Introduction to

Accounting & Finance

Presented by:
Reshma Nanan F.C.C.A, C.A
Preparation of budgets
At the end of this topic, you should be able to:

• The budgeting process

• Operational budgets
• The master budget

3
The budgeting process

• 3 stages
−Set the budget
−Monitor actual performance against budget targets –
identifying VARIANCES
−Take action (if necessary) based on comparing
actual and budgeted data
Preparation of the Master Budget

• Sales Budget
• Production Budget
−Material Requirement
−Material Cost
 Labour Budget
 Cash Budget

 Forecast Income Statement

 Forecast Statement of Financial Position
The Sales Budget

• It forecast the sales for each product /department

• There are 3 steps to constructing a Sales Budget:

1. Gather Information
2. Set Sales Target in Units for the next 12 months
– Sales Volume Budget
3. Apply a Selling Price and calculate the Sales
Revenue Budget
Exercise 1

2023 budget: Sales Revenue and units

Team Tennis Badminton
Total
Kits Racquets Racquets
Sales 16,000 10,000 5,000
Units
Selling
Price
£15 £33 £35
per unit

Total
Sales
Revenue
The Production Budget

• Cannot be set until the Sales Budget is agreed.

• Needs to answer the question:

“ How can we make the amount of product needed to meet

the Sales Budget?”
The Production Budget

•Factors to consider include:

• Production Capacity
• Cost, Quality & Availability of Labour
• Cost, Quality & Availability of Materials
• Timing – seasonal fluctuations?
• Warehouse storage space
The Production Budget
• Once all this information has been processed, the Production
Manager can:

−Production Volume budget or Raw material usage

budget - Set a Production Budget in Units for the
next 12 months

−Production Cost Budget or Raw material purchases

budget - Apply a Unit Cost and calculate the
production cost
Exercise 2

Team Tennis Badminton

Kits Racquets Racquets
Unprinted Team
1 kit
kits

Aluminum per
0.6 0.5
Racquet (Kg)

String per
3.6 3.0
Racquet (meters)
Accessory kits
(incl. grip, 1 Accessory Kit 1 Accessory Kit
plastic, etc)
Exercise 2

2023 Budget: Raw Material Usage assumptions

No. of Accessory
Aluminum String kits
Unprinted
(kilograms) (meters)
Team kits
16,000 x 1=
Team kits
16,000

Tennis
racquets

Badminton
racquets

Total 16,000 kits

Exercise 3

2023 Budget: Raw Material Cost per unit

Team Accessory Total
Aluminum String
Kits @ kits @£2 per material cost
@£12 per @£0.50
£3.50 per kit per unit
kg per meter
kit
Cost per team 1 kit @
£3.50
kit £3.50

Cost per tennis

racquet

Cost per
badminton
racquet
The Labour Budget

• It forecast the labour required for each product /department

• steps to constructing a Labour Budget:

1) Determine type of labour required – eg specific type of skill

2) Determine number of hours required per unit
3) Determine the cost per hour
4) Determine the labour cost based on cost per hour
Exercise 4
2023 budget: Labour hours
Team Tennis Badminton
Total
Kits Racquets Racquets
Hours 2 1.5 2.5
per unit

Cost per
hour £5 £3 £4

Total
Labour
Hours
Assumptions

• What are the other forecasted expenses of the business

−Rent
−Electricity
−Stationery
The Cash Budget – the importance of cash flow..

• Cash is NOT the same as profit..

• Refer to Lecture 4 & 5

The Budgeted Income Statement

• A profit forecast; a budgeted projection of expected sales,

expected costs and expected profit (on a monthly basis).

• Sales and Purchases are usually made on credit, so this is a

statement of the expected profit situation not the cash/bank
balance.
The Budgeted Statement of Financial Position

• The Forecast Balance Sheet shows the expected value

of the Assets and Liabilities of the business at the end
of the budget period.