Task A: 1

ABP POST GRADUATE DIPLOMA BUSINESS MANAGEMENT

Unit : Management of Financial Resources and Performance

Activity title : Financial Management Assignment

Assignment reference : MFRP 2

Date issued- Date due : 06.06.2011-19.06.2011

Assessor(s) : __Melek YILMAZ_____

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Student : ……………………………………………….

………………………………………………..

…………………………………………………

Date submitted : …………………………………………….

 Task A: 3

Outcome Evidence for the Feedback Assessor’s Internal

and criteria decision Verification

criteria

Justify the 3.1

selection of data to
use in analysing
business
performance
organisations

3.2

Evaluate
performance data
to support strategic
3.Know how to decision making
assess the
performance of
Analyse business 3.3
organizations
information to
make
substantiated
recommendations
about improving
business
performance

4.1

Analyse costing
reports

4.2
Compare
organisational
performance
4.Understand against costs and
how to use budgets
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management 4.3
Analyse budgets
accounting
and budget out
methodology to turns
manage
resources
effectively
Identify actions to 4.4
be taken in
response to
costing and
budgetary
information
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Lecturer’s additional feedback and comments

 Task A: 6

Internal verification (IV) of assignment brief (approved version)

IV name (print) Date

I confirm that this is all my own work Learner signature

REQUIRED:

You have been asked to produce an assignment on two parts for management of financial
resources and performance of the financial resources and investment appraisal methods that
are very essential for the business.

Produce an assignment in which you:

SCENARIO

Managing company’s resources efficiently is a key success for an organisation but especially
during turbulent times it is even more important. Nowadays as we witness economic downturn it is
eminent that revenues will be negatively affected. As revenues fluctuates and / or decreases cost
calculation becomes even more important. Organisations must answer questions in these turbulent times
such as;
 Which cost method they need to use?
 How they need to set their budget?
 How they will asses performance of the organisation?
 And in order to do this planning of course “must” is a correct, up to date information and
comparison of past data with the current data in order to employ right techniques. As in GREECE
example misleading will cause such a state then it will be almost impossible to repair and yet
again in the past as in ENRON case.
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TASK- A

Justify the selection of data to use in analysing business performance and evaluate performance data
to support strategic decision making and analyse business information to make substantiated
recommendations about improving business performance.

TASK- B

i) Analyse the marginal and absorption costing reports when you calculate the profits at sales
volumes of 5,000, 7,500 and 10,000 units.

“Beanland Ltd makes a single product, the ‘Beany’, which sells for £15 per unit.
Opening stock zero and 10,000 units are produced in the period. Variable costs
(labour, material and expenses) are £10 per unit and fixed costs are £37,500”.
ii) Choose one UK organization;

o Compare its organisational performance against costs and budgets

o Analyse its budgets and budget out turns.

o Identify actions to be taken in response to its costing and its budgetary information.

GRADING

Pass All outcomes identified in the assignment are met.

MARKING GUIDANCE

 Financial Management is a complex activity and the work must indicate both how the
figures have been evaluated and how assumptions have been built in to the work. All
 Task A: 8

analysis of the changes facing financial managers must be based on reasoned

arguments and relevant supporting evidence. There need to be clear explanations and
conclusions need to be justified.

 Word limit is 5000.

 The Assignment comprises TWO parts: A and B.

 Your coursework MUST be prepared using Microsoft Word and Excel. Hard copy must
produce in Microsoft Word and you need to insert necessary tables from Excel. Soft
copy must include all your work WORD and EXCEL files.

 Your submitted Coursework will be assessed by Melek Yilmaz and Mahmut Aydin.
Coursework is subject to double marking. All results when first published are provisional
until confirmed by the External Examiner. No appeals regarding your published mark are
available until after confirmation by the External Examiner at the Exam Board held in
Summer Term 2011.

 Use 11 point Arial script.

 Use ‘Harvard Referencing System’

 Draft material for will be discussed at the tutorials in the week beginning (15.06.2011)

 Complete the title page and sign the statement of authenticity.

 Use a butterfly or treasury tag to keep the pages of your work together and put it in the
plastic folder.

