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I. PURPOSE AND NATURE OF THE BUDGETING PROCESS1. The purpose and nature of the budgeting process:

1.1The nature of budgeting:a. Definition of budget:Budget is defined as a quantitative statement for a defined period of time, which

may include planned revenue, expenses, assets, liabilities and cash flows (BPP

Professional Education Management Accounting, 2004, p.155).

b. The differences between budget and plan, budget and standard costing

Budget Plan

-Budget is usually prepared for a short

period, for quarter or one year.

-The budget looks at the financial stage

needed to support achieving the

companys goals.

-The budget provides financial

information about the resources needed

to make appropriate business decisions.

-a plan is set out for more general and

long term, from two to five years

-Strategic plan shows the direction and

goals of the company as well as

guidelines for actions to achieve those

goals (Carol Wiley, n.d.).

-The plan focuses more on the direction

and methods to carry out the business

goals effectively.

Budget Standard costing

-The budget is set for total volume of

activity and total cost.

-Budgeting is carried out based on

standard costs.

-Standard cost uses the unit cost in

inventory control and valuation.

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c. Types of budget:There are three main types of budget: operating budget, financial budget and

flexible budget.

Operating budget includes:Sales budget, production budget, manufacturing cost budget, selling

and administrative expense budget and budgeted income statement

(Ms. Giangs study documents, 2012).

Financial budget includes:Capital expenditure budget, cash budget and budgeted balance sheet

(Ms. Giangs study documents, 2012).

Flexible budget is set for a single activity level and at relevant range(BPP Management Accounting, 2004, p.168). Flexible budget shows

the variances between static budget and actual result. Hence, it is

designed to change as activity level changes.

1.2Purposes of budget: To help organizations achieve their main objectives (BPP Management

Accounting, 2004, p.155).

Using a budget, companies can set out their goals as well as their expectations in

financial stages. Being known as a type of statement which illustrates all kind of

cost and relevant activities set out in the future, budget allows managers to

monitor the direction of producing following as plan or not so that company can

adjust errors in time in order to achieve targets set out. Thus, based on the

enterprises current condition, the managers can make appropriate budget plan to

reach their objectives. Therefore, other employees will know how they should

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work to follow and achieve the budgets targets. Besides, the budget also can give

managers a general view of their firms financial situation whether they are in bad

condition or not. In other words, the employment can identify the core objectives.

Hence, top management and the employment can join and create suitable solutions

to solve the existing problems. Good budgets are intelligent devices to see clearly

the ability of covering the cost and how benefit in how long the company can get.

To compel planning (BPP Management Accounting, 2004, p.155).After making a budget, managers can have an overview of what they should work

to achieve for in a period of time. In order to reach the best result and targets set,

management will have to look for the future and plan more detailed about the

solutions applied for different departments needed for the companys current

stage. Besides, basing on the budget, all management line can involve in

discussion to evaluate whether a particular activity level is appropriate to perform

or not. In addition, managers can also prepare for the needed amount of resources

like raw materials, direct labors, and other expenses not only to carry out the plan,

but also to be suitable with the companys financial ability.

To communicate effectively ideas and plans in the whole company (BPPManagement Accounting, 2004, p.155).

According to Budgetary control (n.d.), to make effective budget, it is necessary to

involve many people in the company. As there are different departments in a firm,

each area has its own plans and goals aimed to achieve. Therefore, in the

budgeting process, managers in each department will have to explain to their top

management about their scopes and desired activity level. Basing on all the given

plans, top managers can set out appropriate business decisions and tasks to assign

for each department.

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The communication in budgeting process is very important for the company. The

more effective communication between top managers with subordinates, the better

their mutual commitment reaches. There can be a one way interaction that

managers giving order to lower ones, or a two-way dialogue (BPP Management

Accounting, 2004, p.155).

To co-ordinate activities(BPP Management Accounting, 2004, p.155).As the budget is available throughout the whole company, each department will

have its own desired goals to achieve. However, to meet the firms main

objectives, it is necessary for all departments to co-ordinate to aim for the best

results following the budget. Coordination is the process of activities

synchronizing of all individuals from levels management to employees to achieve

organization objectives. they need to know clearly general goals of the enterprise

to accordance with the strategy laid out. The fact is that through the budget,

different sections in the enterprise can see correlations between each other, and

are shown how to join and help each other work effectively. For instance, the

number and types of products to be sold must be coordinated with the purchasing

and manufacturing departments to ensure goods are available.

To provide framework for responsibility accounting (BPP ManagementAccounting, 2004, p.155).

The budget requires people who are in charge to be responsible in controlling and

ensuring the process to go as planned. In addition, the managers will understand

the importance of their roles in supervising the process, and try their best to

achieve the best results.

To establish a control system (BPP Management Accounting, 2004, p.155).

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Basing on the budget plan, the enterprise will have to do analysis and make

comparison between the actual result and the budget. Moreover, managers also

have to evaluate the efficiency of each strategy through the comparison.Budgets

and actual profit and expenditures are controlled for variations and to determine

whether the company meets its targets or not.Hence, if the performance does not

meet the budget, managers can carry out actions immediately to adjust activities.

To motivate employees to improve their performance(BPP ManagementAccounting, 2004, p.155).

The budget shows the efficiency of a businesss performance. Additionally, at the

same time, budgets also provide the working quality of employment. Therefore, to

meet the companys requirements, employees will have to continuously improve

their abilities and performances. Moreover, as budget help managers to create a

control system, all the employees have to follow the set strategies, and try their

best to achieve the budget plan. Based on budget process, managers can make

decision about the rewards or punishments at the right time in the performance

evaluation. It is an effective way to motivate the employees performance,

encourage their spirits and passion working as well as avoiding idle times to get

the highest productivity.

