create a master budget

Summary: Create a master budget for the following scenario. MODERN AGRICULTURAL FARM: BUDGETING FOR CONTROL In May 2011, Jehanzeb Alamgir, a director in the Alamgir Group of businesses and the managing partner of Modern Agricultural Farm (MAF), was reviewing the set of performance reports for the previous month sent in by the farm accountant. These reports had been designed by the consultant Hashim Ahmed, who was working on a project to make the MAF systems compatible with those of other Alamgir Group companies. The next project meeting was to be held during the last week of May. On recommendation by Ahmed, a master business plan (MBP) for 2011 had been developed for the first time by MAF, and Alamgir felt that Ahmed's help would be needed to develop the plan for 2012. Alamgir was looking for a way to handle the fluctuations in MAF's monthly cash flow. He had selected the Rabi season that had just finished to analyze the situation. Recently, he had wanted cash to purchase farm animals but had found that the required amount was not available. In an earlier meeting with Ahmed, Alamgir had said, My manager sells an acre of maize fodder at Rs 30,000 with my consultation. He prepares the sales order [in fact, there was no formal sales order]. When I run short of cash, I learn that he had collected the money and used it at the farm for some farm work and reported it later, although he had no right to do that! Ahmed, a management analysis and research consultant, had been advising Alamgir on improving performance reporting and management control. The main change, he stressed, was to establish an annual MBP to control operations. Alamgir had earlier acquired computer-based accounting software from SAGE Pro, which he thought would be helpful in expediting accounting and reporting. He was now committed to implementing an overall operating controls framework based on zero-based annual budgeting. This would help to enable improvement in farm output by setting new performance indicators. Training in preparing various reports had been provided earlier to the farm accountant. FARM BACKGROUND MAF was located in the province of Sindh in the south of Pakistan, about 850 kilometres from Lahore where the Alamgir Group had its head office. The farm area was a total of about 448 acres1 and used canal water for irrigation. Some of the land was shale, and another 100 acres had not been cleared for use. The farm workers were generally unskilled labourers provided by a contractor during the harvest of cotton and wheat. The full-time staff who remained on site included the farm manager, the two workers (called "baildars) who watered the crops and security guards; the accountant lived in Agriabad, a nearby town. There were also attendants in the rest house where the partners or other visitors to the farm stayed. The agricultural year in Pakistan was split into two seasons: Rabi and Kharif. The Rabi crops, harvested in March and April, were known as the winter crop." The term Rabi means spring in Arabic. The major crops of the season were wheat, cotton, gram, lentil, onion, potato, sunflower, canola and barley. The Kharif crops were harvested in October and November as the Kharif sowing season started on May I and continued to October 30. Some crops were usually sown with the beginning of the first rains in August, the southwest monsoon season. The term Kharif means "autumn in Arabic. Major Kharif crops were cotton, sugarcane, millets (bajra and jowar), paddy (rice), maize, moong (pulses), groundnut, red chili and soybean. The two seasons formed the performance year for MAF - in this case, from November 1, 2010 to October 31, 2011. The choice of crops to be grown in each season was dependent on many factors: suitability of the weather and soil, the current cash flow situation, the length of time the crop needed to mature in the field, the contribution margin that was likely to be achieved and the likelihood of the finished crop needing storage before dispatch. Keeping this in view, MAF planned to grow the main crops of wheat, cotton, maize fodder and sarson (mustard) during the 2011 Rabi season and to grow cotton, maize fodder, jawar and sunflower in the Kharif season. MAIN CROPS Wheat Wheat was the main staple food item of Pakistan's population and the largest grain crop in the country2 Planting of winter wheat took place from mid-September through October, and it was harvested from mid-May through June. This being a worldwide cultivated grass, wheat grain was a staple food used to make flour for leavened, flat and steamed breads, cookies, cakes, breakfast cereal, pasta, noodles and biofuel. It had a long growing period of about 10 months from sowing to harvest. Wheat was planted to a limited extent as a forage crop for livestock, and the straw could be used as fodder for livestock or as a construction material for roofing thatch. At MAF, wheat was planted late; since some fields were sown in January, some proceeds of the sale of the wheat planted in fall 2010 were outstanding at an amount of Rs1.7 million, 3 which was to be received in May 2011. The contribution based on the price of Rs 21 per kilogram was Rs 4,436 per acre. Cotton Cotton 4 which was also known as "white gold," was an important crop in Pakistan and many developing countries. The crop yield was dependent on the environment in which it was grown and the land use polices of the cropping system adopted by MAF management. Alamgir was very conscious of this and regularly obtained advice from agronomists. The different crops each year were rotated in the two seasons to protect the nutrient value of the land. Factors responsible for stagnant cotton production included excessive rain at the time of sowing, high temperatures at the flowering stage, late wheat harvesting resulting