 ENSURE THAT YOU ENTER YOUR STUDENT EXAMINATION NUMBER ON EACH

PAGE OF YOUR SUBMITTED COURSEWORK IN THE TOP RIGHT HAND CORNER
(IN THE HEADER)

SUBMITTING YOUR ASSIGNMENT

 Late work will only be marked on the next occasion the unit is taught in 2012.If the unit
does not run again then you will need to pay a late assessment fee in line with the
requirements of the college’s assessment policy.
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Contents
Outcome .................................................................................................................................................. 3
Evidence for the criteria....................................................................................................................... 3
Task A: ......................................................................................................................................................... 10
3.1 Selection of data to be used in analyzing business performance: ........................................................ 10
3.2 Evaluation of Performance data & analysis of business information ............................................. 11
Absorption costing .............................................................................................................................. 11
Marginal Costing ................................................................................................................................. 12
Activity Based Costing ......................................................................................................................... 12
Other tools for evaluating Data: ......................................................................................................... 13
3.3 Why analysis of business is important to make substantiated recommendation about
improvement: ............................................................................................................................................. 13
Example of Enron ................................................................................................................................ 13
Task B: ......................................................................................................................................................... 17
4.1 Analyzing Cost Report: .......................................................................................................................... 17
Calculations of the given question ...................................................................................................... 17
4.2 Sainsbury & its Performance against cost & budgets ........................................................................... 18
Sainsbury’s Performance against cost and budgets: .......................................................................... 20
Sainsbury’s Performance against Budgets: ......................................................................................... 21
4.3 Budget & Its out turns: .......................................................................................................................... 22
Purpose of Budgeting:......................................................................................................................... 22
Behavioral aspects of budgeting: ........................................................................................................ 22
Example of Budgeting: ........................................................................................................................ 23
Budget & Its out Turn:......................................................................................................................... 25
4.4 Actions need to be taken accordingly by Sainsbury: ............................................................................ 25
Actions against costing information: .................................................................................................. 25
Actions against budgetary information: ............................................................................................. 26
References: ................................................................................................................................................. 27
 Task A: 10

Task A:

3.1 Selection of data to be used in analyzing business performance:

In management accounts, data is accumulated to convert it into information and then decisions
are taken on the basis of that information. So the selection of the data can be taken as a very
critical area on which efficiency of an organization depends up to a considerable extent. The set
of data can be benefited by using different approaches e.g. The conventional methods of
costing uses job order costing and process costing which had more emphasize on direct labor
and direct machine basis of costing but this method of costing has changed much towards the
greater importance of accounting for factory overheads. Costing with reference to overhead
accounting provides a more comprehensive view than the ordinary traditional method and so
the data regarding overheads of the business can be used to increase its efficiency (Lord,
1996).

Most important information for business purpose can be the costing data. Costing data consist
on material, labor and Overheads information. Overheads can be further classified as
production / non-production overheads or it can also be categorized as Fixed / Variable. Other
relevant business data guides to the future decisions to enhance the business performance.

The need of data can be justified for following purposes:

1. Significance of internal functions’ information:

Internal Information is used to do a better budgeting regarding internal functions. Budgeting Is

very important to know the lacking aspects of the business and so take decisions on basis of
those loop holes by tightening the screws. If information needs will not be fulfilled in this regard
then the budgetary controls will not work as well.

2. Costing Data Importance:

Costing data can be used to know exactly about the costing expenditures and thus can be used
reduce the cost as maximum as possible. This can guide the business to take decisions
according to the profitability of the business. The products that are giving positive contribution to
 Evaluation of Performance data & analysis of business information 11

the business profits can be concentrated more and decision can be taken on the rolling back of
the products which are giving negative contribution.

3. External Environment Information:

External environmental information is also very important to have a business Intelligence sense
and to decide about the strategy on basis of these external factors. If the external data need is
not accomplished in the manner required, then business strategic decisions can go wrong.

3.2 Evaluation of Performance data & analysis of business

information

Once the data is gathered, evaluation of the data & its analysis plays a vital role in making
decisions. There can be different evaluation techniques which can be adopted depending upon
the nature of data.

