How The Firms Should Allocate Their Revenues And Expenditures? (Case Study Sample)

Organic Foods Ltd Name: Institutional Affiliation: Organic Foods Ltd Table of Contents Cover Page……………………………………………………………………………………….1 Table of Contents………………………………………………………………………..……….2 Executive Summary………………………………………………………………………...…….3 Introduction……………………………………………………………………………..………..3 The Role of Budgeting Process at Organic Foods Ltd and how it Relates to the Strategic Planning Process…………………………………………………………………....……………..3 Whether or not John Winslow’s Budget Attains each of the Financial Objectives……………....5 Increase Sales by 12 Percent per Year……………………………………..……………………..5 Increase Profit before Taxes by 15 Percent per Year……………………………………………..6 Maintain Long-Term Debt at a Maximum of 16 Percent of Assets………………………….…..6 Maintain Cost of Goods Sold at a Maximum of 70 Percent of Sales………………………...…..7 Whether or not the Adjustments Contemplated by John Winslow are Unethical………………..7 Conclusion………………………………………………………………………..……..………..8 References……………………………………………..………………………………..………..9 Executive Summary The budgets are essential in estimating how the firms should allocate their revenues and expenditures as the firms look at their financial requirements in the future. The budgets help the organizations to make plans depending on how much income, costs, and the cash flows that they expect. Hence, the budgets help the businesses to support their strategic plans, set their priorities right, and to make sure that their employees work towards the set goals. In addition, the budget helps to point at the financial consequences of the organizations’ plans and defines the resources that the firms require to attain those plans. The budgets also offer a way in which the managers measure, view, and control the results that the firm obtains as compared to their plans. Introduction Budgets are the estimates of all the revenues and expenditures, which assist companies to find out the future financial requirements, hence, make plans depending on the income, costs, and cash flow that they expect. The corporations that lack or do not prepare budgets to support their strategic plans should come up with other financial methods that would help them to support their plans. Burtonshaw-Gunn (2017) asserts that firms use budgets as the management control tools to help the managers make sure that the corporations obtain and use their resources in an efficient and effective manner. Budgets help the managers to achieve the institutions’ objectives. In addition, the budgets offer the direction that the firm should follow as they quantify the objectives of the managers. Managers complete making the budgets with each of them having defined targets to aim, hence, commit their energy towards achieving the goals. The Role of Budgeting Process at Organic Foods Ltd and how it Relates to the Strategic Planning Process The budgeting process at Organic Foods Ltd helps it to estimate all its revenue and expenditures, and find out its future financial requirements, hence, make its plans based on the cash flow, expenditures, and profits that the firm expects. According to Ji (2017), businesses should develop the budgets in order to support their strategic plans. Managers at Organic Foods Ltd should use strategic planning to help them in the setting of priorities, focus the various resources while strengthening operations, and make sure that staffs work towards the objectives of the company. According to Wolf and Floyd (2017), a firm can use one of the various available strategic planning methods. One of the approaches that Organic Foods Ltd can use is to strategically analyze where the institution is today, comprising its economic environment, strengths, and weaknesses. These factors are the ones that helped the president of Organic Foods, Andrea Donis, together with the board of directors to choose the direction that the corporation needs to go and set the goals then asked John Winslow, the management accountant to find out the tactics to attain those objectives through the Company’s budgeting process. Organic Foods Ltd requires financial budgets because they inform how the corporation will acquire and expend money in the future. The firm uses the budgeted income statement and budgeted balance sheet as its financial budgets. The balance sheet shows the level of long-term debt while the income statement shows sales, profit before taxes, and the cost of goods sold that help the firm to make decisions on how to achieve its financial objective. Each component in the financial budget comes from operational budgets such as the Sales budget, and Selling and administrative budgets. According to Buse, Bernstein, and Bilimoria (2016), an operational budget is essential because it helps the corporation to know the unit cost of every product that the firm manufactures and assists the business to make sure that it charges sufficient money in order to continue existing. Firms combine both the financial and operational budgets to come up with the master budget. A master budget is the unified budgets of incomes and expenditures, which helps in planning the future financial transactions of a firm (Ji, 2017). The master budget will help Organic Foods Ltd to plan its business activities and at the end of the next year, the management will compare the actual outcomes with the master budget, hence, take the required control actions. Liebman and Mahoney (2017) assert that a budget helps to point at the financial consequences of the organizations’ plans and defines the resources that the firms require to attain those plans. In addition, budgets offer a way in which the managers measure, view, and control the results that the firm obtains as compared to the plans. Therefore, Organic Foods Ltd should prepare the budgets to help the directors to forecast, read the trends, and come up with the required strategies. The budgets can also help the Organic Foods Ltd to avoid any forthcoming problem as they act as communication tools that limit the managers from overspending of funds. The budgets will help the firm to evaluate its performance. As control tools, the budgets will help the managers to confirm whether the outcomes comply or not with the goals that the Organic Foods Ltd set. Additionally, the budgets will highlight the variances that occur and what caused them then the management will apply the corrective measures.  Whether or not John Winslow’s Budget Attains each of the Financial Objectives Increase Sales by 12 Percent per Year According to the calculation below, John Winslow’s budget does not attain the financial objective to increase sales by 12 percent per year. John Winslow increases sales by 11.5 percent in the next year. Last year’s actual sales = $1 700 000 Next year’s budgeted sales = $1 895 500 Increase in sales = Next year’s budgeted sales- Last year’s actual sales = $1 895 500- $1 700 000 = $195 500 Percentage increase in sales = (Increase in sales/ Last year’s actual sales) X 100 = ($195 500/ $1 700 000) X100 = 11.5%. Increase Profit before Taxes by 15 Percent per Year According to the calculation below, John Winslow’s budget attains the financial objective to increase profit before taxes by 15 percent per year. John Winslow increases profit before taxes by exactly 15 percent in the next year. Last year’s Profit before taxes = $210 000 Next year’s budgeted Profit before taxes = $241 500 Increase in Profit before taxes = Next year’s budgeted Profit before taxes - Last year’s Profit before taxes = $241 500- $210 000= $31 500 Percentage increase in Profit before taxes = (Increase in Profit before taxes / Last year’s Profit before taxes) X 100 = ($31 500/ $210 000) X100 = 15%. Maintain Long-Term Debt at a Maximum of 16 Percent of Assets From the calculation below, John Winslow’s budget attains the financial objective to maintain long-term debt at a maximum of 16 percent of assets. The long-term debt is at 15.02 per cent of the total assets, which is less than the 16 percent. From the balance sheet, the budgeted long-term debt = $616 000 and the budgeted total assets = $4 100 000. Therefore, the percentage of the budgeted long-term debt to the budgeted total assets = ($616 000/$4 100 000) X 100 = 15.02%. Maintain Cost of Goods Sold at a Maximum of 70 Percent of Sales From the calculation below, John Winslow’s budget attains the financial objective to maintain the cost of goods sold at a maximum of 70 percent of sales. The cost of goods sold is at 60.64 percent of the sales, which is less than the 70 percent. From the income statement, the budgeted cost of goods sold = $1 149 450 and the budgeted sales = $1 895 500. Therefore, the percentage of the budgeted cost of goods sold to the budgeted sales = ($1 149 450 /$1 895 500) X 100 = 60.64%. Whether or not the Adjustments Contemplated by John Winslow are Unethical It is ethical to overestimate the ending inventory in the budget. The board of directors of Organic Foods Ltd has adopted a long-term strategy to maximize the value of the shareholders’ investment. And, since, the firm has experienced several ...