Budgets

What is a Budget ?

A budget is a financial plan of future costs and revenues for a specific period in the future.

What are the purposes of Budgeting ? To compare budgeted costs with actual costs

at the same level of activity To help in controlling costs To plan product levels To compare like with like

Operating /Subsidiary BudgetsSales Budget = Budgeted Unit sales X Budgeted Selling PriceProduction Budget = Budgeted Sales +

Budgeted Closing Stock – Budgeted Opening Stock

Material Usage Budget = Production Units X Units of Different Materials Required per Product

Materials Purchase Budget = Materials Usage Budget + Closing Stock of Materials – Opening Stock of Materials

Principal Budgets

1. Cash Budget2. Master Budget3. Flexible Budget (Higher Level only)

Principal BudgetsCash Budget

*prepared on weekly/monthly basis to allow management deal with shortages or surpluses.

*show the opening cash position + inflows – outflows = closing cash

Cash Budget• Only actual receipts and payments are

included• Only when actually received and paid, not

due• Depreciation is always excluded• Credit sales and purchases at the end of the

period are excluded• Changes in stock level will affect cash budgets• The closing balance at the end of the period

one is equal to the opening balance of period two.

Principal BudgetsMaster Budget

*Includes all subsidiary budgets

*Consists of budgeted profit and loss account and budgeted balance sheet

*If manufacturing firm a budgeted manufacturing account and budgeted trading account will be also prepared

Principal BudgetsFlexible Budgets ( Higher Level )

*adjusting the original budget to the actual level of activity so that comparisons can be made

*separate costs into fixed costs and variable costs using the high low method

Exam Tips Order you Prepare Budgets sales, production, materials usage , material

purchases

Can be asked in 3 parts A schedule of receipts A schedule of payments A cash budget

Budgeting Exam Paper Question 9

Higher Level

2012

2011

2010 2009 2008 2007

2006 2005 2004

Cash Budget

1 1 1 1 1

Flexible Budget

1

Production Budget

1 1 1

Ordinary Level

2012

2011

2010 2009 2008 2007

2006 2005

Cash Budget

1 1 1 1

Flexible Budget

Production Budget

1 1 1 1