Accounting



Accounting

Introduction

The process of budgeting is considered as the most important financial tool that helps the management of the company in evaluating the company's performance, and in speculating the performance of the company for the future. there are several forms of budgeting that a company can adopt, however, the most common of them is described as “Line Item budgeting”. This budgeting approach allows the management to analyze systematic business operations, and helps them in making decision on improving the problematic business operations. According to the projected budget, the company is expecting annual sales of 3510 bikes at a price of $1495 thus making annual sales of $5,247,450 in next fiscal year, a slight increase from the sales of previous year which was 5,083, 000, whereas, a considerable decrease in the sales of year 6. Further, estimated production cost of these bikes is around $3,826,826 that comprises various items, for instance, estimated cost of material used for the production of bikes is $ 1,326,778, cost of labor $ 1,053,000, and others.

After analyzing the budgeted income statement of the company is was observed that projected net income for the next fiscal year is mere $36185, mainly because of high cost of production that has decreased the profitability level of the company. Further, while evaluating the projected balance sheet of the company it was observed that total cash balance would be $523,492 a considerable decrease from preceding year that clearly explains considerable increase in the company's overall expense. After reviewing the budgets of all the important business activities it is extremely clear that company business position is decreasing as compare to preceding year, despite of increase in sales volume, and it also explains that financial team has drafted an inappropriate budget for the next fiscal year. Therefore, all the issues and aspects related to Accounting will be discussed in detail.

Overview of Accounting Issues

An organization can use either fixed budgeting tool, or flexible budgeting tools to speculate the activities of the company for next fiscal years. However, flexible budget is described as the process of budget that could be adjusted according to the volume of the activity. Because of its flexible nature, this budget is used for comparing the actual cost used in the accomplishment of that activity, against the actual cost of particular activity. In addition to this, this budgeting technique allows company to differentiate between the fixed and variable cost used by the company in the manufacturing of the product. Another biggest advantage of flexible budgeting technique is that it allows the management of identify the favorable and unfavorable variances that are playing part in the performance of the company. Amount of projected item is less than the actual amount than it is favorable for the company, on the other hand, if projected value of variance is higher than the actual value than it is considered as unfavorable for the company. However, in the context of sales the variable would be favorable if its projected cost is lower than actual cost ...