- a) Preparation of financial statements
- i) Annual Purchases Budget for Aluminium Windows Trading
|
|
January
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February
|
March
|
April
|
May
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June
|
July
|
August
|
September
|
October
|
November
|
December
|
|
Opening inventory
|
1,200
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
|
Sales
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
|
Closing inventory
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
4,800
|
|
Purchases (units)
|
6,000
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
2,400
|
Total annual purchases = 32400 units
Purchases = Sales + closing inventory – opening inventory
- ii) Annual Operating Expenses budget for the year
|
Month
|
January
|
February
|
March
|
April
|
May
|
June
|
July
|
August
|
September
|
October
|
November
|
December
|
|
Sales Revenue
|
$3,84,000
|
$3,84,000
|
$3,84,000
|
$3,84,000
|
$3,84,000
|
$3,84,000
|
$3,84,000
|
$3,84,000
|
$3,84,000
|
$3,84,000
|
$3,84,000
|
$3,84,000
|
|
Advertising
|
$3,840
|
$3,840
|
$3,840
|
$3,840
|
$3,840
|
$3,840
|
$3,840
|
$3,840
|
$3,840
|
$3,840
|
$3,840
|
$3,840
|
|
Wages- shop
|
$12,000
|
$12,000
|
$12,000
|
$12,000
|
$12,000
|
$12,000
|
$12,000
|
$12,000
|
$12,000
|
$12,000
|
$12,000
|
$12,000
|
|
Sales commission
|
$38,400
|
$38,400
|
$38,400
|
$38,400
|
$38,400
|
$38,400
|
$38,400
|
$38,400
|
$38,400
|
$38,400
|
$38,400
|
$38,400
|
|
Vehicle running expenses
|
$2,500
|
$2,500
|
$2,500
|
$2,500
|
$2,500
|
$2,500
|
$2,500
|
$2,500
|
$2,500
|
$2,500
|
$2,500
|
$2,500
|
|
Delivery truck expense
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
|
Shop rent
|
$3,600
|
$3,600
|
$3,600
|
$3,600
|
$3,600
|
$3,600
|
$3,600
|
$3,600
|
$3,600
|
$3,600
|
$3,600
|
$3,600
|
|
Total selling expenses
|
$65,340
|
$65,340
|
$65,340
|
$65,340
|
$65,340
|
$65,340
|
$65,340
|
$65,340
|
$65,340
|
$65,340
|
$65,340
|
$65,340
|
|
Packing and Freight
|
$28,800
|
$28,800
|
$28,800
|
$28,800
|
$28,800
|
$28,800
|
$28,800
|
$28,800
|
$28,800
|
$28,800
|
$28,800
|
$28,800
|
|
Warehouse rental
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
|
Total distribution expenses
|
$33,800
|
$33,800
|
$33,800
|
$33,800
|
$33,800
|
$33,800
|
$33,800
|
$33,800
|
$33,800
|
$33,800
|
$33,800
|
$33,800
|
|
Power
|
$800
|
$800
|
$800
|
$800
|
$800
|
$800
|
$800
|
$800
|
$800
|
$800
|
$800
|
$800
|
|
Office salaries
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
$20,000
|
|
Office rental
|
$10,000
|
$10,000
|
$10,000
|
$10,000
|
$10,000
|
$10,000
|
$10,000
|
$10,000
|
$10,000
|
$10,000
|
$10,000
|
$10,000
|
|
Total Administration expenses
|
$30,800
|
$30,800
|
$30,800
|
$30,800
|
$30,800
|
$30,800
|
$30,800
|
$30,800
|
$30,800
|
$30,800
|
$30,800
|
$30,800
|
|
Total operating expenses
|
$129,940
|
$129,940
|
$129,940
|
$129,940
|
$129,940
|
$129,940
|
$129,940
|
$129,940
|
$129,940
|
$129,940
|
$129,940
|
$129,940
|
Total Operating expenses for the year = $1,559,280
iii) Abbreviated Budgeted Income Statement of Aluminium Windows Trading for the Year using individual tax rate
|
Particulars
|
Amount
|
|
Sales revenue
|
$46,08,000
|
|
Less: Expenses
|
|
|
Selling expenses
|
$7,84,080
|
|
Distribution expenses
|
$4,05,600
|
|
Administration expenses
|
$15,59,280
|
|
Operating income
|
$18,59,040
|
|
Less: Income tax
|
$6,04,403
|
|
Net income
|
$12,54,637
|
Working Notes
Income tax for sole proprietor
|
Up to 14000 @10.5%
|
$1,470
|
|
$14000-$48000 @ 17.5%
|
$5,950
|
|
$48000-$70000 @30%
|
$6,600
|
|
Over $70000 @33%
|
$5,90,383
|
|
Income tax
|
$6,04,403
|
(IRD) iv) Abbreviated Budgeted Income Statement of Aluminium Windows Trading for the Year using company tax rate
|
Particulars
|
Amount
|
|
Sales revenue
|
$46,08,000
|
|
Less: Expenses
|
|
|
Selling expenses
|
$7,84,080
|
|
Distribution expenses
|
$4,05,600
|
|
Administration expenses
|
$15,59,280
|
|
Operating income
|
$18,59,040
|
|
Less: Income tax @28%
|
$5,20,531
|
|
Net income
|
$13,38,509
|
(Tradingeconomics)
- b) Yes, we recommend the company to turn into limited liability as the net income is higher under limited liability as compared to sole proprietorship
Advantages of limited liability over sole proprietorship
Financial factors
- i) Income of sole proprietors is taxed on a personal income tax basis whereas that of limited liability is taxed on a corporate tax basis. As we can see the taxes paid are less in limited liability when the level of income is high.
