Download Prepare static budgets

Prepare static budgets
Contents
Key to resources
2
Introduction
3
Sales budget for a trading organisation using static
techniques
3
Manufacturing operation
8
Forecasting revenue
16
Presenting information in a budget
16
Summary
17
Feedback to activities
19
Activity 1
19
Activity 2
21
This learning guide is based on the following resource(s):
Textbook
Hughes, R, Minogue, D and Senaratne, G (2006) Business Budgeting and Analysis and
Financial Management (3rd edn), National Core Accounting Publications, Bondi
Prepare static budgets
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Key to resources
Resource
Textbook
1
2.1 Revenue forecasting pp 40–44
2
Self-testing exercises 1–3 pp 42–43
3
2.3 Fees budget pp 45–46
4
Self-testing exercise 5 p 45
5
3.3 Expense budget pp 54–55
6
1.5 Preparation of budgets pp 12–13
7
Non-manufacturing budgets pp 50–53
8
Self-testing exercises 1–3 pp 50–52
9
3.4 Financial performance budget pp 56–57
10
4.1 Cash budgets pp 86–102
11
Self-testing exercises 1–3 pp 90, 95 and 100
12
5.3 Budgeted statement of cash flows pp 121–122
13
5.2 Budgeted balance sheet pp 115–117
14
Self-testing exercises 3 and 4 pp 118–120
15
3.5 Production budget pp 59–60
16
Self-testing exercise 4 p 59
17
3.6 Purchases budget pp 61–62
18
Self-testing exercise 5 p 61
19
3.7 Direct labour budget p 63
20
Self-testing exercise 6 p 63
21
3.8 Factory overhead budget pp 64–69
22
3.11 Comprehensive manufacturing budget example pp 67–69
23
3.12 Cost of goods sold budget p 70
24
5.1 Budgeted income statement pp 112–114
25
Self-testing exercises 1 and 2 p 114
26
5.2 Budgeted balance sheet pp 115–117
27
2.1 Revenue forecasting p 40
28
7 Visual presentation of data pp. 181-198
Note: Commentary on the textbook is indicated in italics.
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Prepare static budgets
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Introduction
In this learning guide we will look at how to prepare budget schedules for a
range of organisations.
Specifically you will learn to:

prepare operating and financial budgets using static budget techniques
for service and trading operations such as:
– revenue, sales or fees
– operating expenses
– revenue statements
– cash (including collections from accounts receivable)
– balance sheets

prepare the following operating and financial budget schedule using
static budget techniques for a simple manufacturing operation (ie one
product, one raw material and factory overhead) relating to the factory
as a whole, not departmentally, no variances included:
– sales
– production
– material purchase and usage
–
–
–
–
–
–
direct labour
factory overhead
cost of goods sold
expenses
revenue statement
balance sheet.
Sales budget for a trading organisation
using static techniques
The sales budget for a trading organisation shows the total revenue that
would be realised from the sale of goods. It shows the volume of goods that
will be sold and the expected selling price.
Preparing a sales budget of products for a given period
1
Estimate the volume or quantity to be sold.
2
Set up the expected selling price.
3
Calculate the sales value of each product by multiplying the estimated
quantity by the estimated selling price.
4
Calculate the total sales value.
Prepare static budgets
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Now go to Resource 1
The location of this and all other resources for this learning guide is found in
the Key to resources at the front of Prepare budget schedules.
To read about revenue forecasts and a sales budget example go to your
resource.
Now go to Resource 2
To do a self-test exercise go to your resource.
Fees budget for a service organisation
Fees budget is prepared for a service business whose income is earned by
providing labour or performing activity for its customers.
Preparing a fees budget for a given period
1
Estimate the number of activities to be provided.
2
Set up the estimated fee per activity.
3
Calculate the revenue of each activity by multiplying the estimated
number of activities by the estimated fee per activity.
4
Calculate the total fees received.
Now go to Resource 3
To see an example about a fees budget go to your resource.
Now go to Resource 4
To do a self-test exercise go to your resource.
4
Prepare static budgets
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Operating expenses budget
Operating expenses are classified into three functions:

marketing or selling

administrative

financial.
A separate budget may be prepared for each of these three classes or the
three classes of expenses maybe presented as one budget.
Now go to Resource 5
To see a detailed expense budget go to your resource.
Note that Example 1 shows operating budget as the total of the three classes
and Example 2 shows the budget for an individual class of expense.
Now go to Resource 6
To see an example of a preparation of a budget go to your resource.
Note that Example 1 is expenses budget for a service business.
Budgeted income statement for trading and service
operations
A budgeted income statement provides management with the estimated
profit or loss for the given budget period. The budgeted results of operation
are calculated by summarising the data from the sales budget, cost of goods
sold budget and operating expenses budget.
For a service organisation, the profit or loss is determined by matching the
total fees received from the fees budget with the operating expenses budget.
Now go to Resource 7
To see a detailed purchases budget go to your resource.
Note how the required quantity to be purchased is calculated as well as the
purchases cost.
Prepare static budgets
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Now go to Resource 8
To do a self-test exercise go to your resource.
Now go to Resource 9
To see an example of a budgeted income statement go to your resource.
Note that Example 1 is a budgeted income statement for a trading business.
The budgeted gross profit value was carried over from the budgeted trading
statement and the total expenses were from the budgeted operating
expenses.
Note that Example 2 is a budgeted income statement for a service
organisation.
Cash budget
Cash is said to be the lifeblood of the business. It has to be safeguarded and
managed properly and effectively to avoid pitfalls brought about by the
improper management of cash.
The cash budget shows the anticipated cash receipts and cash payments and
the closing balance of cash for a given budget period.
To prepare cash budget data from the sales budget the following are needed:

purchases budget

operating expenses budget

balance sheet budget and the business policy regarding collections of
credit sales

payments of credit purchases

GST.
Now go to Resource 10
To read about cash budgets go to your resource.
The basic format of the cash budget shows an opening cash balance. This
opening cash balance was the closing cash balance of the previous period.
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Now go to Resource 11
To do a self-test exercise go to your resource.
Budgeted statement of cash flows
Budgeted cash flow shows the movement of cash just like the cash budget.
However, the presentation or the format has to conform to the requirements
of accounting standards AASB 101 Presentation of financial statements and
AASB 107 Cash flow statements. Note that there has been a change in
accounting standards due to the recent introduction of international
accounting standards. The most current are shown here.
Now go to Resource 12
To see the format required by AASB 101 and AASB 107 for statement of
cash flows go to your resource.
Activity 1
Steve Forbes provided you with the following budgeted bank account as at 30 June 2006.
You are required to prepare budgeted cash flows of Steve Forbes for the six months ended
30 June 20X6 in compliance with the format prescribed by accounting standards AASB
101 and AASB 107.
Cash at bank
1/1/06
Balance b/d
6 500
30/6/06
Cash sales
Loan – East Bank
Equipment
Interest income
Accounts receivable
Operating expenses
25 000
66 000
Machinery
30 000
15 000
Drawings
10 000
5 500
Accounts payable
33 000
350
Cash purchases of
inventory
7 700
Balance c/d
9 650
22 000
115 350
1/7/06
Balance b/d
30/6/06
115 350
9 650
Prepare static budgets
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Budgeted balance sheet for trading and service
organisations
A budgeted balance sheet shows the expected financial position of the
business at a given budget period. It shows the finalisation of all preceding
budgets. It therefore provides management with the information of how the
planned activities will affect the business as a whole.
To prepare a closing budgeted balance sheet, the data from the following are
required:

opening balance sheet

budgeted cash flow

budgeted income statement.
Now go to Resource 13
To see an example of a budgeted balance sheet go to your resource.
Now go to Resource 14
To do a self-test exercise go to your resource.
Manufacturing operation
Sales budget
The preparation of a sales budget for a manufacturing operation is no
different from the sales budget for a merchandising business. The point to
note, however, is that here the goods being sold are manufactured by the
business. The estimated selling price is calculated by adding a mark up on
the cost of production.
Production budget
A production budget is prepared by a manufacturing business to show the
estimated volume or quantity to be produced in order to meet the budgeted
sales. The estimated quantity to be produced is the basis for the preparation
of the raw materials purchases budget, direct labour budget and factory
overhead budget.
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To calculate the estimated quantity to be produced, the data for the
following are needed:

budgeted sales

opening stock

required closing stock.
The pro forma below shows the relationship of these three accounts
assuming there is only one product and one budget period.
Production budget (in units) for the period ending
Product A
Budgeted sales ( units )
X
Add: Required closing stock (units)
X
Total requirements (units)
X
Subtract: Opening stock ( units)
X
Budgeted production (units)
X
Production budget for several periods
Say the production budget is prepared for a quarter. The pro forma will be:
Production budget (in units) for the quarter ending
Product A
Quarter
1st
2nd
3rd
4th
Total
Budgeted sales (units)
X
X
X
X
X
Add: Required closing stock (units)
X
X
X
X
X
Total requirements (units)
X
X
X
X
X
Subtract: Opening stock (units)
X
X
X
X
X
Budgeted production (units)
X
X
X
X
X
Note:

The closing stock of one twelve-month period is the opening stock of
the next period.