2. Behavior aspect in budgeting:2.1.Budgetary slack:

a. Definition:Budgetary slack is referred to providing a cushion in a budget in order to avoid

an unfavorable variance at the end of the budget year (Budgetary Slack

definition, n.d.). It is also said that budgetary slack might happen when recording

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the amount of budget expenses are more than expected or the amount of budget

revenues are less than expected.

b. Purposes:Budgetary slack is carried out to ensure that the results will occur within the

budget limits (Budget slack, n.d., Financial Term).

The point is that the adjustment of budgetary slack can help the organization to

achieve or reach its objective in an easier way. Besides, in the situation that the

actual expenses are over than expected, budgetary slack can be carried out to

adjust the amount in appropriate rates. Hence, the managers will not be blamed for

the poor results.

c. Budgetary slacks effects:Budgetary slack influences with proper corporate performance, since employment

wants to meet budget goals. When there is budgetary slack for consecutive years,

a company may find that its overall performance has declined in comparison to

that of more aggressive competitors who use stretch goals (What is budgetary

slack, 2010). Therefore, budgetary slack can lead to long-term negative effects on

the profitability and competitive advantages of a company.

A budgetary slack does not necessarily reflect genuine risk considerations used

in contingency planning (Jay Way, n.d.). However, its result is more likely to be

considered as unethical management behaviors. Adjusting a budget, management

wants to make a budget easier to achieve, which might decline the business

efficiency and inhibit innovation.

d. SolutionsBudgetary can be solved by good alignment between budgeting process and the

company's strategies. They can be achieved by communication and coordination

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between top management and lower managersto ensure that all employments have

the plan in achieving the same goals. Besides, to prevent budgetary slack, good

implementation of budgetary control is also important.

2.2.Dysfunctional behavior:

a. Definition:It is said that when the managers goals are not met the general goals of the whole

organization, dysfunctional behaviors might be carried out with poor decision

making. In other words, dysfunctional behaviors refer to organizational

behaviors in budgeting that are considered as violation of control system rules and

procedures (Jaworski& Young, 1992, p.17).

b. Dysfunctional behavior effects:According to Teerooven (n.d.), doing dysfunctional behaviors, managers might

can more about being self-centered rather than organization goal-

focused.Therefore, the negative effects might be incurred is that with unreliable

information, it will be difficult for the whole company to know who takes

responsibility for unfavorable variances.

Dysfunctional behaviors can lead to the unbalancing in resources among different

departments in the organization. As the unit managers might create biased

budgeting to improve their own departments which also make others become

lacking of resources.

c. Solutions:In order to prevent dysfunctional behaviors, it is better if the whole employment

can meet the same goals. In other words, the organization should create good

communication between employees to prevent them from conflicting. After that,

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the top management should ensure that lower managers understand and follow to

achieve for the overall goals of the company. Moreover, the firm should have

reward policies for employees who follow the truth budgets, and against the

biased budgets.

II. BUDGETING METHODS1. Fixed budget and flexible budget

a. DefinitionA fixed budget, also named static budget is "designed to remain unchanged

irrespective of the volume of output or turnover attained with no analysis of cost"

meanwhile flexible budget is built to "adjust the permitted cost levels to suit thelevel of activity actually attained", Terry Lucey (Costing, 1981,p.330)

b. Advantages and disadvantagesFixed budget brings a lot of advantages because of consisting of constant

numbers. According to Miriam (n.d.), fixed budget allows to plan ahead according

to the goals and needs, prepare for expenses in advance and investigate financial

options. In addition to that, it is an isibility of variable forces business to be aware

of where the budget was inaccurate, let an organization easily monitor market

trends (Thibodeaux, n.d.). In comparing with flexible budget, it is a lower influence

of variance factors so it takes a shorter time to prepare and understand. Moreover,

it is easier to follow the spending limits because accountants do not need to adjust

the budget each month.

Nevertheless, the fixed numbers of this type budget make some challenges in

business operation. In result, it is only valid for the single planned level of activity

and inappropriate for evaluatin how well costs are controlled. With the long-term

plan, fixed budget will increase the difficulty of the organization in finance which

are may both true and untrue for the following periods. Besides, businesses do not

allow adjusting the budget based on a change in environment such as the loss of a

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job or reduced profits. Thus, based on Thibodeaux (n.d.), fixed budget is a difficulty

in accounting for inflation and rise in costs.

In contrast to fixed budget, the advantages of fixed budget become

disadvantages of flexible budget and vice versa. Being built through variable figures,

flexible budget is used in controlling stage which includes various levels of activity

and variance analysis. In flexible budget, there has a relationship between cost and

volume incurred at different levels of activity so it reflects the change of variable

costs followed the actual level activity to reject the variances of actual and budgeted

costs due to the volume change. McIntosh (n.d.) suggested that, flexible budget

allows to compare how the businesss actual sales figures stack up against expected

sales figures as well as evaluate the manager's performance more fairly. Hence,

when the future activity level cannot be reasonably estimated, management can run

the flexible budget for several activity levels.

In spite of advantages, flexible also has some disadvantages. The process of

setting a flexible budget takes a longer time than a fixed budget because of too many

changes in the range of estimation if incurring only one variable cost. It depends on

hindsight to adjust financial expectations and can do nothing to adjust the

performance or sales of the quarter that just passed (Lister, n.d.) One more

disadvantage of flexible budget is creating obstacles in estimating tax payment of

the organization.

c. Some comparisons between fixed budget and flexible budgetThe first fields in see the differences between these two budgets are in the

planning and controlling area. The fixed budget is useful for planning purposes

because it is set out at a predetermined level of activity meanwhile being

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established based on the fluctuation of activity level, flexible budget works on well

with controlling purpose more than static budget.

