Learning Objectives
LO1: Explain the relationship between financial planning
and analysis and the master budget.
LO2: List and explain purposes of budgeting.
LO3: Prepare each of the budget schedules that make up the
master budget in a non-manufacturing firm, and that exist
in manufacturing budgets as well.
LO4: Prepare the additional master budget schedules
required by a manufacturing firm.
2
What is Budgeting?
Budgeting is the process of identifying, gathering,
summarizing, and communicating financial and non-
financial information about an organization's future
activities.
Budgeting is an essential part of the continuous planning
for an organization in order to accomplish long-term goals
3
What is a budget?
A budget is a quantitative plan for acquiring and
using resources over a specified time period.
Budgets
• a plan
• expressed in monetary terms
• covering a future time period
• based on a defined level of activity
4
Purposes of budgeting
• Implement strategy by allocating resources in
line with strategic goals
• Co-ordinate activities and assist in
communication between different parts of the
organization
• Motivate managers to achieve targets
• Provide a means to control activities
• Evaluate managerial performance
5
1
Sales forecast
6 7
Finished goods
2 Selling and
forecast Production forecast administrative forecast
3 4 5
Direct material Direct labour Overhead
forecast forecast forecast
8
Cash forecast
9 10
Income Statement Balance sheet 6
forecast forecast
Sales forecast
QA ?
7
Sales Budget
Forecast sales volume, price and revenue
next terms
Forecast cash received and account
receivables
8
Sales Budget
ABC prepares for sale planning in 2023 with
following information:
Sale volume:
Quarter 1 : 30,000 units
Quarter 2 : 45,000 units
Quarter 3 : 60,000 units
Quarter 4 : 50,000 units
Forecasting price is £25
9
Sales Budget
As previous years, 60% of sales will be
received immediately in cash, 40% will be
receive next period,
The account receivables on the balance
sheets on 31/12/2022 was £350,000 which
will be paid in term 1
Prepare a sales and cash receipts forecast
10
Sales Budget
Q1 Q2 Q3 Q4 Year
Volume
Price
Sales
Expected Cash Collections
AR on 31/12/2022
Term 1
Term 2
Term 3
Term 4 11
Total
Sales Budget
Q1 Q2 Q3 Q4 Year
Volume 30,000 45,000 60,000 50,000 185,000
Price 25 25 25 25 25
Sales 750,000 1,125,000 1,500,000 1,250,000 4,625,000
Expected Cash Collections
AR on 31/12/2022
Term 1
Term 2
Term 3
Term 4 12
Total
Sales Budget
Q1 Q2 Q3 Q4 Year
Volume 30,000 45,000 60,000 50,000 185,000
Price 25 25 25 25 25
Sales 750,000 1,125,000 1,500,000 1,250,000 4,625,000
Expected Cash Collections
AR on 31/12/2022 350,000
Term 1 450,000 300,000
Term 2 675,000 450,000
Term 3 900,000 600,000
Term 4 750,000 500,000 13
Total 800,000 975,000 1,350,000 1,350,000 500,000
Exercise – Page 314
Aim is to determine the volume of finished goods
needed to produce
Finished Sales Ending Beginning
goods = volume + finished - finished
volume goods goods
Example: The firm want its beginning finished
goods as 10% of current sales volume, Ending
finished goods on 31/12/2023 is expected of 4,000
units
15
Q1 Q2 Q3 Q4 2023
Sales volume 30,000 45,000 60,000 50,000 185,000
Ending finished
4,000 4,000
goods
Total demand 189,000
Beginning finished
3,000 4,500 6,000 5,000 3,000
goods
Demanded finished
186,000
goods produced 16
Q1 Q2 Q3 Q4 2023
Sales volume 30,000 45,000 60,000 50,000 185,000
Ending finished
4,500 6,000 5,000 4,000 4,000
goods
Total demand 34,500 51,000 65,000 54,000 189,000
