Tutorial: Preparing Budgets

A.MANUFACTURING Business Entity

Jay Sdn Bhd is a manufacturer of two products - Ace and Bee. Information relating to the following year 2013 is as follows:

1.Inventory of finished goods (Product Ace and Product Bee):

Product Ace

Product Bee

Estimated sales

2,500 units

500 units

Selling price

RM26

RM41

Opening inventory of finished goods

50 units

20 units

Closing inventory of finished goods

550 units

25 units

2.Materials

Material X

Material Y

Material content per unit of finished goods

Product Ace

6 kg

5 kg

Product Bee

3 kg

4 kg

Opening inventory

1,250 kg

1,100 kg

Closing inventory

1,500 kg

250 kg

Price per kg

RM0.60

RM1.30

3.Labour

Product Ace

Product Bee

Labour required for 1 unit of finished goods

6 hours

10 hours

Labour rate per hour

RM2

RM2

You are required to prepare the followings:

a)Sales budget

b)Production budget

c)Material usage budget

d)Material purchase budget

e)Direct labour budget

ANSWER

a)Sales Budget

- This budget gives estimates of the number of units to be sold.

Sales Budget for the year ending 31 December 20x3

Product

Units sold

Selling price (RM)

Total revenue (RM)

b)

Production Budget

This budget gives estimates of the number of units to be produced.

Annual Production Budget

Ace

Bee

Units to be sold

Add: Required closing inventory

Total units required for the year

Less:Opening inventory

Units to be produced

c)Materials Usage Budget

-This budget gives estimates of materials required to meet the production budget.

Product

Material X

Material Y

Ace

kg

kg

Bee

Materials to be used (kg)

RM

RM

TOTAL

Cost per kg

RM

Cost of materials used

d)Materials Purchase Budget

-This budget shows the expected costs of the planned purchases of materials required to meet the production requirements.

Direct Material Purchase Budget

Material X

Material

Y

kg

kg

Quantity required for production

Add:Planned Closing stock (kg)

Less:Planned Opening stock (kg)

Total materials to be purchased (kg)

TOTAL

RM

RM

RM

Cost per kg

Total purchases

OR(Budget in RM)

Direct Material Purchase Budget

Material X

Material Y

RM

RM

Quantity required for production

Add: Planned Closing stock

Less: Planned Opening stock

Total materials to be purchased

Total purchases =

e)Direct labour Budget

-This budget provides estimates of the departments' labour hours required to meet the planned production.

Annual Direct labour Budget

Product

Production

units

Labour hours

per unit

Total

hours

Rate per

hour

Labour

Cost

Ace

TOTAL

RM

RM

Bee

B.NON-Manufacturing Business Entity

Zulu Enterprise is a retailer of a speedometer, MT7. The financial year of Zulu ends on 31 December of each year. Given below is the Statement of Financial Position as at 31 December 2012

Statement of Financial Position as at 31 December 2012

RM

RM

RM

Non-current assets:

Land

30,000

Motor vehicles

15,000

Less: Depreciation

(4,500)

10,500

40,500

Current assets:

Inventories

1,800

Receivables (debtors)

3,125

Cash

1,260

6,185

46,685

Equity:

Ordinary shares of RM1 each

37,500

Retained profit

7,535

45,035

Current Liabilities:

Payables (creditors)

1,650

46,685

In preparing the budgets, additional information for the following year 2013 is as given below:

1.Information relating to inventory of Product MT7.

Product MT7

Selling price

RM26

Purchase Price (Cost of goods sold) per unit

RM10

2012

2013

4th Qtr

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Units

Units

Units

Units

Units

Opening inventory

xx

180

50

110

185

Closing inventory

180

50

110

185

310

2.Projected sales for each of the four quarters:

2012

2013

4th Quarter

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Sales (units):

Product MT7

700

400

600

700

800

10% of sales is expected to be on a cash basis. 60% of the credit sales are expected to be collected in the same quarter the sales took place, and the remaining 40% in the quarterthat follows.

