5.3 My LC (Learning Consultants)’s Master Budget

In accordance to the concerned topics, I choose to take the topics of my ongoing educational works. I have been running an educational service provider - Learning Consultants (LC) for two years. So far, my first purpose on establishing the LC is to happily contribute to the people’s education. I span the digital based platform in collaboration with youtube, blogspot, and wordpress. In the future, I  want to build my own in house built websites or even the use of google domain and premium blogspot or wordpress as well as constructing physical building for the institution. In the two years run of LC, I don’t think about how profitable I will be. I just think to share values to all people. This results in unsustainable activity in the future. Therefore, I choose to create subsidized educational service accessible for all people. For this reason, I need to create the well-established LC’s master budget.

The process to create the LC’s budgets begin with the first quarter of yearly project of university entrance exam preparation of all senior high school students in an event namely Ciamis Learning Camp (CLC). The budget of the next quarter can be taken as other periodic educational activities for long term preparation or other educational programs. As the first quarter project, it was established as a non-profit organizational project. In the future, we consider to generate profit by taking educational fees for high economy students to be given as subsidized scholarships for basic needs of all students and learning facilitators. As the first quarter project, the budgeting process start with the review of last year’s data which is considered to be critical for the expenditures of legal authority sponsors (Heisinger, & Hoyle, (n.d.)). Last year the YBMPLN as a CSR of our national electrical company was the only sponsor for the event. The sponsor gave us the total amount of about Rp. 20000000 (twenty million rupiah) or around $ 1409.34395 for a quarter social educational project. Other unseen assets considered as profitable in the future are the number of social media subscribers. Currently, the LC’s youtube subscriber is 266. Fb page is about 285 and Ig follower is 184. The number of youtube subscriber is targeted to be at least 1000 to generate advertising based revenues. Further aspiration is the available android and web based application for future educational activities.  In detail, some important points of master budget calculations can be given in the following table,

Table 1 : LC (Learning Consultanst)’s Budgeted income statement

Based on the master budget, we recognized the CLC project start in the first quarter from January to April. This is well chosen since we know the university entrance exam is usually nationally held in May. In the first quarter, all sponsor funds with the amount of Rp. 20000000 are fully given to 20 best students @ Rp.1000000 to improve their achievement, to teach other students and to motivate them for getting the admission. For that quarter period, the net income is supposed to be Rp. 40720400 if the total number of targeted registered students reach 15000 persons paying the cost of the cheapest ticket of Rp. 12000. In the second to fourth quarter, available students are the ones doing long time preparation for university entrance, school, or TOEFL exams. In each three quarter, the targeted registration is to reach 5600 persons @Rp. 25000 giving net income of Rp. 720400 for quarter 2 to 4 and Rp. 42881600 that year.     

Based on comparison of the above data to the previous master budgets of the manufacturing companies. The master budget of general service such as educational service provider are different. As we were concerned with the Krakatau Steel Inc as one of the government owned manufacturing companies which produce diverse steel products, My LC (Learning Consultants) as one of the privately owned companies provide educational service instead of seen object as branded products. In generals, principal differences can be seen in the cost calculations of sold products or services which can be seen in the following illustration (Anonimous, n.d.),

Sevice company	Manufacturing company
Provided service cost	Manufactured product cost
Overhead and labor costs in primary	Overhead, labor and materials
Online or digital learning inventories such as android and web based	Real building inventories

 

References

Heisinger, & Hoyle. (n.d.). Budgeting in Nonmanufacturing Organizations. Budgeting in nonmanufacturing organizations. Retrieved October 7, 2021, from https://2012books.lardbucket.org/books/accounting-for-managers/s13-04-budgeting-in-nonmanufacturing-.html. 

Anonimous. (n.d.). Manufacturing, Merchandising and Service Companies. Managerial accounting. Retrieved October 8, 2021, from http://www.csun.edu/~hfact004/Managerial.html.

 

 

5.2 Variance Analysis of A Fruits Company

 

Variance analysis is the process of analyzing the standard and actual cost differences. The analysis is done by management accountants to analyze the direct materials, labor and manufacturing variances (Heisinger & Hoyle, n.d). In this case, the company budgeted to sell $500,000 worth of cartons at a price of $25 each. Actual sales met a budget of $500,000 at $25 per carton.

Based on the available data and the above information, we can do the following calculation and articulation:

Table 1: Variance analysis calculation of the fruit company (wrong calculation of direct material price variance. The correction is explained in no 3.)

