preparation of master budget.ppt

8/14/2019 Preparation of master budget.ppt

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Preparation of master budget


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Budget

A budget is a quantitative statement, for a

defined period of time, which may includeplanned revenue, expenses, assets, liabilities

and cash flows


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Purpose of preparing budget

Planning

Coordination

Communication

Motivation

Performance evaluation


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Steps in the preparation of

budget Consideration of all external factors

Preparation of other budgets

Production budget, purchases budget, direct labourbudget, overheads budget and selling and administrativebudget

Negotiation of budget

Coordination of budget Cash budget, capital expenditure budget, budget balance

sheet, budget income statement, budget cash flowstatement, budget statement of retained earnings


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Final acceptance of budget

Budget review


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Cash budget


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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


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Cash budget

Receipts 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 doesnot involve cash flow)

Tax payment


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Cash budget

In drawing up a cash budget, it can be found that allthe payments for units produced would very rarely

be at the same as production itself. For instance, theraw materials might be bought in March, goods

beingproduced in Apriladpaid for in May

Similarly the date of sales and the date of receipt of

cash will not usually be at the same time. Forinstance, the good might be sold in Mayand themoney received in August


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Example


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A cash budget for the six months ended 30thJune 2003 is to be

Drafted from the following information.

(a) Opening cash balance at 1stJanuary 2003 $3200

(b) Sales: at $12 per unit: cash received three months after sale units:2002 2003

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

80 90 70 100 60 120 150 140 130 110 100 160

(c) Production: in units2002

Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep

70 80 90 100 110 130 140 150 120 160 170 180

(d) Raw materials used in production cost $4 per unit of production. They

are paid for two months before being used in production(e) Direct labour: $3 per unit paid for in the same month as the unit is

produced.

(f) Other variable expenses $2 per unit, of the cost being paid for in the

same month as production, the other paid in the month after producti


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Cash budget for the six months ended 30 June 2003

Jan Feb Mar Apr May Jun

$ $ $ $ $ $Opening balance 3200

Add: Receipts

Sales 960 1080 840 1200 720 1440

4160

Less: Payments

Raw materials 520 560 600 480 640 680Direct labour 300 330 390 420 450 360Variable exp 195 215 250 275 295 255

Fixed expenses 100 100 100 100 100 100Motor van - - - 800 - -

3045

3045

4125

2920

2920

3760

2420

2420 1545 780

3620 2265 2220

1545 780 825

Workings 1 Working 2

Closing balance


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Workings 1:

Receipts :

Jan 80(Oct) * $12= 950

Feb 90 (Nov)*$12= 1080Mar 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= 560Mar 150 (May)*$4 = 600

Apr 100 (Jun)*$4 = 480

May 160 (Jul)*$4 = 640

June 170 (Aug)*$4=680

Workings 3:

Direct labour :

Jan 100(Jan) * $3= 300

Feb 110 (Feb)*$3= 330Mar 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 $100Mar $100

Apr $100

May $100

June $100

The month in which the sales was made

Back


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Working 5:

Variable expenses: $ $

Jan 100(Jan)*3/4*$2 15090 (Dec)*1/4*$2 45 195

Feb 110(Feb)*3/4*$2 165

100 (Jan)*1/4*$2 50 215

Mar 130(Mar)*3/4*$2 195

110(Feb)*1/4*$2 55 250Apr 140(Apr)*3/4*$2 210

130(Mar)*1/4*$2 65 275

May 150(May)*3/4*$2 225

140 (Apr)*1/4*$2 70 295Jun 120(Jun)*3/4*$2 180

150(May)*1/4*$2 75 255

Back


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Budget income statement andbalance sheet


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Budgeted income statement and

balance sheet These financial statements reflect the

predicted results to be achieved.


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Example


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ABC Ltd.

Balance sheet as at 31 December 2004

Fixed Assets Cost Dep Net

Machinery 4000 1600 2400

Motor vehicles 2000 800 12006000 2400 3600

Current Assets

Stock: finished goods (75 units) 900

Raw materials 500Debtors (2004 Oct $540 +Nov $360+Dec $450) 1350

Cash and bank 650

3400

Less: Current liabilities

Creditors for raw materials

(Nov $120+ Dec $180) 300

Creditors for fixed expenses (Dec) 100

3000

6600


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Financed by: $ $

Share capital, 4000 shares of $1 each 4000

Profit and loss account 2600

6600

The plans for the six months ended 30 June 2005 are as follows:

(i) Production will be 60 units per month for the first months,

followed by 70 units per month for May and June

(ii) Production costs will be (per unit):Direct materials $5

Direct labour 4

Variable overhead 3

12

(iii)Fixed overhead is $100 per month, payable always one month in

arrears.

(iv) Sales, at price of $18 per unit, are expected to be:


no. of units 40 50 60 90 90 70


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(v) Purchases of direct materials will be:


$ $ $ $ $ $

150 200 250 300 400 320(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

(x) 3000 shares of $1 each are to be issued at par in May

(xi) Depreciation for the six months: machinery $450, motor vehicles$200

Required:

Prepare budget income statement and balance sheet as at 30 June 2005


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Budget income statement


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Wong Ltd.

Budget income statement for the six months ended 30 June 2005

$ $

Sales (400*$18) 7200

Less: COGS

Opening stock of finished goods 900

Add: Cost of goods completed (380*$12) 4560

Less: closing stock of finished goods

(55*$12) 660 4800Gross profit 2400

Less: expenses

Fixed overhead ($100*6 mth) 600

Depreciation: Machinery 450Depreciation: Motors 200 1250

Net profit 1150


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Wong Ltd.

