Assignment Analysis on Accounting for Managers

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Question 1

a. Cash Budget

Cash Budget
Cash Budget	July	Aug	Sep	Oct	Nov	Dec	Total
Opening Cash Balance	10000	4500	-4800	-32300	-79300	40900	-61000
Cash Inflows:
Total Cash Collections	167500	215500	297500	395000	443000	352000	1870500
Total Cash Available	177500	220000	292700	362700	363700	392900	1809500
Cash Outflows:
Total Cash Payments	133000	184800	252000	322000	282800	179200	1353800
Selling, General & Administrative Expenses	40000	40000	40000	40000	40000	40000	240000
Taxation Expense		33000			33000	66000
Capital Expenditure				80000			80000
Total Cash Outflow	173000	224800	325000	442000	322800	252200	1739800
Closing Cash Balance	4500	-4800	-32300	-79300	40900	140700	69700

b. Sources of Fund

Every business entity including companies requires funds to perform its business operations, to expand their businesses into new locations or markets, to overcome the competition or to invest in research & development (RND). Like any other company, both the selected companies also have limited sources to raise to raise capital funding or external funding. The various sources are:-

• Retained Earnings
• Debt Capital
• Equity Capital

Debt Capital

Like any other entity, companies also can borrow money in the form of private bank loans or issue of debentures, corporate bonds or other debt securities to public. Using debt issues a huge number of investors can become the lenders to the company. The most important drawback of debt capital is the fixed payments (interest) to the lenders.

External Source: Debt Financing: Merits

1. With debt financing the ownership rights remains intact and a limited number of people has the controlling powers:
2. The Taxation Agencies offers various deductions upon the financing cost.
3. The costs of financing (or interest rates) are comparatively lower than the cost of equity.

External Source: Debt: Shortcomings

1. The major shortcoming of debt financing is that the company has to make fixed periodical repayments to the lender irrespective of profits or losses in the company.
2. The lender in order to guarantee the repayment of loan from the company requires some collateral security.
3. The ability to repay the loans highly impacts the credit rating of the company.
4. The company is required to have large pool of liquid funds like cash or equivalents.

Question 2

a. Variance Analysis

Particulars	Budgeted	Actual	Variance $	Variance %
Sale	800	760	-40	-5%
Price	40	40	0	0%
Revenue	32000	30400	-1600	-5%
Supplies	1600	2000	400	25%
Labor	16000	16000	0	0%
Variable Utilities	1600	1520	-80	-5%
Fixed OH	9000	9000	0	0%
Profit / (Loss)	3800	1880	-1920	-51%

b. Interpretation of Variance Analysis

The actual to budget variance analysis is very important during the financial planning of a business. It is a process by which the budget of a company gets compared to the actual outcomes and later interpretation of the reasons for the variance is conducted.

When budgeted figures are compared to the actual figures numbers and the differences are called as variance. It is calculated for revenue, labor, materials, and variable expenses. However, management pays attention to variances that are significant. Generally, analysis of these variances is conducted to identify any problem in order to fix them or to improve the overall performance of the company. This is an unfavorable situation

As per the above variance analysis of ABC Pty Ltd, the actual sales revenue is less by 5% than expected (budget), the main reason is that the company was not able to sale its services as per expectations (800 WCD) and could sale only 760 WCDs

Despite of lower sales volume, the cost of supplies increased by $400, this is also an unfavorable situation

The variable utilities witness a little decrement in the actual figures ($ 1520) as compared to the budgeted figures ($ 1600). The main reason is that the actual sales remain lower than the budgeted sales and variable expenses are directly depended on the sales volume. This cannot consider being a favorable situation.

Overall the overall profit of the company gets reduced considerably.

Reference

Coleman, S., Cotei, C. and Farhat, J. 2016. The debt-equity financing decisions of US startup firms. Journal of Economics and Finance, 40(1), pp.105-126.

Schwienbacher, A., Baker, T. and Welter, F. 2015. Financing the business. The Routledge companion to entrepreneurship, pp.193-206.

Yazdanfar, D. and Öhman, P. 2015. Debt financing and firm performance: an empirical study based on Swedish data. The Journal of Risk Finance, 16(1), pp.102-118.

Chiu, C.H., Choi, T.M., Dai, X., Shen, B. and Zheng, J.H., 2018. Optimal advertising budget allocation in luxury fashion markets with social influences: a mean‐variance analysis. Production and Operations Management, 27(8), pp.1611-1629.

Saputra, M.D. and Putrayasa, M.A., 2018, May. Analysis of sales budget and actual sales at CV Sumberjaya. In Proceedings (Vol. 1, No. 1, pp. 141-146).