in less area for the cotton, incidence of leaf curl virus and soil system, and weather adversity. The input costs had to be closely monitored at MAF, and for this a good cost accounting record was required. The cotton was sold to ginneries at the international price of phutti, as the freshly picked produce was called. All the proceeds for the sale of cotton had been received. The sale terms were delivery against cash. The phutti price was dependent on the international trend of cotton prices. There was thus an uncertainty factor as to what the ultimate price was likely to be for the MBP for the following year. The contribution based on the prevailing price of Rs 90 per kilogram was Rs 41,150 per acre. Sunflower Sunflower, 5 grown for edible oil, was one of the four most important annual crops in the world. In Pakistan, its seed contained 35 to 55 per cent oil content. Research work on this crop had shown that there was great potential for growing it under all soil and climatic conditions, in rain fed as well as irrigated farming systems and in different agro-ecological zones. It was grown in some areas of the province of Sindh where the spring crop was sown in February or July and harvested in May or October. Sunflower in Pakistan was mainly grown to extract edible oil, and the fact that the crop was ready for harvest between 90 and 110 days after sowing made cropping management easier. For MAF, the flexibility in the time when it could be grown was important as Alamgir thought that this crop, if planted at the correct time, could generate cash in the lean period. The contribution of sunflower at the prevailing price of Rs 22 per kilogram was Rs 4,436 per acre. FODDER CROPS Pakistan had a large stock of farm animals including buffaloes and cows for milk production and goats and sheep for meat. There was a stable and regular demand for fodder to feed these animals. Most of the animals were in rural areas, in the recent past, large numbers of buffaloes and cows had been raised by dairy farms to supply milk to processing plants. Sarson (Mustard) Sarson, grown as fodder for farm animals, had a three-month maturity period and was sold for cash. This was another crop whose cultivation could be strategically timed so that it was harvested to generate cash when required. Sarson was produced in very small quantities as it was sensitive to variations in weather. This created a demand for other crops such as maize, jowar and oats. MAF was aiming to expand the scope of MBP to identify strategic products, such as a variety of fodder crops, to benefit from such market imbalances, and wanted to establish a mechanism to do so. Also, like other Pakistani farmers, Jehanzeb wanted to increase the production by using technology better. To increase profitability, it was necessary to improve fodder supply through enhanced production practices and also to reduce the growth of weeds. Although herbicide use had become popular, the weeds still stayed for some time, which affected output adversely. Besides mustard, there were other products that could be used as animal feed. The new items needed further analysis by MAF as the contribution of mustard based on the prevailing price of Rs38 per kilogram was Rs 4,532 per acre per cut. The number of cuts of a fodder crop, from 1 to 6. could affect the actual contribution realized. Maize (Corn) The setting up of a very large maize processing plant in the province of Punjab had improved the prices realized by farmers. This plant, located near Faisalabad, produced starch, glue and other farm animal feed products. As this one plant had a huge demand, the sale of maize was not a problem. However, the crop was susceptible to insect attack, which could reduce production substantially, MAF cash needs meant that its main fodder crop was maize and that it had to keep the fields sprayed to protect the plants from the insect called borer. By May 2011 the three cuttings for the Rabi season had been completed and the balance of the crop was expected to bring cash receipts of RS 0.4 million. The contribution based on the prevailing price of Rs 9 per kilogram was Rs 27.010 per acre. Barseem (Clover) and Guar (Pea) These crops were sown from September to November and harvested from mid-December to May, up to five or six cuttings could be achieved from one crop. These fodder crops were planted in a small area and, when ready, were sold for cash - this helped the farm cash flow in March when cash receipts were low. Barseem that was sown from April to September was harvested from June to December, while guar was sown from April to July and harvested from June to December. Generally, the conversion of the fodder crop into cash took only four to six months from date of planting. The contributions based on the prevailing prices of Rs 8 per kilogram for barseem and Rs 19 per kilogram for guar was Rs 37,207 per acre and Rs 176 238 per acre, respectively. SOIL REJUVENATION Jantar (Sesban) and Guar These two plants were required to fill the space between crops as the main source of green manure. When ready, they were ploughed back into the land to replenish the soil with the nutrients eroded by growing crops. The prominent cropping systems (the order in which the crops were grown) in Pakistan were: 1.rice-wheat 2. cotton-wheat 3. mixed cropping (sugarcane, maize, wheat, cotton) 4. oilseed-pulses-wheat. For the exclusive use of F. Walker, 2020. This document is authorized for use only by Frances Walker in 2020. The first three cropping systems were very exhaustive, and the soil became weak in nutrients. Over the years, farmers had experienced that the use of nitrogen- and phosphate-based fertilizer was harmful as the soil yields declined. To remain close to a natural solution, MAF used major green manure crops, as discussed above. FRUIT