Besides, in the evaluation of product processing, the static budget is more

appropriate with efforts of motivating employees to achieve the highest

productivity at the lowest price while, flexible budget is known as a performance

evaluation device. Thus, flexible budget can be analyzed at the end of the period to

forecast the static budget for the following period that helps controlling the

unexpected costs incurred.

Based on the variance of fixed budget which is usually used for estimating

expenses in a certain time period, managers can carry out financial statement with

the higher accuracies because it is a bigger frequency of errors appearance of

expense variance on static budget.

Fixed budget is set out easier than flexible budget because accountants can

monitor fixed costs than variable costs and in some cases, fixed budget can has the

same functions as flexible budget when related to variable account. In the other

hand, flexible budget helps managing for future changes in any expense or income

account so it is not difficult for accountants and managers to see the situation of

surplus or deficiency.

2. Incremental budget vs Zero based budgeta. Definition

John B. Miller (Principles of Public and Private Infrastructure Delivery, 2000,

p.364) stated the inncremental budget means the next year's budget is established based

upon the current budget plus an "increment" added to cover the increasing costs of

services generally each year

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Different from incremental budget, all the expenses of zero-based budget are started

from zero.Zero-based budget definition (n.d.) said it is where the expenses or costs of

the prior year are not taken into consideration when establishing expense or budgetary

levels looking forward.

b. Advantages and disadvantagesEach type of them has own strengths in the process of budget establishment. About

incremental budget, it is considered as the easiest budget to perform and understand

because the accountant only has to follow the stable form of the past period. In other

words, it is very clearly to see the fluctuation of individual items in different times and

make a better co-ordination between budgets. NIA (2010) claimed it is easily

understand, simple to operate makes marginal changes and secures agreement through

negotiation. However, the ignoring influence of changes cause some disadvantages

when using incremental budget. It is the reason why there is no innovation in developing

idea incentives to reduce costs.

In the case of zero-based budget, it is built up without combining with the previous

period budget so pros and cons are also existing. Starting with the zero figures, it is a

quite clear link between budgets and objectives to inncrease staff motivation by

providing greater initiative and responsibility in decisions making. Accountants and

managers can also have a stricter control through seeing evidently the effectiveness on

every output cash flow and efficient allocation of resources in overall evaluation.

Yet, applying zero-based budget will face to some troubles. This budget requires a

deep review of individual account which is affected by many various costs over the

budget period so it is very time and manpower consuming. Besides, to make a zero-based

budget, the operation needs to train employees and there are difficulties in indentifying

suitable performance measure and decision criteria (CIPFA, n.d.)

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c. Differences between incremental and zero-based budgetThe beginning accounts of these two budgets are mentioned at the first step.

Incremental continues the ending inventory of the previous period while zero-based

budget is assumed with zero indicators. It explains why zero-based budget has a greater

ability since every aspect of the budget is supervised in terms of both costs and benefits.

In incremental budget, it requires to justify only additions to or subtractions from the

previous cost levels but zero-based budget needs the justification single cost from zero

basis.

In frequency, accountants and mangers usually carry out the incremental budget for

every year but the zero-based budget is prepare for the longer period, five or more. Thus,

the previous periods accounts allocated for activity are adjust for inflation without the

changes of activity ranks but in contrast, inn zero-based budgeting, each organizational

activity, or decision package, is evaluated and ranked based on its benefit to the

organization

3. Top-down budget and bottom-up budget

a.Definition

Top-down budget is defined as the budget planning strategy where cost estimates are

generated by working from the highest level downwards. In top-down budget, a cost is

typically put on each unit of raw materials, services, or labor required for the project, and

the estimated number of u nits is then converted into monetary sum to produce the

overall cost estimate to be used by the business (Business dictionary, n.d.).

Whereas, bottom-up budget begins with identifying all the constituent tasks that are

involved in implementing a project and working out the resources and funding required

by each (Anon, 2010).

b. Advantages and disadvantages

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Top-down budget have many advantages, one of them is that top-down budgeting

methods allow upper managers to maintain complete financial control over a budget

(McQuerry, 2011). According to Arthur, it means that a business can allow the lower

managers to focus on their departments and what they do best. In addition to that, Using

top-down budget method can save time overall because each level of management of a

company come up with the budget, and have full information about the budget of their

particular department. Another advantage of top-down budgeting method is that greater

financial accountability of employees. Staffs must have prudent financial decisions about

how the money will be used because of having to work with the certain budget

(McQuerry, 2011).

Besides the advantages, top-down budget also have some drawbacks that is

considered as the challenges to managers in thinking about how and when should use

top-down budgeting method to achieve the best result for business. First of all, the

method can results in underfunding or overfunding of a department because of the

shortage of key personnel input from the staff rank. It means that the decision made by

the upper managers might be inaccurate because of limited knowledge, which in turn will

result in insufficient budget for the department and cause potential for underperformance

(McQuerry, 2011). It conduce the lower morale of subordinates who they are notinvolved in process.

Although top-down budget has both advantages and disadvantages, the advantages

outweigh the drawbacks. It is a reason why the method still is chosen by many manager

for their business.

In contrast to top-down budget, the advantages of top-down budget become the

disadvantages of bottom-up budgets. Firstly, bottom-up budget tends to be more accurate

than other method budgets because it has concern to every level of employees in the

company and it is planned from detailed information. It means that it create the

environment with greater employees motivation. According to Arthur, The method is

suitable for large organization. Additionally, it helps build the better coordination and

communication among level managers and their employees (Florin, 2011).

