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Master Budget for DigitalToday - Case Study Example

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The paper 'Master Budget for DigitalToday" is a good example of a finance and accounting case study. Budgeting refers to expressing business plans in quantitative terms. Budgeting process focuses on the short term. A budget is a plan of the financial transactions that are anticipated to arise in future. A master budget aggregates all the budgets at the lower level that are specific to the various functional areas of a company…
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Extract of sample "Master Budget for DigitalToday"

The paper 'Master Budget for DigitalToday" is a good example of a finance and accounting case study. Budgeting refers to expressing business plans in quantitative terms. Budgeting process focuses on the short term. A budget is a plan of the financial transactions that are anticipated to arise in future. A master budget aggregates all the budgets at the lower level that are specific to the various functional areas of a company. In addition, it includes cash forecast, financial plan and budgeted financial statements. Budgets help the various departments in a company to understand how the departments aid in strategic objectives of the company by putting strategic plans into operation. The use of budgets in a company aids in the decision-making process by
  • Putting long-term plans into operation
  • Assisting in planning decisions in the short-term, such as capacity utilization
  • Identification of limited resources in a budgetary period
  • Identification of periods when excess cash holdings and cash shortages are anticipated
  • Setting performance targets for staffs
  • Forecasting data related to sales which usually set the level of activity for the budgetary period
  • Determination of the purchasing requirements for materials and the optimal level of inventory

This paper describes a start-up business and the master budgets for the new business. The business is called DigitalToday and operates in the telecommunications industry. DigitalToday offers a wide range of phones with the focus of being the best digital solution in Australia. DigitalToday will be incorporated as a company limited by shares.

The demand for phones is elastic; thus, it changes with changes in price. The highest demand is experienced in the month of December with 1250 units being sold and the lowest demand being experienced in the month of January with sales volume aggregating to 700 phones. DigitalToday prices its products well to influence demand and hence higher sales revenue with its prices ranging from $145 to $200 per unit sold. DigitalToday operates efficiently and does not disappoint its customers. This is the reason why the ending inventory is based on the company's requirement to ensure that future sales are met hence the requirement that the ending inventory of the current month exceeds the expected sales of the following month by 20%. This is to mean, for instance, the closing inventory in the month of March is 120% of the expected sales in the month of April. The company had 1000 phones in its inventory before opening its doors to the public, which was sufficient to meet the anticipated demand in its first month of operation. The production of more phones is dependent on the inventory levels to meet the anticipated demand in the following month.

The cost of direct raw materials required in the production of phones is assumed constant at $20 per phone produced and is not expected to change any time soon. However, the number of phones produced in any given month is a variable, which leads to variability in the total cost of direct raw materials.

The cost of direct labour input in the production of phones is assumed constant at $7 per phone produced and is not expected to change within the current year. This is because the company has entered into a contract with a firm which charges labour at a constant price per unit of phones produced which means that the contract can only be subjected to change at renewal. However, the number of phones produced in any given month is a variable which leads to variability in the total cost of direct labour.

The major variable costs to the company are the sales commission, which is equal to 5% of the sales revenue and the distribution expenses, which is equal to $5 per unit sold.

The master budget shows that DigitalToday Company is profitable as has been measured by the gross profit margin and the net profit margins, which are 69.69% and 24.15% respectively. Moreover, the cash budget shows that the company is financially stable.

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