The Budgetary Analysis of the Impact of the New Line of Equipment - Essay Example

 The Budgetary Analysis of the Impact of the New Line of Equipment To: Joe Morgan, Controller From : Me, Accounting Analyst In continuation of the budgetary analysis of the impact of the new line of equipment, I feel that looking at only the income statement budget would not give be a good idea if the actual level of activity turns out to be vastly different than that presumed for this budget. We prepared the budget based on just one sales forecast, without considering the impact of other economic factors which could influence the sales.

Technically speaking this budget represents a static budget for the reasons stated above. A flexible budget takes into account a range of possible activity levels e.g., for a range of sales volumes, range of sales values, range of cost levels or proportions. Flexible budget lets us know the reasons for the achievement or underachievement, if they are due to the change in activity levels or they are due to work efficiency / inefficiency of the concerned. For Pharmafin, when the actual results get compared with the flexible budget, we would not only see the variances but even be able to zero in on the reasons for the same and minimize the impact if they are not in our favor or enhance them if they are in our favor.

In short the efficiency of the effective factors can be multiplied and means of improvement of the negative factors can be sought for overall improvement of our organization. I propose that we further break down the budgeted income statement incorporating the new product line into sub budgets as follows: A sales budget showing break up of sales per territory, further sales per sales man. A cost of goods sold budget - budgeting costs / resources needed for each department involved from the purchase of modules through their storage ,assembly and quality checking and to their transfer to the warehouse.

Selling and administrative budget showing the resources budgeted to support the sales forecast. A Working capital budget to show the additional capital needed to support the projected sales. This would incorporate projected cash and credit sales against the cash and credit payments. We would then know if need additional funds towards working capital and the best possible way of financing the same. A Fixed assets (long lived assets) budget to evaluate the need for additional fixed assets for the new line of activity.

It is quite clear that a full master budget incorporating the new product line would enable the management of Pharmafin to review the planned launch of the machinery in a holistic manner. It would give a bird’s eye view of the all the factors affecting the bottom line of Pharmafin. The planning right from the financing of the working capital, timely procurement of long lived assets, correct pricing will aide in smooth production and launch of the new line of product. Moreover the review and corrective action based on variance analysis of the sub budgets of the master budgets at the end of the period would in more accurate and realistic forecast for the next year.

Master budget preparation is in the long term interest of Pharmafin. Me Accounting Analyst Pharmafin