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AFMLll.DOC AYJL\V ACCOUNTING 1''0R MANAGERS Page AFMLll - 7

APPENDIX 2 BUDGETARY CONTROL

PRODUCTIVE
OPPORTUNITIES

COMPANY
OBJECTIVES
- --,

BUDGET

ACTUAL
ACHIEVEMENT

VARIANCES

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EXAMPLE 1 CASH BUDGET

The following information is relevant to the preparation of the cash budget of

Spiros Ud. for the first six months of the year.

1. On l January, cash on hand and at bank is expected to amount to GBP 5,000.

2. Debtors normally pay at the end of the month following the month in which the
sales took place, whereas the company pays its creditors at the end of the month.

3. Expenses of GBP 5,000 will be paid at the end of each month.

4. A machine costing GBP 18,000 is to be acquired and paid for at the end of March.

5. Budgeted purchases and sales are as follows:-

Month Purchases Sales

December 12,000 25,000

January 22,000 25,000

February 19,000 27,000

March 18,000 30,000

April to June are budgeted as for March.

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 AFMLt I.DOC AYJLW ACCOUNTING FOR MANAGERS Page AFMLl 1 - 9

CASH BUDGET

SPIROS LTD. CASH BUDGET (January - June)

JAN FEB MAR APR MAY JUN TOTAL

RECEIPTS
Bal. bid 5,000 3,000 4,000 4,000 5,000
Receipts
from debtors 25,000 25,000 27,000 30,000 30,000 30,000 167,000

30,000 28,000 31,000 30,000 30,000 34,000 172,000

PAYMENTS
Deficit bid 10,000 3,000
Purehases 22,000 19,000 18,000 18,000 18,000 18,000 113,000
Expenses 5,000 S,000 5,000 5,000 5,000 5,000 30,000
Acquisition
of machine 18,000 18,000

27,000 24,000 41,000 33,000 26,000 23,000 161,000

Bal. c/d 3,000 4,000 (10,000) (3,000) 4,000 11,000 11,000

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MASTER BUDGET - EXAMPLE 2

STEP 1 : Sales Budget

It is assumed that customer demand is the principal budget factor and that sales forecasts
have been prepared. The sales budget is prepared from the sales forecasts as:-

Schedule l Sales Budget For the six months to 30 June

Units Price Total Sales

Product A 40,000 10 400,000
Product B 16,000 12.5 200,000

600,000

STEP 2 : Production Budget

Once the sales budget has been determined, the production budget may be prepared.

Schedule 2 Production Budget For the six months to 30 June

Product A Product B
( Units ) ( Units )
Budgeted Sales Schedule I 40,000 16,000
Budgeted Closing Stock Schedule 3 1,200 800
-------- --------
Total requirements 41,200 16,800
Less: Opening Stock ( assumed ) 500 500
-------- --------
Required Production 40,700 16,300
-------- -------·-

Schedule 3 Finished Goods Stock Budget For the six months to 30 June

Finished goods stock on 30 June Units Cost Total

Product A 1,200 7.5 9,000
Product B 800 7.5 6,000

2,000 15,000

N.B. Both products are assumed valued at GBP 7.5 per unit.

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STEP 3:
Now, the production levels have been determined and the costs of achieving that level can
be budgeted. In this case, three separate budgets will be prepared:

1. Raw Materials Budget

2. Labour Budget

3. Factory Expenses Budget

Schedule 4 Raw Material Stock Budget For the six months to 30 June

Units Cost
Raw material stock on 30 June 7,000 7,000

Schedule 5 Raw 1\faterials Budget For the six months to 30 June

Units of Quan Total Total

Product. Unit Quantity Price Cost
Kg Kg GBP GBP
Needed for production of:
Product A Schedule 2 40,700 2 81,400 1 81,400
Product B Schedule 2 16,300 2 32,600 1 32,600
---~------ ----------
Total to be used in production 114,000 114,600
Desired Closing Stock Schedule 4 7,000 7,000
---------- ----------
Total requirements 121,000 121,000
Less: Opening Stock ( assumed ) 5,000 5,000
---------- ----~-----

Total to be purchased 116,000 116,000

------·---- ----------

Schedule 6 Labour Budget For the six months to 30 June

Units of Hour/ Total Total

Product Unit Hours Rate Cost
Product A Schedule 2 40,700 2 81,400 1.5 122, 100
Product B Schedule 2 16,300 2 32,600 l.5 48,900

Total 114,000 171,000

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 AFMLll.DOC AYJLW ACCOUNTING FOR MANAGERS Page AFMLll -12

Schedule 7 Factory Expenses Budget For the six months to 30 June

Indirect labour 49,000

Supervision 30,000
Power 15,000
Maintenance 13,500
Rent and rates 25,000
Depreciation 10,000

142,500

The above expenses are estimated at budgeted level of activity of 114,000 labour hours.