The closing stock of the first quarter is the opening stock of the second
quarter. The closing stock of the second quarter is the opening stock of
the third quarter.
Prepare static budgets
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
In the total column, the closing stock value is the same as the fourth
quarter’s value and the opening stock value is the same as the first
quarter’s value.
Now go to Resource 15
To see an example of a production budget go to your resource.
Now go to Resource 16
To do a self-test exercise go to your resource.
Materials purchases and usage budget
A materials purchases budget shows the materials quantity needed to meet
the requirements of the budgeted units of production. The quantity of
materials to be purchased is affected by the required closing stock as well as
the opening stock.
This relationship is illustrated in the following materials purchases budget
pro forma and the budget is prepared for several periods.
Materials purchases budget for the quarter ending
Material
Quarter
1st
2nd
3rd
4th
Total
Budgeted materials requirement
(quantity)
X
X
X
X
X
Add: Required closing stock
(quantity)
X
X
X
X
X
Total materials requirements
(quantity)
X
X
X
X
X
Subtract: Opening stock (quantity)
X
X
X
X
X
Required materials purchases
(quantity)
X
X
X
X
X
X
X
X
X
X
Unit cost – materials $x
Budgeted purchases cost $
10
Prepare static budgets
© NSW DET 2006, 2006/053/12/2006 LO: 5076
Note:

The budgeted materials requirement or usage represents the materials
quantity needed to produce the budgeted units of production. This is
calculated by multiplying the number of units to be produced by the
materials equivalent in manufacturing one unit of finished product.

The required closing stock is the level of materials quantity on hand at
the end of the period.

The opening stock represents the closing stock of the previous period.

The required purchases cost is calculated by multiplying the required
materials quantity to be purchased by the cost per unit of materials.
Now go to Resource 17
To see an example of a materials purchases budget go to your resource.
Now go to Resource 18
To do a self-test exercise go to your resource.
Direct labour budget
Converting raw materials into finished product requires the physical
exertion of those who are directly involved in the manufacturing operation.
The remuneration paid to these people is termed direct labour, for example
wages paid to a carpenter who works in a furniture factory, wages paid to a
dress designer in a fashion company.
The direct labour budget shows the estimated direct labour hours and the
cost required in manufacturing the budgeted units of production. The
budgeted labour cost is calculated by multiplying the estimated direct labour
hours by the labour rate per hour.
Now go to Resource 19
To see an example of a direct labour budget go to your resource.
Prepare static budgets
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Now go to Resource 20
To do a self-test exercise go to your resource.
Factory overhead budget
Factory overhead is one of the elements of production cost. It consists of
indirect materials, indirect labour and other manufacturing costs. For
example, factory foremen wages, factory cleaners’ wages, factory security
guards’ wages, factory insurance, factory rent and depreciation of
machinery are considered as factory overhead.
These costs are not easily identified with the finished product.
Factory overhead budget shows the estimated costs to be incurred in the
manufacturing process. In the budget, this cost is grouped into two
categories as fixed or variable.
Now go to Resource 21
To see an example of a factory overhead budget go to your resource.
Cost of production budget
Cost of production budget represents the summary of the details of materials
budget, direct labour budget and factory overhead budget. It shows the total
cost incurred in manufacturing the finished product which will be offered
for sale. The relationship of the product costs is shown in the following pro
forma.
Cost of production budget for the period
$
12
Materials cost
X
Direct labour cost
X
Prime cost
X
Factory overhead
X
Cost of production
X
Prepare static budgets
© NSW DET 2006, 2006/053/12/2006 LO: 5076
Note:

Materials cost is specifically for direct materials and its details are
shown in the materials purchases budget.

Direct materials and direct labour are the principal elements of
production; the sum of these two costs is called prime cost.

Prime cost plus factory overhead cost equals cost of production.
Now go to Resource 22
To see an example of a cost of production budget go to your resource.
Pay particular attention to the example of how to prepare cost of production
budget.
Activity 2
Pacific Manufacturing produces quality leather handbags and travelling bags. Using the
following data derived from the budgets for the month of June, you are to prepare a cost of
production budget for the month of June.
Materials cost
$
Handbags
28 000
Travelling bags
32 500
$
60 500
Direct labour cost
Handbags
14 000
Travelling bags
16 250
30 250
Factory overhead
Handbags
3 400
Travelling bags
3 750
7 150
Cost of goods sold budget
Cost of goods sold budget shows the total cost incurred in manufacturing the
finished goods which were sold. It shows the relationship of the opening and
closing stock of finished goods and the cost of production. This relationship
is shown in the following pro forma:
Prepare static budgets
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Cost of goods sold budget for the period ended
$
Finished goods – opening
X
Add: Cost of production
X
Total cost of goods available for sale
X
Subtract: Finished goods- closing
X
Cost of goods sold
X
Note:

Finished goods opening value was the finished goods closing value of
the previous period. If the business is in its first year of operation, there
will be no opening stock of finished goods.

Cost of production was obtained from the cost of production budget.

The sum of the finished goods opening and cost of production is cost of
goods available for sale.

