Budgeting2 Lecture Slides

8/10/2019 Budgeting2 Lecture Slides

http://slidepdf.com/reader/full/budgeting2-lecture-slides 1/31

Introduction to Management Accounting

07/11/2014 1

BUDGETS

Functional BudgetsMost organisations will be split up into various departments orfunctions, e.g., purchases or sales and budgets may have tobe produced for each of these functions

The budget setting processWhat are the main functions for a manufacturing business?

•Buy raw materials

•Store raw materials

•

Process raw materials (using labour & machinery)•Produce finished goods

•Store finished goods

•Sell finished goods




07/11/2014 2

Alpha BetaSales 20X8 (units) 5,000 1,000Sales 20X9 (units) 5,500 1,000

Selling price (£) 600 800Closing stock (as a % of X9 sales) 20% 5%

Actual opening stock (units) 100 50 Actual opening stock (£) 38,400 26,200

Material X per unit (kg) 12 12

Material Y per unit (kg) 6 8

Labour hrs per unit 4 6

Exercise – Functional budgets

BT Engineering Ltd produces 2 products, the Alpha & Beta

The budget for the forthcoming year to 31 March 20X8 isto be prepared. Future expectations include the following




07/11/2014 3

Mat X Mat YPrice (£ per kg) 7 10

Actual opening stock (kg) 7,000 6,000

Closing stock (kg) 8,000 2,000

Labour is paid at a rate of £20 per hour

Labour

Overheads

Materials

£

Fixed production 1,200,000 Variable non-production 475,000Fixed non-production 395,000

At the planned level of activity, it is expected that thefollowing costs will be incurred:

Fixed production overheads will be absorbed on directlabour hours




07/11/2014 4

Steps in preparing the operating budget

Step 1: Identification of the limiting factor

Before you can set budgets you need to have some idea ofexpected activity levels for the year.

The factor that limits activity is normally sales volume, e.g. youmay think that you can only sell 1,000 units of output.

Alternatively you may think that there is a shortage of materialsavailable and this will determine your activity levels at say 800units.

The budget you prepare 1st is the one dealing with the limitingfactor, e.g. the sales budget or the materials purchase budget.

The limiting factor is not normally known until a draft budgethas been attempted. We will therefore start of with the salesbudgets and work backwards through the stages of activity




07/11/2014 5

Step 2: The sales budget

Alpha Beta Total

£ £ £

Quantity (units)

Unit price

Sales revenue




07/11/2014 6


Alpha Beta Total

£ £ £

Quantity (units) 5,000 1,000

Unit price

Sales revenue




07/11/2014 7


Alpha Beta Total

£ £ £


Unit price 600 800

Sales revenue




07/11/2014 8


Alpha Beta Total

£ £ £


Unit price 600 800

Sales revenue 3,000,000 800,000 3,800,000




07/11/2014 9

Sales forecasting When forecasting sales we will consider the following factors:

Internally • Past sales patterns• New or improved products• Advertising plans• Pricing Policy

Externally • Economic Environment• Competitors - prices, products • Customers - tastes/fashions, disposable income • Government - legislation • Market research




07/11/2014 10

Step 3: The finished goods closing stock budget

Alpha Beta

Units UnitsSales in X9

%

Closing stock X8

Our closing stock will be needed to meet sales demandduring the early part of next year




07/11/2014 11


Alpha Beta

Units UnitsSales in X9 5,500 1,000

%

Closing stock X8





07/11/2014 12


Alpha Beta

Units UnitsSales in X9 5,500 1,000

% 20% 5%

Closing stock X8 1,100 50





07/11/2014 13

Step 4: The production budget

Alpha Beta

Units UnitsSales

Closing stock X8

Total units required

Less opening stock X8Production

Once we know how many units we plan to sell and howmany units we need to store as closing stock we can thencalculate how much we should produce




