Session 6 – Project Budgeting Skills

Session Objectives
After this session the participants will be able to:
• Budget their projects through top-bottom
budget and bottom-top budget systems
 What is a budget?

A financial plan set

in advance for a
given period of time
in the future
 Benefits of Budgets
• Planning
Goal orientation
Preparation of resources
Anticipation of risks
• Controlling
Benchmarks for evaluation
Delegation of authorities on expense approval
and usages
 Benefits of Budgets
Others:
 Create a cost consciousness
 Promote teamwork
 Improve communication
 Types of Budgets
• Top-to-Bottom
• Bottom-to-Top
• Operational
• Developmental
 Budgeting Process: Steps in setting up Budget
Step 5

Step 4

Step 3
Approve
budgets
Step 2 Develop
master
Step 1 Collect & budgets
consolidate
Identify the
information
decisive
factor and
the key
Form the
budget
budget
team
 Budgeting Team
STEP
1 Board of
Management

Accounting
HR & Admin
& Finance
The budget
team

Sales & Production

Marketing
 Decisive Factor and Key Budget
STEP
2
Sales Sales
revenue? budget

Identify
the decisive factor
& the key budget

Production Production
volume budget
 Collect & Consolidate Information
STEP 3

Internal info

Sales Collect & Competitors

reports Consolidate Economic
Statistic information climate
al data

External info
 Develop Master Budgets
STEP 4
Projected Profit & Loss (1)

Projected Cashflow (2)

Setting up a Projected Balance Sheet (3)

FINANCIAL PLAN
of the enterprise
 Projected Profit and Loss (1)
Projected Profit and Loss (2)

SALES budget EXPENSE budget

Budget of
Budget of Budget of
management
selling expense Cost of goods sold
expense
 Sales Budget
• Projected sales
– Projected Sales volume
– Projected Selling price

1 2 3 Quarter 1
Sales volume 75,000 70,000 55,000 200,000

Unit price $ 10 $ 10 $ 10 $ 10
Sales $ 750,000 $ 700,000 $ 550,000 $ 2,000,000
 Expense Budget

Sales Expense
budget budget
t ed
e
pl
o m
C

Expense budgets are constructed in accordance

with the sales budget drawn up
 Selling Expense & Management Expense Budget

1 2 3 Quarter 1
Selling 80,000 67,000 47,000 194,000
Commision $ 40,000 $ 35,000 $ 22,000 $ 97,000
Transportation 10,000 7,000 5,000 $ 22,000
Advertising 30,000 25,000 20,000 $ 75,000
Management 52,000 52,000 52,000 156,000
Salaries $ 40,000 $ 40,000 $ 40,000 $ 120,000
Office rental 5,000 5,000 5,000 $ 15,000
Depreciation 7,000 7,000 7,000 $ 21,000
 Cost of Goods Sold (1)
Cost of goods
i n g ri s e purchased in
ad erp
Cost
r
T nt the period
e
of M
en anu
t f
goodserpri actu
se rin
g
Cost of goods
sold (2) produced in the Production
Production cost (6)
period volume

Direct Direct Over-

RM labor head
cost (3) cost (4) Cost (5)
 Budget of Cost of Goods Sold (1)
Production
budget

Direct RM (2) Direct labor (3) Overhead (4) Stock

budget budget budget budget

Cost of goods sold (5)

budget
 Production Budget
1 2 3 Quarter 1
Budgeted sales volume 75,000 70,000 55,000 200,000

Plus Ending stock 10,000 6,000 5,000 5,000

Required production volume 85,000 76,000 60,000 205,000

Minus Beginning stock 4,000 10,000 6,000 4,000
Volume to be produced 81,000 66,000 54,000 201,000