Despite advantages, bottom-up budget also have some drawbacks. The method

consumes the large amount of time. Florin said that the method require managers toperformance the same administrative tasks as those that deals with this kind of skills

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(2011). It also asks managers elaborate budgets without the benefits of context within the

company. Last but not least, Top manager has little impact over the budgeting process.

c.Some comparison between top-down budget and bottom-up budget

The differences between top-down budget and bottom-up budget are shown through

some points. Top-down budget will aggregate fiscal and take into account forecast. The

forecast can help company have the whole sight about which industry will generate the

best returns. Meanwhile, bottom-up budget largely ignores economic forecasts (Kim &

Keun Park, 2006). According to Kim and Keun Park, the top-down budgeting system

helps to reduce the inefficient budget formulation practices that can usually be found in a

bottom-up budget. Top-down budget delegates the authority for allocating financial

resources among individual appropriations to line departments, while the bottom-up

approach is a centralized system in which the authority for resources allocation remains

vested primarily in the finance department. It is a vital reason why in general top-down

budgeting is used more often than bottom-up budgeting. Additionally, the senior

managers in the particular company can perceive that bottom-up budgeting is the risk

and unreliable choice to use. The advantages and disadvantages of each budgeting can

complement and brings the higher efficiency. Therefore, managers can use a mix of both

methods in some case. If there are any discrepancies between the data, adjustments will

be made until the two budgets meet.

III. BUDGETS FOR PHONG PHU COMPANY1. REVENUE BUDGET

(units: )

Revenue budget A B

Budgeted sales in units 11,200 12,900

Budgeted selling price 150 90

Budgeted revenues 1,680,000 1,161,000

Table 1.1: Revenue budget for Phong Phu company

Notes:

Budgeted revenue = Budgeted sales in units * Budgeted selling price

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Budgeted revenues of product A: 11,200 x 150 = 1,680,000 Budgeted revenues of product B: 12,900 x 90 = 1,161,000

2. PRODUCTION BUDGET

Process 2 A B


Desired ending finished goods inventory 700 180

Total units required 11,900 13,080

Less: beginning finished goods inventory 500 200

Required production in units 11,400 12,880

Good yield 95% 92%

Gross production needed from cost centre

P2

12,000 14,000

Table 1.2: Production budget of centre P2

Notes:

Good yield = 100% - reject rate Good yield of product A = 100% - 5% = 95% Good yield of product B = 100% - 8% = 92% Gross production needed from cost centre P2 =

Gross product needed for product A = 11,400 : 95% = 12,000 Gross product needed for product B = 12,880 : 92% = 14,000

Production budget (P1) A B


Plus: Desired ending work in process 300 125

Total units required 12,300 14,125

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Less: beginning work in process inventory 150 100

Required production in units 12,150 14,025

Good yield 90% 85%

Gross production needed from cost centre

P1

13,500 16,500

Table 1.3: Production budget of centre P1

Notes:

Budgeted sales in units of department 1 is gross product required ofdepartment 2

Good yield = 100% - reject rate

Good yield of product A = 100% - 10% = 90% Good yield of product B = 100% - 15% = 85%

Gross production needed from cost centre P1 =

Gross production needed for product A = 12,150 : 90% = 13,500 Gross production needed for product B = 14,025 : 85% = 16,500

3. DIRECT MATERIAL BUDGETDirect material budget Product A Product B

Required production in units (P1) 13,500 16,500Direct material required per unit

Material X 2.5

Material Y 3

Total direct material required in units 33,750 49,500

Less beginning direct material inventory inunits 500 300

Add ending direct material inventory in units 600 350

Direct material to be purchased in units 33,850 49,550

Budgeted cost of material X 20

Budgeted cost of material Y 8

Budgeted cost of direct material to bepurchased 677,000 396,400

Table 1.4: Direct material budget for Phong Phu company

Notes:

Require production in unit in direct material budget is the gross productrequired of department 1

Total direct material required in units = Required production in units x Directmaterial required per unit

Total direct material X required for product A = 13,500 x 2.5 = 33,750 Total direct material Y required for product B = 16,500 x 3 = 49,500

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Budgeted cost of direct material to be purchased = Direct material to bepurchased in unit x Budgeted direct material cost

Budgeted cost of direct material X = 33,750 x 20 = 677,000 Budgeted cost of direct material Y = 49,500 x 8 = 396,400

4. DIRECT LABOR BUDGETProduct A Product B

Process 1(P1)

Gross production in units 13,500 16,500

DL required per unit, in hours 1.0 0.6

Total direct labor hours required 13,500 9,900

Cost per direct labor hour 10 10

Budgeted cost of direct labor for P1 135,000 99,000

Process 2(P2)

Gross production in units 12,000 14,000

DL required per unit, in hours 2.0 0.9

Total direct labor hours required 24,000 12,600

Cost per direct labor hour 10 10

Budgeted cost of direct labor for P2 240,000 126,000

Totalbudgeted costof directlabor for P1and P2

375,000 225,000

Table 1.5: Budgeted direct labor cost in two process P1 and P2

Notes:

Total direct labor hours required = Gross production in units x DLrequired per unit, in hours

Total direct labor required for product A in P1 = 13,500 x 1= 13,500 Total direct labor required for product B in P1 = 16,500 x 0.6 = 9,900 Total direct labor required for product A in P2 = 12,000 x 2 = 24,000 Total direct labor required for product B in P2 = 14,000 x 0.9 = 12,600