First it will be looked that how costing information can be evaluated. The methods available for
evaluating costing data of the business are:

Absorption costing

In this approach of dealing overheads data, all cost whether fixed or variable is included in unit
cost. It is completed in four steps which include

Allocation: All cost that relate to single cost center are allocated to the cost center.

Apportionment: When an overhead is commonly combined, it is apportioned to more than one

cost centers and resultantly shared among the relevant cost centers.

Reapportionment: Service departments provide a helping hand to production departments so

their cost is allocated to production department again. This is done by either direct method (also
called one way method) or indirect method (further can be used through step down method or
reciprocal way)

Absorption rate: On the basis of all the calculation done as per procedure the absorption rate
of overhead is calculated.
 Evaluation of Performance data & analysis of business information 12

As absorption costing uses the predetermined rate on the basis of historical data so actual
results can be different from the estimated. This is achieved by adjusting over /under absorption
in OAR (overhead absorption rate). Some organizations also use blanket rate for the overhead
absorption but it is not recommended because results can’t be accurate where factory consist of
different production centers and products (Shields, 1997).

Marginal Costing

In this method of costing, only fixed production overheads are charged to profit & loss as period
cost and variable costs becomes the part of P&L as product cost. Contribution is calculated by
using the revenues and variable cost. This contribution is used later to subtract fixed cost when
determined. As fixed cost is not estimated but is actual, so there is no point of under / over
absorption (Shields, 1997).

Activity Based Costing

ABC is the alternative approach of traditional ways in accounting overheads. In conventional

methods, overheads are absorbed on volume basis which can guide to imprecise decisions so
in this method of accounting, production volume is not the sole element to decide. Rather it
allocates the cost of overheads on the basis of activities.

ABC of overheads is done by

Identification of activities: In the first step all activities are identified which result cost in
organization’s system.

Cost Pool: In this level, costs are classified on the basis of activities. So it can also be said that
overhead cost are identified and allocated in this step.

Cost Drivers: A cost driver is something which consumes recourses. Here cost is allocated on
consuming of the activities. It can also be defined as influencing factor of cost.

ABC is very beneficial in most of cost accounting problems but provide best results if

1) Overheads are of higher proportion.

2) No of products being produced is more than one.

 Why analysis of business is important to make substantiated recommendation about improvement: 13

3) Different products results in activities of different level and consumes different resources
(Cooper, 1990).

These different tools makes the decision easy for the management to know the cost of every
segment of production process and so it can guide them to strategic decision like whether the
production of any specific item should be increased or decreased or should be shut down.

Other tools for evaluating Data:

Further managerial data can be used to make budgets considering organization’s forecasted
expenditure and revenues. This historical data is evaluated by using the budgeting tool and to
assess the business performance. For example, the different operating expenses are measured
at different sales level on the basis of historical data. This can guide the strategic management
to foresee the business situation and to know exactly which department is not showing up to
mark performance or crossing its boundaries in terms of allocated expenditure. So by applying
corrective measures basing upon the budgetary information, greater business performance can
be achieved. Further sales budgets can guide whether the organization has achieved its full
potential in terms of revenue or not.

3.3 Why analysis of business is important to make substantiated

recommendation about improvement:

Analysis of business is important in making decisions. If information needs are not fulfilled
accurately it can lead to wrong direction and even collapses can be the results. It can be
explained by the example of Enron.

Example of Enron
Introduction

Enron’s mission was to be the world’s largest energy company and was revised in 2001 as
world’s greatest company. They seemed to be on track till late 1990’s with huge amount of
assets and favorable conditions to expand further. Enron was the seventh largest company of
US but fell in bankruptcy in just three years. The main reasons of their collapse were the week
controls, wrong financial and accounting methods and management policies (porter J, 2005).
 Why analysis of business is important to make substantiated recommendation about improvement: 14

This report will analyze these factors in detail which led to the fall of Enron using the four stage
financial analysis.

