Table of Contents

1.0 Introduction.....................................................................................................................................4
2.0 Developing Budgets........................................................................................................................5
2.1 Sales Budget................................................................................................................................5
2.2 Production Budget.......................................................................................................................5
2.3 Material Usage Budget................................................................................................................6
2.4 Material Purchase Budget............................................................................................................6
2.5 Overhead Budget.........................................................................................................................6
2.6 Labor Budget...............................................................................................................................7
2.7 Cash Budget.................................................................................................................................7
3.0 Findings...........................................................................................................................................8
4.0 Suggestions and conclusion.............................................................................................................9
5.0 References....................................................................................................................................10
6.0 Appendices....................................................................................................................................11

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 1.0 Introduction
According to Chartered Institute of Management Accountants “management accounting is the
sourcing, analysis, communication and use of decision- relevant financial and non-financial
information to generate and preserve value for organizations”. (CIMA, 2018) Budget is a future
assumption of how the business will operates in the future. Budget is used as a tool to choose
future activities which must be done and how the cash flow will occur.
This report was prepared with the intention to enhance the knowledge and skill on preparation of
budgets for different types of organizations.

Developing Budgets

Here in this company they have practiced Incremental budgeting as their budgeting approach.
Here the budget is being prepared for a quarter (January, February and March) of 2019. In order
to prepare this budget we select last year’s actual values

2.1 Sales Budget

In this rice manufacturing rice mill they mainly focused in producing two varieties of rice
products as “Samba” and “Red Kekulu”. The sales value of rice is being divided among
‘Samba’ and ‘Red Kekulu’ in 3:1 respectively. According to their last year financial records it is
assumed that the sales units of January for Samba would be 171 units due to the season. As the
month of January is a new beginning of a new year it would increase the demand for rice. Since
there is a higher demand for ‘Samba’ in the market the price of Samba is estimated to increase to
4450 per 50 kgs packet. When it comes to ‘Red Kekulu’ it is normally being consumed by
healthy conscious consumers therefore the demand for this product would not increase due to
seasonal factors and there is only limited number of consumers for this product in the rice
market. The price of this product would be 3700 per 50 kgs packet which is comparatively lesser

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compared to Samba product price. Sales budget was prepared at the beginning because the
limiting factor of this organization is Sales.

In February month the demand for customer orders would drastically reduce from the hotel
sector so due to it the demand would decrease to 161 units, this has result to decrease in the price
of Samba. In March there would be a huge increase in the demand for both the products due to
New Year season.

2.2 Production Budget

In the month of January they would intend to keep finished good stock 20 units of Samba rice as
their closing stock balance in order to use in an urgent situation. Since rice is a product that can
be kept for about 6 months without any defect it is fruitful to have stock to deal with the
unexpected demand in the market place.

Through this production budget it helps the company to meet the short term inventory
requirements. This is considered as one of the main budgets that help the manufacturing
organization to estimate the cost of the product. The closing stock of April month would
increase to 40 units due to the seasonal demand in the competitive market.

2.3 Material Usage Budget

When preparing this material usage budget it is assumed that one packet of rice is prepared by
consuming 3 packets of paddy bags (50 kgs). With that assumption the material usage budget is
prepared by assigning a rate for both the raw materials (paddy) of Samba and Red Kekulu. With
the increase of demand for products the rate per paddy bag also increases gradually thus resulting
in an increase in the total costs.

2.4 Material Purchase Budget

This rice mill purchase raw materials (paddy) from different suppliers to produce products of
Samba and Red Kekulu. The quantity of paddy to be purchased is being decided by considering
both the production volume and inventory requirement. It is better for the mill to keep a stock of

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raw materials as it will help them to cater with the demand for rice in the market when paddy is
scarce. It is estimated that in March month they would receive a huge order from hotels and
restaurant customers therefore a closing stock of 95 units and 8 units is being kept from Samba
and Red Kekulu paddy respectively.

2.5 Overhead Budget

Variable manufacturing overhead rate depends on the direct labor hours and this rate differs
based on the labor hours for both Samba and Red Kekulu products. In March the variable rate is
high due to increase in the utilization of labor to produce more number of rice packets.

2.6 Labor Budget

It is assumed that one laborer takes 10 minutes to produce one packet of Rice. This time is
constant to both Samba and Red Kekulu products. The labor rate is estimated to Rs. 150 and
when the production volume is high laborers should be paid with an additional rate for overtime.
Through this budget it helps to estimate the future labor force requirement.

2.7 Cash Budget

The sales figures are obtained from the sales budget. It is assumed that 70% of the sales are
expected to collect in the quarter in which the sales are made and the rest are considered as credit
sales. It is the company policy to maintain a good relationship with customers therefore they also
sell 30% of their products on credit basis. But they intend to collect money on cash as they need
a huge sum of money to buy raw materials (paddy) from suppliers.

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It is estimated that December 31 % the accounts receivable balance of 20000 and 14000 for
Samba and Red Kekulu will be collected in full.

2.0 Findings

mill uses first in first out (FIFO) method as their inventory policy. The organization use paddy as
their direct raw material. They purchase paddy from Polonnaruwa, Anuradhapura and Ampara
area. The organization will discuss the rates with different suppliers and they bargain with them
to get the raw materials at a fair price. When raw materials are being brought to the mill they are
being brought by an experienced person who has knowledge of paddy industry. When recruiting
laborers there is a certain procedure that they adhere. That is they concern more about the work
experience and the knowledge about the rice manufacturing industry. The end market of this mill
is hotels, super markets and wholesale buyers. So in order satisfy their consumers they provide
consumers with high quality products at a fair price. When the cost per unit is decided the cost
occurred for the whole process of manufacturing is being considered and then it is compared
with its competitors in the market. Normally they assign 20% profit margin on sales price. To
increase the efficiency and the effectiveness of rice packet manufacturing they use newly
innovated machines from India and China.

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 3.0 Suggestions and conclusion

According to this business there’ no ongoing budget. They used to report their daily transactions
on their own books in an informal manner. when the organization needs to know how will it
perform, the requirement for a budget will arise. A budget is prepared by a budgeting committee.
Budgeting committee is consisted with the top management and CEO. And, there is a need of
well plan financial reporting and analyzing system. Without well plan budgeting system they
must face circumstances such as,

1) expenses which are not available on the surface can throw the business on off track.
2) organization cannot get a clear idea about their future cash flows.
3) it’s much more difficult to reach their business goals.
4) problems could occur when dealing with the workers

By preparing one the organization can get a clear idea about how the company will perform in
the future and how cash flows will generate. by considering all the past data records and statistics
of their business we made a budget which helps to uplift the performance of their business. We

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recommend the organization to use budgeting method to get a clear idea about the organization
and prepare a budget.

mill is a medium scale rice manufacturing which operate more than two decades companychan.
This is a sole proprietorship business and established in 1991. In 2008 it converted to partnership
business. They used Indian and chines machinery for their milling. They produce samba and red
kekulu. Raw material purchased from Ampara, Anuradhapura and Polonnaruwa. The company
keeps recording of transaction and prepare accounts but the company was missing a budget. The
report is comprised with quarterly budget for the year 2019. This was prepared based on last
year’s information.

4.0 References
CIMA. (2018, 02 22). CIMA.com. Retrieved from www.cimaglobal.com:
https://www.cimaglobal.com/Starting-CIMA/Why-CIMA/what-is-management-
accounting/

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