Beginning finished
3,000 4,500 6,000 5,000 3,000
goods
Demanded finished
31,500 46,500 59,000 49,000 186,000
goods produced 17
Exercise – Page 314
Forecast materials consumed by one
product, materials needed to purchase,
materials price, and direct materials
expenses next terms
Forecast cash payment and account
payables
19
To produce a product, the firm needs 1kg of material with
price of £ 12 per kg
Beginning materials is expected to be 10% of materials
needed in that term, Ending materials on 31/12/2023 will be
3,500 kg
As previous years, 50% of materials purchased in the term
will be paid immediately, the rest will be paid next period,
The account payables on the balance sheets on 31/12/2022
was £ 258,000 which will be paid in term 1 20
Q1 Q2 Q3 Q4 Year
Demanded finished goods
produced (unit) 31,500 46,500 59,000 49,000 186,000
Materials consumed (kg/unit) 1 1 1 1 1
Demanded materials (kg) 31,500 46,500 59,000 49,000 186,000
Ending materials(kg) 3,500 3,500
Total demand (kg) 52,500 189,500
Beginning materials (kg) 3,150 4,650 5,900 4,900 3,150
Purchased materials (kg) 47,600 186,350
Price (£/kg) 12 12 12 12 12
Cash needed for purchasing (£)
Direct materials expenses(£)
AP on 31/12/2020
Term 1
Term 2
21
Term 3
Term 4
Total cash payments
Q1 Q2 Q3 Q4 Year
Demanded finished goods
produced (unit) 31,500 46,500 59,000 49,000 186,000
Materials consumed (kg/unit) 1 1 1 1 1
Demanded materials (kg) 31,500 46,500 59,000 49,000 186,000
Ending materials(kg) 4,650 5,900 4,900 3,500 3,500
Total demand (kg) 36,150 52,400 63,900 52,500 189,500
Beginning materials (kg) 3,150 4,650 5,900 4,900 3,150
Purchased materials (kg) 33,000 47,750 58,000 47,600 186,350
Price (£/kg) 12 12 12 12 12
Cash needed for purchasing (£)
Direct materials expenses(£)
AP on 31/12/2020
Term 1
Term 2
22
Term 3
Term 4
Total cash payments
Q1 Q2 Q3 Q4 Year
Demanded finished goods
produced (unit) 31,500 46,500 59,000 49,000 186,000
Materials consumed (kg/unit) 1 1 1 1
Demanded materials (kg) 31,500 46,500 59,000 49,000 186,000
Ending materials(kg) 4,650 5,900 4,900 3,500 3,500
Total demand (kg) 36,150 52,400 63,900 52,500 189,500
Beginning materials (kg) 3,150 4,650 5,900 4,900 3,150
Purchased materials (kg) 33,000 47,750 58,000 47,600 186,350
Price (£/kg) 12 12 12 12 12
Cash needed for purchasing (£) 396,000 573,000 696,000 571,200 2,236,200
Direct materials expenses(£) 378,000 558,000 708,000 588,000 2,232,000
Cash payments
AP on 31/12/2022 258,000
Term 1
Term 2
23
Term 3
Term 4
Total cash payments
Q1 Q2 Q3 Q4 Year
Demanded finished goods
produced (unit) 31,500 46,500 59,000 49,000 186,000
Materials consumed (kg/unit) 1 1 1 1
Demanded materials (kg) 31,500 46,500 59,000 49,000 186,000
Ending materials(kg) 4,650 5,900 4,900 3,500 3,500
Total demand (kg) 36,150 52,400 63,900 52,500 189,500
Beginning materials (kg) 3,150 4,650 5,900 4,900 3,150
Purchased materials (kg) 33,000 47,750 58,000 47,600 186,350
Price (£/kg) 12 12 12 12 12
Cash needed for purchasing (£) 396,000 573,000 696,000 571,200 2,236,200
Direct materials expenses(£) 378,000 558,000 708,000 588,000 2,232,000
Cash payments
AP on 31/12/2022 258,000 258,000
Term 1 198,000 198,000 396,000
Term 2 286,500 286,500 573,000
24
Term 3 348,000 348,000 696,000
Term 4 285,600 285,600
Total cash payments 456,000 484,500 634,500 633,600 2,208,600
Exercise – p.314
Required:
Prepare a direct materials budget for musk oil, by quarter and in total,
for Year 2. At the bottom of your budget, show the amount of
purchases in roubles for each quarter and for the year in total.