Cost of goods sold is the difference between cost of goods available for
sale and the finished goods closing.
Now go to Resource 23
To see an example of a cost of goods sold budget go to your resource.
Note in the example that the business manufactures the product as well as
buys them from other suppliers. The cost of goods sold includes the
purchases cost. The cost of goods available for sale is the sum of finished
goods opening plus cost of production and purchases cost. Budgeted cost of
goods sold is the difference between the cost of goods available for sale and
the finished goods closing.
If the business is in its first year of operation, there will be no finished goods
opening. Using the information above where the business apart from
manufacturing the product also buys from other suppliers, the calculation of
the cost of goods sold is as follows:
$
14
Cost of production
x
Add: Purchases
x
Goods available for sale
x
Subtract: Finished goods closing
x
Cost of goods sold
x
Prepare static budgets
© NSW DET 2006, 2006/053/12/2006 LO: 5076
Operating expenses budget
The operating expenses budget for a manufacturing firm represents the
expenses incurred in relation to its marketing, administration and financial
activities. It does not include the manufacturing costs. These operating
expenses are matched against the income earned within the same period and
they are known as period costs. In the budget they are classified either as
fixed or variable for they react to the changes of volume.
This budget has been discussed previously for service or trading operations.
Budgeted income statement
A budgeted income statement for a manufacturing firm shows the budgeted
net profit or net loss for a given period. The budgeted results of the
operation is calculated by putting together the data from the sales budget,
cost of goods sold budget and the operating expenses budget.
Now go to Resource 24
To see an example of a budgeted income statement go to your resource.
Now go to Resource 25
To do a self-test exercise go to your resource.
Budgeted balance sheet
The budgeted balance sheet for a manufacturing firm shows the anticipated
assets, liabilities and net worth or equity of the owners. The format of this
statement is the same as that for merchandising and service firms.
Now go to Resource 26
To see an example of a budgeted balance sheet go to your resource.
Prepare static budgets
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Forecasting revenue
There are different methods of forecasting available. There is the qualitative
method and the quantitative method.
Now go to Resource 27
To read about visual presentation of information go to your resource.
Presenting information in a budget
Once you have prepared the budgets for your organisation how do you
present it? Here we will look at how you can present the information in your
budgets in a visual presentation.
Now go to Resource 28
To read about visual presentation of information go to your resource.
16
Prepare static budgets
© NSW DET 2006, 2006/053/12/2006 LO: 5076
Summary
You should now know how to:

prepare operating and financial budgets using static budget techniques
for service and trading operations such as:
–
–
–
–
–

revenue, sales or fees
operating expenses
revenue statements
cash (including collections from accounts receivable)
balance sheets
prepare the following operating and financial budget schedule using
static budget techniques for a simple manufacturing operation (ie one
product, one raw material and factory overhead) relating to the factory
as a whole, not departmentally, no variances included:
–
–
–
–
–
sales
production
material purchase and usage
direct labour
factory overhead
–
–
–
–
cost of goods sold
expenses
revenue statement
balance sheet.
Prepare static budgets
© NSW DET 2006, 2006/053/12/2006 LO: 5076
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18
Prepare static budgets
© NSW DET 2006, 2006/053/12/2006 LO: 5076
Feedback to activities
Activity 1
Statement of cash flows of Steve Forbes for the six months ended 30 June 20X6
Cash flows from operating activities
Receipts:
$
Cash sales
66 000
From accounts receivable
22 000
Interest income
Payments: To accounts payable
Operating expenses
Cash purchases
$
350
–33 000
–25 000
–7 700
Net cash flow from operating activities
22 650
Cash flows from investing activities
Receipts:
Sale of equipment
Payments: Purchase of machinery
5 500
–30 000
–24 500
Net cash flow from investing activities
Cash flows from financing activities
Receipts:
Loan – East bank
Payments:
Drawings – Steve Forbes
15 000
–10 000
Net cash flow from financing activities
5 000
Net increase (decrease) in cash held
3 150
Cash at bank balance 1 January 2006
6 500
Cash at bank balance 30 June 2006
9 650
Prepare static budgets
© NSW DET 2006, 2006/053/12/2006 LO: 5076
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20
Prepare static budgets
© NSW DET 2006, 2006/053/12/2006 LO: 5076
Activity 2
Pacific Manufacturing Company
Cost of production budget for the month of June
$
$
Budgeted materials cost
Handbags
28 000
Travelling bags
32 500
60 500
Budgeted direct labour cost
Handbags
14 000
Travelling bags
16 250
Budgeted prime cost
30 250
90 500
Budgeted factory overhead
Handbags
3 400
Travelling bags
3 750
Budgeted cost of production
7 150
97 650
Prepare static budgets
© NSW DET 2006, 2006/053/12/2006 LO: 5076
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