Budget balance sheet as at 30 June 2005

Fixed asssets Cost Dep Net

$ $ $Machinery 6000 2050 3950

Motor vehicles 2000 1000 1000

8000 3050 4950

Current assets

Stock: finished goods 660

raw materials 220

Debtors 4500

Cash and bank 1240

6620Less: Current liabilities

Trade creditors 720

Creditors for overheads 100 5800

10750


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Financed by: $ $

Capital and reserves

Share capital (4000+3000) 7000Profit and loss account (2600+1150) 3750

10750


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Production budget: (in $)


$ $ $ $ $ $

Materials cost 300 300 300 300 350 350Labour cost 240 240 240 240 280 280

Variable overhead 180 180 180 180 210 210

720 720 720 720 840 840

Creditors budget:Jan Feb Mar Apr May Jun

$ $ $ $ $ $

Opening stock 300 330 350 450 550 700

Add: purchases 150 200 250 300 400 320450 530 600 750 950 1020

Less: Payments 120 180 150 200 250 300

330 350 450 550 700 720

Back 2


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Debtors budget:


$ $ $ $ $ $

Opening stock 1350 1530 2070 2700 3600 4320Add: Sales 720 900 1080 1620 1620 1260

2070 2430 3150 4320 5220 5580

Less: Received 540 360 450 720 900 1080

1530 2070 2700 3600 4320 4500

Back 2


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Cash budget:


$ $ $ $ $ $

Opening balance 650 550 210 (2010) (2010) 1050Add: Debtors 540 360 450 720 900 1080

Share issue - - - - 3000 -

650 550 500 500 600 570

Less: Creditors 120 180 150 200 250 300

Fixed overhead 100 100 100 100 100 100

Direct labour 240 240 240 240 280 280

Variable O/H 180 180 180 180 210 210

Machinery - - 2000 - - -

550 210 (2010) (2010) 1050 1240

Back 2


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Fixed and flexible budget


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Fixed budget

Fixed budget is a budget which is designed to

adjust the permitted cost levels to suit the

level of activity actually attained


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Fixed budget

A fixed budget is a budget, which is designed

to remain unchanged irrespective of the

volume of output or turnover attained


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Example


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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:

1. 100% activity represents 60000 units produced2. Variable cost (per unit):

$

Materials 40

Direct labour 30Royalties 2

Electricity 6

Maintenance 5

83

3. Fixed cost

$

Depreciation 20000

Rent 120000

Indirect labour 80000


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Flexible budget

Level of activity 48000 60000 720000 units

Variable cost $ $ $Materials 1920000 2400000 2880000

Direct labour 1440000 1800000 2160000

Royalties 96000 120000 144000

Electricity 288000 360000 423000

Maintenance 240000 300000 3600003984000 4980000 5976000

Fixed cost

Depreciation 20000 20000 20000

Rent 120000 120000 120000Indirect labour 80000 80000 80000

4024000 5200000 6196000


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Flexible budgets and budgetary

control By comparing the actual results with the

budgeted amounts, the managers can

ascertain which costs do not conform to theoriginal plans and therefore deserve theirattention

The differences between the actual resultsand the expected outcomes are calledvariance


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If we compare the actual results with thefixed budgets, we do not know whether the

variance are caused by the difference in thelevels of activity or the change in efficiency

However, by comparing the actual costs with

the flexible budget prepared at the actualactivity level, we can see how efficient themanagers are in controlling the costs


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Example


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ABC Ltd. Manufactures and sells a single product.

In accordance with the following information:

1. 100% activity represents 60000 units produced

2. Variable cost (per unit):$

Materials 40

Direct labour 30

Royalties 2Electricity 6

Maintenance 5

83

3. Fixed cost

$

Depreciation 20000

Rent 120000

Indirect labour 80000

h b d d l l f h f ll


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The budget and actual results for 2005 are shown as follows:

Budgeted Actual Variance

60000 units 80000 units

$ $Sales revenue ($100 each) 6000000 8000000 2000000(F)

Less: variable cost

Materials 2400000 3201000 801000 (A)

Labour 1800000 2500000 700000 (A)

Royalties 120000 160000 40000(A)Electricity 360000 485000 125000 (A)

Maintenance 300000 404000 104000 (A)

Fixed overhead:

Depreciation 20000 20500 500 (A)Rent 120000 160000 40000 (A)

Indirect labour 80000 95000 15000 (A)

800000 974500 174500 (F)

* F = favourable, A = Adverse variance


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Required:

(a) Prepare a flexible budget based on the original budgeted

unit costs and selling price(b) With the use of the variances, reconcile the original budget profit

with the actual profit


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Fixed Flexible Actual Variance

budget Budget results

60000 units 80000 units 80000 units

(a) (b) ( c) ( c) (b)

$ $ $ $Sales revenue ($100 each) 6000000 8000000 8000000 -

Less: variable cost

Materials 2400000 3200000 3201000 1000 (A)

Labour 1800000 2400000 2500000 100000 (A)

Royalties 120000 160000 160000 -Electricity 360000 480000 485000 5000 (A)

Maintenance 300000 400000 404000 4000(A)

Fixed overhead:

Depreciation 20000 20000 20500 500 (A)

Rent 120000 120000 160000 40000 (A)

Indirect labour 80000 80000 95000 15000 (A)

800000 1140000 974500 165500 (F)

$340000 (F) Volume variance $165500 (A) Expenditure variance

Total variance $174500 (F)

80000*budget units cost


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(b) The overall reconciliation of profit is shown as follows:

$ $

Fixed budget profit 800000

VariancesSales volume ($100 - $83)*20000 340000 (F)

Materials 1000(A)

Labour 100000(A)

Electricity 5000 (A)

Maintenance 4000 (A)

Depreciation 500(A)

Rent 40000 (A)

Indirect labour 15000 (A) 165000 (A)

Actual profit 974500According 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

preparation of master budget.ppt

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