STEP 4:
The total production costs may be summarized in a cost of goods sold budget.

Schedule 8 Cost of Goods Sold Budget For the six months to 30 June

Materials ( Schedule 5 ) 114,000

Labour ( Schedule 6 ) 171,000
Expenses ( Schedule 7 ) 142,500

427,500
Add: Stock of Finished Goods, I Jan ( assumed) 7 ,500

435,000
Less: Stock of Finished Goods, 30 June (assumed) 15,000

Cost of Goods Sold 420,000

STEP 5:
The next step is to prepare the necessary service budgets.

For illustration purposes, only two arc assumed to be required.

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 AFMLll.DOC AYJLW ACCOUNTING FOR MANAGERS Page AFMLll -13

Schedule 9 Selling Expenses Budget For the six months to 30 June

At budgeted level of activity of:

Sales Product A 40,000 units

Product B 16,000 units

Sales commission 25,000

Salaries 32,000
Travelling expenses 15,000
Advertising 23,000

95,000

Schedule 10 General & Administrative Expenses Budget For the six months 30 June

Office wages 21,000

Executive salaries 35,000
Office supplies 4,000
Miscellaneous 5,000

65,000

STEP 6:
The final step in the planning process is to determine the equipment budget.

Schedule 11 F..quipment Budget For the six months to 30 June

Estimated
Project date of
No. Payment
153 30 fan Replace machine X 75 20,000
154 31 May New machine 10,000
Sundries 5,000

Total capital expenditure 35,000

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STEP 7 : The next step is to prepare Cash Budget.

Schedule 12 Cash Budget For the six months to 30 June

RECEIPTS Collections from customers (Schedule I less Debtors 6,000) 594,000

PAYMENTS Materials (Schedule 5 less creditors 5,000) 111,000

Wages ( Schedule 6 ) 171,000
Factory expenses ( Schedule 7 less Depreciation 10,000 ) 132,500
Selling expenses ( Schedule 9 ) 95,000
General & administrative expenses ( Schedule 10 ) 65,000
Purchase of machines ( Schedule 11 ) 35,000

609,500

Balance/( Deficit ) for the period (15,500)

Balance at the beginning of the period 22,500

Balance at the end of the period 7,000

STEP 8: The master budget may now be prepared.

BUDGETED BALANCE SHEET AS AT 30 JUNE

Fixed Assets 285,000

Current Assets
Stocks: Finished goods ( Schedule 3 ) IS,000
Work in progress ( assumed ) 8.000
Raw materials ( Schedule 4 ) 7,000
Debtors ( Opening Bal. 24,000 + 6,000) 30,000
Cash ( Schedule 12 ) 7,000
67,000
Less: Current Liabilities
Creditors (Opening Bal. 12,000 + S,000) 17,000 50,000

NET ASSETS 335,000

Financed by : Issued Share Capital 240,000

Profit and loss account, 1 Jan. (assumed) 75,000
Budgeted Profits 20,000

335,000

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 AFMLll.DOC AYJLW ACCOUNTING FOR MANAGERS Page AFMLll - 15

N. B. - Fixed assets are computed as follows:-

Opening balance 260,000

Budgeted purchases ( Schedule 11 ) 35,000

295,000
Less: Depreciation ( Schedule 7 ) 10,000

Net Book Value 285,000

BUDGETED TRADING AND PROFIT AND LOSS ACCOUNT

FOR THE SIX MONTHS TO 30 .JUNE

Sales ( Schedule I ) 600,000

Less: Cost of Sales ( Schedule 8 ) 420,000

Gross Profit 180,000

Less Selling expenses ( Schedule 9 ) 95,000

General & administrative expenses ( Schedule JO) 65,000 160,000

Budgeted Profits 20,000

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