1. Preparation of master budget

2. Budget
A budget is a quantitative statement, for a defined period of time, which may include planned revenue, expenses, assets, liabilities and cash flows

3. Purpose of preparing budget
Planning
Coordination
Communication
Motivation
Performance evaluation

4. Steps in the preparation of budget
Consideration of all external factors
Preparation of other budgets
Production budget, purchases budget, direct labour budget, overheads budget and selling and administrative budget
Negotiation of budget
Coordination of budget
Cash budget, capital expenditure budget, budget balance sheet, budget income statement, budget cash flow statement, budget statement of retained earnings

5. Final acceptance of budget
Budget review

6. Cash budget

7. Cash budget
The cash budget is a statement of expected cash receipt and payments
It help avoid surplus cash and unexpected cash deficiencies
Normally, the cash budget consists of the following items:
Closing balance of cash = Opening balance of cash Receipts - Payments

8. Cash budget Receipts include: Payments include: Cash sales
Collection from debtors
Other incomes such as investment income, rent received
Payments include:
Cash purchases
Payment to creditors
Direct labour
Other expenses such as manufacturing overhead, administrative and selling expenses (depreciation does not involve cash flow)
Tax payment

9. Cash budget
In drawing up a cash budget, it can be found that all the payments for units produced would very rarely be at the same as production itself. For instance, the raw materials might be bought in March, goods being produced in April ad paid for in May
Similarly the date of sales and the date of receipt of cash will not usually be at the same time. For instance, the good might be sold in May and the money received in August

10. Example

11. A cash budget for the six months ended 30th June 2003 is to be
Drafted from the following information.
Opening cash balance at 1st January 2003 $3200
Sales: at $12 per unit: cash received three months after sale units:
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
(c) Production: in units
2002
Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep
(d) Raw materials used in production cost $4 per unit of production. They
are paid for two months before being used in production
Direct labour: $3 per unit paid for in the same month as the unit is
produced.
(f) Other variable expenses $2 per unit, ¾ of the cost being paid for in the
same month as production, the other ¼ paid in the month after production

12. (f) Other variable expenses $2 per unit, ¾ of the cost being paid for in
the same month as production, the other ¼ paid in the month after
production.
(g) Fixed expenses of $100 per month is paid monthly
(h) A motor van is to be bought and paid for in April for $800
Required:
Prepare the cash budget for six months ended 30 June 2003

13. Cash budget for the six months ended 30 June 2003
Jan Feb Mar Apr May Jun
$ $ $ $ $ $
Opening balance
Add: Receipts
Sales
3045
2920
4160
4125
3760
Less: Payments
Raw materials
Direct labour
Variable exp
Fixed expenses
Motor van
3045
2920
2420
Closing balance
Workings 1
Working 2

14. Workings 1: Receipts : Jan 80(Oct) * $12= 950 Feb 90 (Nov)*$12= 1080
Mar 70 (Dec)*$12 = 840
Apr 100 (Jan)*$12 = 1200
May 60 (Feb)*$12 = 720
June 120 (Mar)*$12=1440
Workings 2:
Raw materials :
Jan 130(Mar) * $4= 520
Feb 110 (Apr)*$4= 560
Mar 150 (May)*$4 = 600
Apr 100 (Jun)*$4 = 480
May 160 (Jul)*$4 = 640
June 170 (Aug)*$4=680
The month in which the sales was made
Workings 3:
Direct labour :
Jan 100(Jan) * $3= 300
Feb 110 (Feb)*$3= 330
Mar 130(Mar)*$3 = 390
Apr 140 (Apr)*$3 = 420
May 150 (May)*$3 = 450
June 120 (Jun)*$12=360
Workings 4:
Fixed expenses :
Jan $100
Feb $100
Mar $100
Apr $100
May $100
June $100
Back

15. Working 5:
Variable expenses: $ $
Jan 100(Jan)*3/4*$2 150
90 (Dec)*1/4*$
Feb 110(Feb)*3/4*$2 165
100 (Jan)*1/4*$
Mar 130(Mar)*3/4*$2 195
110(Feb)*1/4*$
Apr 140(Apr)*3/4*$2 210
130(Mar)*1/4*$
May 150(May)*3/4*$2 225
140 (Apr)*1/4*$
Jun 120(Jun)*3/4*$2 180
150(May)*1/4*$
Back

16. Budget income statement and balance sheet

17. Budgeted income statement and balance sheet
These financial statements reflect the predicted results to be achieved.

18. Example

19. ABC Ltd.
Balance sheet as at 31 December 2004
Fixed Assets Cost Dep Net
Machinery
Motor vehicles
Current Assets
Stock: finished goods (75 units) 900
Raw materials
Debtors (2004 Oct $540 +Nov $360+Dec $450) 1350
Cash and bank
3400
Less: Current liabilities
Creditors for raw materials
(Nov $120+ Dec $180) 300
Creditors for fixed expenses (Dec) 100
3000
6600

20. Financed by: $ $
Share capital, 4000 shares of $1 each
Profit and loss account
6600
The plans for the six months ended 30 June 2005 are as follows:
Production will be 60 units per month for the first months,
followed by 70 units per month for May and June
Production costs will be (per unit):
Direct materials $5
Direct labour 4
Variable overhead 3 12
Fixed overhead is $100 per month, payable always one month in
arrears.
Sales, at price of $18 per unit, are expected to be:
Jan Feb Mar Apr May Jun
no. of units