07/11/2014 14


Alpha Beta

Units UnitsSales 5,000

Closing stock X8







07/11/2014 15


Alpha Beta


Closing stock X8 1,100







07/11/2014 16


Alpha Beta



Total units required 6,100






07/11/2014 17


Alpha Beta




Less opening stock X8 (100)Production







07/11/2014 19


Alpha Beta

Units UnitsSales 5,000 1,000



Less opening stock X8 (100)Production 6,000





07/11/2014 20


Alpha Beta



Total units required 6,100 1,050

Less opening stock X8 (100)Production 6,000





07/11/2014 21


Alpha Beta



Total units required 6,100 1,050

Less opening stock X8 (100) (50)Production 6,000 1,000





07/11/2014 22

Step 5: The material usage budget (units & £s)

Once we know how many units we plan to produce we canthen plan for level of production resources we need tomanufacture the finished goods

Resource budgets

X (kg) Y (kg)

Production of Alpha= 6,000 units x 12kg

Production of Beta

= 1,000 units x 12kg

72,000

12,000

84,000Total usage

= 6,000 units x 6kg 36,000

= 1,000 units x 8kg 8,000

44,000

Materials

Price (£) 7 10

588,000 440,000 1,028,000




07/11/2014 23

Step 6: The material purchase budget (units & £s)

Once we know how many kgs we plan to use and howmany kgs we need to store as closing stock we can thencalculate how much we should purchase

Material X Material Y

kg kgUsed in production 84,000 44,000

Add closing stock for X8 8,000 2,000

Total requirements 92,000 46,000

Less opening stock for X8 7,000 6,000

85,000 40,000Purchases (kg)

Purchase price £7 £10

Purchases (£) £595,000 £400,000




07/11/2014 24

Step 7: The direct labour budget

These costs depend on wage rates, production methodsand hiring plans

Labour

hrsProduction of Alpha

= 6,000 units x 4 hours

Production of Beta

= 1,000 units x 6 hours

24,000

6,000

30,000Total hours

Hourly rate £20

Labour cost £600,000




07/11/2014 25

Step 8: The manufacturing overhead budget

Step 9: The non-production overhead budgets

These will actually be separate budgets produced with the help

of managers of the following departments

•Selling

•Distribution

• Admin

After the direct cost budgets have been calculated the production

departments will have to estimate their overhead costs






07/11/2014 27

Step 11: Computation of units costs of finished goods

Once absorption rates have been calculated we can thencalculate the unit costs of each product.

Alpha Beta

Price (£) Inputs £ Inputs £

Material X (kg)

Material Y (kg)

Direct Labour (hrs)

Prod. Overhead

7 12 8410 6

20 4

4

384

1260

80

16040

88480

6 120

2406

524




07/11/2014 28

Step 12: Closing stock budget

Once we know the unit cost of finished goods, we can thenvalue all closing stock

Raw materials X Y Totalkilograms 8,000 2,000price (£) 7 10

£56,000 £20,000 £76,000

Finished goods Alpha Beta Totalunits

Cost (£)

1,100

384£422,400

50

524£26,200 £448,600




07/11/2014 29

Step 13: Cost of goods sold budget (finished goods)

Once we know the value of closing stock, we can thencalculate the cost of goods sold

£ £

Opening stock 64,600

Materials used (5)Labour used (7)

Production overhead

Less: Closing stock (12)

1,028,000600,000

1,200,000

2,828,000

(448,600)

2,892,600

2,444,000




07/11/2014 30

Step 14: Co-ordination & review

Need to consider any limiting factors which have come to lightduring the previous stages, e.g. labour shortage due to specialistskills being required. Budget will then be adjusted

Step 15: Preparation of the Master Budget

All the above budgets are summarised in the budgeted profitand loss account, balance sheet and cash budget

The final accounts will be prepared in exactly the same manneras normal, e.g. prepared using standard formats and accruals.




07/11/2014 31

Step 16: Budgeted profit statement

£Sales (2) 3,800,000

Less: Cost of sales (13) (2,444,000)

1,356,000

Less: Non-prod. overheads (870,000)

Operating profit 486,000

Date post:	02-Jun-2018
Category:	Documents
Upload:	anonymous-ko2mvk7etz
View:	217 times
Download:	0 times

Budgeting2 Lecture Slides

Documents