BUDGET PREPARATION

The aim of the exercise

Many companies take months to prepare their budgets for the year, and most questions that you have attempted to date simplify the process to such an extent that one forgets the need for frequent revisions to the draft budgets as new data comes in, or forecasts change, or office politics and negotiations take place.

This exercise is designed to remind you of the complexities of the budgetary process, and to ensure further practice with spreadsheets. (Most employers want to see proficiency with spreadsheets, so put it on your CV!) Obviously we cannot spend the months preparing a budget that an accountant in a large company might spend, but you will have to prepare a draft budget on a spreadsheet, and you will subsequently have to make amendments to your budget as further information becomes available.

Note

• You are to work in groups of 4
• You will be given supplementary information on both Friday 9^th March and Friday 16^th

Scenario

You are the chief accountant of a company which buys and distributes a single product.  At 30^th April 2018 the company’s balance sheet is expected to be:                                                                                                                       £

Non Current assets at cost                                                             4,380,000

less: Depreciation provision                                                          1,780,000

                                                                                                            2,600,000

Current assets:

            Stock (56,000 kilograms)                                                    1,788,000

            Receivables: February sales                                               160,000

                                    March sales                                                    960,000

                                    April sales                                                        960,000

            Fixed administration expenses prepaid                                15,000

            Cash at bank                                                                                       875,000

                                                                                                            4,758,000

less: Current liabilities:                                          

            Payables for materials: April purchases                             160,000

            Fixed administration expenses accrued                               20,000

            Taxation                                                                                   350,000

            Proposed dividend                                                                 120,000

                                                                                                               650,000

Less: Non Current Liabilities:       

            16% £1 Debentures                                                              1,000,000

                                                                                                            £5,708,000

                                                                                   

Ordinary shares of 25p each, fully paid                                       2,000,000

Retained profit                                                                                  3,708,000

                                                                                                           £5,708,000

Business Organisations and Environments in a Global Context

The following information is available:

1. The selling price of the product during May and June 2018 will be unchanged at £110 per unit. The sales director estimates that 28,000 units should be sold in each of these months. 
2. All sales are on credit, and customers are required to pay their accounts during the second month following the month of sale. This means that the sales in February should be received by the company in April.  However, many customers do not adhere to these policies (despite having agreed to them, in writing, in the sales contract), and typically they pay 80% in the second month following the month of sale, 16% in the third month after sale, with the remainder not being paid at all.  It is the company’s policy to provide for Doubtful Debts at the earliest opportunity.
3. Only one kind of material is contained within the product, and 2kg’s of this material comprise one unit. The purchase price of the material will be £30 per kg.  During the two months all purchases are on credit, and the company pays suppliers during the month following the month of purchase.  The managing director requires material stocks to be reduced to 50,000 kg’s at the end of May and 40,000 kg’s at the end of June.
4. Variable distribution costs of £21 per unit will be payable in the month in which they are incurred.
5. The company values stock in the balance sheet as the total of direct materials. No other costs are included in the stock value.
6. Fixed assets costing £555,000 are expected to be purchased for cash on 1st May 2018. The company’s policy is to depreciate its fixed assets at the rate of 15% per annum on cost on a straight line basis, and the depreciation charge for a month is to be regarded as a fixed cost. For this purpose, all months are to be regarded as of equal length. No fixed assets will be depreciated more than 100% of cost during the period.
7. The following cash payments, other than to suppliers of materials or for the purchase of non-current assets, wages or variable costs, are expected to be made:

                                                                             May                            June

                                                                                   £                                  £

            Taxation                                             350,000                                  –

            Proposed dividend                                      –                      120,000         

            Fixed administration expenses     206,500                      206,500

            Fixed wage costs                             237,500                      237,500

It is to be assumed that the settlement of payables accounts will occur on the due dates.

8. Accrued and prepaid fixed administration expenses at the month-ends should be:

                                                                            May             June

                                                                                 £                                  £

            Accrued                                             22,000                        24,000

            Prepaid                                              16,000                        17,000

Nutrition for Nursing Practice

9. Provision is to be made each month for corporation tax at the rate of 19% of net profit. The rules on the payment of corporation tax are shown on https://www.gov.uk/prepare-file-annual-accounts-for-limited-company

The company’s financial year ends on 31^st May each year.

10. Debenture interest is paid on 31^st October and 30^th April each year.

You are required to present your suggestions for the budget for the months of May and June 2018, the presentation to be made during the week commencing 16^th April. The presentation should last for 15 minutes, and you must be able to answer questions from ‘The Board’.

       You will need to be able to address the points made by each manager during the budgetary process, and hence to make your recommendations for the budget. The aim is to have a budget that can satisfy as many of the required criteria as possible, and that will be approved by the Board.

       Marks will be awarded for presentation style as well as the spreadsheet.

       You must be able to show your spreadsheet to the Board, if necessary, and hence justify your recommendations. The spreadsheet must show the overall position of the company, with the three financial statements, supporting data, graphs etc – whatever you consider necessary.  All cells in the spreadsheet must be linked with formulae so that any changes will update the financial statements correctly.

            Marks will be awarded as follows:

                        Spreadsheet Integrity                                    30%

                        Accounting Knowledge                                30%

                        Presentation                                                   40%

                                                                                                100%

           

The mark that will be given for the presentation will be for the GROUP, and it is up to you to determine how that group mark is split amongst you.  Thus any slacker will find him / herself being given a low proportion of the group mark, which is of course only fair. Likewise an excellent contribution deserves extra marks. Note that an individual’s mark after your adjustments cannot exceed 100% and also that an individual’s mark can increase by a maximum of 10 marks compared with the group mark.

In order to avoid victimisation, I will expect every member of the group to sign their agreement with the split of marks, whatever split that might be.

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