Budgeted cost of direct labor = Total direct labor hours required x Costper direct labor hour

Budgeted cost of direct labor for product A in P1 = 13,500 x 10 =135,000

Budgeted cost of direct labor for product B in P1 = 9,900 x 10 = 99,000 Budgeted cost of direct labor for product A in P2= 24,000 x 10 =

240,000

Budgeted cost of direct labor for product B in P2= 12,600 x 10 =126,000

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5. BUDGET FOR MANUFACTURING OVERHEAD5a. Budget for manufacturing overhead in P1

(unit: )

Budget for fixed manufacturing overhead in

P1A B

Budgeted DL hours required for each product 13,500 9,900

Budgetet total DL hours required in P1 23,400

Bugeted fixed manufacturing overhead rate 3.5

Budgeted fixed overhead allocated to each

product47,250 34,650

Table 1.6: Budgeted for fixed manufacturing overhead in P1

Notes:

Budgetet total DL hours required in P1 = 13,500 +9,000 = 23,400 Bugeted fixed manufacturing overhead rate =

=

= 3.5 per hour

Budgeted fixed overhead allocated to product A = 3.5 x 13,500= 47,250 Budgeted fixed overhead allocated to product B = 3.5 x 9,900 = 34,650

(unit: )

Budget for total manufacturing overhead in P1 A B

Total DL hours required 13,500 9,900

Budgeted variable overhead per DL hours 5 5

Total budgeted variable manufacturing overhead 67,500 49,500

Plus: Total budgeted fixed manufacturing 47,250 34,650

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overhead

Total budgeted manufacturing overhead 114,750 84,150

Table 1.7: Budget for total manufacturing overhead in P1

Notes:

Total budgeted variable manufacturing overhead = Total DL hours required x

Budgeted variable overhead per DL hours

Total budgeted variable manufacturing overhead for product A: 13,500 x 5 =67,500

Total budgeted variable manufacturing overhead for product B: 9,900 x 5 =49,500

5b. Budget for manufacturing overhead in P2

(unit: )

Budget for fixed manufacturing overhead in P2 A B

Budgeted DL hours required for each product 24,000 12,600

Budgetet total DL hours required in P1 36,600

Bugeted fixed manufacturing overhead rate 3.4

Budgeted fixed overhead allocated to each product 81,600 42,840

Table 1.8: Budget for fixed manufacturing overhead in P2

Notes:

Budgetet total DL hours required in P1 = 24,000 +12,600 = 36,600 Bugeted fixed manufacturing overhead rate =

=

= 3.4 per hour

Budgeted fixed overhead allocated to product A = 3.4 x 24,000= 81,600

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Budgeted fixed overhead allocated to product B = 3.4 x 12,600 =42,8400

(unit: )

Budget for total manufacturing overhead in P2 A B

Total DL hours required 24,000 12,600

Budgeted variable overhead per DL hours 3 3

Total budgeted variable overhead 72,000 37,800

Budgeted fixed overhead 81,600 42,840

Total budgeted overhead 153,600 80,640

Table 1.9: Budget for total manufacturing overhead in P2

Notes:

Total budgeted variable manufacturing overhead = Total DL hours required x

Budgeted variable overhead per DL hours

Total budgeted variable manufacturing overhead for product A: 24,000 x 3 =72,000

Total budgeted variable manufacturing overhead for product B: 12,600 x 3 =37,800

6. ENDING INVENTORY BUDGET FOR MATERIALS(unit: )

Ending inventory budget for materials X Y

Budgeted cost of DM purchase 677,000 396,400

Add beginning DM inventory 9,000 1,800

DM available for use 686,000 398,200

Less budgeted cost of desired ending DM 12,000 2,800

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inventory

Budgeted cost of DM to be use 674,000 395,400

Table 1.10:Ending inventory budget for materials

Notes:

Budgeted cost of desired ending DM inventory = desired ending direct material

inventory x cost per direct material unit

Budgeted cost of desired ending direct material X inventory = 600 x 20 =12,000

Budgeted cost of desired ending direct material Y inventory = 350 x 8 = 2,800

7. ENDING INVENTORIES BUDGET FOR WORK IN PROCESS(unit: )

Ending inventories budget for WIP A B

Budgeted cost of DM to be used 674,000 395,400

Budgeted direct labour cost 135,000 99,000

Total budgeted overhead 114,750 84,150

Budgeted total manufacturing costs in P1 923,750 578,550

Total good units of output in P1 12,150 14,025

Budgeted cost per unit of WIP 76 41

Budgeted ending WIP inventory in units 300 125

Budgeted cost of ending WIP inventory 22,800 5,125

Table 1.11:Ending inventory budget for materials

Notes:

Budgeted cost of desired ending DM inventory = desired ending direct material

inventory x cost per direct material unit

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Budgeted cost of desired ending direct material X inventory = 600 x 20 =12,000

Budgeted cost of desired ending direct material Y inventory = 350 x 8 = 2,800

8. ENDING INVENTORIES BUDGET FOR WORK IN PROCESS(unit: )

Budgeted cost of WIP to be used in P2 A B

Cost of beginning WIP 9,750 3,800

Plus: Total budgeted manufacturing cost in P1 923,750 578,550

Cost of total WIP available for use 933,500 582,350

Less: budgeted ending WIP 22,800 5,125

Budgeted cost of WIP to be used in P2 910,700 577,225

Table 1.12: Budgeted cost of WIP to be used in P2

9. ENDING INVENTORIES BUDGET FOR FINISHED GOODS(unit: )

Ending inventories budget for FG A B

Budgeted cost of WIP to be used 910,700 577,225

Budgeted direct labour cost in P2 240,000 126,000

Total budgeted overhead in P2 153,600 80,640

Total budgeted manufacturing cost in P2 1,304,300 783,865

Good units of output in P2 11,400 12,880

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Budgeted cost per unit of FG 114.5 60.9