Mango The mango6 orchard covered a very large area, about 225 acres, and was also the major revenue generator for MAF. Most of the trees (3,500) that produced fruit had been planted many years ago. Another 600 were young saplings planted during the last three years. Mango Tree Management A variety of mango adaptable to the climatic conditions and the environment was the foundation on which mango tree management systems were built. An adaptable variety was one that under specific climatic conditions showed regularity of bearing and high productivity of good quality fruit. Different varieties of fungi and insects attacked and killed mango trees; the relationship of insect and disease was a complex one but was manageable through the use of proper fertilizers, cultivation and integrated disease management practices. which combined fungicides with suitable insecticides. The use of fungicides increased the cost of production and also decreased the fruit quality because of their toxic substance residues. The trees were regularly treated by MAF from January to March. The irrigation system was one of the most important resources in a commercial orchard. The type of irrigation system depended on the capital budget for orchard development. MAF was using the old flood system and realized that each year the amount of canal water available was reduced so they would need to invest in a sprinkler system that used much less water. The large size of the garden made it the major focus of farm activity during harvest time. The trees started to flower in February and early March, and the fruit ripened during June and July. Once the fruit ripened, it had a very short shelf life, so the produce had to be plucked in a semi-ripe stage. Some of the fruit fell from the trees and was damaged so could not be sold in the regular market. To prevent this from happening, the fruit was taken off the tree by a special cutter tied to the end of a long pole that cut the end of the branch to which the mango was attached. The market for mangoes was of two kinds: the ripe fruit was sold at an attractive price as it was considered the king of fruits" in Pakistan, and the damaged ones were bought by beverage companies to prepare products from the juice. Methods of sales of mangoes were of two types: either the harvesting of the entire orchard was contracted out or the farm could sell the fruit itself. The sale contract was signed after the bidder made an estimate of the fruit on the trees and made a bid. This was negotiated by the farmer, among other terms, the agreement included a payment schedule. Normally payment was received in three installments: one-third was payable in advance, one-third after a certain quantity had been harvested and the final third on completion of harvest but before the last truck was dispatched. Sales in 2011 were to be handled in-house, and for this, trucks had to be arranged to deliver to the dealers in Lahore whose market (known as a 'mandi") was the largest in Pakistan and set the prices for the whole country. The MBP contained the budget for the mango orchard and was a simple document that was based on the output and prices of last year increased by a factor of 12 per cent (see Exhibit 1). Other Fruits The farm also had a few other fruits useful in generating cash. These included 300 guava, four acres of banana, 50 lychee and 400 jamun. The banana trees brought in handy cash, while the number of the other trees was not of a commercial size, so their fruits were either sold or consumed during the year. VEGETABLESS Onion was one of the key condiments used in all households all the year round in the cooking and preparation of meals in Pakistan. International research also suggested that onions in the diet might play a part in preventing heart disease and other ailments. Onions, which could be planted either in July and August or in November, took three months to mature. The other vegetables grown were sweet potatoes and chili. Vegetables required daily inspection and were labour-intensive as they had to be harvested and delivered to the wholesale market as soon as they ripened; thus, only a small portion of land was cultivated with vegetables FARM OPERATIONS The cropping plan and how the land was to be used were prepared by Alamgir at the head office in consultation with the farm manager (see Exhibit 2). The MAF land had been split into equal sized subunits, called "managing units" (MU), consisting of about eight acres each. Two irrigation canals were nearby, one on either side of the land boundary. The quantity of farm irrigation water was sanctioned by the government irrigation department and was in limited supply. The farm was managed onsite by a resident farm manager who kept in close contact with Alamgir and was expected to carry out the work in accordance with the annual budget. Variances from the budget were to be explained in an analytical report. Management Control The MBP was prepared from a base of zero for all produce except mangoes and was to serve as a benchmark to determine the year's performance. The cost collection system was designed to run under Sage Pro software and would collect costs by MU, the basic land unit for performance reporting. The farm manager was in charge and was assisted by a farm accountant who was responsible for recording daily transactions and all financial reporting. Guidelines for accounting and recording transactions had been provided in the form of standard operating procedures. In the rural economy of Pakistan, business dealings were mainly in cash, and some of the amounts handled at the farm could be very large. As a method of control on cash, Alamgir had established two bank accounts in Agriabad, one in the name of the farm and one in the name of the local partner, H. Bashir. The funds were sent