Brief History of Enron:

In 1985, Merger of Houston Natural Gass and InterNorth merger gave birth to the largest energy
company which was having its own natural gas pipeline. In 1989, it came with an innovative
idea of opening a gas bank where long term supplies of natural gas could be bought. Enron
expanded its holding in all parts of world and also focused on other commodities besides natural
gas and pipeline operations from 1990-98. In 1999, it launched its broadband services and
Enron Online. With all this good things happening in Enron, its share price touched the
maximum of $90 and bring it to rating of seventh largest company in Aug 2000 but just after one
year it showed the first quarter loss and reduced the shareholder equity by $1 billion dollars. To
shock the world, it filed for bankruptcy in Dec, 2001 (Cnnmoney.com, 2002).

Understanding the accounting and financial system allow analyzing the organization in a better
way but in case of Enron, they were not using the business information to improve their
business but were trying to manipulate that information for their needs and it definitely pushed
them to dead end. Some of the deliberate mistakes they were making were:

1. Manager’s Accounting Choice:

Managers chose the non transparent financial statements that did not clearly show the
operations and finances of the company. They took the advantage of complex business model
and used the accounting limitations to misrepresent profits and present the balance sheet in
away to present the favorable portions of business only. They used the policies in such a way to
report positive cash flows, inflated asset value and shown undermine liabilities. Moreover
company hide considerable portion of loans by adopting complex financial structure to meet the
expectations in way that was even difficult to understand by experts. These polices were
adopted with direct or indirect knowledge of directors and chairman and subsequently resulted
in bankruptcy (Dahlan, 2008).

2. Revenue Recognition:

Energy suppliers earn profits by providing the services and also build and maintain the power
plants, natural gas, pipeline and facilities of processing. Merchants can report the sale price as
earnings and product cost as cost of goods sold but on the other hand working as an agent
 Why analysis of business is important to make substantiated recommendation about improvement: 15

allow them to avoid the risk of buying and selling. Resultantly, service provider can report
trading and brokerage fee as revenue if rated as agent. This method was adopted by other
companies in conventional method but Enron adopted a rather aggressive model by adopting all
value of its trade as revenues. Because of such policy, the revenues increased from $13.3
billion in 1996 to $100.8 billion in 2000 and recorded an increase of 750% in the period. This
was extremely abnormal growth of profits, as the normal growth rate is 2-3 % for companies
related to energy sector. Even in just first three quarters of 2001, Enron reported $138.7 billion
profits which brought it at number six (Foss, 2003).

3. Managers have a number of incentives to choose accounting policy choices that are
biased:

Well-functioning capital market "creates appropriate linkages of information, incentives, and

governance between managers and investors. This process is supposed to be carried out
through a network of intermediaries that include assurance professionals such as external
auditors; and internal governance agents such as corporate boards."On paper, Enron had a
model board of directors comprising predominantly outsiders with significant ownership stakes
and a talented audit committee. In its 2000 review of best corporate boards, Chief Executive
included Enron among its top five boards. Even with its complex corporate governance and
network of intermediaries, Enron was still able to "attract large sums of capital to fund a
questionable business model, conceal its true performance through a series of accounting and
financing maneuvers, and hype its stock to unsustainable levels (Yale, 2002).

Enron which was apparently on the way of growth was collapsed ultimately due to the misuse of
the business information. They were not using the business information to take corrective
decision on their strategic management, rather they were using that information to misguide
their stake holders. So that is how there is high need for making recommendation for
improvement of the business on the basis of business information else Enron’s example can be
a good one to know what can happen to business if information is not used appropriately.

Ratio analysis tools can also be used to make recommendation about how to improve
the business performance. It can guide that what are the lacking aspects and how it can be
corrected. Like if we consider liquidity aspect of Sainsbury, it shows that:
 Why analysis of business is important to make substantiated recommendation about improvement: 16

Liquidity Ratio for J Sainsbury 2008-10

Sr. No Description 2008 2009 2010

1 Working capital Ratio 0.7 : 1 0.5 : 1 0.7 : 1

2 Quick Ratio 0.40 : 1 0.31 : 1 0.41 : 1

Sainsbury’ both ratios never came in comfort zone in last 5 years. The best it touched
was in 2006 but even at that time it was short of good 20-30% of required benchmark. So
Analysis of J Sainsbury plc as per liquidity ratios is a matter of concern. Its working capital ratio
as well as quick ratio is on the lower side. This means that company needs some attention on
its Current assets. Although it never been in safe side in all recent years but on top of it, shows
decreasing trend. That is more alarming which need due care.