Budgeted ending FG in units 700 180

Budgeted cost of ending FG 80,150 10,962

Table 1.13: Ending inventories budget for finished goods

Notes:

Budgeted cost per unit of FG =

Budgeted cost per unit A of FG= 1,304,300 : 11,400 = 114.5 per unit Budgeted cost per unit B of FG= 783,865 : 12,880 = 60.9 per unit Budgeted cost of ending FG = Budgeted cost per unit of FG x Budgeted ending

FG in units

Budgeted cost of ending FG inventory of product A = 114.5 x 700 = 80,150 Budgeted cost of ending FG inventory of product B = 60.9 x 180 = 10,962

10.BUDGETED COST OF GOODS SOLD(unit: )

Budgeted Cost of goods sold A B

Cost of beginning finished goods 50,000 11,000

Plus: Total budgeted manufacturing cost in P2 1,304,300 783,865

Cost of goods manufactured 1.354,300 794,865

Less: budgeted cost of ending FG 80,150 10,962

Budgeted cost of goods sold 1,274,150 783,903

Table 1.14: Budgeted Cost of goods sold

11.BUDGETED INCOME STATEMENT(unit: )

Budgeted income statement A B Total

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Sales 1,680,000 1,161,000 2,841,000

Cost of goods sold 1,274,150 783,903 2,058,053

Gross profit 405,850 377,097 782,947

Table 1.15: Budgeted income statement of Phong Phu Company

Notes:

Gross profit = Sales - Cost of goods sold

Task 2:

1. Schedule of expected cash collections:April May June Quarter

Cash sales $268,000 $280,000 $272,000 $820,000

Account collections:

From current months

sale40,200 42,000 40,800 123,000

From 1 month ago 273,000 281,400 294,000 848,400

From 2 months ago 76,800 78,000 80,400 235,200

Total $658,000 $681,400 $687,200 $2,026,600

Notes:

Sales are 40% for cash cash sales = 40% x sales

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cash sales for April = 40% x 670,000 = $268,000 cash sales for May = 40% x 700,000 = $280,000 cash sales for June = 40% x 680,000 = $272,000 cash sales for 2nd quarter = 268,000+ $280,000 + 272,000 = $820,000

Sales on account are collected over a three-month period with10% collected in the month of sale

account collection from current months sale = 60% x sales x 10%Account collection fromcurrent months sale for

April 60% x 670,000 x 10% = $40,200

May 60% x 700,000 x 10% = $42,000

June 60% x 680,000 x 10% = $40,800

Quarter 40,200+42,000+40,800 = $123,000

70% collected in the first month following the month of sale

account collection for April from March = 60% x sale of March x 70%= 60% x 650,000 x 70% = $273,000

account collection for May from April = 60% x sale of April x 70%= 60% x 670,000 x 70% = $281,400

account collection for June from May = 60% x sale of May x 70%= 60% x 700,000 x 70% = $294,000

account collection for quarter from 1 month ago273,000 + 281,400 + 294,000 = $848,400

the remaining 20% collected in the second month following the month of

sale

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account collection for April from February = 20% x sale of February x20%

= 20% x 640,000 x 20% = $76,800

account collection for May from March = 20% x sale of March x 20%= 20% x 650,000 x 20% = $78,000

account collection for June from April = 20% x sale of April x 20%= 20% x 670,000 x 20% = $80,400

account collection for quarter from 2 months ago:76,800 + 78,000 + 80,400 = $235,200

2.a. Inventory purchases budget:

April May June Quarter

Budgeted COGS (*) $469,000 $490,000 $476,000 $1,435,000

Add desired ending

inventory

98,000 95,200 91,000 284,200

Total needs 567,000 585,200 567,000 1,719,200

Less beginning inventory 93,800 98,000 95,200 287,000

Required purchases$473,200 $487,200 $471,800 $1,432,200

Notes: (*) cost of goods sold

Each months ending inventory must equal 20% of the cost of the merchandise tobe sold in the following month

The merchandise inventory at March 31 is $93,800 => desired endinginventory for April is $98,000

desired ending inventory for May = 20% x COGS of June

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= 20% x 476,000 = $95,200

desired ending inventory for June = 20% x COGS of July= 20% x 455,000 = $91,000

desired ending inventory for quarter = 98,000 + 95,200 + 91,000 = $284,000 the desired ending inventory of current months sale becomes the beginning

inventory of the following month.

b. Schedule of expected cash disbursement for merchandise purchases:April May June Quarter

March purchases $320,460 - - $320,460

April purchases 141,960 $331,240 - 473,200

May purchases - 146,160 $341,040 487,200

June purchases - - 141,540 141,540

Total cash disbursements

for purchases $462,420 $477,400 $482,580 $1,422,400

Notes:

30% of a months inventory purchases are paid for in the month of purchase Accounts payable at March 31 for inventory purchases during March total

$320,460 => $320,460 is paid in April

Aprils inventory purchases is paid in April = 30% x required purchases forApril

= 30% x 473,200 = $141,960

Mays inventory purchases is paid in May= 30% x required purchases forMay

= 30% x 487,200 = $146,160

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Junes inventory purchases is paid in June= 30% x required purchases forJune

= 30% x 471,800 = $141,540

remaining 70% are paid in the following month Aprils inventory purchases is paid in May = 70% x required purchases for

