BUDGETS

1
BUDGETS

• Objectives
• Master budget of a trading concern
• Master budget of a service concern
• Variable budget
• Cash budget

2
BUDGETS

• Why do we have budgets?
• Planning
• Control process
• Budget control
• Planning
• Co-ordination
• Control
• Feedback
• Human factor
• Limitations
• Often in reality so-called management does not
  have the skills to manage budgets properly

3
BUDGETS

• Service enterprise budget
• Purchases of parts and revenue
• Monthly or quarterly
• Trading enterprise budget
• Monthly
• Manufacturing enterprise budget
• Various

4
MANUFACTURING BUDGETS

• Operating Budgets
• Main operating budgets
• Sales budget
• Production budget
• Cost of sales budget
• Subsidiary operating budgets
• Raw materials usage budget
• Raw materials purchases budget
• (Direct) Labour budget
• Manufacturing overheads budget
• Variable budgets
• Financial budgets
• Cash budget

5
MAIN OPERATING BUDGETS

• Sales Budget
• THE STARTING POINT
• Estimated sales price multiplied by budgeted unit
  sales
• Influences
• Example 19.1
• Production budget
• Ensure sufficient UNITS are available and
  manufactured
• Need enough to meet sales demand
• Required production
• Closing and opening inventory
• Example 19.2

6
MAIN OPERATING BUDGETS

• Cost of sales budget
• As the Cost of Sales calculation in the Income
  Statement
• Done after all other calculations

7
SUBSIDIARY OPERATING BUDGETS

• Raw materials USAGE budget
• Based on production budget
• Focus is on material required not produced
• Quantity of goods (not units)
• How can you otherwise produce enough to meet the
  expected sales demand?
• Quantity and cost of materials
• Example 19.3

8
SUBSIDIARY OPERATING BUDGETS

• Raw material PURCHASES budget
• Since you now know how much you need to produce,
  you need to work out how much to purchase
• Also need to know the closing and opening
  inventory
• Quantity and cost
• Example 19.4

9
SUBSIDIARY OPERATING BUDGETS

• Direct labour budget
• Based on production budget because you need
  workers to produce the goods that you want to
  sell
• Content
• Number and type of workers
• Expected cost of their labour
• Example 19.5

10
SUBSIDIARY OPERATING BUDGETS

• Manufacturing overheads budget
• Talk of fixed, variable and semi-variable
  costs
• Think of whether the cost can fluctuate or cant
  for a certain period
• Fixed costs cant change over a certain period
  e.g. rent
• Variable can e.g. electricity
• Must spread over direct labour hours
• Example 19.6

11
CASH BUDGETS

• To manage the cash resources to fund the other
  budget operations
• Need information from the other budgets i.e.
  production levels, labour and expected sales
• Consists of three parts
• Cash inflows
• Cash outflows
• Bank balances (opening and closing)

12
CASH BUDGETS

• Example 19.7
• Format on page 425
• Month by month basis
• Workings for receipts
• Credit sales table format

13
VARIABLE BUDGETS

• More to show the variability in total costs
• Relies on costs per unit that vary
• Fixed costs stay fixed
• The change in the variable costs is key
• Related to production level or units produced