A Budget Is a Plan about Expenditures - Essay Example

A master budget that is a set of interrelated budgets used for different purposes. The master budget is categorized into both an operating budget and a financial budget. The operating budget shows income-generating activities alongside the expenses incurred in generating the revenues. This is usually captured in the budgeted income statement.

The finance budget shows the inflows and outflows of cash as well as the firm or companies' financial position. The operating budget includes the eight components of the budget such as the sales budget, purchase budget, production budget, direct material budget, labor budget, direct material budget, selling and distribution budget, and overhead budget. The financial budget components include; a budgeted income statement, a budgeted balance sheet, and a cash flow budget.

Based on the spreadsheet attached (excel) file shows how a company has forecasted its budget for the year 2015 divided into months to get the overall performance for the year. It is analyzed from the data in the Excel budget summary in terms of both values and ratios.

The values are interrelated and are used to give the final results shown on the formula of ratios and budget summary. The sheet is prepared in such a way that the values keyed into the spreadsheet will give different ratios and formulas. It, therefore, implies the first two sheets are relied upon by the other subsequent sheets.

            The spreadsheet is in such a way that it is very sensitive to the values fed into it. Assume that I have a company called ABC manufacturing company that has three branches in the country. The company deals with the processing of loaves of bread. The price of bread in different locations is based on the demand. In branch A the unit sales of bread is $45 with a cost price of $30.B selling price per unit is$ 50 with a cost price of $40 and A’s selling price per unit is $40 with a cost price of $30.the volumes of sales are 300 units in A, 400 units in B, and 500 units in C respectively. Using the data above will give different results assuming the financial year is 2006. (Assume the cost price per unit in every branch remains constant).

From the above mentioned, the marked yellow values affect the gross margin and are variable depending on the values of sales, purchases, and units of sales and purchase volume. The net profit ratio has also changed while the return on capital employed has also changed because the Earning before tax and interest have changed while the other components such as capital employed have not changed.

The solvency ratio components such as the working capital ratio and quick acid tests have also changed. This is due to the change in inventory.

Based on the above system(spreadsheet) of the budgeted costs and expenditures with an example given the new budget summary would be shown from the Excel. in this case, sensitivity analysis carried out showed how different variable(product)  affects the budgeted income statement, budgeted cash flow statement, and overhead budget. From the analysis the values will be obtained accurately .however should the formulae be deleted it will give an inaccurate and conflicting value. This is one of the limitations of Excel (spreadsheet) as a tool for analysis. Sensitivity analysis involves revising the budget based on varied assumptions. In practical budgeting, all the values have changed and are sensitive to changes in their variables or components.

The master budget models the company’s planned activities. Cash budget and the budgeted balance sheet to support key strategies. Actual plans differ from plans. The management wants to know if budgeted income and cash flows will change if key variables turn out to be incorrect. Sensitivity analysis is a what-if technique what the results will be if the predicted amount is not achieved.

Companies use a computer spreadsheet program like Microsoft Excel to prepare master budget schedules. The spreadsheet examines how sales and costs will change if the values change.

Summary

            The values from the Yearly budget summary are as follows:

Budget Summary

Sales

£382,325

Gross Profit

£97,575

Gross Profit Margin

26%

Net Profit

£61,021

Net  Profit Margin

16%

Return on Capital Employed

93%

Cash position

-£57,579

Break Even units

2436.933333