- ii) The limited company is not exposed to certain federal taxes like limited companies
Non-financial factors
- i) The liability of members of the company is limited to their share in the company unlike sole proprietorship where the proprietor is completely liable personally also and in case of losses may have to pay from personal assets.
- ii) There is flexibility in management as they are not required to have board members or annual meetings and thus the operations are more flexible.
Make or Buy Decision
- a) ABC Trading should make the component as the variable cost of $30 is less than the buying cost of $40 and also the company has spare capacity which it can easily use to produce the component. The fixed costs will not be affected because the company is already incurring the fixed costs and an additional production will only reduce the fixed cost per unit. The company will save $10 by making the product. The use of spare capacity will not increase the fixed costs.
- b) If ABC Trading produced the component at a cost of $30, it will lose contribution margin from another product of $25 so the total cost of manufacturing the component will be $55 which is more than the buying cost. Hence the company should buy at $40 rather than making in this case.
Flexible Budgeting
- a) The favourable or unfavourable variance analysis of the product X in the un-flexed budget is as follows:
|
|
This quarter
|
This quarter
|
|
|
Year to date
|
Year to date
|
Year to date
|
|
|
|
Budget($)
|
Actual ($)
|
Variance (Actual-budget)
|
Variance (U/F)
|
Budget($)
|
Actual ($)
|
Variance (Actual-budget)
|
Variance (U/F)
|
|
Cost of sale
|
28,750
|
31,938
|
3,188
|
U
|
54,688
|
58,125
|
3,437
|
U
|
|
Electricity
|
1,875
|
2,000
|
125
|
U
|
3,750
|
3,666
|
-84
|
F
|
|
General expense
|
5,563
|
5,979
|
416
|
U
|
10,625
|
11,038
|
413
|
U
|
|
Consultancy fee
|
3,125
|
3,125
|
–
|
NA
|
6,250
|
6,250
|
–
|
NA
|
|
Advertising
|
5,563
|
5,131
|
-432
|
F
|
10,125
|
9,619
|
-506
|
F
|
|
Wages
|
15,938
|
17,400
|
1,462
|
U
|
31,250
|
33,419
|
2,169
|
U
|
|
Total expenses
|
60,814
|
65,573
|
4,759
|
U
|
1,16,688
|
1,22,117
|
5,429
|
U
|
- b) Since the quantities sold was more than the budgeted, the flexible budget and the variance analysis is given below:
|
|
This quarter
|
This quarter
|
|
|
Year to date
|
Year to date
|
Year to date
|
|
|
|
|
|
|
Budget($)
|
Flexible budget($)
|
Actual($)
|
Variance (U/F)
|
|
Budget($)
|
Flexible budget($)
|
Actual($)
|
Variance (U/F)
|
|
|
|
Cost of sale
|
28,750
|
35,424
|
31,938
|
-3,486
|
F
|
54,688
|
67,383
|
58,125
|
-9,258
|
F
|
|
|
Electricity
|
1,875
|
2,310
|
2,000
|
-310
|
F
|
3,750
|
4,621
|
3,666
|
-955
|
F
|
|
|
General expense
|
5,563
|
6,854
|
5,979
|
-875
|
F
|
10,625
|
13,092
|
11,038
|
-2,054
|
F
|
|
|
Consultancy fee
|
3,125
|
3,850
|
3,125
|
-725
|
F
|
6,250
|
7,701
|
6,250
|
-1,451
|
F
|
|
|
Advertising
|
5,563
|
6,854
|
5,131
|
-1,723
|
F
|
10,125
|
12,475
|
9,619
|
-2,856
|
F
|
|
|
Wages
|
15,938
|
19,638
|
17,400
|
-2,238
|
F
|
31,250
|
38,504
|
33,419
|
-5,085
|
F
|
|
|
Total expenses
|
60,814
|
74,932
|
65,573
|
-9,359
|
F
|
1,16,688
|
1,43,776
|
1,22,117
|
-21,659
|
F
|
|
Note: The budgeted and actual sales for the year to date have been assumed to be the same for each quarter and hence the sales units for the quarter have been multiplied by 4 to arrive at year to date sales.