1.     Standard cost per unit is the specific cost per unit. While the budgeted costs are the total cost given a certain activity level (Heisinger & Hoyle, (n.d.)).

Standard cost of unit of carton (SP): budgeted unit cost of fruit + budgeted unit cost of package + budgeted unit cost of labor = $10.00 + $0.50 + $4.50 = $15.00

2.     Actual cost per unit of carton (AP) : actual unit cost of fruit + actual unit cost of package + actual unit cost of labor = $12.21 + $0.55 + $7.50 = $20.26

3.     Direct material price variance, AQ^P definition is on the table.      

= (AQ^P)*(AP-SP) = 211000*($20.26 - $15.00) = $1,109,860.00 (This value was                     wrong and need correction)

Direct materials are consumed supplies and materials during the product manufacture (Bragg, 2021).

4.     Direct material usage variance =  (Actually used quantity - Standard usage quantity) x Standard cost per unit (Bragg, 2021) = ((AQ^U) – (SQ))*SP

The problem does not specifically mention the used materials in production. This assume the purchased materials are also totally used. Since we also know that SQ is standard quantity of materials for actual level of activity. Therefore, AQ^U = AQ^P = SQ giving the result that the direct material usage variance is zero

5.     Direct labor rate variance

= ((actual labor cost per carton/actually spent hours per carton)-(budgeted labor cost per carton/budegetedly spent hours per carton))*actually spent hours per carton* (#Units of carton)

= (Actual Rate – Standard Rate) × Actual Hour = (AR-SR) x AH

= (($7.50 /0.75)-($4.50/0.5))*0.75*20000 = $15,000.00

6.     Direct labor efficiency variance   

= (AH − SH) × SR = (actual hour – standard hour) *# Units of cartons* standard rate = (Actual hour – Standard hour)*# Units of cartons* (budgeted labor cost per carton / budgetedly spent hour per carton) (budgeted labor cost per carton / budgetedly spent hour per carton)

= (0.75-0.5) hour *20000*($4.50 / 0.5 hour) = $45,000.00 

To assess whether the actual performance is better than budgeted expectation, we can analysis the above data one by one.  The actual and standard cost variance giving the difference of AP-SP = $20.26 - $15.00 = $5.26 meaning that the actual price is greater than the budgeted one. This is not a good performance due to the fact that customers of the fruit company tend to find lower prize. This variance in budgeted and actual price also impacts the direct material variance. Since (Actual Price – Standard Price) > 0 and the variance of direct material is proportional to the price difference then the actual direct material price is greater than the budgeted one. For the company this is unfavorable due to the need to decrease the cost as much as possible. Direct material usage having the zero variance means that all purchased materials are totally used telling the optimum performance of the company. The value of direct labor rate variance which is greater than zero means the actual rate is greater than budgeted one. This condition is also unfavorable since the company needs to pay more for the labor rate. Lastly, the greater variance of labor efficiency is also unfavorable due to inefficient labor cost of actual case.

In the real work, we are to discuss with some involved individuals in root cause identification of the variances. As the company’s owner, we should contact the production manager who should be responsible for the root cause of the actual and standard price variance, direct material price and usage variances. We also should contact the human resource development manager who should be responsible for the root cause of labor rate and labor efficiency variances. Overall, the involved managerial accounting professionals can be asked for further verification and discussion about the causes of each variances.    

As usual, to propose the well thought causes of each variances. We should start from the first root cause which is the actual and standard price variance. That variance comes as a result of the fail prediction of the fruit price in the market or from the first plant grower. At that time the price increase to the certain predicted amount. Other factors can be the increase of the price of the fertilizer for the fruit plants. In the material price variance, the actually used package weight less than the budgeted one with the greater price in the actual one. The difference is $1000. This variance is a result of the increase in the price of packaging materials. The manager must have failed again in predicting the price. This can happen if the company has less interaction with survey of market price for the materials. Labor rate and efficiency variances with greater value in the actual one can happen as a matter of fact that the actual performance require more time to produce which expects the company to pay more for the labor salaries.           

In conclusion, the greater values of actual performance than the budgeted expectation require the strong attention of the management to the actual and standard price variance, direct material price variance, labor rate and efficiency variances. In this matter, we suggest some courses of action:

1.     The CFO with the budget committee should do well-established digital and direct quantitative and qualitative survey of the market price for the available fruits if they are going to buy it from grower.

2.     If they are going to have their own plants to grow and sell their own fruits. They should make sure to make a good way of farming using state of the art technology such as using the IoT (internet of things) to control the farming process until to market it in such a way that they can have qualified fruits affordable for the customers and profitable for them as the producers and suppliers.

