This study is based on the necessity of budget and its controlling process. Therefore, cost budget of Happy Food and Drink Ltd has been analysed for reviewing the changes in actual stage. The variations have measured through variance analysis report of the company. Along with this, the budget controlling process has allocated for better review and controlling the budgetary process. Moreover, other budgetary systems have been discussed for better controlling over costs.
Through the preparation of cash budget, company would be able to allocate necessary costs for business activities. That means control over the unnecessary expenses is possible through cash budget. Moreover, cash budget is formed for short-term business activities (Hofstede, 2012, p.118). This study has monitored and discussed the implications of projected cash budget for the company Happy Food and Drink Ltd. Moreover; possible risks also have been stated clearly for decision support system. Along with this, supportive models have been discussed for controlling the variances within last accounting period. That means the overall contribution of this study has justified the budgeting process and controlling process for better evaluation of accounting issues.
In this case, cash budget has been prepared for the company Happy Food and Drink Ltd, which has stated all levels of costs for business. Moreover, through the cash budget, the financial executive of the company has revealed necessary cash inflows and outflows within business. In the words of Cárdenas et al. (2011, p.360), cash budget is necessary for controlling the operational activities within business. Moreover, cash budget allows activities cost budgeting process, where each task has its relevant costs. That means organisational executives cannot exceed the allocated costs. However, Kaplan and Atkinson (2015, p.92), rolling budget could be another option for reducing the uncertain activities or situations within business, which is not possible through nominal cost budget. The projected cash budget of Happy Food and Drink Ltd is shown below:
The projected cash budget has shown a lower level of increment for sales through the financial months. In that case, the company should allocate and have strategies for more sales so that actual sales figure can increase more, because the variation between budget and actual figure always exists. According to Ostergren and Stensaker (2011, p.170), the actual sales figure goes down in maximum cases due to the high intensity of competition in the market. Therefore, it is necessary to increase the budgeted sales structure for having better sales.
In this case, the cash payments have been illustrated clearly, which are necessary for business. In this case, the business executives would need to monitor and control that actual payments should not increase compared to budgeted payments; or else that will effect on company's profitability. From the viewpoint of Simons (2013, p.90), uncertain expenses are possible for business. Therefore, companies would need to control their expenses within the business so that allocated costs can cover uncertain expenses also. Moreover, companies can allocate provision amount for covering the uncertain expenses in the business.
The prepared cash budget has stated excess cash payments, which has reduced the net cash flow. Moreover, this has affected the opening balance and closing balance of cash budget. Therefore, it is necessary for company executives for reducing the cash payments for better cash inflow in business. On the other hand, the projected closing balance has shown a continuous reduction throughout the months.
The costs for material purchase have increased continuously in cash budget, which has affected company’s operating expenses and net cash flow in business. Therefore, it is necessary to purchase raw materials in bulk quantity at a time and make inventory so that costs for raw materials can be controlled. This process could be effective for net cash flow in business.
The cash budget is necessary for allocating relevant costs and controlling the unnecessary expenses within the business. Moreover, different risks issues can appear within the preparation and implementation of the cash budget. The details of possible risks are incorporated below:
Allocation of fewer costs for business level activities could be serious risks of cash budget, because the allocation of fewer costs will create the shortage of financials during the implementation process and the company might face loss. Therefore, it is necessary to evaluate previous budget and allocated costs for preparation of new cash budget for business level activities (Kerzner, 2013, p.127).
Errors of omission and errors of the commission could be another risk issues for cash budgeting process. Therefore, it is necessary to put exact cash volumes for allocating relevant costs for activities. Otherwise, that will effect on the allocation of financial sources and company's debt amount might increase.
Uncertainties in the market is another serious risk for cash budget. Threats of suppliers bargaining power or threats of new entries in the market could have affected the cash budget for the company. In that case, the rolling budget is appropriate to make changes according to the situation. Therefore, the company should relevant costs factors and provisions for covering the uncertain and risk issues in business and cash budget (Becker et al. 2013, p.231).