For flexible budgets, the expense per unit was calculated and the same was multiplied by actual sales units i.e. 3450 to arrive at the flexible budgeted expenses items.
- c) Yes, for expenses variance having a favourable variance is good because it means the actual expenses are less than the budgeted expenses. Like the electricity expense is unfavourable because the actual cost of advertising is $5131 whereas the budgeted cost was $5563, so it is favourable and it is always better to have low expenses to increase profits.
- d) Yes, we recommend Flexible budget to David Trading. As we can see the most of the expenses variance was unfavourable in case of un-flexed budget because the budgeted expenses were on the basis of budgeted sales of 2800 units. However, the actual units sold was more than budgeted at 3450 units, so it is more logical that with more sale units, the budgeted expenses should also increase according to the increased sales. Then the flexible budgeted expenses should be compared to the actual expenses which are at 3450 units’ level of sales. Under flexible budget, all the expenses variances have become positive or favourable.
Cash Budget
- i) Schedule of cash receipts from Accounts Receivables for the three months to June 2017
|
Particulars
|
April
|
May
|
June
|
|
Opening balance
|
$1,53,000
|
$1,73,700
|
$1,86,000
|
|
Less:1st month sale receipts
|
$75,600
|
$88,200
|
$92,400
|
|
Less:2nd month sale receipts
|
$15,300
|
$16,200
|
$18,900
|
|
Less:3rd month sale receipts
|
$9,600
|
$10,200
|
$10,800
|
|
Less: Bad debts
|
$4,800
|
$5,100
|
$5,400
|
|
Add: Sales
|
$126,000
|
$132,000
|
$132,000
|
|
Closing balance
|
$1,73,700
|
$1,86,000
|
$1,90,500
|
- ii) Schedule of cash payments of Accounts Payables for the three months to June 2017
|
|
April
|
May
|
June
|
|
Opening balance
|
$23,400
|
$27,300
|
$28,600
|
|
Less: Cash paid
|
$21,060
|
$24,570
|
$25,740
|
|
Less: Discount
|
$2,340
|
$2,730
|
$2,860
|
|
Add: Purchases
|
$27,300
|
$28,600
|
$28,600
|
|
Closing balance
|
$27,300
|
$28,600
|
$28,600
|
iii) Cash Budget for the three months to June 2017
|
|
April
|
May
|
June
|
|
Opening balance
|
$36,000
|
$43,340
|
$48,370
|
|
Add: Cash receipts
|
$1,00,500
|
$1,14,600
|
$1,22,100
|
|
Total cash available
|
$1,36,500
|
$1,57,940
|
$1,70,470
|
|
Purchases
|
$21,060
|
$24,570
|
$25,740
|
|
Wages
|
$49,500
|
$51,500
|
$51,500
|
|
Other expenses
|
$22,600
|
$23,500
|
$23,500
|
|
Total cash disbursements
|
$2,43,160
|
$1,09,570
|
$1,00,740
|
|
Cash surplus/deficit
|
-$1,06,660
|
$48,370
|
$69,730
|
|
Loan
|
$1,50,000
|
$0
|
$0
|
|
Closing cash balance
|
$43,340
|
$48,370
|
$69,730
|
- iv) Yes, the company should go ahead with the purchase of equipment costing $150,000 by taking a loan of $150000 as the cash balance is positive in all the months from April to June. In case the loan is not taken, then the company will not have sufficient cash balance to finance the equipment and hence should not consider purchasing it.