Direct labour Production Payment per
=
costs hours needed * 1 hour
Example: To produce a product, the firm need
0.5hr with the rate per hour of $8
26
Q1 Q2 Q3 Q4 Year
Demanded finished
goods
Hours consumed
by one product
Total hours needed
Labour hour rate
Direct labour costs
27
Q1 Q2 Q3 Q4 Year
Demanded finished
31,500 46,500 59,000 49,000 186,000
goods
Hours consumed
0.5 0.5 0.5 0.5 0.5
by one product
Total hours needed 15,750 23,250 29,500 24,500 93,000
Labour hour rate 8 8 8 8 8
Direct labour costs
126,000 186,000 236,000 196,000 744,000
28
• Exercise – p.314
Variable overhead costs is expected to be £ 4/hr
Fixed overhead costs will be £ 30,000/term, in which
depreciation is £ 10,000
The firm allocate overhead costs based on direct
labour hours
30
Q1 Q2 Q3 Q4 Year
Direct labour hours 15,750 23,250 29,500 24,500 93,000
Variable overhead
costs/hour
Total variable
overhead costs
Fixed overhead costs
Total overhead costs
Depreciation
Payment for
overhead costs 31
Q1 Q2 Q3 Q4 Year
Direct labour hours 15,750 23,250 29,500 24,500 93,000
Variable overhead 4 4 4 4 4
costs/hour
Total variable
overhead costs
Fixed overhead costs 30,000 30,000 30,000 30,000 120,000
Total overhead costs
Depreciation 10,000 10,000 10,000 10,000 40,000
Payment for
overhead costs 32
Q1 Q2 Q3 Q4 Year
Direct labour hours 15,750 23,250 29,500 24,500 93,000
Variable overhead 4 4 4 4 4
costs/hour
Total variable 63,000 93,000 118,000 98,000 372,000
overhead costs
Fixed overhead costs 30,000 30,000 30,000 30,000 120,000
Total overhead costs 93,000 123,000 148,000 128,000 492,000
Depreciation 10,000 10,000 10,000 10,000 40,000
Payment for 83,000 113,000 138,000 118,000 452,000
overhead costs 33
(For the whole year)
Cost Total Cost per unit
Total demanded finished
goods produced
Total Direct materials cost
Total Direct labour cost
Total Overhead cost
Total costs
Ending finished goods (units)
Value of ending finished goods(£)
Sales volume (units)
Cost of goods sold (£)
(For the whole year)
Cost Total Cost per unit
Total demanded finished 186,000
goods produced units
Total Direct materials cost 2,232,000 12
Total Direct labour cost 744,000 4
Total Overhead cost 492,000 2.645
Total costs 3,468,000 18.645
Ending finished goods (units) 4,000 units
Value of ending finished goods(£) 74,580
Sales volume (units) 185,000 units
Cost of goods sold (£) 3,449,325
Variable selling and administration expenses is expected
to be £2 per unit
Advertising costs will be £25,000 per term, management
salaries will be £20,000 per term, depreciation will be
£10,000 per term,
The firm will buy transportation insurance in term 1, and
warehouse insurance in term 2 which will cost £15,000
and £10,000 respectively,
37
Selling costs of £5,000 will occur in term 4
Q1 Q2 Q3 Q4 Year
Sales volume 30,000 45,000 60,000 50,000 185,000
Variable S&A costs per unit 2 2 2 2 2
Total variable costs 60,000 90,000 120,000 100,000 370,000
Advertising
Salary
Depreciation
Insurance
Other selling costs
Total fixed costs
Total Selling and admin costs
38
