TOPIC 9: BUDGETING

Example: AK Co. has estimated the sales volume will increase at 10% by next year (2024). The unit sales price will
change to RM35. The sales volume at the current year (2023) is as follows.

Quarter Current unit sales

1 15,500
2 15,700
3 16,900
4 17,100

You are required to prepare operating and financial budgets for AK Co.

i. Sales Budget
Suppose a sales price of RM35 per unit, the sales budget for 2024, by quarters is shown in Table 1.

Table 1: Sales Budget

Sales Budget
For the Year Ending December 31, 2024
Quarter
Total
1 2 3 4
Unit Sales 2023 15,500 15,700 16,900 17,100 65,200
Unit Sales 2024 (110%) 17,050 17,270 18,590 18,810 71,720
Unit selling price (RM) 35 35 35 35 35
Total sales 596,750 604,450 650,650 658,350 2,510,200

ii. Schedule of expected cash collection

Cash collection schedule shows the cash collection for each calculated period.
Assumes that a credit collection policy is: “50% from sales revenue will be collected in period of sales and another 50%
will be collected in the following quarter.”

Table 2: Cash collection budget (2024)

Quarter
Total
1 2 3 4
Total sales 596,750 604,450 650,650 658,350 2,510,200
Collection during the month (50%) 298,375 302,225 325,325 329,175 1,255,100
Collection in the following month (50%) 0 298,375 302,225 325,325 925,925
Total 298,375 600,600 627,550 654,500 2,181,025

iii. Merchandise Purchases Budget

The purchase budget shows the units that must be purchased to meet anticipated sales. The required purchases are
determined from the following formula.
Budgeted cost of goods sold
Plus Desired ending merchandise inventory
Less Beginning merchandise inventory
Required Purchase of merchandise

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 Assumptions
• Suppose AK Co. policy in setting up its desired ending merchandise inventory is equal to RM5,000 + 50% cost of
goods sold for the following period. The cost of goods sold is 40% of the current month of sales.
• Sales revenue for the first quarter of 2025 is estimated to be RM700,000.

Table 3: Merchandise Purchases Budget (2024)

Quarter 2024 2025
1 2 3 4 1
Total sales (RM) 596,750 604,450 650,650 658,350 700,000
Cost of goods sold (40% x Current month's sales)(RM) 238,700 241,780 260,260 263,340 280,000
Plus: Desired ending Inventory(RM) 125,890 135,130 136,670 145,000
Less: Beginning inventory (RM) 0 125,890 135,130 136,670
Total Merchandise Purchase (RM) 364,590 251,020 261,800 271,670

iv. Cash payment budget

Assuming AK‘s policy of credit purchase is as follows: 50% of the current month purchase will be paid in the same
month and the rest is in the following month.

Table 4: Cash payment budget (2024)

Quarter
1 2 3 4
Total Purchase(RM) 364,590 251,020 261,800 271,670
Payment:
50% of the purchases (current month) (RM) 182,295 125,510 130,900 135,835
50% in the following month(RM) 0 182,295 125,510 130,900
Total cash payment(RM) 182,295 307,805 256,410 266,735

v. Selling and Administrative Expenses Budget (Operating expense budget)

The sales budget is often used as the starting point for estimating the selling and administrative expenses. These expenses
can be divided to fixed expenses and variable expenses.

Table 5: Selling and Administrative Expenses Budget

Selling and Administrative Expenses Budget
For the Year Ending December 31, 2024
Quarter Total
1 2 3 4 (RM)
Selling Expenses (RM):
Salaries 7,000 9,000 10,000 10,500 36,500
Advertising 7,000 9,000 11,000 12,000 39,000
Travelling 3,000 4,500 5,000 5,500 18,000
Administrative expenses (RM):
Salaries 90,000 90,000 90,000 90,000 360,000
Utilities 8,000 10,000 11,000 12,000 41,000
Rental 15,000 15,000 15,000 15,000 60,000
Supplies 6,000 8,000 9,000 10,000 33,000
Miscellaneous 5,500 6,000 8,000 9,000 28,500
Total expenses (RM) 141,500 151,500 159,000 164,000 616,000
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Financial Budget

i. Cash Budget
The cash budget contains three sections (cash receipts, cash disbursements and financing) and the beginning and ending
cash balances. As shown in Table 6;

The cash receipts section includes expected receipts from the company’s principal source (s) of revenue. These are
usually cash sales and collections from customers on credit sales. This section also shows anticipated receipts of interest
and dividends and proceeds from planned sales of investment, plant assets and the company’s capital stock.

The cash disbursements section shows expected cash payments. Such payments include direct materials, direct labor,
and manufacturing overhead and selling and administrative expenses.

The financing section shows expected borrowings and the repayment of the borrowed funds plus interest. This section
is needed when there is a cash deficiency or when the cash balance is below management’s minimum required balance.

Data in the cash budget must be prepared in sequence. The ending cash balance of one period becomes the beginning
cash balance for the next period.

Example: The cash budget for AK Co. is based on the following assumptions.
(1) The January 1, 2024, cash balance is expected to be RM20,420.
(2) Management plans to purchase equipment amounting RM10,000 cash in the first quarter.
(3) Loans (in multiple of RM5,000), 5% annual interest are repaid in the earliest quarter in which there is sufficient
cash.
(4) The Company sets RM20,000 as a minimum required cash balance at each quarter.

Table 6: Cash Budget

Cash Budget
For The Year Ending December 31, 2024
Quarter
Assumption 1 2 3 4
Beginning cash balance (RM) 1 20,420 20,000 125,858 337,998
Add: Receipts
Collections from customers Table 2 298,375 600,600 627,550 654,500
Total available cash (RM) 318,795 620,600 753,408 992,498
Less: Disbursements
Purchases payment Table 4 182,295 307,805 256,410 266,735
Selling & administrative Table 5 141,500 151,500 159,000 164,000
Equipment 2 10,000 - - -
Total disbursements (RM) 333,795 459,305 415,410 430,735
Excess (deficiency) of available cash over disbursements (15,000) 161,295 337,998 561,763
Financing:
Borrowings 35,000 - - -
Repayments - 35,000 - -
Interest - 438 - -
Ending cash balance(RM) 20,000 125,858 337,998 561,763

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ii. Budgeted Income Statement
Budgeted income statement indicates the expected profitability of operations for the budget period. The budget for sales
cost of goods sold and selling and administrative expenses, combined with the data on other income, other expense and
income tax are used to prepare the budgeted income statement.
AK Company
Budgeted Income Statement
For The Year Ending December 31, 2024
RM
Sales 2,510,200
Cost of goods sold 1,004,080
Gross profit 1,506,120
Less: Selling and administrative expenses 616,000
Other expenses
Interest expenses 438
Income before income tax 615,563
Less: Income Tax (28%) 172,358
Net Income 443,205

iii. Budgeted Balance Sheet

The budgeted balance sheet estimates the financial condition at the end of a budget period. It assumes that all operating
budgets and financing plans are met. It is similar to a balance sheet based on actual data in the accounts.

BUDGETING IN MANUFACTURING COMPANIES

In the previous illustration, we are actually referred to merchandising companies, the manufacturing companies set up
production budget. Generally, the basis to prepare the manufacturing’ companies’ budget is same with the merchandising
but they will have additional budget like production budget, direct materials budget, direct labor budget and
manufacturing budget. Refer to the PowerPoint slides for the example of production budget.