So this is how analysis of business information can guide to better recommendation to

improve the business efficiency.
 Task B: 17

Task B:

4.1 Analyzing Cost Report:

Calculations of the given question

Q: Analyse the marginal and absorption costing reports when you calculate the profits at
sales volumes of 5,000, 7,500 and 10,000 units.

“Beanland Ltd makes a single product, the ‘Beany’, which sells for £15 per unit. Opening
stock zero and 10,000 units are produced in the period. Variable costs (labour, material
and expenses) are £10 per unit and fixed costs are £37,500”.

Ans:

In absorption costing method, expected fixed overheads are absorbed in the cost sheet
to know the profits regarding any particular product in advance. Then any over / under
absorbed portion of the cost is absorbed after coming to know the exact figure of
overheads. Following is the cost sheet as per absorption costing method.

Absorption Costing
Sales Volume 5000 7500 10000

Sales Value (£15 per unit) 75000 112500 150000

C.G.S
Op.Stock - - -
 4.2 Sainsbury & its Performance against cost & budgets 18

Direct Cost (10,000 X 10) 100000 100000 100000

(Closing Stock) 50000 25000 -
Gross Profit 25000 37500 50000
Expected Fixed Cost (37500) (37500) (37500)
Net Profit -12500 0 12500

In Marginal Costing method, overheads are not absorbed; rather only direct cost is taken
into cost cards so it gives the contribution that should be achieved by producing a
particular product. Hereunder same question is solved by applying marginal costing
method.

Marginal Costing
Sales Volume 5000 7500 10000

Sales Value (£15 per unit) 75000 112500 150000

C.G.S
Op.Stock - - -
Direct Cost (10,000 X 10) 100000 100000 100000
(Closing Stock) 50000 25000 -
Contribution 25000 37500 50000

4.2 Sainsbury & its Performance against cost & budgets

Suitable Cost Method for Sainsbury

 4.2 Sainsbury & its Performance against cost & budgets 19

There are two different costing Methods that can be adopted by Sainsbury. Each method
has its Pros & Corns. Here both of the methods are analyzed for selecting the suitable
method of costing for Sainsbury.

Absorption Costing:

Strengths:
 Being a widely distributed major Sainsbury can enjoy major advantage of Absorption
costing, i.e. it is simple to implement & not a time consuming process.
 ABC reports differ from GAAP, so maintenance of two cost systems requires duplication
of efforts. This can be overcome by adoption of absorption costing.
 It has so much emphasis on control of activities and so pooling cost may not be cost
effective in retail industry where, pricing is mostly set by manufacturer and government.

Weaknesses:

– Due to involvement of service sector, Sainsbury may not be able to decide about
efficiency and effectiveness of a service with absorption costing. On the other hand ABC
can identify activities that use too much of the company's resource and time but
contribute less in profitability. ABC can also help in deciding whether outsourcing will be
solution or improvement in process is needed.
– For Sainsbury accurate cost determination is more important for effectiveness of
operations and efficiency of labour. Managers need exact and precise information to
decide about value added services like home delivery and customers’ entertainments
during purchasing which is not provided in this approach (Kaplan, 1983).

ABC system

Strength:
 4.2 Sainsbury & its Performance against cost & budgets 20

 ABC will provide a helping hand to Sainsbury in analyzing new value added services to
existing products by producing true picture relating to costs incurred.
 ABC can provide help to Sainsbury to spot out non-profitable and inefficient activities
and products, which in turn reduces profits. It can also eliminate low margin products
more easily than Absorption costing.
 As Sainsbury has retail stores in different countries even so accurate product divisional
profitability is more important in comparing the efficiency and performance result
between different outlets. This can be achieved by adopting ABC (Luther et al, 1998).