3.Payments during each quarter:

2012

2013

4th Qtr

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

RM

RM

RM

RM

RM

Purchases of merchandise (Note below)

3,000

??

??

??

??

Wages and salaries

6,250

7,300

7,000

8,000

Other expenses

3,125

4,650

2,700

3,000

Purchase of a new motor vehicle

-

-

3,000

-

Tax

600

-

-

-

Note: Purchases of inventory are all on credit. The supplier allows Zulu Enterprise to pay 30% of the cost of goods sold in the quarter of purchase and 70% in the quarter that follows.

4.The business expects to take a bank loan of RM2,500 on 1 July 2013 to partly finance the acquisition of a new equipment Interest of 10% per annum is payable twice yearly, at the end of June and end of December.

5.Depreciation of motor vehicle for the year 2013 is RM1,200.

You are required to prepare the followings:

a)Sales budget

b)Inventory purchases budget

c)Cash budget

ANSWER

a)Sales Budget

Sales Budget for the year ending 31 December 2013

2013

1st Quarter

1st Quarter

1st Quarter

1st Quarter

Sales units

RM

RM

RM

RM

Selling price per unit

Desired / Targeted Sales (RM)

b)Merchandise / Inventory Purchases Budget

This budget shows the expected costs of the planned purchases of inventory required to meet the sales requirements.

Inventory Purchases Budget

2013

1st Quarter

2nd Quarter

3rd t Quarter

4th Quarter

Desired sales units

(units)

(units)

(units)

(units)

Add: Planned Closing stock

Units required

Less: Opening stock

Units to be purchased

Cost per unit

RM

RM

RM

RM

Total purchases

OR(Budget in RM)

Inventory Purchases Budget

2013

1st Quarter

1st Quarter

1st Quarter

1st Quarter

Cost of Goods Sold / Cost of Sales

RM

RM

RM

RM

Add: Cost of Closing stock

Less: Cost of Opening stock

Total cost of purchases

c)Cash Budget for the year ended 31 December 2013

QUARTER

1

2

3

4

Receipts (inflow):

RM

RM

RM

RM

Cash sales @ RM26

From customers (credit sales):

Received in same Qtr (60%)

Received in next Qtr (40%)

Bank loan

Total receipts

Payments (outflow):

Purchases of inventory:

Paid in same Qtr (30%)

Paid in next Qtr (70%)

Wages

Other costs and expenses

Purchase of new equipment

Tax

Interest on Loan

[RM2,500 x 10% x ]

Total payments

Surplus / (Deficit)

(inflow - outflow)

Opening cash balance

Closing cash balance

WORKINGS:

A:Receipts from credit customers:

Product MT7

2012

2013

4th Quarter

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

Sales (units)

700 units

400 units

600 units

700 units

800 units

Cash Sales (10

Credit Sales (90%)

Credit sales in:

Cash collected in same

quarter as sales (60%)

Cash collected in the next

quarter (40%)

2012: 4th Quarter

RM

RM

2013:

1st Quarter:units x RM

= RM

60% x

40%

2nd Quarter:units x RM

= RM

60% x

40%

3rd Quarter:units x RM

= RM

60% x

40%

4th Quarter:units x RM

= RM

60% x

40%

B: Payments to Suppliers

2012

2013

4th Quarter

1st Quarter

2nd Quarter

3rd Quarter

4th Quarter

RM

RM

RM

RM

RM

Purchases (RM)

Credit purchases in:

Cash paid in same quarter

as purchases (30%)

Cash paid in the next

quarter (70%)

RM

RM

2012: 4th Quarter : RM

70% x

2013:

1st Quarter:

30% x

70% x

2nd Quarter:

30% x

70% x

3rd Quarter:

30% x

70% x

4th Quarter:

30% x

70% x