Pembinaan Kekal Mewah Report

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The operating budget is based primarily on the firm's sales forecast. It is a budget of sales revenue minus expenses and essentially ends up with gross profit. In the operating budget, the business firm has to determine what they need in sales revenue to meet their expenses and achieve the profit goals. The cash flow budget is incredibly important for the business firm. It is a budget showing expected cash inflows and cash outflows. The cash flow budget shows whether or not enough cash will be available to meet monthly expenses.

The objectives of budgeting are;

i. Provide structure.

A budget is especially useful for giving a company guidance regarding the direction in which it is supposed to be going. Thus, it forms the basis for planning what to do next. A CEO would be well advised to impose a budget on a company that does not have a good sense of direction. Of course, a budget will not provide much structure if the CEO promptly files away the budget and does not review it again until the next year. A budget only provides a significant amount of structure when management refers to it constantly, and judges employee performance based on the expectations outlined within it.

ii. Predict cash flows.

A budget is extremely useful in companies that are growing rapidly, that have seasonal sales, or which have irregular sales patterns. These companies have a difficult time estimating how much cash they are likely to have in the near term, which results in periodic cash-related crises. A budget is useful for predicting cash flows, but yields increasingly unreliable results further into the future. Thus, providing a view of cash flows is only a reasonable budgeting objective if it covers the next few months of the budget.

iii. Allocate resources.

Some companies use the budgeting process as a tool for deciding where to allocate funds to various activities, such as fixed asset purchases. Though a valid objective, it should be combined with capacity constraint analysis which is more of an industrial engineering function than a financial function to determine where resources should really be allocated.

iv. Model scenarios.

If a company is faced with a number of possible paths down which it can travel, the company can create a set of budgets, each based on different scenarios, to estimate the financial results of each strategic direction. Though useful, this objective can result in highly unlikely results if management lets itself become overly optimistic in inputting assumptions into the budget model.

v. Measure performance.

A common objective in creating a budget is to use it as the basis for judging employee performance, through the use of variances from the budget. This is a treacherous objective, since employees attempt to modify the budget to make their personal objectives easier to achieve.

TECHNIQUE 2: JOB ORDER COSTING

Job order costing involves the accumulation of the costs of materials, labor, and overhead for a specific job. Job costing is used to accumulate costs at a small-unit level. For example, job costing is appropriate for deriving the cost of constructing a custom machine, designing a software program, constructing a building, or manufacturing a small batch of products. It involves the following activities:

a) Materials.

It accumulates the cost of components and then assigns these costs to a product or project once the components are used.

b) Labor

Employees charge their time to specific jobs, which are then assigned to the jobs based on the labor cost of the employees.

c) Overhead

It accumulates overhead costs in cost pools, and then allocates these costs to jobs. Job costing results in discrete buckets of information about each job that the cost accountant can review to see if it really should be assigned to that job. If there are many jobs currently in progress, there is a strong chance that costs will be incorrectly assigned, but the very nature of the job costing system makes it highly auditable. If a job is expected to run for a long period of time, then the cost accountant can periodically compare the costs accumulated in the bucket for that job to its budget, and give management advance warning if costs appear to be running ahead of projections. This gives management time to either get costs under control over the remainder of the project, or possibly to approach the customer about a billing increase to cover some or all of the cost overrun. In a job costing environment, materials to be used on a product or project first enter the facility and are stored in the warehouse, after which they are picked from stock and issued to a specific job. If spoilage or scrap is created, then normal amounts are charged to an overhead cost pool for later allocation, while abnormal amounts are charged directly to the cost of goods sold. Once work is completed on a job, the cost of the entire job is shifted from work-in-process inventory to finished goods inventory. Then, once the goods are sold, the cost of the asset is removed from the inventory account and shifted into the cost of goods sold, while the company also records a sale transaction.

In a job costing environment, labor may be charged directly to individual jobs, if the labor is directly traceable to those jobs. All other manufacturing-related labor is recorded in an overhead cost pool and is then allocated to the various open jobs. The first type of labor is called direct labor, and the second type is known as indirect labor. When a job is completed, it is then shifted into a finished goods inventory account. Then, once the goods are sold, the cost of the asset is removed from the inventory account and shifted into the cost of goods sold, while the company also records a sale transaction.

In a job costing environment, non-direct costs are accumulated into one or more overhead cost pools, from which you allocate costs to open jobs based upon some measure of cost usage. The key issues when applying overhead are to consistently charge the same types of costs to overhead in all reporting periods, and to consistently apply these costs to jobs.

The accumulation of actual costs into overhead pools and their allocation to jobs can be a time-consuming process that interferes with closing the books on a reporting

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