from head office to Bashir's account from where they were given to the farm in cheques as required by the farm manager. All receipts of sales, which were mostly cash, were also deposited in the Bashir account. There were approximately 30 support staff who carried out watering, security, hoeing and working at the rest house. The flow of various accounting control documents had also been established and inventory controlled by using standard documents to record the various processes followed. The documents were designed to be used for data entry once the Sage Pro software was implemented. Inventory was classified on receipt and stored in one of three stores: chemicals finished product and fertilizer. At harvest time, the record of output was kept according to MU SO that the yield for the crop could be established, since yield per acre was a key performance measure. The Sage Pro software had been installed at the head office, and data entry for all transactions was done by the accountant at the farm via remote link to the system in Lahore. The four modules to be used were to handle inventories, receivables, payables and general ledger accounting. The farm accountant sent his working papers monthly to head office. The effort to prepare a budget had raised the issue of cost accounting since the variable unit costs and individual components of farm operations had to be analyzed with the revenues to achieve VEGETABLESS Onion was one of the key condiments used in all households all the year round in the cooking and preparation of meals in Pakistan. International research also suggested that onions in the diet might play a part in preventing heart disease and other ailments. Onions, which could be planted either in July and August or in November, took three months to mature. The other vegetables grown were sweet potatoes and chili. Vegetables required daily inspection and were labour-intensive as they had to be harvested and delivered to the wholesale market as soon as they ripened; thus, only a small portion of land was cultivated with vegetables FARM OPERATIONS The cropping plan and how the land was to be used were prepared by Alamgir at the head office in consultation with the farm manager (see Exhibit 2). The MAF land had been split into equal sized subunits, called "managing units" (MU), consisting of about eight acres each. Two irrigation canals were nearby, one on either side of the land boundary. The quantity of farm irrigation water was sanctioned by the government irrigation department and was in limited supply. The farm was managed onsite by a resident farm manager who kept in close contact with Alamgir and was expected to carry out the work in accordance with the annual budget. Variances from the budget were to be explained in an analytical report. Management Control The MBP was prepared from a base of zero for all produce except mangoes and was to serve as a benchmark to determine the year's performance. The cost collection system was designed to run under Sage Pro software and would collect costs by MU, the basic land unit for performance reporting. The farm manager was in charge and was assisted by a farm accountant who was responsible for recording daily transactions and all financial reporting. Guidelines for accounting and recording transactions had been provided in the form of standard operating procedures. In the rural economy of Pakistan, business dealings were mainly in cash, and some of the amounts handled at the farm could be very large. As a method of control on cash, Alamgir had established two bank accounts in Agriabad, one in the name of the farm and one in the name of the local partner, H. Bashir. The funds were sent from head office to Bashir's account from where they were given to the farm in cheques as required by the farm manager. All receipts of sales, which were mostly cash, were also deposited in the Bashir account. There were approximately 30 support staff who carried out watering, security, hoeing and working at the rest house. The flow of various accounting control documents had also been established and inventory controlled by using standard documents to record the various processes followed. The documents were designed to be used for data entry once the Sage Pro software was implemented. Inventory was classified on receipt and stored in one of three stores: chemicals finished product and fertilizer. At harvest time, the record of output was kept according to MU SO that the yield for the crop could be established, since yield per acre was a key performance measure. The Sage Pro software had been installed at the head office, and data entry for all transactions was done by the accountant at the farm via remote link to the system in Lahore. The four modules to be used were to handle inventories, receivables, payables and general ledger accounting. The farm accountant sent his working papers monthly to head office. The effort to prepare a budget had raised the issue of cost accounting since the variable unit costs and individual components of farm operations had to be analyzed with the revenues to achieve EXHIBIT 1: SUMMNAY OF MANO ORCHARD RESULTS Area Variety Number of trees in 2020 Production 2020 Revenue acres kgs Rs in 000 Sindhri 1692 93 130200 5773 Deasee 782 11000 264 Chaunsa 657 36100 2109 Dusehri 171 13500 702 Langra 271 14000 539 Ratol 62 700 23 Saroli 14500 173 TOTAL 3635 220000 9583 EXHIBIT 2: CROPPING PLAN 2012 SUMMARY BE SEASON RABI season KHARIF season Area Area in Number of cuts Item Used twice Item Number of cuts in acres acres M-Fodder Sunflower 44.03 M-Fodder-3 Cuts Cotton 40.66 Onion Jawar Sarson 58.08 Moong Wheat 44.33 16.5 Mash Cotton 88.8 Cauliflower Jantar 40 Maize Fodder Subtotal 305.21 Subtotal 195.69 Mango 225 Mango Unused 14 Unused Total Net Acres 544.21 Total Net Acres 448.69