21. Purchases of direct materials will be:
Jan Feb Mar Apr May Jun
$ $ $ $ $ $
(vi) The creditors for raw materials bought are paid two months after
purchase
(vii) Debtors are expected to pay their accounts three months after they
have bought the goods
(viii) Direct labour and variable overhead are paid in the same month
as the units are produced
(ix) A machine costing $2000 will be bought and paid for in March
3000 shares of $1 each are to be issued at par in May
Depreciation for the six months: machinery $450, motor vehicles
$200
Required:
Prepare budget income statement and balance sheet as at 30 June 2005

22. Budget income statement

23. Wong Ltd.
Budget income statement for the six months ended 30 June 2005
$ $
Sales (400*$18)
Less: COGS
Opening stock of finished goods 900
Add: Cost of goods completed (380*$12) 4560
Less: closing stock of finished goods
(55*$12)
Gross profit
Less: expenses
Fixed overhead ($100*6 mth) 600
Depreciation: Machinery 450
Depreciation: Motors
Net profit

24. Wong Ltd.
Budget balance sheet as at 30 June 2005
Fixed asssets Cost Dep Net
$ $ $
Machinery
Motor vehicles
Current assets
Stock: finished goods
raw materials
Debtors
Cash and bank
6620
Less: Current liabilities
Trade creditors
Creditors for overheads
10750

25. Financed by: $ $
Capital and reserves
Share capital ( )
Profit and loss account ( )
10750

26. Materials budget:
Jan Feb Mar Apr May Jun
$ $ $ $ $ $
Opening stock
Add: purchases
Less:used in production
Production budget: (in units)
Jan Feb Mar Apr May Jun
Opening stock
Add: purchases
Less: Sales
Back 1
Back 2

27. Production budget: (in $)
Jan Feb Mar Apr May Jun
$ $ $ $ $ $
Materials cost
Labour cost
Variable overhead
Creditors budget:
Jan Feb Mar Apr May Jun
$ $ $ $ $ $
Opening stock
Add: purchases
Less: Payments
Back 2

28. Debtors budget:
Jan Feb Mar Apr May Jun
$ $ $ $ $ $
Opening stock
Add: Sales
Less: Received
Back 2

29. Cash budget:
Jan Feb Mar Apr May Jun
$ $ $ $ $ $
Opening balance (2010) (2010) 1050
Add: Debtors
Share issue
Less: Creditors
Fixed overhead
Direct labour
Variable O/H
Machinery
(2010) (2010)
Back 2

30. Fixed and flexible budget

31. Fixed budget
Fixed budget is a budget which is designed to adjust the permitted cost levels to suit the level of activity actually attained

32. Fixed budget
A fixed budget is a budget, which is designed to remain unchanged irrespective of the volume of output or turnover attained

33. Example

34. ABC Ltd. Manufactures and sells a single product. Prepare the
flexible budgets for 2005 at the activity levels of 80%, 100% and 120%.
In accordance with the following information:
100% activity represents units produced
Variable cost (per unit): $
Materials 40
Direct labour 30
Royalties 2
Electricity 6
Maintenance 5 83
3. Fixed cost
Depreciation 20000
Rent
Indirect labour 80000

35. Flexible budget
Level of activity units
Variable cost $ $ $
Materials
Direct labour
Royalties
Electricity
Maintenance
Fixed cost
Depreciation
Rent
Indirect labour

36. Flexible budgets and budgetary control
By comparing the actual results with the budgeted amounts, the managers can ascertain which costs do not conform to the original plans and therefore deserve their attention
The differences between the actual results and the expected outcomes are called variance

37. If we compare the actual results with the fixed budgets, we do not know whether the variance are caused by the difference in the levels of activity or the change in efficiency
However, by comparing the actual costs with the flexible budget prepared at the actual activity level, we can see how efficient the managers are in controlling the costs

38. Example

39. ABC Ltd. Manufactures and sells a single product.
In accordance with the following information:
100% activity represents units produced
Variable cost (per unit): $
Materials 40
Direct labour 30
Royalties 2
Electricity 6
Maintenance 5 83
3. Fixed cost
Depreciation 20000
Rent
Indirect labour 80000

40. The budget and actual results for 2005 are shown as follows:
Budgeted Actual Variance
60000 units units
$ $
Sales revenue ($100 each) (F)
Less: variable cost
Materials (A)
Labour (A)
Royalties (A)
Electricity (A)
Maintenance (A)
Fixed overhead:
Depreciation (A)
Rent (A)
Indirect labour (A)
(F)
* F = favourable, A = Adverse variance

41. Required:
Prepare a flexible budget based on the original budgeted
unit costs and selling price
With the use of the variances, reconcile the original budget profit
with the actual profit

42. Fixed Flexible Actual Variance
budget Budget results
60000 units units units
(a) (b) ( c) ( c) – (b)
$ $ $ $
Sales revenue ($100 each)
Less: variable cost
Materials (A)
Labour (A)
Royalties
Electricity (A)
Maintenance (A)
Fixed overhead:
Depreciation (A)
Rent (A)
Indirect labour (A)
(F)
80000*budget units cost
$ (F) Volume variance
$ (A) Expenditure variance
Total variance $ (F)

43. (b) The overall reconciliation of profit is shown as follows: $ $
$ $
Fixed budget profit
Variances
Sales volume ($100 - $83)* (F)
Materials (A)
Labour (A)
Electricity (A)
Maintenance (A)
Depreciation (A)
Rent (A)
Indirect labour (A) (A)
Actual profit
According to the above variance analysis statement, the increase in actual profit is caused by the increase in sales volume
However, the adverse cost variance show that there may have been a general price rise of expenditure or inefficient control of expenditure by departmental managers