The Master Budget and Responsibility Accounting

Budgetary Control

23.1 Budgets

Budgets are plans set in financial and quantitative terms for a business for a
specified period of time in the future.

23.2 Budgetary Control

Budgetary control is a process whereby actual results are compared to budgeted

figures and any significant differences must be investigated to discover the cause.

23.3 Purposes of the Budget

 To aid the planning of annual operations

 To coordinate the activities of the various parts of the organisation
 To communicate plans to the various responsibility managers
 To motivate managers to strive to achieve organisational goals
 To control activities
 To evaluate the performance of managers

23.4 Functional Budgets

Functional budgets are budgets prepared for the various functions and
departments of an organisation. For examples, sales budget, production budget,
purchases budget, direct labour budget etc.

(a) Sales Budget

This consists of the number of each type of product that it is anticipated will be
sold and the price at which they are to be sold.

Sales budget for the …………….

April May June Total
Budgeted sales in unit = A XX XX XX XX
Selling price per unit (RM)= B XX XX XX XX
Total budgeted sales (RM)
=C=AxB XX XX XX XX

(b) Production Budget

This can be prepared once the sales units are determined.

Production budget (in units) for ………

April May June Total
Sales requirements A XX XX XX XX Finished goods
Add:Closing inventory D XX XX XX XX Finished goods
Less:Opening inventory E (XX) (XX) (XX) (XX) Finished goods
Production F=A+D-E XX XX XX XX Finished goods

(c) Raw Materials Budget

Once production units are known, the quantity of raw materials needed can be
determined. The expected price of the raw materials is then applied to the quantity
budgeted to be used to determine the Raw Materials Purchases Budget.

Raw materials purchases budget for the ……

April May June Total
Production F XX XX XX XX Finished goods
Material per unit of FG Y XX XX XX XX
Production requirement G=F x Y XX XX XX XX Raw materials
Add: Closing RM inv. H XX XX XX XX Raw materials
Less: Opening RM inv. I (XX) (XX) (XX) (XX) Raw materials
Budgeted purchases in unit J=G+H-I XX XX XX XX Raw materials
Purchase price per unit P XX XX XX XX
Purchases in RM JxP XX XX XX XX

(d) Labour Budget

This can be determined once the production units are known. The rate of pay for
each grade of labour can then be applied to give the labour cost budget.
 Direct labour budget for the
April May June Total
Production (unit) F XX XX XX XX
Direct labour hour per unit (hours) U XX XX XX XX
Total hours L=F x U XX XX XX XX
Direct labour cost per hour (RM) V XX XX XX XX
Direct labour budget (RM) M=LxV XX XX XX XX

Illustration 23.1

Royal Company is preparing budgets for the quarter ending 30 June 20X8.

Budgeted sales for the next five months are:

a. April 20,000 units
b. May 50,000 units
c. June 30,000 units
d. July 25,000 units
e. August 15,000 units.

The selling price is $10 per unit.

The management at Royal Company wants closing inventory to be equal to 20%

of the following month’s budgeted sales in units. On 31 March, 4,000 units were
on hand.

At Royal Company, 5 kgs of material are required per unit of product.

Management wants materials on hand at the end of each month equal to 10% of
the following month’s production requirement. On 31 March, 13,000 kgs of
material are on hand and on 30 June, 11,500 kgs of material are expected on hand.
Material cost is $0.40 per kg.

At Royal, each unit of product requires 0.05 hours of direct labor. Workers are
paid a wage rate of $10 per hour.

Required: For the year quarter ending 30 Jun 20X8, prepare:

1. Sales budget
1. Production budget
1. Material purchases budget
1. Direct labour budget
Solution:

(i)
Sales budget for the quarter ending 30 June 20x8
April May June Total
Budgeted sales in unit A
Selling price per unit B
Total budgeted sales (RM) C=A x B

(ii)
Production budget (in units) for the quarter ending 30 June 20x8
April May June Total
Sales requirements A
Add:Closing FG inventory D
Less:Opening FG inventory E
Production F=A+D-E

(iii)
Raw materials purchases budget for the quarter ending 30 June 20x8
April May June Total
Production (unit) F
Material (kg) per unit of FG Y
Production requirement (kg) G=F x Y
Add: Closing RM inv. (kg) H
Less: Opening RM inv. (kg) I
Budgeted purchases in kgs J=G+H-I
Purchase price ($) per kg P
Purchases in $ JxP

(iv)
Direct labour budget for the quarter ending 30 June 20x8
April May June Total
Production (unit) F
Direct labour hour per unit (hours) U
Total hours L=F x U
Direct labour cost per hour (RM) V
Direct labour budget (RM) M=LxV
When all the functional budgets have been set, the master budget can then be
prepared.

