Budget

O A budget is a quantitative statement, for a

defined period of time, which may include planned revenue, expenses, assets, liabilities and cash flows

Purpose of preparing budget

O Planning O Coordination O Communication O Motivation O Performance evaluation
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Steps in the preparation of budget

O Consideration of all external factors O Preparation of other budgets O Production budget, purchases budget, direct labor

budget, overheads budget and selling and administrative budget O Negotiation of budget O Coordination of budget O Cash budget, capital expenditure budget, budget balance sheet, budget income statement, budget cash flow statement, budget statement of retained earnings
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Componets of the Master Budget :

Operating Budget:
Sales budget Inventory budget Purchases & cost of goods sold budget Operating expense budget

Budgeted income statement

Cash budget
O The cash budget is a statement of expected cash

receipt and payments O It help avoid surplus cash and unexpected cash deficiencies O Normally, the cash budget consists of the following items: Closing balance of cash = Opening balance of cash + Receipts - Payments

Cash budget
O Receipts include: O Cash sales O Collection from debtors O Other incomes such as investment income, rent received O Payments include: O Cash purchases O Payment to creditors

O Direct labour
O Other expenses such as manufacturing overhead,

administrative and selling expenses (depreciation does not involve cash flow) O Tax payment
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Cash budget
O 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
O 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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When will the sales actually generate cash?

.

(Sales made for credit do not produce immediate cash inflows, and the cash budget must take these delays into account.) Customers payment habits tend to remain in the same over time.

Payment Month Paid

Month of sale 15% Month after sale Second month after sale

Percentage

35% 50%

MONTH COLLECTED November 2005 December 2005 January 2006 15% 35% 50%

CASH

246000 574000 820000

Budgeted income statement and balance sheet

O These financial statements reflect the

predicted results to be achieved.

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Wong Ltd. Budget income statement for the six months ended 30 June 2011

Sales (400*$18) Less: COGS Opening stock of finished goods Add: Cost of goods completed (380*$12) Less: closing stock of finished goods (55*$12) Gross profit Less: expenses Fixed overhead ($100*6 mth) Depreciation: Machinery Depreciation: Motors Net profit

$ 7200 900 4560 660 4800

2400 600 450 200 1250 1150

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Wong Ltd. Budget balance sheet as at 30 June 2011

Fixed asssets
Machinery Motor vehicles

2000

Cost $ 6000 1000 8000

Dep $ 2050 1000 3050

660 220

Net $ 3950
4950

Current assets Stock: finished goods raw materials Debtors Cash and bank
Less: Current liabilities Trade creditors Creditors for overheads

4500 1240 6620 720 100

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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Thank You