Cash for selling and admin
Q1 Q2 Q3 Q4 Year
Sales volume 30,000 45,000 60,000 50,000 185,000
Variable S&A costs per unit 2 2 2 2 2
Total variable costs 60,000 90,000 120,000 100,000 370,000
Advertising 25,000 25,000 25,000 25,000 100,000
Salary 20,000 20,000 20,000 20,000 80,000
Depreciation 10,000 10,000 10,000 10,000 40,000
Insurance 15,000 10,000 25,000
Other selling costs 5,000 5,000
Total fixed costs 70,000 65,000 55,000 60,000 250,000
Total Selling and admin costs 130,000 155,000 175,000 160,000 620,00039
Cash for selling and admin 120,000 145,000 165,000 150,000 580,000
Ending cash on 31/12/2022 was £150,000,
Expected minimum ending cash is £130,000
The firm is tended to buy an equipment in term 1 and a new
system in term 2 which cost £250,000 and £100,000
respectively
Expected taxes for each term is £20,000
Firm will borrow from bank with 3% interest per term in
cash-shortage term, and will pay back in cash-surplus term,
Firm will borrow in the beginning of the term and pay at the 41
end of the term.
Q1 Q2 Q3 Q4 Year
Beginning cash
Cash from sales
Total cash collected
(Cash in flow)
Materials purchased
Direct labor
Overheads
Selling and admin.
Equipment
Tax
Total cash spent (Cash out
flow)
Cash shortage/surplus
Borrow - -
Principal payment - -
42
Interest payment - -
Ending cash
Q1 Q2 Q3 Q4 Year
Beginning cash 150,000 150,000
Cash from sales
Total cash collected
(Cash in flow)
Materials purchased
Direct labor
Overheads
Selling and admin.
Equipment 250,000 100,000 - - 350,000
Tax 20,000 20,000 20,000 20,000 80,000
Total cash spent (Cash out
flow)
Cash shortage/surplus
Borrow - -
Principal payment - -
43
Interest payment - -
Ending cash
Q1 Q2 Q3 Q4 Year
Beginning cash 150,000 130,000 130,000 130,000 150,000
Cash from sales 800,000 975,000 1,350,000 1,350,000 4,475,000
Total cash collected 950,000 1,105,000 1,480,000 1,480,000 4,625,000
(Cash in flow)
Materials purchased 456,000 484,500 634,500 633,600 2,208,600
Direct labor 126,000 186,000 236,000 196,000 744,000
Overheads 83,000 113,000 138,000 118,000 452,000
Selling and admin. 120,000 145,000 165,000 150,000 580,000
Equipment 250,000 100,000 - - 350,000
Tax 20,000 20,000 20,000 20,000 80,000
Total cash spent (Cash out 1055,000 1,048,500 1,193,500 1,117,600 4,414,600
flow)
Cash shortage/surplus (105,000) 56,500 286,500 362,400 600,400
Borrow 235,000 73,500 - -
Principal payment - - 130,940 177,560 308,500 44
Interest payment - - 25,560 5,326.8 30,886.8
Ending cash 130,000 130,000 130,000 179,513.2 179,513.2
In $000
$
Sales(185,000*25) Sales forecast
COGs (185,000*18.645) Finished goods forecast
Gross profit
Selling and admin costs Selling and admin forecast
EBIT
Interest Cash forecast
EBT
Taxes Cash forecast
46
EAT
1. Review Problem: Budget Schedules-page 311
2. EXERCISE 8–1 Schedule of Expected Cash Collections-
page 314
3. EXERCISE 8–11 Production and Direct Materials Budgets-
page 317
4. PROBLEM 8–15 Production and Direct Materials Budgets-
page 318
5. PROBLEM 8–16 Direct Labor and Manufacturing
Overhead Budgets-page 319
