Budgeting TEAM WIN-MART Budgeting A master budget is a - PowerPoint PPT Presentation

Budgeting TEAM WIN-MART

Budgeting A master budget is a comprehensive projection of how management expects to conduct all aspects of business over the budget period, usually a fiscal year. The master budget summarizes projected activity by way of a cash budget, budgeted income statement and budgeted balance sheet. Most master budgets include interrelated budgets from the various departments. Managers typically use these subset budgets to plan and set performance objectives. Master budgets are generally used in larger businesses to keep many managers on the same page .

Type of budgets ● Sales budget ● Production budget ● Direct materials usage budget ● Direct materials purchase budget OPERATING BUDGET ● Direct labour budget ● Factory overhead budget ● Selling and administration budget ● Cash budget CASH BUDGET

Sales budget. The sales budget shows forecast sales in units and currency, for an upcoming period.Because of its effect on other budgets,the sales budget is sometimes referred to as the cornerstone of the entire master budget. The starting point in preparing a sales budget is the sales forecast.An inaccurate forecast can render the entire budget a futile exercise and when inaccurate can impose costly expenses on the firm as wells as its suppliers .

Production budget. A production budget shows planned production for a given period.For manufacturers,planned production in a given period depends on budgeted sales, desired units finished goods ending inventory and the units finished goods beginning inventory as described in the following equation. BUDGETED BUDGET SALES DESIRED BEGINNING = - + PRODUCTION (UNITS) ENDING INVENTORY (IN UNITS) INVENTORY (UNITS) (UNITS)

The information in the production budget becomes the Direct material basis for preparing several manufacturing-related budget. usage and Direct material purchase Direct material usage budget shows the amount ● budget budgeted cost of direct materials required for production. Direct material purchase budget shows the amount ● of direct materials such as raw materials or component part to be purchased during the period.

Direct labour budget. Each firm needs a requisite number of people of employees with required skills to carry out production activities,as budgeted.the direct budget labour budget enables the personnel department to plan for the hiring and repositioning of the employees. Good labour budget helps the firms: Avoid emergency hiring. ● Prevent labour shortage. ● Reduce or eliminate the need to lay off workers.a ●

A factory overhead budget include Factory all production costs than direct overhead materials and direct labour.some budget firms separate factory overhead into variable and fixed costs.

Selling and administration budget serves as a Selling and guidelines for selling and administrative activities administration during the budget period.Many selling and administrative expenditures are the results of sales budget and marketing activities and programmes. Firms are known to reduce or eliminate Selling and administrative expenses to increase operating income for the period.

Cash budget A cash budget brings together the cash effects of all budgeted activities.A cash budget depicts the organization’s cash position during the budget period. By preparing a cash budget, management can take steps to ensure having sufficient cash on hand to carry out the planned activities, allow sufficient time to arrange for additional financing that may be needed during the budget period( and thus avoid high costs of emergency borrowing), and plan for investments of excess cash on hand to earn the highest possible return.

Example question Geek Realistic Sdn Bhd, a company with two operating divisions, employs you as the budget accountant. The Alpha division manufactures and sells Pipe. The Sigma division manufactures and sells Hose. The company’s financial year runs from 1 January to 31 December. Geek Realistic is preparing the annual budget for next financial year based on the budgeted information given to you.

Sales budget Given information Finished Products Model Pipe Model Hose Forecast sales (units) 8,500 1,600 Selling price per unit (RM) 400 560 Ending inventory required (units) 1,870 90 Beginning inventory (units) 170 85

Sales budget Sales budget (RM) PIPE HOSE Forecast sales unit 8500 1600 Multiple(×): Selling 400 560 price/unit 3400,000 896,000

Production budget Finished Products Model Pipe Model Hose Forecast sales (units) 8,500 1,600 Selling price per unit (RM) 400 560 Ending inventory required (units) 1,870 90 Beginning inventory (units) 170 85

Production budget Production budget (Units) PIPE HOSE Budgeted sales 8500 1600 Add: desired ending inventory 1870 90 Total units needed 10370 1690 Less: beginning inventory (170) (85) 10,200 1,605

Direct material usage budget Model Pipe Model Hose Material X 10 units 8 units Material Y 5 units 9 units Direct 10 hours 15 hours Labour Production budget (Units) PIPE HOSE 10,200 1,605