From Sales budget Budgeted

 Raw Material Budget
1 2 3 Quarter 1
Production volume 81,000 66,000 54,000 201,000
RM
RM amount 5 5 5 5
required for this
volume 405,000 330,000 270,000 1,005,000
Unit price $ 0.50 $ 0.50 $ 0.50 $ 0.50
Cost of RM
required for this $ 202,500 $ 165,000 $ 135,000 $ 502,500
Plus Ending RM stock 33,000 27,000 11,500 11,500
RM amount required 438,000 357,000 281,500 1,016,500
Minus Opening RM
stock 13,000 33,000 27,000 27,000
RM amount to be
purchased 425,000 324,000 254,500 989,500
From Production budget Budgeted
 Direct Labor Budget
1 2 3 Quarter 1
Production volume 81,000 66,000 54,000 201,000
Labor hours/1product 0.05 0.05 0.05 0.05
Required labor hours 4,050 3,300 2,700 10,050
Unit price/1labor hour $ 10 $ 10 $ 10 $ 10
Total Direct labot costs $ 40,500 $ 33,000 $ 27,000 $ 100,500

From Production
budget
 Overhead Cost Budget

1 2 3 Quarter 1
Direct labor hours 4,050 3,300 2,700 10,050
Unit variable cost $ 15 $ 15 $ 15 $ 15
Total variable cost $ 60,750 $ 49,500 $ 40,500 $ 150,750
Fixed cost 60,000 60,000 60,000 60,000
Total Overhead cost 120,750 109,500 100,500 210,750

From Direct labor budget

 Budget of Cost of goods sold (1)
Production cost Amount
Direct RM cost $ 502,500
Direct labor cost 100,500
Overhead cost 210,750
Total PRODUCTION COST $ 813,750
WIP cost
Beginning $ 5,000
Ending $ 4,000
Total product cost $ 814,750 Budgeted
Unit product cost $ 4.05
Cost of goods sold $ 810,000 814,750/201,000

200,000 x 4.05
 Projected Profit & Loss (1)
ABC Company
Projected Profit and Loss Sales
QUARTER 1 budget

Sales revenue (200,000 units @ $10) $ 2,000,000

Cost of goods sold (200,000 @ $4.05) 810,000 Cost of goods
Gross profit 1,190,000
sold budget
Selling expense and Management expense350,000
Net profit $ 840,000

Selling expense
& management
expense budgets
 Projected cash-flow (1)
Projected Net Cash-flow

Projected Cash-in flow (2) Projected Cash-out flow (3)

Cash collected from sales revenue From operating activities

(Cash collection budget) (Expense budgets)

Cash collected from investment From investment activities

activities (Investment budget) (Investment budget)

Cash collected from financing From financing activities

activities (Financing budget) (Financing budget)
 Cash budget
1 2 3 Quarter 1
Cash at the beginning of the period
Plus Cash received in the period
Total budgeted incoming cash
Minus Cash paid for
Raw material
Direct labor
Overhead
Selling and Management expenses
Investment, purchase of FA
Payment of borrowing interest
Total outgoing cash - - - -
Budgeted balance $ - $ - $ - $ -
Projected Balance sheet (1)

Projected Balance sheet (2)

Owners’ equity
Assets (3)
and liabilities (4)
 Projected Assets (1)
ASSETS Sources
Current assets
Cash Projected cashflow
Account receivables Sales budget, budget of Account
receivable
Stock Production budget, budget of Cost of
goods sold
Non current assets
Fixed assets Investment budget
 Projected Owners’ Equity & Liabilities (1)
LIABILITIES & Sources
OWNERS’ EQUITY
Liabilities
Account payables RM budget, Budget of Cash payment

Borrowings Financing budget

Owners’ equity
Owners’ capital Financing budget
Retained profit Projected profit & loss statement
 ABC Co.Ltd
Projected Balance Sheet
as at 31/3/2005
Projected Cashfl
Current assets
Cash $ 278,200 Cash collection b
Account receivables 75,000
Production bud
Stock 35,750 COGS budge
Total current assetsBeginning balance $ - 388,950
Fixed assets Plus: Gross profit 840,000
Ending balance $ 840,000 Investment budg
Factory 212,450
Machines & equipm ent 367,000
Total fixed assets 579,450
Total ASSETS $ 968,400
Ow ners' equity & Liabilities Cash payment b
Account payables $ 28,400
Ow ners' capital 100,000
Retained profit 840,000
Total OWNERS' EQUITY & LIABILITIES $ 968,400
 Developing master budgets
STEP 4 (Manufacturing enterprise)
Sales
budget

Stock Production Budgets of

budget budget Selling expenses
Management expenses
Direct RM Direct labor Overhead
budget budget budget

Projected
Profit & Loss

Projected Cash Budget (1)