Capital Investment Decision
- i) Annual net cash flows for Project X
|
Year
|
1
|
2
|
3
|
4
|
5
|
|
Cash inflow
|
$50,000
|
$60,000
|
$70,000
|
$80,000
|
$90,000
|
|
Less: Variable cost
|
$5,000
|
$6,000
|
$7,000
|
$8,000
|
$9,000
|
|
Less: Fixed cost
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
$5,000
|
|
Operating income
|
$25,000
|
$49,000
|
$58,000
|
$67,000
|
$76,000
|
|
Annual net cash flows
|
$25,000
|
$49,000
|
$58,000
|
$67,000
|
$76,000
|
- ii) Payback period, NPV, Discounted payback period for Project X
|
Year
|
0
|
1
|
2
|
3
|
4
|
5
|
|
Annual net cash flows
|
-$1,20,000
|
$25,000
|
$49,000
|
$58,000
|
$67,000
|
$76,000
|
|
Multiply: Cost of capital
|
$1
|
$0.909
|
$0.826
|
$0.751
|
$0.683
|
$0.621
|
|
Present value of cash flows
|
-$1,20,000
|
$22,727.27
|
$40,495.87
|
$43,576.26
|
$45,761.90
|
$47,190.02
|
NPV = Present value of cash inflows – cash outflow
= $199,751.32 – $120,000
= $79751.32
Payback period
|
Year
|
Net Cash flows
|
Cumulative cash flows
|
|
0
|
-$1,20,000
|
-$1,20,000
|
|
1
|
$25,000
|
-$95,000
|
|
2
|
$49,000
|
-$46,000
|
|
3
|
$58,000
|
$12,000
|
|
4
|
$67,000
|
$79,000
|
|
5
|
$76,000
|
$1,55,000
|
Payback period = 2 + (46000/58000)
= 2.79 years
Discounted payback period
|
Year
|
Present value of cash flows
|
Cumulative cash flows
|
|
0
|
-120000
|
-120000
|
|
1
|
$22,727.27
|
-$97,272.73
|
|
2
|
$40,495.87
|
-$56,776.86
|
|
3
|
$43,576.26
|
-$13,200.60
|
|
4
|
$45,761.90
|
$32,561.30
|
|
5
|
$47,190.02
|
$79,751.32
|
Discounted payback period = 3+ (13200.6 / 45761.9)
= 3.2 years
iii) Annual net cash flows for Project Y
|
Year
|
1
|
2
|
3
|
|
Cash inflow
|
$50,000
|
$80,000
|
$1,00,000
|
|
Less: Variable cost
|
$5,000
|
$8,000
|
$10,000
|
|
Less: Fixed cost
|
$5,000
|
$5,000
|
$5,000
|
|
Operating income
|
$30,000
|
$67,000
|
$85,000
|
|
Annual net cash flows
|
$30,000
|
$67,000
|
$85,000
|
- iv) Payback period, NPV, Discounted payback period for Project Y
|
Year
|
0
|
1
|
2
|
3
|
|
Annual net cash flows
|
-$1,20,000
|
$30,000
|
$67,000
|
$85,000
|
|
Multiply: Cost of capital
|
$1
|
$0.909
|
$0.826
|
$0.751
|
|
Present value of cash flows
|
-$1,20,000
|
$27,272.73
|
$55,371.90
|
$63,861.76
|
NPV = Present value of cash inflows – cash outflow
= $146506.39 – $120,000
= $26,506.39
Payback period
|
Year
|
Net Cash flows
|
Cumulative cash flows
|
|
0
|
-$1,20,000
|
-$1,20,000
|
|
1
|
$30,000
|
-$90,000
|
|
2
|
$67,000
|
-$23,000
|
|
3
|
$85,000
|
$62,000
|
Payback period = 2+ (23000/85000)
= 2.2 years
Discounted payback period
|
Year
|
Present value of cash flows
|
Cumulative cash flows
|
|
0
|
-$1,20,000
|
-$1,20,000
|
|
1
|
$27,272.73
|
-$92,727.27
|
|
2
|
$55,371.90
|
-$37,355.37
|
|
3
|
$63,861.76
|
$26,506.39
|
Discounted payback period = 2+ (37355.37 / 63861.76)
= 2.58 years
- v) For a project to be accepted in capital budgeting it is necessary for the project to have a positive NPV, the payback and discounted payback should be within the life time of the project. The capital budgeting techniques results for projects X and Y is as below:
|
Techniques
|
Project X
|
Project Y
|
|
NPV
|
$79751.32
|
$26,506.39
|
|
Payback period
|
2.8 years
|
2.2 years
|
|
Discounted payback period
|
3.2 years
|
2.58 years
|
From the above table we see that both projects have positive NPV and payback periods are within the lifetime of the projects. However both the projects are mutually exclusive. For mutually exclusive projects, the project with the highest NPV is selected. Mutually exclusive projects means only project can be selected from the given options. Since Project X has a higher NPV, hence Umang Trading Ltd should accept Project X.
IRD. (n.d.). Income Tax Rates. Retrieved September 18, 2017, from Inland Revenue: https://www.ird.govt.nz/how-to/taxrates-codes/rates/itaxsalaryandwage-incometaxrates.html
Tradingeconomics. (n.d.). New Zealand Corporate Tax Rate. Retrieved September 18, 2017, from Trading Economics: https://tradingeconomics.com/new-zealand/corporate-tax-rate.
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