Master

Budgeting
Fundamental
 A budget is a detailed quantitative
plan for acquiring and using
financial and other resources over
The Basic a specified forthcoming time
Framework of period.
Budgeting • The act of preparing a budget is called
‘budgeting.
• The use of budgets to control an
organization’s activity is known as
‘budgetary control’.
Planning & Planning –
Control involves developing objectives and
preparing various budgets to achieve
objectives.

Control –
involves the steps taken by management
that attempt to ensure the objectives are
attained.
Advantages of Budgeting

Define Goal & Communicate Uncover Potential

Objectives Plans bottleneck

Means of
Coordinate Think about and
allocating
Activities plan for the future
resources
Selecting the budget period
A continuous budget is a 12-month budget that
rolls forward one month (or quarter) as the
current month (or quarter) is completed .

Operating
Budget

2020 2021 2022 2023

Operating budget ordinarily cover a one year period corresponding to
company fiscal year. The annual operating budget may be divided into
quarterly or monthly budget
The Master Budget – an overview

Sales Budget
Ending Finished
Selling & Adm
Good Budget Production Budget
Budget
Manufacturing
Direct Labor Overhead
Direct Material Budget Budget
Budget
Cash Budget

Budgeted Financial Statement

Budgeting Example
Month Budget Amount
April 30.000
1. ABC Company is preparing budgets for the May 50.000
quarter ending June 30 June 40.000
2. Budgeted sales for the next five months: July 35.000
3. The selling price is $10 per unit August 45.000

1. Total Sales Budget;

April May Jun 2nd Quarter

Budgeted Sales in Unit 30.000 50.000 40.000 120.000
Selling Price per Unit $ 10,00 $ 10,00 $ 10,00 $ 30,00
Total Budgeted Sales 300.000 500.000 400.000 1.200.000
2. Expected April May Jun 2nd Quarter
Cash Collection AR per 31 March 30.000 30.000
April Sales
1. All sales are on account. *80%*300.000 240.000 240.000
2. ABC Company collection pattern
is:
*15%*300.000 45.000 45.000
• 80% collected in the May Sales
month of sale, *80%*500.000 400.000 400.000
• 15% collected in the *15%*500.000 75.000 75.000
month following sale, 5%
uncollectible. Total Cash Collections 270.000 445.000 75.000 790.000
3. The March 31 accounts
receivable balance of; $30,000 will
be collected in full.
3. The Production Budget
The Management at ABC Company wants ending inventory to be equal to 20% of the following
month’s budgeted sales in units. On March 31, 4,000 units were on hand.
Let’s prepare the production budget
Noted; Production must be adequate to meet budgeted sales and provide for
sufficient ending inventory

April May Jun 2nd Quarter

Budgeted Sales 30.000 50.000 40.000 120.000
Add; Projected End Inventory 10.000 12.000 6.000 6.000
Total Needs 40.000 62.000 46.000 126.000
Less; Beginning Inventory 4.000 10.000 10.000 24.000
Required Prdocution 36.000 52.000 36.000 102.000
 At ABC Company, five pounds of material are required per unit
of product. Management wants materials on hand at the end
4. The Direct of each month equal to 10% of the following month’s
production. On March 31, 15,000 pounds of material are on
Material Budget hand. Material cost is $0.50 per pound.
Let’s prepare the direct materials budget.

April May Jun 2nd Quarter

Production 36.000 52.000 36.000 124.000
Material per Pound 5 5 5 5
Total Production Needs 180.000 260.000 180.000 620.000
Add; Projected End Inventory 26.000 18.000 20.000 64.000
Total Needded 206.000 278.000 200.000 684.000
Less: Beginning Inventory 15.000 26.000 18.000 59.000
Material to be Purchased 191.000 252.000 182.000 625.000
 April May Jun 2nd Quarter
Account Payable Per 31 March 20.000 20.000
April Purchase;
191.000*0.4=76.400
50%*76400 38.200 38.200 76.400
May Purhcase;
252.000*0.4=100.800
50%*100.800 50.400 50.400 197.200
Total Cash Disbursements 58.200 88.600 50.400 293.600

ABC Company pays $0.50 per pound for its materials. One-half
5. Expected Cash of a month’s purchases is paid for in the month of purchase;
the other half is paid in the following month. The March 31
Disbursement accounts payable balance is $20,000.

for Material Let’s calculate expected cash disbursements

6. The Direct Labor Budget
At ABC Company, each unit of product requires 0.05 hours (3minutes) of direct labor. The Company has a “no
layoff” policy so all employees will be paid for 40 hours of work each week. In exchange for the “no layoff”
policy, workers agree to a wage rate of $10 per hour regardless of the hours worked (no overtime pay). For the
next three months, the direct labor workforce will be paid for a minimum of 1,500 hours per month.
Let’s prepare the direct labor budget.