Projected Balance sheet (2)
 Budget approval
STEP
5

• Compliance Approve

• Non-compliance Adjust
 Using budgets

• Using flexible budgets

• Analyzing Variances
• Taking actions
 Flexible budget

A budget that is set-up

corresponding to certain
levels of changes in the
volume of activities
 Variable and fixed costs (1)
• Total variable costs adjust to
changes in the volume of
activity.
b l e
• Total fixed costs remain ar ia
V
unchanged in certain levels
of activity. Fixed
 Setting-up Flexible Budget
Variable
costs
Product output 1 product 5,000 7,000 9,000 11,000
Variable costs
Raw materials $ 4.00 20,000 28,000 36,000 44,000
Direct labor 3.00 15,000 21,000 27,000 33,000
Electricity 0.50 2,500 3,500 4,500 5,500
Total variable costs $ 7.50 $37,500 $52,500 $ 67,500 $ 82,500

Fixed costs
Depreciation 12,000 $ 12,000 $ 12,000 $ 12,000
Management salaries 2,000 2,000 2,050 2,050
Total fixed costs 14,000 $ 14,000 $ 14,050 $ 14,050
Total costs 51,500 $ 66,500 $ 81,550 $ 96,550
 Comparing Actual Figures with Static Budget
Variable Static Actual Variance
costs budget figures
Product output 1 product 7,000 8,000 1,000
Variable costs
Raw materials $ 4.00 28,000 $ 34,000 $ 6,000
Direct labor 3.00 21,000 25,500 4,500
Electricity 0.50 3,500 3,800 300
Total variable costs $ 7.50 52,500 $ 63,300 $ 10,800

Fixed costs
Depreciation 12,000 $ 12,000 $ 0
Management salaries 2,000 2,050 50
Total fixed costs 14,000 $ 14,050 $ 50
Total costs 66,500 $ 77,350 $ 10,850
 Comparing Actual Figures with Flexible Budget
Variable Static Flexible Actual Variance
costs budget budget figures
Product output 1 product 7,000 8,000 8,000 0
Variable costs
Raw materials $ 4.00 28,000 $ 32,000 $ 34,000 $ 2,000
Direct labor 3.00 21,000 24,000 25,500 1,500
Electricity 0.50 3,500 4,000 3,800 200
Total variable costs $ 7.50 52,500 $ 60,000 $ 63,300 $ 3,300

Fixed costs
Depreciation 12,000 $ 12,000 $ 12,000 $ 0
Management salaries 2,000 2,000 2,050 50
Total fixed costs 14,000 $ 14,000 $ 14,050 $ 50
Total costs 66,500 $ 74,000 $ 77,350 $ 3,350
 Variance analysis
FAVORABLE ADVERSE
 Actual sales revenue is  Actual sales revenue is
higher than budgeted lower than budgeted
sales revenue; or
sales revenue; or
 Actual costs are higher
 Actual costs are lower than budgeted costs
than budgeted costs
 Variance Analysis

Profit (1) variance

Revenue (2) variance Cost (3) variance

Raw material cost Labor cost (5)

(4) variance variance
 Revenue (1) variance

Revenue variance

Sales VOLUME variance Selling PRICE variance

= (actual sales volume – = (actual selling price –

budgeted sales volume) budgeted selling price)
*actual selling price *budgeted sales volume
 RM cost (1) variance
RM cost variance

Variance in AMOUNT used Variance in purchasing PRICE

= (actual amount used – = (actual purchasing price –

budgeted amount) budgeted purchasing price)
*actual purchasing price *budgeted amount used
 Labor cost (1) variance
Labor cost variance

Labor hour variance Labor price variance

(AMOUNT) (PRICE)
= (Total actual labor hours – = (Actual labor price per hour -
Total budgeted labor hours) Budgeted labor price per hour)
*Actual labor price per hour *Total budgeted labor hours
 Responsibility for variances

Variances under
control Variances out of
control
 Taking Actions

g e t
Bud tment
d jus
a

Identification of
Variance analysis
responsibilities
Op
im era
pro tio
v e ns
me
nt
 Performance Review

Responsibility centers

1. Cost centre
2. Profit centre
3. Investment centre
 Group Work:
Follow the instruction for
a mini-project
 Question
&
Evaluation