April

= 70% x 473,200 = $331,240

Mays inventory purchases is paid in June= 70% x required purchases forMay

= 70% x 487,200 = $341,040

c.Schedule of expected cash disbursements for selling and administrativeexpenses:


Selling expense $82,000 $83,000 $83,000 $248,000

Administrative expense 75,000 78,000 79,000 232,000

Less depreciation 16,000 16,000 16,000 48,000

Total cash disbursements

for selling and

administrative

expenses $141,000 $145,000 $146,000 $432,000

d. Cash budgetApril May June Quarter

Beginning cash balance $47,000 $1,580 $(9,420) $39,160

Add cash collections 658,000 681,400 687,200 2,026,600

Total cash available 705,000 682,980 677,780 2,065,760

Less cash disbursements:

Purchases of inventory 462,420 477,400 482,580 1,422,400Selling and administrative 141,000 145,000 146,000 432,000

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expense

Purchases of land 0,000 70,000 0,000 70,000

Cash dividends 100,000 0,000 0,000 100,000

Total cash disbursements 703,420 692,400 628,580 2,024,400

Excess (deficiency) of cash $1,580 $(9,420) $49,200 $41,360

Note: Excess (deficiency) of cash = total cash available total cash disbursement

It can be seen from the above cash budget, the ending cash balances for the month of

April and May are under the amount $30,000 that Vinabike company must maintain.

The reason might be total amount of budgeted cash available based on cash collection

for these two month cannot cover the cash disbursements so Vinabike will fall in the

deficiency of cash situation. Therefore, to meet the requirement of ending cash balance,

Vinabike should consider some solutions to collect cash effectively.

Currently, in addition to borrowing money from banks and relative or issuing stock and

bonds, Vinabike also can purchase material on account, financial leasing or debt

collection to raise money. Nevertheless, each method has own pros and cons so that

Vinabike should investigate carefully to collect cash quickly and effectively.

Share issuing is one of tools to attract the capital from shareholders as well as the

internal workers and employees of the company where has an abundant cash flow. In

recently years, the stock market of Vietnam has not really promoted its full effects, even

many times the stock market became frozen because of too much supply.

In contrast, the situation of bonds issue is a relatively actively development. The

issuance of bonds of companies such as Vinaconex, Da, Vincom etc. has attracted great

interest of investors at home and abroad. It becomes a method to mobilize flexibly

capital in long term up to 5 years, 10 years or longer, especially the firm is not under

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pressure to pay recurring debt as bank loans ( Mr.Do Ngoc Quynh - the General

Secretary of Vietnam's bond market VMBA, 2011). bond interest payments are charged

based on the operational cost so the enterprise has more advantages than stock issuing

and also attract the attention of investors to help promote brand widely. However, to

have the approval opinion of government, the organization has to meet considerable

requirements such as financial statements must be audited fully, issuing bonds the

international market must have produced results of operational business for three

consecutive years preceding the year of issuance of the business (An Viet, cited financial

information number 24/2011).

Besides, financial leasing is a cost reduction because enterprise only has to pay a piece

of facilities instead of buying new machinery or technological innovation. Although this

solution allows businesses to use capital flexibility and without affecting bank loan

limitation, the form of financial leasing in Vietnam has not yet popular due to relatively

high rents with insurance costs, high depreciation. Meanwhile, material purchasing on

account is to limit cash outflows for businesses because businesses do not has to pay

money immediately and only prepay a fraction of the material cost and then, cash can be

used for other purposes. As the same function with these two methods, debt collection

is also option in raising money but it can be time-consuming in recovery the account

receivable.

One more instrument which is considered as the closest with the business is borrowing

money from banks and relatives. Recently, the general interest rate tend to decrease to

develop the investment so that it is easier for company to approach capital from banks.

although the administrative procedures are still cumbersome and mortgaged assets

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requirement. Different from banks, relatives who help company collecting cash fast with

simply agreement in short-time will require a charging at the higher level of interest.

In the case of Vinabike, assumption that, the company has an agreement with a local

Agribank that allows the company to borrow in increments of $1,000 at the beginning of

each month. The interest rate on these loans is 1% per month and for simplicity, it will

be assumed the interest is not compounded. The company would, as far as it is able,

repay the loan plus accumulated interest at the end of the quarter. As result, the cash

budget is illustrated as follow:


Beginning cash balance $47,000 $30,580 $30,580 $108,160

Add cash collections 658,000 681,400 687,200 2,026,600

Total cash available 705,000 711,980 717,780 2,134,760

Less cash disbursements:

Purchases of inventory 462,420 477,400 482,580 1,422,400

Selling and administrative

expense 141,000 145,000 146,000 432,000Purchases of land 0 70,000 0 70,000

Cash dividends 100,000 0 0 100,000

Total cash disbursements 703,420 692,400 628,580 2,024,400

Excess (deficiency) of cash $1,580 $19,580 $89,200 $110,360Financing 29,000 11,000 0 40,000Less interest 40,400 40,400

Ending balance $30,580 $30,580 $48,800 $109,960

To find the most appropriate loan account for June financing with the guarantee of

maintaining $30,000 ending cash balance, Vinabike should pay attention to the highest

amount of money borrowed which stands for A in this formula:

(89,200 + A) (29,000 + 11,000 + A) x (1 + 1%) 30,000

18,800 0.01 x A 1,880,000 A

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Hence, $1,880,000 is the highest amount to ensure the $30,000 ending balance in the

last month of the 3rd quarter. Vinabike has to borrow $40,000 from local Agribank with

1% interest per month and the loan plus accumulated interest are repaid at the end of

the quarter. It can be realized that total loan plus interest for both April and May that

will be paid at the end of June is:

(29,000 + 11,000) x (1 + 1%) = $40,400

Besides, the excess of cash in June is $89,200 or in other words, the ending balance of

June will be:

89,000 40,400 = $48,400

$48,400 meets the requirement of at least $30,000 ending balance for June.Moreover, to minimum the interest of the second quarter, Vinabike should

borrow the lowest loan account. Therefore, Vinabike does not have to borrow

anymore for June.

