Objectives

• Explain the role of budget.

• Illustrate the budgeting process.
• Recognise factors that could
Chapter 4 contribute to the success of a
budget.
Budgeting

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Budget
It is a reflection in quantitative
1. Budget terms how to allocate
2. The role of budgeting financial resources to each
part of an organisation in a
3. Operating budget specific period.
Content

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 • Enforce the management in
Budget period planning task.
The role • Provide information of available
of resources for decision making.
• Serve to coordinate many activities
Operating budget budgeting of an organisation.
• Offer thresholds for performance
evaluation.
2009 2010 2011 2012

Annual operating budget could be split into

months or quarters.

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Operating Budget
Operating Budget
Sales Budget
• Operating budget comprises
budgets that are in relation with
Production Sales & Admin
operational activities such as: Budget Costs Budget
✓Sales
✓Manufacturing (or purchasing) Direct material Direct labour Overhead
✓Distributing Cost Budget Cost Budget Cost Budget

✓Administrative;
✓and financial activities. Cash
Budget

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Budgeted Financial Statements

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 Sales budget determination

The expected level of sales and revenue are

Sales Budget based on a number of conditions.

Provide expected level of

sales units and revenue in the
next period.

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Sales budget determination Sales budget example

SG company is crafting budget for the second
1. Previous periods sales. quarter of 2016.
2. Expectation of sales division. Expected sales units in the next months are as
following
3. Economic condition.
April 20,000 units
4. Competitor’s actions.
May 50,000 units
5. Changes in price policy.
June 30,000 units
6. Changes in product mix. July 25,000 units
7. Market surveys. August 15,000 units
8. Marketing plans. Expected sales price is $10/unit.
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 Sales budget Cash inflow from sales

➢Settlement policy applied in SG:

April May June July • 70% of revenue is collected imideiatly,
Expected • 25% of revenue is collected in the next month,
sales units 20,000 50,000 30,000 100,000 • 5% of revenue would become uncollectible.
➢At the end of March outstanding amount for
receivable was at $30,000 (100% collectible)
Unit price $ 10 $ 10 $ 10 $ 10
Total revenue $ 200,000 $ 500,000 $ 300,000 $ 1,000,000
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Cash inflow from sales Production Budget

April May June Quarter
Outstanding
receivable from
March $ 30,000
Sales
Production
Revenue in April Budget
Budget
70% x $200,000 140,000
25% x $200,000 $ 50,000
Revenue in May
70% x $500,000 350,000
25% x $500,000 125,000
Revenue in June
70% x $300,000 210,000 Determine the number of products needed to produce
Toal cash inflow $ 170,000 $ 400,000 $ 335,000 $ 905,000 in order to fulfill sales and inventory demands
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 Production Budget Production Budget

➢SG wants to maintain the level of ending inventory April May June Quarter
at 20% of the sales demand in the next month. Expected sales 20,000 50,000 30,000 100,000
Add Ending
➢Ending inventory in March was 4,000 units. Inventory 10,000 6,000 5,000 5,000
Total Demand 30,000 56,000 35,000 105,000
Prepare the production budget. Less Opening
Inventory 4,000 10,000 6,000 4,000
Expected
production 26,000 46,000 29,000 101,000

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Direct Material Cost Budget Direct Material Cost Budget

Determine: ➢Direct material: 5kg/unit.

- Direct material cost in the ➢SG has a policy to maintain the level of ending
period. material for each month equal to 10% of next
- The quantity of material needs month’s expected production demand.
to be purchased. ➢Ending material in warehouse at the end of March:
- Settlement schedule to material 13,000 kg.
supplier.
➢Material price: $0.40/kg.

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 Direct Material Cost Budget
April May June Quarter Settlement for purchased material
Production 26,000 46,000 29,000 101,000
Per unit 5 5 5 5
Material for
production 130,000 230,000 145,000 505,000

Add ending m aterial 23,000 14,500 11,500 11,500 ➢Settlement policy is that 50% purchased valued is
Total dem and 153,000 244,500 156,500 516,500 settled immediately and 50% is settled in the next
Less opening month.
m aterial 13,000 23,000 14,500 13,000
➢Outstanding amount of payable at the end of
Purchasing m aterial 140,000 221,500 142,000 503,500 March: $12,000.
Material price 0.4 0.4 0.4 0.4

Material value 56,000 88,600 56,800 201,400

Direct Material cost 52,000 92,000 58,000 202,000

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Settlement for material purchased