23.5 Master Budgets

Master Budgets are budgets that give an overall view of the plan of an
organization. It is the final budget prepared by incorporating all functional
budgets.

Master budget will normally consist of a cash budget, a budgeted income

statement and a budgeted balance sheet.

Cash Budget
A cash budget is a budget that shows in summary form, the expected cash receipts
and cash payments, net cash flow (surplus or deficit), opening and closing cash
balances for the budget period.

The format of the cash budget is as follows:

 ABC Pte Ltd
Cash budget for the three months from June to August 20X9
Jun July Aug
$ $ $
Receipts
Capital or Share capital XX
Cash sales XX XX XX
Credit customers (Trade receivables/Debtors) XX XX XX
Proceeds from disposal of fixed assets XX XX XX
Dividend received XX XX XX
Receipts = A XX XX XX

Payments
Suppliers (Trade payables/Debtors) XX XX XX
Salaries XX XX XX
Rental XX XX XX
Tax paid XX XX XX
Purchase of fixed assets XX XX XX
Repayment of loan XX XX XX
Loan interest XX XX XX
Payments =B XX XX XX

Surplus / (Deficit) = C = (A - B) (Net cash flow) XX XX XX

Opening cash balance = D XX XX XX
Closing cash balance = C + D XX XX XX

Budgeted Income Statement and Budgeted Balance Sheet

The budgeted income statement is a summary of various component projections

of revenues and expenses for the budget period. It indicates the expected net profit
for the period.

The budgeted or pro forma balance sheet projects the financial position of
the company as of the end of the year.

The budgeted income statement format and budgeted balance sheet format are as
follows:
 ABC Pte Ltd
Budgeted Income Statement for the three months ending 31 December 20X9.
$ $
Sales XX
Less: Cost of Sales
Opening inventory XX
Purchases XX
XX
Less: Closing inventory XX XX
Gross profit XX
Less: Expenses
Rental XX
Telephone XX
Salaries XX
Sundry expenses XX
Depreciation-computer XX
Depreciation-furniture XX XX
Net profit XX
Less: dividend XX
Retained earnigs for the year XX
Retained earnings b/d XX
Retained earnings c/d XX

ABC Pte Ltd

Budgeted Balance Sheet as at 31 December 20X9
Cost Acc. Dep NBV
Non-current assets $ $ $
Computer XX XX XX
Furniture and fittings XX XX XX
XX
Current Assets
Inventory XX
Trade receivable XX
Cash XX
XX
Less: Current liabilities
Trade payables XX
Accuals (Telephone) XX XX
Net current assets XX
XX
Financed by:
Share Capital / Capital)* XX
Retained earnings / Net profit* XX
XX
Non-Current liabilities
Debenture XX
XX
* For sole trader
Illustration 23.2

Dana started a business on his own, running a shop selling gifts and souvenirs.
Dana is renting a shop lot at a mall. His principal start up was cost of inventories.
He has invested in a computer to keep track of his inventories. His assets and
liabilities prior to start up are:

$
Trade payables 15,000
Inventories 15,000
Computer 3,900
Furniture and fittings 6,100
Cash 3,500

In his first six months of trading, Dana planned the following sales and purchases
of inventories:

Sales Purchases
$ $
July 4,250 3,375
August 7.750 4,625
September 12,375 8,125
October 15,500 9,500
November 18,000 9,500
December 20,750 9,500
78,625 44,625
It is expected that the sales will be for cash, except for a 30% of monthly sales to
be settled in the month following the sales.

Purchases of inventories will be on credit, with payment made in full in the month
following the purchases. Closing inventories at the end of December are budgeted
at $22,400.

The following are the budgeted expenses:

$ Payment details
Rental 1,500 Payable in the beginning of the month
Telephone 300 Payable from August onwards (one month
later)
Salaries 800 Payable at the end of the month
Sundry expenses per annum 5,250 RM300 in July and RM450 thereafter
The computer will be subject to depreciation using straight line method over 5
years. Furniture and fittings have an estimated useful of 10 years and will be
depreciated using the same method as computer.
Required:

(a) Prepare a monthly cash budget for six months from July to December
20X9.

(b) Prepare a budgeted income statement for the six months ended 31
December 20X9.

(c) Prepare a budgeted balance sheet (SOFP) as at 31 December 20X9.