Download Preparation of master budget

Preparation of master budget
1
Budget
 A budget is a quantitative statement, for a
defined period of time, which may include
planned revenue, expenses, assets, liabilities
and cash flows
2
Purpose of preparing budget
 Planning
 Coordination
 Communication
 Motivation
 Performance evaluation
3
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
4
 Final acceptance of budget
 Budget review
5
Cash budget
6
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 does
not involve cash flow)
Tax payment
8
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
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Example
10
A cash budget for the six months ended 30th June 2003 is to be
Drafted from the following information.
(a) Opening cash balance at 1st January 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 units
2002
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, ¾ of the cost being paid for in the
same month as production, the other ¼ paid in the month after producti
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(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
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Cash budget for the six months ended 30 June 2003
Jan Feb Mar Apr May Jun
$
$ $
$
$
$
Opening balance
3200 3045 2920 2420 1545 780
Add: Receipts
Sales
960 1080 840 1200 720 1440
4160 4125 3760 3620 2265 2220
Less: Payments
Raw materials 520 560
600
Direct labour 300 330
390
Variable exp 195 215 250
Fixed expenses 100 100 100
Motor van
- 3045 2920 2420
Closing balance
Workings 1
480 640
420 450
275 295
100 100
800 1545 780
680
360
255
100
825
Working 2
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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
14
Working 5:
Variable expenses:
Jan
100(Jan)*3/4*$2
90 (Dec)*1/4*$2
Feb
110(Feb)*3/4*$2
100 (Jan)*1/4*$2
Mar 130(Mar)*3/4*$2
110(Feb)*1/4*$2
Apr 140(Apr)*3/4*$2
130(Mar)*1/4*$2
May 150(May)*3/4*$2
140 (Apr)*1/4*$2
Jun
120(Jun)*3/4*$2
150(May)*1/4*$2
$
150
45
165
50
195
55
210
65
225
70
180
75
$
195
215
250
275
295
255
Back
15
Budget income statement and
balance sheet
16
Budgeted income statement and
balance sheet
 These financial statements reflect the
predicted results to be achieved.
17
Example
18
ABC Ltd.
Balance sheet as at 31 December 2004
Fixed Assets
Cost Dep
Machinery
4000 1600
Motor vehicles
2000 800
6000 2400
Current Assets
Stock: finished goods (75 units)
900
Raw materials
500
Debtors (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
Net
2400
1200
3600
3000
6600
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Financed by:
Share capital, 4000 shares of $1 each
Profit and loss account
$
$
4000
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:
Jan
Feb Mar Apr May Jun
no. of units 40
50
60
90
90
70
20
(v) Purchases of direct materials will be:
Jan
Feb
Mar Apr May Jun
$
$
$
$
$
$
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
22
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
4800
Gross profit
2400
Less: expenses
Fixed overhead ($100*6 mth)
600
Depreciation: Machinery
450
Depreciation: Motors
200
1250
Net profit
1150
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Wong Ltd.
Budget balance sheet as at 30 June 2005
Fixed asssets
Cost Dep
$
$
Machinery
6000 2050
Motor vehicles
2000 1000
8000 3050
Current assets
Stock: finished goods
660
raw materials
220
Debtors
4500
Cash and bank
1240
6620
Less: Current liabilities
Trade creditors
720
Creditors for overheads
100
Net
$
3950
1000
4950
5800
10750
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Financed by:
Capital and reserves
Share capital (4000+3000)
Profit and loss account (2600+1150)
$
$
7000
3750
10750
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Materials budget:
Jan
Feb
$
$
Opening stock
500
350
Add: purchases
150
200
650 550
Less:used in production300 300
350
250
Production budget: (in units)
Jan
Feb
Opening stock
75
95
Add: purchases
60
60
135
155
Less: Sales
40
50
95
105
Mar
$
250
250
500
300
200
Mar
105
60
165
60
105
Apr
$
200
300
500
300
200
Apr
105
60
165
90
75
May
$
200
400
600
350
250
May
75
70
145
90
55
Jun
$
250
320
570
350
220
Jun
55
70
125
70
55
Back 1 Back 2
26
Production budget: (in $)
Jan
$
Materials cost
300
Labour cost
240
Variable overhead
180
720
Feb
$
300
240
180
720
Mar
$
300
240
180
720
Apr
$
300
240
180
720
May
$
350
280
210
840
Jun
$
350
280
210
840
Creditors budget:
Opening stock
Add: purchases
Less: Payments
Jan
$
300
150
450
120
330
Feb
$
330
200
530
180
350
Mar
$
350
250
600
150
450
Apr
$
450
300
750
200
550
May
$
550
400
950
250
700
Jun
$
700
320
1020
300
720
Back 2
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Debtors budget:
Opening stock
Add: Sales
Less: Received
Jan
$
1350
720
2070
540
1530
Feb
$
1530
900
2430
360
2070
Mar
$
2070
1080
3150
450
2700
Apr
$
2700
1620
4320
720
3600
May
$
3600
1620
5220
900
4320
Jun
$
4320
1260
5580
1080
4500
Back 2
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Cash budget:
Jan
$
Opening balance
650
Add: Debtors
540
Share issue
650
Less: Creditors
120
Fixed overhead 100
Direct labour 240
Variable O/H 180
Machinery
550
Feb
$
550
360
550
180
100
240
180
210
Mar
$
210
450
500
150
100
240
180
2000
(2010)
Apr
$
(2010)
720
500
200
100
240
180
(2010)
May
$
(2010)
900
3000
600
250
100
280
210
1050
Jun
$
1050
1080
570
300
100
280
210
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
33
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 produced
2. Variable cost (per unit):
$
Materials
40
Direct labour
30
Royalties
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
Variable cost
Materials
Direct labour
Royalties
Electricity
Maintenance
Fixed cost
Depreciation
Rent
Indirect labour
48000
60000
720000 units
$
1920000
1440000
96000
288000
240000
3984000
$
2400000
1800000
120000
360000
300000
4980000
$
2880000
2160000
144000
423000
360000
5976000
20000
120000
80000
4024000
20000
120000
80000
5200000
20000
120000
80000
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 the
original plans and therefore deserve their
attention
 The differences between the actual results
and the expected outcomes are called
variance
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 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
37
Example
38
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
2
Electricity
6
Maintenance
5
83
3. Fixed cost
$
Depreciation
20000
Rent
120000
Indirect labour
80000
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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
Budget
80000*budget units cost budget
60000 units 80000 units
(a)
(b)
$
$
Sales revenue ($100 each) 6000000 8000000
Less: variable cost
Materials
2400000 3200000
Labour
1800000 2400000
Royalties
120000
160000
Electricity
360000
480000
Maintenance
300000
400000
Fixed overhead:
Depreciation 20000
20000
Rent
120000
120000
Indirect labour80000
80000
800000
1140000
$340000 (F) Volume variance
Actual
results
80000 units
( c)
$
8000000
Variance
3201000
2500000
160000
485000
404000
1000 (A)
100000 (A)
5000 (A)
4000(A)
20500
160000
95000
974500
500 (A)
40000 (A)
15000 (A)
165500 (F)
( c) – (b)
$
-
$165500 (A) Expenditure variance
Total variance $174500 (F)
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(b) The overall reconciliation of profit is shown as follows:
$
Fixed budget profit
Variances
Sales volume ($100 - $83)*20000
Materials
1000(A)
Labour
100000(A)
Electricity
5000 (A)
Maintenance
4000 (A)
Depreciation
500(A)
Rent
40000 (A)
Indirect labour
15000 (A)
Actual profit
$
800000
340000 (F)
165000 (A)
974500
•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
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