Here, variance report has presented for declaring the costs and expenses for sales and cost of sales. Through the analysis, the company has shown the budgeted profit of £550000 during the financial year 2016. Through this, an actual profit has come out of £300000. Therefore, the budgeted profit has not achieved by the company. That means company's costs and expenses have increased compared to budgeted figures. Therefore, the next year's cost allocation would need to be reduced compared to the financial year 2016. As per the statement of Hockey (2011, p.185), cash budget is essential for controlling the unnecessary costs and expenses in the business. However, less focus on cash budget could create a negative impact on company's profitability. The variance analysis report of 2016 is structured below:
The sales volume and sales price are derived from company’s income statement. Along with this, material price and material usage have been stated for measuring the net variance. Moreover, the company has allocated £5000000 for installation of new fixed assets during the next financial year 2017. Therefore, the company would need to allocate more capital or financial sources for business financing. In the words of Friedland (2012, p.171), allocation of financial sources is necessary based on a prepared cash budget. Therefore, company executives would need to control the unnecessary costs and expenses for increasing the profit margin. Moreover, the variance analysis would be effective for better budget preparation and implementation.
The analysis of variance between the budget report and actual cost sheet is necessary for determining the level of unnecessary costs within the actual business processes. This will help for controlling the business level activities and their relevant costs. Therefore, business level objectives would be monitored and fulfilled effectively (Cooke and Williams, 2013, p.161). However, Bormann and Likens (2012, p.118) argued that uncertain conditions cannot be controlled in business, but the company can place relevant provisions for controlling the uncertain factors in business. Along with this, company's liabilities would need to be reduced for better work capital position in business. Nevertheless, the cost of capital and cost of revenue would need to be reduced for better profitability in business.
In this case, the prepared variance report has stated all levels of costs within the business. There cost of labour and material costs are stated, which are the key factors for increasing the expenses within the business. Moreover, the quantitative visual report of variance has stated the increased level of expenses in business and that is why the budget figure has not matched with actual report. In this case, several areas are controllable like material cost and labour costs. Here, the company would need to invest one time for purchasing raw materials so that overall price of materials can be reduced. Along with this, maximum materials would need to be stored in company's warehouse for the future production process, but the cost of inventory would be applicable in this case. Nevertheless, that would be lower than the costs of raw materials.
On the other hand, mass production process or batch production process would be effective for the company. Maintaining of inventory or stock level would be effective in this case. Therefore, the company would be able to reduce the backlogs in the delivery process and market demand would be met timely. That means inventory is necessary for the company to reduce the costs of raw materials and labour costs for increasing profitability and meet budgeted profit at the year ended. As per the statement of Scheer (2012, p.109), budget variance analysis is necessary for allocating gap areas within the operating activities within the business and the company would be able to frame necessary strategies for reducing the loopholes in business. Therefore, in this case, necessity of inventory maintenance has been discussed and it has been allocated that company Happy Food and Drink Ltd would need to use inventory for reducing their labour costs and raw material costs.
Through the analysis of variance of the budget, it has been evaluated that actual profit has been reduced compared to budgeted profit. In this case, the company has failed to control the costs and expenses in business and that has affected company's actual profit level. Here, increased in labour costs and increased in material costs have been allocated in the variance report. Tseng et al. (2012, p.391) stated that variance analysis is necessary for maintaining a relationship with budget report and strategies for implementing the budget in business. Moreover, the effectiveness of budgetary strategies can be measured through variance analysis and next budget can become developed. There cost of labour and material costs are stated, which are the key factors for increasing the expenses within the business. Therefore, these costs are necessary to control for better profitability.
In this case, the rolling budget could be effective for covering the uncertain situations and expenses in the business. However, for implementing the rolling budget, the company would need to have sufficient financial supports, because uncertain costs and expenses would need to cover. On the other hand, mass production process or batch production process would be effective for the company. Maintaining of inventory or stock level would be effective in this case. Therefore, the company would be able to reduce the backlogs in the delivery process and market demand would be met timely. That means inventory is necessary for the company to reduce the costs of raw materials and labour costs for increasing profitability and meet budgeted profit at the year ended.
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