3.     The company should thing on the best brand of the company to be put in the package. As usual the package process should be optimally done by the state of the art IoT technology letting them have the best in class package and reduced cost of packaging.

4.     To reduce spent time or working hours, the company should thing of investing in buying the good technology to help the human employers such us the use of robotic machine which can do more precisely effective jobs with the most time efficient

 

References

Heisinger, K., & Hoyle, J. B. (n.d.). Explain how standard costs are established. Standard costs. Retrieved October 5, 2021, from https://2012books.lardbucket.org/books/accounting-for-managers/s14-02-standard-costs.html  

Bragg, S. (2021, April 16). Direct materials definition. AccountingTools. Retrieved October 6, 2021, from https://www.accountingtools.com/articles/what-are-direct-materials.html. 

Bragg, S. (2021, April 16). Direct material usage variance. AccountingTools. Retrieved October 6, 2021, from https://www.accountingtools.com/articles/what-is-the-direct-material-usage-variance.html.

Official solution : 

solved problem

Chapter 12. Coordinate geometry (B. Positif and negative coordinates part 1)

Chapter 12. Coordinate Geometry (A. Number grids part 2 : Creating straight line)

Chapter 12. Coordinate Geometry (A. Number grids part 1 : Points on the plane)

5.1 Forecasting a hypothetical manufacturing company’s budget in one year period

  

Budgeting process to be written in a budgeted income statement or in a master budget is a process of making estimation of expenses, revenue and profit for a chosen period of time (Picincu, 2020). Through the SG&A budgets, the budgeting process of a one year period can be started with the sales budget. The sales budget is estimation of expected sales price per unit times expected units of product sales. As previously mentioned, a manufacturing company for example the Krakatau steel Inc is supposed to have three units of business, including Hot Rolled Coil (HRC), Cold Rolled Coil (CRC), and Wired Rod (WR). Let’s suppose the calculation for one of business unit in four quarter of a period of year or the calculation of sales budget can be done by the following collaboration of real and hypothetical values of all products are considered as having the same price per unit:

Suppose the Krakatau Steel inc wants to increase 15 % sales ($ 1055277 /price per unit of the company’s product) as (Karim & Tardi, 2021) reported in the coming year of our consideration, then we simply multiply the first quarter sale of the last year by 1.15 with no change of price per unit in such a way that we can get the hypothetical values in the table. The super positional calculation started with the sales budget giving the production budget in terms of the units to be produced for and through the SG&A or the company’s overall overhead budget will be supposed to continue using the following analytical table (Heisinger & Hoyle, (n.d.)),

 

The above result successfully forecasted that if we achieve 278000 units of sales of the year, then at the time period, the total cost of sold goods per unit is $4.31 and the net income of the year is $332,932.00.

Other than the above quantitative analysis, we should be aware of the involved individuals in developing the budgets. Involved individuals in the sales budget are sales staff, economist, and market researcher (Heisinger & Hoyle, (n.d.)). Involved individuals in the process of production budgeting are a production accountant, unit production manager and line producer. Involved individuals in the direct labor and material budgeting are most probably the managers and directors of the company especially the human resource development managers, and the material production managers. In general, all budgets including the selling, administrative and budgeted income statements should be created by a budget committee lead by the company’s CFO (Ingram, 2016).    

  

References

Picincu, A. (2020, December 14). What is a budgeted income statement? Small Business - Chron.com. Retrieved October 4, 2021, from https://smallbusiness.chron.com/budgeted-income-statement-22939.html.

 Heisinger, K., & Hoyle, J. B. (n.d.). Develop the component of master budget. The master budget. Retrieved October 5, 2021, from https://2012books.lardbucket.org/books/accounting-for-managers/s13-03-the-master-budget.html.

 Karim, S., & Tardi. (2021). Financial Reports / Statements of PT. Krakatau Steel. www.krakatausteel.com. Retrieved September 16, 2021, from https://www.krakatausteel.com/public/pdf/Financial%20Report%20KRAS%20June%202021.pdf.  

Anonimous. (2021, September 18). Film budgeting. Wikipedia. Retrieved October 5, 2021, from https://en.wikipedia.org/wiki/Film_budgeting.

 Ingram, D. (2016, October 26). Who handles the budget in a corporate business? Small Business - Chron.com. Retrieved October 5, 2021, from https://smallbusiness.chron.com/handles-budget-corporate-business-70104.html.   

 

 

 

 

 

Chapter 7 (C. Equal algebraic expression part 3)