010). What is Participative Budget? [Online] Accounting Tools. Available at: https://www.accountingtools.com/questions-and-answers/what-is-participative-budgeting.html [Accessed 27 Sept. 2016]

Technical Articles (2010). Environmental Management Accounting [Online] Acca Global. Available at: https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f5/technical-articles/Env-MA.html [Accessed 27 Sept. 2016]