topic 10(short)
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KAL1013 Chapter Ten 1
Chapter Ten
BUDGETING:
THE PLANNING &
CONTROLLING TOOL
KAL1013 Chapter Ten 2
Outline
The concept of budgeting
The benefits of budgeting
Preparing master budget for merchandising
firm: Operational budget
Financial budget
KAL1013 Chapter Ten 3
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.
KAL1013 Chapter Ten 4
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.
KAL1013 Chapter Ten 5
Preparing Budget for Merchandising Firm
Master Budget
Operating Budgets Financial Budgets
KAL1013 Chapter Ten 6
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.
KAL1013 Chapter Ten 7
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
KAL1013 Chapter Ten 8
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.
KAL1013 Chapter Ten 9
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:
KAL1013 Chapter Ten 10
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
KAL1013 Chapter Ten 11
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:
KAL1013 Chapter Ten 12
Syarikat Sang BedalSchedule of Cash Collection for the month of
October, November and December 2002
October November December Total
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
KAL1013 Chapter Ten 13
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.
KAL1013 Chapter Ten 14
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.
KAL1013 Chapter Ten 15
Syarikat Sang BedalFinished Goods Purchase Budget for the month of October, November and December 2002
October November December Total
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
KAL1013 Chapter Ten 16
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.
KAL1013 Chapter Ten 17
Syarikat Sang BedalSchedule of Purchase Payments for the month of
October, November and December 2002
October November December Total
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
KAL1013 Chapter Ten 18
Selling and Administrative Expenses Budget
The selling and administrative expense budget is a projection of anticipated operating expenses.
It distinguishes between fixed and variable costs.
KAL1013 Chapter Ten 19
Selling and Administrative Expenses Budget
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 RM18,000;
Depreciation RM10,000.
Illustration 5:
KAL1013 Chapter Ten 20
Syarikat Sang BedalSelling and Administrative Budget for the month of
October, November and December 2002
October November December Total
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
KAL1013 Chapter Ten 21
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
KAL1013 Chapter Ten 22
Financial Budgets
Financial budgets focus primarily on the cash resources needed to fund expected operations and planned capital expenditures.
Cash Budget
Balance Sheet Budget
KAL1013 Chapter Ten 23
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.
KAL1013 Chapter Ten 24
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.
KAL1013 Chapter Ten 25
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