April May Jun 2nd Quarter

Units of Production 36.000 52.000 36.000 124.000
Direct Labor per Unit 0,05 0,05 0,05 0
Labor Hours Required 1.800 2.600 1.800 6.200
Guaranted labor Hours 1.500 1.500 1.500
Labor Hours Paid 1.800 2.600 1.800 6.200
Hourly Wages Rate 10 10 10 10
Total Direct Labor Cost 18.000 26.000 18.000 62.000

7. Manufacturing
Overhead Budget
At ABC Company, manufacturing overhead is applied to units of product
on the basis of direct labor hours. The variable manufacturing overhead
rate is $25 per direct labor hour. Fixed manufacturing overhead is
$55,000 per month and includes $30,000 of noncash costs (primarily
depreciation of plant assets).
Let s prepare the manufacturing overhead budget

April May Jun 2nd Quarter

Budgeted Direct Labor Hours 1.800 2.600 1.800 6.200
Variable Manufacturing Overhead Rate 25,00 25,00 25,00 75
Variable Manufacturing Overhead Cost 45.000 65.000 45.000 465.000
Fixed Manufacturing Overhead Rate 55.000 55.000 55.000 165.000
Total Manuafacturing Overhead Cost 100.000 120.000 100.000 630.000
Less; Non Cash Cost 30.000 30.000 30.000 90.000
Cash Disbursements of Manufacturing OH 70.000 90.000 70.000 540.000
8. Ending Finished Goods Inventory Budget

Production Cost per Unit Quantity Cost Total

Direct Material 5,00 lbs $ 0,40 $ 2,00
Direct Labor 0,05 hrs $ 10,00 $ 0,50
Manufacturing Overhead 0,05 hrs $ 64,00 $ 3,20
$ 5,70
Budgeted Finished Good Inventory
Ending Inventory in Units 6.000
Unit Product Cost 5,70
Ending Finished Good Inventory 34.200
 At ABC Company the selling and administrative expenses budget is
9. Selling & divided into variable and fixed components. The variable selling and
administrative expenses are $0.50 per unit sold. Fixed selling and
Administrative administrative expenses are $65,000 per month. The fixed selling and
administrative expenses include $10,000 in costs – primarily
depreciation – that are not cash outflows of the current month.
Expense Budget Let’s prepare the company’s selling and administrative expense budget.

April May June 2nd Quarter

Budgeted Sales 30.000 50.000 40.000 120.000
Variable S & A Rate $ 0,50 $ 0,50 $ 0,50 $ 0,50
Variable Expense 15.000 25.000 20.000 60.000
Fix S & A Expense 65.000 65.000 65.000 195.000
Total S & A Expense 80.000 90.000 85.000 255.000
Less; Non Cash Expense 10.000 10.000 10.000 10.000
Cash S & A Expense 70.000 80.000 75.000 245.000
10. The Cash Budget
ABC Company;
▪ maintains a 16% open line of credit for $75,000
▪ Maintains a minimum cash balance of $30,000
▪ Borrows on the first day of the month and repays
loans on the last day of the quarter.
▪ Pays a cash dividend of $55,000 in April
▪ Purchases $152,500 of equipment in May and
▪ $47.500 in June (both purchases paid in cash)
▪ Has an April 1 cash balance of $50,000
▪ Borrowing $50.000 on April 1 and repayment on
June 30
 April May June 2nd Quarter
Beg Cash Balance 50.000 50.000
Add; Cash Collection 270.000 445.000 75.000 790.000
Total Cash Available 320.000 445.000 75.000 840.000
Less; Cash Disbursement
Direct Labor Cost 18.000 26.000 18.000 62.000
Direct Material Cost 58.200 88.600 50.400 197.200
10. The Cash Manufacturing Overhead Cost
Purchased Equipment
70.000
-
90.000
152.500
70.000
47.500
230.000
200.000
Budget Devidend
Total Disbursement
55.000
201.200
-
357.100 185.900
- 55.000
744.200
(continue) Excess (Deficiency)
Financing
118.800 87.900 - 110.900 95.800

Borrowing 50.000 - - 50.000

Repayment - - - 50.000 - 50.000
Interest - - - 2.000 - 2.000
Total Financing 50.000 - - 52.000 - 2.000
Ending Cash Balance 168.800 87.900 - 162.900 93.800
11. The
Budgeted ABC Company
Income Budgeted Income Statement
Statement For the Three Months Ended June 30

Sales (120.000*10) 1.200.000

Cost of Good Sold (120.000*5,7) 684.000
Gross Margin 516.000
Selling & Adm Expense 245.000
Operating Income 271.000
Interest Expense 2.000
Net Income 269.000
 ABC Company
Budgeted Balance Sheet
For the Three Months Ended June 30

12. The Budgeted Current Assets;

Balance Sheet Cash 93.800
AR (15%*400.000) 60.000
Raw Material (20.000*0,5) 10.000
ABC Company reported the
following account balances Finished Good 34.200
prior to preparing its budgeted Total Current Assets 198.000
financial statements: PPE
Land - $50,000 Land 50.000
Equipment 375.000
Common stock - $182.250 Total Assets 623.000
Retained earnings - $135,750
Equipment - $175,000 AP (182.000 * 50%) 91.000
Common Stcok 182.250
RE - Last Year 135.750
RE - Current 269.000
Deduct Devidend - 55.000
Total Liabilities & Equity 623.000