Assignment on the Performance Management and Concept of incremental budget

Task 1:

1.      Introduction of Performance Management:

·         Concept of incremental budget:

Incremental budgets are a kind of budget that utilize the budgeting techniques in such a way that put some marginal changes in the existing budget and develop a new budget for the future. Current budget is use as base line that provides ground for making some incremental changes in the upcoming budget and determines the amount of new budget according to new increments. This approach is considered very effective and mostly used in the business to determine the future production and enhance the future planning according to change requirements from the customers and market. Certain assumptions are used to determine the marginal changes implement in the base line budget and according to changing requirements manage the upcoming budget of the company. So incremental budget is mostly used in the production sectors of the company to settle the future adjustment and proper planning is also necessary. (Corporate Finance institute, 2020)

·         Preparation of income statement budget:

Budgeted income statement is very helpful for the management to determine its monthly and quarterly income according to condition of company. Management utilizes the budgeted income statement to determine its sales goals for the future and determine how much the company has to bear expenses according to sales of the company in future. When the budgeted income statement is preparing accurately then all the other budgets also prepare in accurate way. (Accounting tool, 2019)

It also explains that how much the financial goals are realistic or not. Budgeted income statement includes all the items that are part of normal income statement but the major difference is that is present the budget of future and explain all the costs that company may appear in future. Normally companies prefer to use the budgeted income statement to determine its growth and utilize its estimation according to current condition of the company. Company also uses this statement to determine it’s all the production goals according to its demand in the market and manage all the expenses. (My Excol, 2019)

2.      Financial assumptions:

·         Complete the following base line data:

·         Complete the following incremental assumptions:

3.      Evaluation of Performance Management:

The evaluation of the above information is given as:

·         Budgets can be prepared according to changing requirement of company and different estimations utilize by company to manage its all the functions and costs according to its production setup.

·         The current given budget is the estimation provided by company that it will utilize for making the budget of future and also manage all the costs according to proper estimation.

·         General increase in the sales value or profitability may occur due to any reason but it’s depend on the management that how to determine the profitability of the company in form of budgets to determine the realistic results for future use.

Task 2:

Explanation of Performance Management:

·         The above budget is explaining the sale of the company for the next five years and provides a better assumption about the future of the company.

·         The sales volume of the company rapidly increase with some specific percentage and show that how much the sale increase in the upcoming years of the company.

·         Sales volume in 2020 will be 6120, 6242 in 2021, 6366 in 2022, 6494 in 2023 and 6624 in 2024 according to incremental percentages of the sales volume.

·         With the increase its sale volume, its sale price also increase which show a major change in the profitability of the company and also present that market demand of the product is high in the market and due to this its production will be high.

·         Its sales price will be 51.5 in 2020, 53in 2021, 54.6 in 2022, 56.2 in 2023 and57 .9 in 2024 , Which show that its sales price rapidly increase with the increase of sale volume.

·         So according to provided information and other assumptions, it can be clearly observe that sales of the company increase in the upcoming years and manage them according to requirements of the company.

Explanation:

·         This is the budget of cost of sale of the company that present the next five years budget related to cost of sale of the company.

·         In this budget, cost of production measure according to  changing percentage of the company and it also effect the beginning and closing inventory of the company and manage the required production level of the company and inform company that how much it has capacity to produce in the future and how the company manage its capacity level according to its market demand.

·         According to changing requirements of the market the budget of the cost of sales explain that its cost of sales increase with the increase of cost of production and sales.

·         Its estimated cost of sales for the next five years are: 5150 in 2020, 5304 in 2021, 5463 in 2022, 5627 in 2023 and 5796 in 2024 according to provided information related to budget.

·         Cost of sales explain that company has enough cost of bearing its sales and manage its sales according to its changing requirements of market. This budget explain that in the upcoming years company has enough cost of sales to manage its expenses.

Explanation of Performance Management:

·         The given budget is belonging to the selling and admin expenses of the company which it will incurred in the next five years. Company has to bear selling and admin expenses according to its sales and operations requirement.

·          selling expenses are belong to sales and its related activities that bear by the company according to management of its sales capacity. Admin expenses are all expenses that belong to production and other operations of the company according to its activities.

·         Selling and admin expenses in the budget will increase with consistent percentage. So according to this budget company will bear in the next five years and this will also increase according to incremental rate of other elements or factors that belong to the company and its related activities.

·         Its selling and admin expenses will be: 1178 in 2020, 1207 in 2021, 1237 in 2022, 1268 in 2023 and 1300 in 2024 according to incremental percentage of the expenses in the upcoming years of the company.

 Explanation:

Current budget is the budget of income statement of the company for the next five years.

·         This budget is very helpful for the company to understand that how much the company ability to earn in the future according to changing requirement of the market.

·         When all the factors are going to change then its profitability ration also differ according to changing requirements of the company.

·         The production capacity also different when its sales ration alters and all the attached costs also effected due to change in one major factor. Budgeted income statement explain that how much the company will earn in the next five years and how much its profit increase or decrease with the change in other factors.

·         When the sales and cost of sales will increase in the upcoming years, its gross profit also increases and at the end its net profit also increases. So company has to manage its sales and other factors that enhance its profitability ratio and percentage.