Budgeting (Refer to Chapter 9 of Hilton text)

1. What is a ‘budget’? A budget is a plan expressed in quantitative terms for a specified

period. (pg. 371)

2. Why prepare a budget / What are the advantages of a budget? (pg. 371)
- A budget forces organisations to plan
- Facilitates communication & coordination
- Allocating resources
- Control
- Evaluating performance

3. Types of Budgets (pg. 372)

Budget is a ‘plan’, hence Master Budget is a ‘Master Plan’. It includes all the different
budgets in the organistion (see Exhibit 9-1, pg. 373)

All the budgets will be covered except Budgeted Statement of Cash Flows.

Read also the terms ‘rolling budget / revolving budget / continuous budget’.

4. Now watch the video : Budgeting (Example) Part 1.

The following assumptions accompany the examples :

- Sales budget : Jan -100,000; Feb - 150,000; Mar - 200,000. SP/unit = $20
- Production budget : EFG - 30% of the following (next) month’s sales; Apr Sales 250,000
- D. Materials budget : 2kg/unit; E.D.MAT - 20% of the following (next) month’s d.mat
usage; $5/kg
- D. Labour budget : 3DLH/unit; $2/DLH

5. Budgeted Income Statement for the year ended … (pg. 387)

Sales (Refer to Sales Budget) xxxxx
Less : COGS (No. of units sold x Total cost/unit)* xxxx
Gross Profit xxxx
Less : Operating Expenses
Selling & Admin expenses (Refer to S&A Exp Budget) xxx
Interest expense (Refer to Cash Budget) xxx
Others (Refer to Other budgets) xx
Net Profit before tax xxxx
Less : Tax (xx%) xx
Net Profit after tax xxx

The Budgeted Income Statement is usually prepared for the whole year instead of month
by month. As seen above, all the items in the statement can be obtained from the
respective budgets that were prepared prior to this. In the text, pg. 387, you will see for
example in Schedule 9, Sales Revenue of $2,295,000 was obtained from Schedule 1 on
pg.380, and so forth.

* COGS = No. of units sold x Total cost/unit

No. of units sold can be obtained from the Sales Budget.
 Example : Computing Total cost/unit
D.Mat (2kg/unit x $5/kg) 10
D.Lab (3 DLH/unit x $2/DLH) 6
Overhead (3 DLH x $1/DLH) ** 3
Total cost/unit 19

Information regarding D.Mat and D.Lab costs can be obtained from the D.Mat Budget and
the D.Lab Budget.

** Overhead depends on how it is allocated. If the overhead is allocated using ‘No. of

units’, the Manufacturing Ohd Budget would be prepared based on ‘No. of units’. The
overhead cost/unit would then be computed : Total Overhead / Total units.

If the overhead is allocated using DLH, then the Manufacturing Ohd Budget would be
prepared based on DLH. The Overhead/DLH would be computed : Total Overhead / Total
DLH. The example above assumes overhead is allocated using DLH.

6. Now watch the video : Budgeting (Example) Part 2.

The following assumptions accompany the example :
Opening Cash Bal (‘000) = 10

Collections from customers

- 60% in the month of Sales
- 40% 1 month following (after) Sales
- Dec Sales (‘000) - $100
Sales Budget for the 3 months … (‘000)
Jan Feb Mar
Budgeted sales units xxx xxx xxx
X SP/unit x x x
Budgeted sales revenue 100 200 300
Expected cash collection :
From Dec sales (100 x 40%) 40 - -
From Jan sales 60 * 40 ** -
From Feb sales - 120 # 80 ##
From … etc - - ???
Total Cash Collections 100 160 ???

* (100 x 60%); ** (100 x 40%); # (200 x 60%); ## (200 x 40%)

Minimum Cash Balance (‘000)= 10

7. Budgeted Balance Sheet (pg. 394 & 395)

Each item on the Balance Sheet can be computed as follows :
Cash : from the ending balance of the Cash Budget
A/Cs Receivable : Opening Bal + Sales – Collections from customers (info from Sales
Budget and Cash collection schedule)
Inventory : EFG (units) x Total cost/unit (info from Production Budget)
Non-current assets (cost) : Opening Bal + Additions of new NCA - Disposal of NCA (info
usually provided in the question)
Accumulated Depreciation : Opening Bal + Depreciation for the year - Accumulated Dep
of NCA disposed (info from S&A Budget; Mfg Ohd Budget and other info provided in the
question)
A/Cs Payable : Opening Bal + Purchases – Payments to suppliers (info from D.Mat
Purchases Budget and Cash payment schedule)
Non-current liabilities (Loans) : Opening Bal + New Borrowings - Loan Repayments (info
from Cash budget)
Owner’s Equity : See pg.395 Schedule D