Answer To: ACC 207 Final Project II Guidelines and Rubric Overview Cost accounting is used for two main...
Jyoti answered on Oct 18 2021
Organisational Financial Analysis Report
ACC-207-03 (Module Seven)
SRS Educational Supply Company
A. About Organisation
SRS Company is engaged into business of supplying study materials and other products to institutions providing education. Its educational products includes workbooks, classroom visual aids, instructor support materials, art supplies, lab supplies, and administrative office supplies. Its customers which form a major group are K-12 schools.
Budgeting is an important tool for SRS management for overall planning and cash flow purposes as sales varies each month due to seasonal ordering patterns of Educational Institutions. Hence, this report summarising master budgets for the quarter July to September. SRS has 30th June fiscal year.
B. Budgeting
Budget is a plan that specifies an organisation’s future operations in quantitative terms. An activity of budget creation is identifiable as having an association with overall growth of the company (Davila et.al, 2005) and is adopted by most organisations. It provides the base to a business plans and actions. Its purpose is to estimate future happenings and manner of allocation of resources for achievement of desired future levels. After budget preparation, they are compared with actual operations and any deviation is reported to management. Many organisations have planning outcomes of budgets in their accounting activities and their internal reports shows monitored picture of actual activities. (Emmanuel, et.al, 1990). Therefore, budget preparation activity along with internal reporting activities improves forecasting accuracy which results in overall improvement of organisation slowly. Besides, the role of accounting information is to inform about predictive planning (Cooper, et. al, 2001,).and to facilitate decision making (Baiman, 1982) and (Chenhall, 2003).
Overall, budgeting is done in order to have its contribution in continuity i.e. planning, flexibility i.e. economy, changing (evaluation of policies) and strictness (limited spending). (Wildavsky, 1978).
Educational institutions have seasonal ordering patterns and this makes the sales of SRS variable each month. Therefore, budgeting is an important tool for SRS to have proper planning for future.
C. Budget Process
All inputs are collected in budget preparation process (Bailes, et. al, 1991) by which the decision making authorities set expectations regarding performance of organisation. Each department participates and provides information basis which a successful budget process takes place. The information provided by respective managers along with historical data takes forms of assumptions which helps in creating budget.
Let’s take a view on each departmental budget for SRS.
1. Sales budget
As the name suggests, a sales budget sets sales expectation of company for a respective period, generally one year. It contains quantity and value data of sales to be achieved in desired period. A sales budget provides the base for other budgets as management comes to know how much products it needs to produce or buy, how much cash inflows will take place and how much spending will be done in other departments. There are various factors which affect sales budget like product type, pricing policy, competition, taste of consumer, after sale services, credit terms offered, promotion, economic and political conditions, etc.
SRS Sales Budget
Actual Sales for year ended 30th June. - $5,523,000
Actual Sales for June month- $ 455,000
Refer Appendix 1: Sales Forecast
Summarised Sales Budget for Quarter ending 30th September
Month
Sales
July
$600,000
August
$910,000
September
$475,000
Total =$1,985,000
Variances
(a) Sales in September month declines to $ 475,000 is a sign of concern as August month budgeted sale $ 910,000 is 48% higher from September month. Appropriate analysis may be done to fulfil this gap.
(b) Total actual sales for year ending 30th June is $5,523,000 whereas budgeted sales for upcoming year taking total July to September quarter sales ($1,985,000), October Sales ($385,000) and November to June high range sales in absence of likely outcome ($480000*8) comes to $ 5,825,000. It means sales for upcoming year goes up by 5% only. This slow increase in sales needs to be looked into.
2. Schedule of expected cash collections from Sales
Schedule of expected cash collection from sales depicts expected collections to be received from debtors to whom sales is made. Therefore, sales budget becomes a parent to this budget and its figures are obtained from sales budget. The information of cash collection is then used in cash budget.
This schedule is made on the basis of the information received from finance department that how much credit sales will be received in the month of sale and in next months after sale. Certain percentage is determined considering historical data and debtors ageing cycle.
SRS Schedule of Cash Collection from Sales Budget
SRS makes credit sales only without discounts and become due for payment in 15 days. However, only 30% of a month’s sales is collected by month-end and the remaining 70% is collected in the following month.
Summarised Cash Collection Schedule
Month
Cash Collection from Sales
July
$600,000*30% + $ 340,000(Pending June month) = $520,000
August
$910,000*30% + $600,000*70%(Pending July month) = $693,000
September
$475,000*30%+$910,000*70% (Pending August month) = $779,500
Total = $1,992,500
Variances
(a) Cash collection is although increasing every month, however, it will decrease in October due to low sales in September and percentage of high amount which become due in next month instead of current month itself.
(b) Actual sales of June month is $ 455,000 and its 70% which should become due in July month comes to $ 318,500 whereas, Account receivable in balance sheet ended 30th June shows $340,000.
3. Merchandise Purchase Budget
A merchandise purchase budget shows quantum of money which can be spend by the procuring department on inventory to be purchased for the year. It is essential for every company to have optimum level of inventory as high inventory can lead to cash shortages and low inventory turns to non-fulfilment of sales order.
The required level of inventory to be purchased equals the budgeted cost of merchandised sold with addition of budgeted ending inventory and subtraction of the budgeted beginning inventory.
Summarised SRS Merchandise Purchase Budget
Refer Appendix 2
Month
Purchases
July
[$270,000 ($600,000*45%)+$81,900($409,500*20%)-$50,000]=$ 301,900
August
[$409,500($910,000*45%)+$42,750($213,750*20%)-$81,900]=$370,350
September
[$213,750($475,000*45%)+$34,650($173,250*20%)-$42,750]=$205,650
Total =$877,900
Variances
(a) Purchases in September month declines to $ 205,650 is a sign of concern as August month budgeted purchase is $370,350.
(b) July month’s expected ending inventory is high among all months in comparison to other months.
4. Budgeted Schedule of expected cash disbursements for merchandise
A budgeted schedule of expected cash disbursements for merchandise relates to quantum of cash money to be paid by the procuring department for...