Weakness:
– Major drawback of ABC in case of Sainsbury is that some overhead costs such
as the branch manager salary can’t be allocated as per product usage basis as ABC
can’t answer the cost of time used by employees.
– Similarly the time used in un-successful deal, in convincing customer to purchase
a product can’t be dealt though ABC.
– Cost pooling still required some arbitrary cost apportionment, as Sainsbury is a
retail industry so most of the costs are not associated with production but to individual
customers’ services (Kaplan, 1983).

Taking a view of all strengths and weakness, the better approach foe the service based industry
of Sainsbury will be Activity Based Costing as it provides a more better guidance under the
circumstances.

Sainsbury’s Performance against cost and budgets:

First Sainsbury’s performance against cost is analyzed. For this purpose, company’s
CGS ratio and operating expense ratio is calculated.

Sainsbury
Mar-10 Mar-09 Mar-08
Revenue (£ 000) 19,964 18911 17,837
Cost Of Goods Sold (£ 000) 18,882 17,875 16,835
 4.2 Sainsbury & its Performance against cost & budgets 21

Operating Expense (£ 000) 497 747 673

CGS Ratio (%) 95 95 94
Operating Ratio (%) 2 4 4

Figures of last three years shows the pattern of both direct (CGS) and indirect
(Operating) expenses. It is quite obvious that company’s direct expenditure is on the
higher side representing almost 95% of the revenues which leaves a very little margin of
Gross profit. Company needs to bring down its direct expenditure. On the other side
company’s indirect expenditure representing a very nominal amount of the company’s
revenues. It is showing a better efficiency of the company to manage its operating costs
but lack of ability to have a cut of production cost.

Sainsbury’s Performance against Budgets:

Sainsbury
Mar-10 Mar-09 Mar-08

Budgeted Revenues (£ 000) 30,000 25,000 22,000

Actual Revenues (£ 000) 19,964 18,911 17,837

Sainsbury performance against budgeted sales is also need to be improved. Currently

Sainsbury is holding 16% share of UK Retail Food Industry. Tesco which is the market
leader as well is holding 31% share of the market with the sales of about £65 billion in
2010-11. Sainsbury management wanted to come as close as possible to the sales
figure of Tesco so it set very aggressive sales target for its team. But it was not achieved
in any of the year. The closest margin of difference between budgeted and actual was in
2008 when it was about 4 billion only. In 2010 the sale were short of 10 billion of the
targeted sales.
 4.3 Budget & Its out turns: 22

4.3 Budget & Its out turns:

Importance of budgeting
Budgets are quantitative plans prepared for a specified period of time so exact targets
can be set for the different departments and their performance can be measured,
evaluated and weak points can be highlighted accordingly (Dunbar & Kemp, 2003).
By the budget process, maximum utilization of resources is ensured and possible
hurdles in the path of the growth are identified in advance. This process allows business
to keep itself on the progressive trend by introduction of better control and management
(Needles et al, 1991)

Purpose of Budgeting:

Budget serves number of different purposes. Some of these are identified hereunder:
 Planning: It focuses business on the processes to foresee the future which is a
very important phenomenon to avoid ad hoc policies which often don’t bring long
term benefits.
 Control: It guides to the business to better control by giving its opportunity to
compare the actually versus planned.
 Communication: It serves as a formal communication tool between upper and
lower level management.
 Co-ordination: It facilitates better co-ordination among different departments of
the organization.
 Evaluation: It can be used to measure and evaluate the performance of all the
units of the business and so can identify the loop holes in a better way to make
them correct in future.
 Motivation: It may be used as targets to aim for and so can be a good tool of
motivation among the units (Siegel et al, 2008).

Behavioral aspects of budgeting:

