PROFIT

PLANNING/
BUDGETING
BUDGETING –
DEFINITIONS
Master Budget – a comprehensive plan of all aspects of a firm’s future business and
production operations
Master budget comprises of many separate budgets. These budgets include:
 Sales Budget – forecasts future sales quantities, selling prices, and sales revenues
 Production Budget – shows the number of units of each good expected to be
produced
 Budgeted Manufacturing Costs – prediction of the amounts and costs of each
input required to manufacture expected production quantities
 Direct Materials Budget
 Direct Labor Budget
 Manufacturing Overhead Budget
 Selling and Administrative Expense Budget – prediction of all selling costs
required for attaining forecasted sales levels; prediction of administrative costs
 Budgeted Income Statement
 Capital Expenditure Budget
 Cash Budget
 Budgeted Balance Sheet
BUDGETING – DEFINITIONS
All firms make plans and decisions, such as
 Deciding what to produce and how much to produce (production capacity)
 Deciding what inputs and how much of each input to use
 Deciding what prices to charge and what type of a marketing strategy to pursue
Budgets allow firms to see the impact of their decisions and plans and to improve on
their decisions and plans (planning function of budgets). Firms that systematically
prepare budgets can:

 See projected earnings and cash flows from the plans

 Detect potential problems before they occur
 Line-up additional financing that may be needed
 Coordinate actions of different division within the firm

 Budgets set benchmarks for evaluating subsequent performance (control function

of budgeting)
THE MASTER BUDGET: AN OVERVIEW
Sales
Budget
Ending
Finished Goods
Budget Selling and
Production
Administrative
Budget
Budget

Direct Direct Manufacturing

Materials Labor Overhead
Budget Budget Budget

Cash
Budget

Budgeted Financial Statements

MASTER BUDGET FOR A SAMPLE
COMPANY

 SALES BUDGET – predicts sales quantities and selling prices

to determine the amount of sales revenue the company expects to
generate

 What factors do companies take into account when they decide

how many units they can sell and what price to charge for each
unit?
 Customers tastes
 Production and advertising strategies
 Competitors
 Production capacity
 Changes in the economy
 SALES BUDGET
The Foster Company has predicted that it can maximize its profits if it charges
$200 for its sweaters. The marketing manager of the company has indicated
that at a price of $200 the company can sell 1,000 sweaters in the first quarter
of 2007. Due to an emerging trend observed in fashion houses toward using
cashmere sweaters in their creations, the marketing manager predicts to
increase its sales by 100 sweaters each quarter.

Foster Company
Sales Budget for 2007
Quarter
1st 2 nd
3rd 4th Year

Expected Sales 1,000

(in units)

Selling price x $200 x $200 x $200 x $200 x $200

per unit

Total Sales
Revenue
-PRODUCTION BUDGET
PRODUCTION BUDGET – predicts the number of units
the firm plans to produce during the budget period.

Finished Goods Inventory

Beginning F.G Inventory Units Sold

Units Produced

Ending F.G Inventory

PRODUCTION BUDGET
Note that the number of units a firm plans to produce many
not equal the number of units it plans to sell. Explain
why?
- PRODUCTION BUDGET
FORMAT

Foster Company
Production Budget for 2007
Quarters
1st 2nd 3rd 4th Year

Expected sales
(in units)
Add desired units
in ending finished
goods inventory

Total units needed

Less units in
beginning finished
goods inventory
Units to be
produced
 DIRECT MATERIAL BUDGET
DIRECT MATERIALS BUDGET – Estimated amounts and
costs of direct materials that need to be purchased to
manufacture the budgeted units and to maintain a materials
inventory
Materials Inventory

Beginning Inventory Materials used in production

Materials Purchased

Ending Inventory
FOSTER COMPANY – DM BUDGET
Foster Company
Direct Materials Budget for 2007
Quarter
st nd
1 2 3rd 4th Year
Units to be
produced
DM needed per
unit
DM needed for
production
Add desired ending
inv. of materials
Total DM required

Less beginning DM
inventory
DM to be
purchased
Cost per unit

Total cost of DM
purchases
EXAMPLE
 Prepare production budget from the following details of
XYZ limited

product Estimated Estimated Sales

invenrory 1st inventory 31st Forecast as
April 2016 March 2017 per sales
budget

X 2 500 units 3 000 units 15 000 units

Y 3 500 units 4 000 units 20 000 units
EXAMPLE
 R ltd manufactures 3 products A, B and C . You are
required to prepare for the month of january the
following budgets from the information given below
 Sales budget

 Production budget

 Material utilisation budget

 Purchase budget
SALES FORECAST
product Quantity Price per unit
A 1 000 $100
B 2 000 $120
C 1 500 $140

Materials used in company’s products are;

Material M1 $4 per unit
Material M2 $6 per unit
Material M3 $9 per unit

Quantities
used in
product
Product M1 M2 M3
A 4 2 -
B 3 3 2
C 2 1 1
FINISHED STOCKS
Product A B C
Opening 1000 1500 500
inventory -units

Closing inventory 1100 1650 550

-units
MATERIAL STOCKS
Particulars M1 M2 M3
Opening stock 26 000 20 000 12 000
-units
Closing stock- 31 200 24 000 14 400
units