Akaun Chapter 10

KE1013 Chapter Ten 1

Chapter Ten

BUDGETING:

THE PLANNING &

CONTROLLING TOOL


Outline

• The concept of budgeting

• The benefits of budgeting

• Preparing master budget for merchandising

firm:

– Operational budget

– Financial budget


Budgeting

A budget is a formal written statement of management’s plans for a specified future time period, expressed in financial terms.

The role of accounting during the budgeting process is to:

(a) provide historical data on revenues, costs, and expenses,

(b) express management’s plans in financial terms, and

(c) prepare periodic budget reports.


Benefits of Budgeting

Requires all levels of management to plan ahead.

Provides definite objectives for evaluating performance.

Creates an early warning system for potential problems.

Facilitates the coordination of activities within the business.

Results in greater management awareness of the entity’s overall operations.

Motivates personnel throughout the organization to meet planned objectives.


Preparing Budget for Merchandising Firm

Master Budget

Operating Budgets Financial Budgets


Master Budget

The master budget is a set of interrelated budgets that constitutes a plan of action for a specified time period.

It is developed within the framework of a sales forecast which shows potential sales for the industry and the company’s expected share of such sales.


Operating Budgets

Operating budgets show the individual budgets that result in the preparation of the budgeted income statement.

Sales Budget

Purchase Budget, Finished Goods Inventory Budget, Cost of Goods Sold Budget.

Selling and Administrative Expenses Budget

Income Statement Budget


Sales Budget

The sales budget is the first budget prepared.

Each of the other budgets depends on the sales budget.

It is derived from the sales forecast. It represents management’s best estimate of sales revenue for the budget period.


Sales Budget

Expected Sales = EstimatedQuantity

x Estimated Selling Price

Illustration 1:

October 2,000 pairsNovember 2,500 “December 3,800 “

Syarikat Sang Bedal is a shoes merchandiser.It sells “smart shoes” at a price of RM40.00 per pair. Its estimated sales quantity for next three months are as follows:


Syarikat Sang BedalSales Budget for the month of October, November

And December 2002

October November December Total

Quantity

Selling Price (RM)

Sales Revenue (RM)

2,000 2,500 3,800 8,300

40.00 40.00 40.00 40.00

80,000 100,000 152,000 332,000


Schedule of Cash Collection

Preparing a schedule of cash collections from customers is useful in preparing a cash budget.

Assuming that credit sales per the Sales Budget are collected 60% in the month sold and 40% in the following month. Accounts Receivable of RM30,000 at September 30, 2002 are expected to be collected in full in October 2002.

Illustration 2:


Syarikat Sang BedalSchedule of Cash Collection for the month of

October, November and December 2002


Current MonthSales (60%)

Previous MonthSales (40%)

Total Collection

48,000 60,000 91,200 199,200

30,000 32,000 40,000 102,000

78,000 92,000 131,200 301,200

Sales 80,000 100,000 152,000 332,000


Purchases Budget

It is prepared based on sales budget.

It also depends on the estimated beginning inventory and the desired ending inventory as a preparation for the following sales.

It estimates the quantity of merchandises needed in order to fulfill the estimated sales.


Purchases Budget

Purchases Needed

= Cost of GoodsSold

+ Ending Inventory

- BeginningInventory

Illustration 3: The company’s policy regarding inventories and cost of goods sold:

1. Cost of goods sold is 45% of the sales.

2. The company decided to keep an inventory of at least 30% of the expected cost of goods sold of the following month.

Opening inventory for Oct 2002 = RM9,800.

The expected sales for January 2003 = RM160,000.


Syarikat Sang BedalFinished Goods Purchase Budget for the month of



Sales 80,000 100,000 152,000 332,000

COGS 45% 36,000

(+) End. Inv. 30%

F. G. needed

(-) Beginning Inv.

F. G. Purchases

45,000 68,400 149,400

13,500 20,250 21,600 55,350

49,500 65,250 90,000 204,750

9,800 13,500 20,250 43,550

39,700 51,750 69,750 161,200


Schedule of Purchase Payments

Preparing a schedule of cash payments to suppliers is useful in preparing a cash budget.

Illustration 4:Assuming that the company pays 65% of the purchases in the month of purchase, and the balance will be settled in the following month.

The amount outstanding for September purchase was RM10,500.


Syarikat Sang BedalSchedule of Purchase Payments for the month of



Purchases 39,700 51,750 69,750 161,200

Current monthPurchase 65%

Previous monthPurchase 35%

Total payment

25,805

10,500

36,305

33,638

13,895

47,533

45,338

18,112

63,450

104,781

42,507

147,288



The selling and administrative expense budget is a projection of anticipated operating expenses.

It distinguishes between fixed and variable costs.



The company pays sales commission at the rate of 15% of the current month sales.

Advertising expense is expected to be 5% from the following month sales. Expected sales for January 2003 is RM160,000 Other expenses : Admin salary RM25,000;

Depreciation RM15,000.

Illustration 5:


Syarikat Sang BedalSelling and Administrative Budget for the month of



Sales Comm.

Advertising

Admin Salary

Total Expenses

Depreciation

12,000 15,000 22,800 49,800

5,000 7,600 8,000 20,600

18,000 18,000 18,000 54,000

10,000 10,000 10,000 36,000

45,000 50,600 58,800 154,400


Income Statement Budget

The budgeted income statement is the important end-product of the operating budgets.

This budget indicates the expected profitability of operations and it provides a basis for evaluating

company performance.

The budget is prepared from the:

Sales budget

Purchases budget

Selling and administrative expenses budget


Syarikat Sang BedalBudgeted Income Statement for the three months

ended 31 December 2002

Sales revenue 332,000

(-) Cost of goods sold 149,400

Gross profit 182,600

(-) Operating expenses:

Selling and administrative expenses 154,400

Interest expense 180

Net income 28,020


Financial Budgets

Financial budgets focus primarily on the cash resources needed to fund expected operations and planned capital expenditures.

Cash Budget

Balance Sheet Budget


Cash Budget

The cash budget shows anticipated cash flows.

Because cash is so vital, this budget is often considered to be the most important output in preparing financial budgets.

The cash budget contains three sections:

(1) Cash receipts.

(2) Cash disbursements.

(3) Financing.


Cash Budget

Illustration 6: 1. The company requires a minimum of RM70,000 cash at the end of each

month.

2. The company plans to purchase fixed assets in November 2002 amounting to RM50,000.

3. In the case of cash deficit, the company can obtain bank loan in multiples of RM1,000 with expected

interest rate of 8% p.a. It is assumed that the loan can be obtained at the end of the month and payment of the loan will be paid in full at the end of the following month whenever possible.

4. Cash in hand as at 1 October 2002 RM83,000.


Syarikat Sang BedalCash Budget for the month of


Opening balanceCash collectionSales of assets

Purchase payment

Operating expensesPurchase of assets

Excess / deficitFinancing

Loan repaymentInterest

Closing balance

October November December

83,00078,000

-

161,000

36,30535,000

-

89,695

71,305

---

89,695

89,69592,000

-181,695

47,53340,60050,000

138,133

43,56227,000

--

70,562

70,562131,200

-201,762

63,45048,800

-112,250

89,512--

(180)

89,332


Budgeted Balance Sheet

The budgeted balance sheet is a projection of financial position at the end of the budget period.

It is developed from the budgeted balance sheet for the preceding year and the budgets for the current year.


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Akaun Chapter 10