The reaction of individuals in response to budget process can be in different manners. It

includes dysfunctional behavior and budget slacks. Hoopwood (1973) carried on the
 4.3 Budget & Its out turns: 23

research on 200 different managers and pointed our three distinct styles of using the
information of budgets to evaluate the management performance. These are:
1. Budget Constraints Style: In this style performance is evaluated on the ability to
achieve results in short term and it can bring the job related pressure on them. In this
style, mangers can also be penalized for the lesser achievement of the original plans
and in consequence it can bring strained relations among colleagues (Steve et al, 2007).
2. Profit Conscious Style: This style emphasizes on the ability of achieving ability of
the managers to reduce cost and bring profits in long run. In contrary to above approach,
managers can cross the limit in short run but have to be in line with the targets in long
run. This approach exerts lesser job pressure and also don’t hurt the relationship of
colleagues as well.
3. Non Accounting Style: Under this approach, evaluation is not carried on
accounting basis but on quality and customer service basis. In terms of outcomes it is
almost similar to profit conscious approach (Susan et al, 2007).
Later some studies contradicted hoopwood’s studies. On the basis of research on
different profit centers of organizations, they came up with the finding that budget
constraints style is best when it comes bring better performance. With better and tight
management under budget constraint style, better results in terms of performance can
be achieved (Otley, 1978).

Example of Budgeting:

Cash Budget:

Cash is always one of the major concerns for business and all business planning is
dependent upon the availability of cash for business needs. Cash budgets assist
business by providing the view of expected cash flows of the business activities. It
determines the forecasted cash receipt in the business and also the estimated cash
expenditure of the business (Julia, 2007). The other budgets capital expenditure
budgets, overhead budgets, raw material budgets etc are then established on the basis
of cash budget. Any mistakes in the cash budgets can build the wrong foundation of
business strategy and so can bring business losses (Terry, 1992).
 4.3 Budget & Its out turns: 24

Sainsbury’s Example of Cash Budget:

Cash Budget:
Jan Feb Mar April May June
Cash Balance b/d 12000 30000 40000 28000 46000 69000
Cash from sales 60000 52000 55000 55000 60000 55000
Total available cash 72000 82000 95000 83000 106000 124000
Cash Payments
Cash paid for inventory 30000 30000 30000 25000 25000 25000
Salaries & wages 10000 10000 10000 10000 10000 10000
Electricity charges 14000 9000
overheads 2000 2000 2000 2000 2000 2000
Cash paid for van 11000
Total Cash Payments 42000 42000 67000 37000 37000 46000
End of month net
cash 30000 40000 28000 46000 69000 78000
 4.4 Actions need to be taken accordingly by Sainsbury: 25

Budget & Its out Turn:

Once the budgets are developed, its final figures are matched with anticipated values to
know the variance. These variances are called out turns. Here budgets and its out turns
will be explained by the sales budget of Sainsbury again.

Sainsbury

10-Mar 9-Mar 8-Mar

Budgeted Revenues (£ 000) 30,000 25,000 22,000

Actual Revenues (£ 000) 19,964 18,911 17,837

Out turn (10,036) (6,089) (4,163)

Adverse Adverse Adverse

It is obvious from the information above that Sales target is not achieved in any of the
last three years. It fell short of the target in every year, which is not an appraisable thing
from Sainsbury’s point of view. They want to be the market leader of UK retail food
industry, and with these much adverse figure their purpose to be the market leader can’t
be fulfilled. They need to focus more on their sales technique to bring the adverse
figures down.

4.4 Actions need to be taken accordingly by Sainsbury:

Actions against costing information:

As discussed earlier in the report, Sainsbury’s production cost is on the higher side and it
need to take corrective action to bring it down up to a considerable extent. It can do it by
using Lean Production Technique. By Lean production, it is meant that production
 4.4 Actions need to be taken accordingly by Sainsbury: 26

techniques need to be improved, wastages needs to be at minimum level and stocks will be
demanded on JIT approach to minimize the stock holding cost. By adopting these methods,
Sainsbury can bring down its manufacturing direct cost up to a considerable extent. Its
operating cost is already under control and don’t need any further adjustments but it can still
be monitored by having tight budgetary controls. In this way company can decrease its cost
to minimum possible level.

Actions against budgetary information:

Budgetary information provides a detail view of deviations present in actual and planned
figures. Once that weak sector is identified by using budgetary information, actions can be
taken to make it correct. In case of Sainsbury, it could not achieve the expected sales
figures in last three years. As they want to be the market leader in the retail food industry of
UK so they have to meet the plan targets. Adverse figures in sales can be avoided by
adopting better approach in marketing, offering more discounts & attractive deals, extending
a better customer services & providing quality services at the best possible rates
 References: 27

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