BudgetO A budget is a quantitative statement,

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

1

Purpose of preparing budget

O Planning

O Coordination

O Communication

O Motivation

O Performance evaluation

2

Steps in the preparation of budget

O Consideration of all external factorsO Preparation of other budgetsO Production budget, purchases budget, direct

labor budget, overheads budget and selling and administrative budget

O Negotiation of budgetO Coordination of budgetO Cash budget, capital expenditure budget,

budget balance sheet, budget income statement, budget cash flow statement, budget statement of retained earnings

3

Componets of the Master Budget :

Operating Budget:

Sales budget

Operating expense budget

Purchases & cost of goods sold

budget

Inventory budget

Budgeted income statement

Cash budgetO The cash budget is a statement of expected

cash receipt and paymentsO It help avoid surplus cash and unexpected

cash deficienciesO Normally, the cash budget consists of the

following items:Closing balance of cash =

Opening balance of cash + Receipts - Payments

6

Cash budgetO Receipts include:

O Cash salesO Collection from debtorsO Other incomes such as investment income, rent received

O Payments include:O Cash purchasesO Payment to creditorsO Direct labourO Other expenses such as manufacturing overhead,

administrative and selling expenses (depreciation does not involve cash flow)

O Tax payment

7

Cash budgetO 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

8

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 MonthPercentage Paid

Month of sale 15%Month after sale 35%Second month after sale 50%

MONTH CASH COLLECTED

November 2005 15% 246000December 2005 35% 574000January 2006 50% 820000

Budgeted income statement and balance

sheetO These financial statements reflect

the predicted results to be achieved.

12

13

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

$ $Sales (400*$18) 7200Less: COGS

Opening stock of finished goods 900Add: Cost of goods completed (380*$12) 4560Less: closing stock of finished goods

(55*$12) 660 4800Gross profit 2400Less: expenses

Fixed overhead ($100*6 mth) 600Depreciation: Machinery 450Depreciation: Motors 200 1250

Net profit 1150

14

Wong Ltd.Budget balance sheet as at 30 June 2011

Fixed asssets Cost Dep Net$ $ $

Machinery 6000 2050 3950Motor vehicles 2000 1000 1000

8000 3050 4950Current assetsStock: finished goods 660

raw materials 220Debtors 4500Cash and bank 1240

6620Less: Current liabilities

Trade creditors 720Creditors for overheads 100 5800

10750

15

Financed by: $ $Capital and reservesShare capital (4000+3000) 7000Profit and loss account (2600+1150) 3750

10750

Thank You