• This budget helps to
determine the labour
April May June Quarter
resources needed for the
Outstanding 12,000 Direct production
Material purchased
in April 28,000 28,000 Labour
Cost
Material purchased Budget
in May 44,300 44,300

Material purchased
in June 28,400

Settlement amount 40,000 72,300 72,700 185,000

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 Direct Labour Cost Budget Direct Labour Cost Budget
April May June Quarter
Expected producing units 26,000 46,000 29,000 101,000

➢Direct labour: 0.05 hour/unit. Labour hour per unit 0.05 0.05 0.05 0.05
➢Labour cost: $10/hour.
Total labour hours 1,300 2,300 1,450 5,050

Labour cost per hour $ 10 $ 10 $ 10 $ 10

Total labour cost $ 13,000 $ 23,000 $ 14,500 $ 50,500

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Overheads costs budget

• Overhead costs budget is
helpful in setting out other ➢Unit variable cost $1/produced unit.
production costs besides ➢Fixed overheads cost is currently at $50,000/ month.
direct material and direct This fixed cost includes non-cash expenditure amount
labour costs as well as the of $20,000 (mostly from depreciation).
Overheads cash payment for this type
costs of cost.
budget

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 Overheads costs budget Sales and Admin cost Budget

April May June Quarter

➢Sales and admin variable cost is currently at $0.50
Expected production 26,000 46,000 29,000 101,000
/sold unit.
Unit variable cost $ 1 $ 1 $ 1 $ 1
Total variable cost $ 26,000 $ 46,000 $ 29,000 $ 101,000 ➢Sales and admin fixed cost are $70,000 per month.
This fixed cost include an amount of $10,000 of non-
Total fixed cost 50,000 50,000 50,000 150,000
cash expenditure (mostly the depreciation cost).
Total cost 76,000 96,000 79,000 251,000
Less: Non-cash expenditure 20,000 20,000 20,000 60,000
Cash payment for
overhead $ 56,000 $ 76,000 $ 59,000 $ 191,000
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Sales and Admin cost Budget

April May June Quarter Cash Budget
Expected sale units 20,000 50,000 30,000 100,000
Sales and admin
unit variable cost $ 0.50 $ 0.50 $ 0.50 $ 0.50

Total variabe cost $ 10,000 $ 25,000 $ 15,000 $ 50,000 • There are 4 parts:
Sales and admin • Sources of cash.
fixed cost 70,000 70,000 70,000 210,000
• Uses of cash.
Total cost 80,000 95,000 85,000 260,000
Less Non-cash • Net cash position.
expenditure 10,000 10,000 10,000 30,000 • Finance requirement.
Cash paid for sales
and admin cost $ 70,000 $ 85,000 $ 75,000 $ 230,000
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Cash Budget Cash Budget

April May June Quarter
At SG company: I.Begin cash $ 40,000 $ 30,000 $ 30,000 $ 40,000
➢Minimum cash balance $30,000. II.Cash from sales 170,000 400,000 335,000 905,000
➢Cash could be borrowed in the first day of the Total sources of cash 210,000 430,000 365,000 945,000
III.Uses of cash
quarter with the rate of 16% per year.
Direct Material (slide 23) 40,000 72,300 72,700 185,000
Reimbursement will be required at the end of the
Direct Labour (slide 26) 13,000 23,000 14,500 50,500
quarter. Overheads (slide 29) 56,000 76,000 59,000 191,000
➢Cash dividend $49,000 in April. Sales and admin (slide 31) 70,000 85,000 75,000 230,000
➢Cash purchase for equipment is $143,700 in May Cash purchases - 143,700 48,300 192,000
Cash dividend 49,000 - - 49,000
and $48,300 in June.
Total uses of cash 228,000 400,000 269,500 897,500
➢Opening cash balance $40,000 in April. IV.Net cash position $ (18,000) $ 30,000 $ 95,500 $ 47,500

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Cash Budget (Cont.)

April May June Quarter

IV. Net cash position $ (18,000) $ 30,000 $ 95,500 $ 47,500

V. Finance
Borrow 48,000 - - 48,000
Loan Repayment - - (48,000) (48,000)
Interest payment - - (1,920) (1,920)
Total 48,000 - (49,920) (1,920)
VI. Close cash balance $ 30,000 $ 30,000 $ 45,580 $ 45,580
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