Task 3a:

1. Computing variancesa. Material variances actual quantity = total material purchases total ending material

=12,200 3,250 = 8,950 ounces

actual price = = $18.8 per ounce

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total standard quantity = standard quantity x total production= 2.4 x 3,700 = 8,880

Material Price Variance (MPV):MPV = Actual quantity (Actual price Standard price)

= 8,950 x ($18.8- $19.5)

= $6,265 (Favorable)

Material quantity variance(MQV)MQV = Standard price (Actual quantity Standard quantity)

= $19.5 x (8,950 8,880)

= $1,365 (Unfavorable)

Total material variances= MPV + MQV = - 6,265 + 1,365 = 4,900 (Favorable)

Material variances summary

Look at the results of material variances above, it can be seen Price variance of

material is $6,625 Favorable, it means that Riley Labsbargained for an good price

and lower than expected. However, Quantity variance of material is $1,365

Unfavorable, it means it is a worse than expected results. It is some reasons of

unfavorable material quantity variances such as the purchase managers may be buy

material of inferiorquality or direct labors arent trained carelessly leading to do

wrongly and have to use more materials to complete products. Besides, compare

8,950

x

$18.8 per

ounce

8,950

x

$19.5 per ounce

= 174,525

8,880

x

$19.5 per ounce

= $173,160

Price variance $6,265

favorable

Quantity variance

$1,365

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actual quantity with standard quantity of Riley Labs, it can be seen that it is not much

difference with them and total material variance are $4,900 Favorable, so Riley Labs

still should sign contract with this new supplier because they can save material cost

and dont waste money to find new supplier.

b. Direct labor variances Actual hours = Number of employees x Average worked hours

=36 x 175 = 6,300

Standard hours = Standard quantity x Total production= 1.5 x 3,700 = 5,550

Labor rate variance (LRV):LRV = Actual hours x (Actual rate Standard rate)

= 6,300 x ($12.2 - $12.8)


Labor efficiency variance (LEV):LEV = Standard rate x (Actual hours Standard hours)

= $12.8 x (6,300 5,550)


Total labor variances = LRV + LEV= -3,780 + 9,600 = $5,820 (Unfavorable)

Labor Variances summary6,300 hours

x

$12.2 per hour

= $76,860

6,300 hours

x

$12.8 per hour

= 80,640

5,550 hours

x

$12.8 per hours

= $71,040

Rate variance

$3,780 favorable

Efficiency variance

$9,600 unfavorable

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c.Variable manufacturing overhead variances

Variable manufacturing overhead is assigned to department on the basis ofdirect labor-hours

Actual rate =

= $18,900: 6,300 = $3 per hour

Standard hours = Standard quantity x total production= 1.5 x 3700 = 5,550

VMSV= Actual Hours x (Actual rate Standard rate)= 6,300 x ($3 - $3.2)


Variable manufacturing overhead efficiency variances (VMEV):VMEV = Standard rate x (Actual hours Standard hours)

= $3.2 x (6300 5550)


Total variable overhead variances:= VMSV + VMEV = -1,260 + 2,400 = $1,140 (Unfavorable)

Variable manufacturing overhead variances summary6,300 hours

x

$3 per hour

= $18,900

6,300 hours

x

$3.2 per hour

= $20,160

5,550 hours

x

$3.2 per hour

= $17,760

spending variance

$1,260 favorable

efficiency variance

$2,400 unfavorable

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task 3b:

Antigua Blood Bank

Cost Control Report

For the Month Ended September 30

Cost formula perliter

Total fixedcosts

Budget

240 320

Liters of blood collected

Variable costs:Medical supplies 14 $3,360 4,480

Lab tests 11.5 2,760 3,680

Refreshments fordonors

6.2 1,488 1,984

Administrative supplies 2 480 640

Total variable costs 33.7 8,088 10,784

Fixed costs:

Staff salaries 8,000 8,000 8,000

Equipment

depreciation

1,000 1,000 1,000

Rent 500 500 500

Utilities 225 225 225

Total fixed costs 9,725 9,725

Total costs $17,813 20,509Notes:

Medical supplies =

= $14 per liter

Lab tests =

= $11.5 per liter

Refreshments for donors =

= $6.2 per liter

Administrative supplies =

= $2 per liter

Antigua Blood Bank

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Cost Control Report

For the Month Ended September 30

Cost formulaper liter

Total fixedcosts

Flexiblebudget

Actualresults

Variances

Liters of blood collected 320 320 0Variable costs:

Medical supplies 14 4,480 4,650 $ 170(U)

Lab tests 11.5 3,680 2,800 880 (F)

Refreshments for donors 6.2 1,984 2,188 204 (U)

Administrative supplies 2 640 620 20 (F)

Total variable costs 33.7 10,784 10,258 $ 526 (F)

Fixed costs:

Staff salaries 8,000 8,000 8,000 $ 0

Equipmentdepreciation

1,000 1,000 1,400400 (U)

Rent 500 500 500 0

Utilities 225 225 250 25 (U)

Total fixed costs 9,725 10,150 425 (U)

Total costs 20,509 20,408 $ 101 (F)

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