Direct material usage budget Direct materials usage budget- MATERIAL X PIPE HOSE Budgeted production 10200 1605 Multiply (×): Number of material X 10 8 required for one product(units) Total material X needed for production 102,000 12,840 Multiply (×): Value of MATERIAL X RM 734,400 RM 92,448 ( 7.20 RM) TOTAL 826,848

Direct material usage budget Model Pipe Model Hose Material X 10 units 8 units Material Y 5 units 9 units Direct 10 hours 15 hours Labour Production budget (Units) PIPE HOSE 10,200 1,605

Direct material usage budget Direct materials usage budget- MATERIAL Y PIPE HOSE Budgeted production 10200 1605 Multiply (×): Number of material Y 5 9 required for one product(units) Total material Y needed for production 51,000 14,445 Multiply (×): Value of MATERIAL Y RM 816,000 RM 231,120 (16.00RM) TOTAL 1047,120

Direct material purchase budget Direct Material Material Material X Y Beginning inventory (units) 8,500 8,000 Ending inventory required 10,200 1,700 (units) RM Material X 7.20 per unit Material Y 16.00 per unit Direct Labour 12.00 per hour

Direct material purchase budget Direct materials purchase budget- MATERIAL X PIPE AND HOSE Total direct material x needed in the production. 114,840 Add: desired ending inventory 10,200 Total direct material x needed 125,040 Less: beginning inventory (8500) Total direct material x purchases (unit) 116540 Multiply (×): purchase price (RM) 7.20 Total cost of direct material x purchases 839088

Direct material purchase budget Direct Material Material Material X Y Beginning inventory (units) 8,500 8,000 Ending inventory required 10,200 1,700 (units) RM Material X 7.20 per unit Material Y 16.00 per unit Direct Labour 12.00 per hour

Direct material purchase budget Direct materials purchase budget- MATERIAL Y PIPE AND HOSE Total direct material y needed in the production. 65,445 Add: desired ending inventory 1700 Total direct material y needed 67145 Less: beginning inventory (8000) Total direct material y purchases (unit) 59145 Multiply (×): purchase price (RM) 16.00 Total cost of direct material y purchases 946,320

Direct labour budget. RM Material X 7.20 per unit Material Y 16.00 per unit Direct Labour 12.00 per hour Model Pipe Model Hose Material X 10 units 8 units Material Y 5 units 9 units Direct Labour 10 hours 15 hours

Direct labour budget. Direct labour budget PIPE HOSE Budgeted production 10200 1605 Multiply(×) :labour usage (hrs) 10 15 Total direct labour hours 102,000 24,075 Multiply(×): hourly labour rate(RM) 12 12 Total direct labour (wages) RM 1224,000 RM 288,900

Factory overhead budget. Division Alpha (RM) Sigma (RM) Budgeted variable overhead rates (per direct labour hour): Indirect materials 1.20 0.80 Indirect labour 1.20 1.20 Power (variable portions) 0.60 0.40 Maintenance (variable portions) 0.20 0.40 Budgeted fixed overheads Depreciation 100,000 80,000 Supervision 100,000 40,000 Power (fixed portions) 40,000 2,000 Maintenance (fixed portions) 45,600 3,196

Factory overhead budget.

Factory overhead budget. Stationery etc. (Administration) 4,000 Salaries Sales 74,000 Office 28,000 Commissions 60,000 Car expenses (Sales) 22,000 Advertising 80,000 Miscellaneous (Office) 8,000 276,000

Selling and administrative budget PIPE & HOSE Selling expenses : Salaries 74,000 Advertising 80,000 Car expenses 22,000 Commission 60,000 Administrative expenses: Stationary 4,000 Salaries 28,000 Miscellaneous 8,000 Total selling & administrative 276,000

Cash budget Budgeted cash flows are as follows: Quarter 1 Quarter 2 Quarter 3 Quarter 4 (RM) (RM) (RM) (RM) Receipts from customers 1,000,000 1,200,000 1,120,000 985,000 Payments: Materials 400,000 480,000 440,000 547,984 Payment for wages 400,000 440,000 480,000 646,188 Other cost and expenses 120,000 100,000 72,016 13,642