MFP8 - Budgeting Financial Planning

MBA Programme
TÍTULO Managing Financial Performance

Subtítulo
Budgeting & Financial Planning
Nalin Anthony
MBA, M.Sc.(Fin), MCIM,ACMA,CFS,LLB
Budget
a detailed plan, expressed in quantitative terms, that specifies
how resources will be acquired and used during a specified
period of time.
Purposes of Budgeting Systems

• Planning
• Facilitating Communication and Coordination
• Allocating Resources
• Controlling Profit and Operations
• Evaluating Performance and Providing Incentives
Planning Relationships
Top
Management
Strategic Top, Middle,
and
Planning Operational
Tactical Management
Planning
Budget
Top and
Middle
Management
Participative Budgeting
Top Management
Middle Middle
Management Management
Supervisor Supervisor Supervisor Supervisor
Flow of Budget Data

Budgets Provide
• Guide to align activities and resources with organizational goals
• Vehicle to promote employee participation, cooperation, and

departmental coordination
• Tool to enhance planning, controlling, problem solving, and

evaluating
Forecast Vs Budget
In order to establish a budget it is essential to forecast various
important variables like sales, selling prices, availability of
materials, price of materials, wage rate etc.
Forecast Budgets
1 Forecasts may cover for longer period or Budget is planned or prepared for a
years shorter period
2 Forecast is only a tentative estimate Budget is a target fixed for a period
3 Forecast results in planning Result of planning is budgeting

4 Forecast usually covers a specific Budget is prepared for the business as
business function a whole
5 Forecasting does not act as a tool of Purpose of budget is not merely a
controlling measurement planning device but also controlling
tool
Budgetary Controls
This is the process of establishments of budgets
relating to various activities and comparing the
budgeted figures with the actual performance and
interpret the variances. So, this is a very important
tool in planning and controlling.
Master Budget
When the functional budgets have been completed, the

budget committee will prepare a master budget for the
target of the concern. It comprises of budgeted profit and
loss account , budgeted balance sheet. The Institute of
Chartered Management Accountants – UK defines a Master
Budget as “ Summary budget incorporating its functional
budgets, which is finally approved, adopted and employed”.
Master budget includes “operating budget” and “financial

budget”
Operating Budget
Sales Budget
Selling
& Admin
Budget
Production Budget
Purchases Budget Overhead Budget

Direct Labor Budget
The Financial Budget
Cash Budget
Financial Capital Budget

Budget
Income
Statement
Structure of Master Budget
Sales of Services or Goods
Ending
Inventory Production
Budget Budget
Work in Process
and Finished
Goods
Ending Direct Direct Selling and

Overhead
Inventory Materials Labor Administrative
Budget Budget Budget Budget
Budget
Direct Materials
Cash Budget
Budgeted Income
Statement
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
Sales Budget
Sales estimate is the commencement of budgeting may be

made in quantitative terms. Sales budget is primarily
concerned with forecasting of what products will be sold in
what quantities and at what prices during the budget
period.
Case - Harry’s Easy Baskets
Harry’s Easy Baskets is a manufacturing business that sells baskets, wants a

master budget prepared for the first three months of this year (January,
February and March). The managers of the different departments have
provided the following information:
The Sales Manager has projected the following sales:
January 5,000 units

February 4,000 units
March 6,000 units
Projected selling price is $35.00/unit
Production Budget
Production budget is usually prepared on the basis of sales. But it also
takes into account the stock levels desired to be maintained and
estimated output of the business. In preparing the production budget
availability of raw materials, plant capacity, availability of labour
should also be considered. Production must be adequate to meet
budgeted sales and provide for sufficient ending inventory.
Harry’s Easy Baskets

Your Production Manager gave the following information:
– Ending Inventory is to be 20% of next month’s production need
– April & May Projected Sales 5,000 units
– December 2013 Ending Inventory was 1,000 units
Direct-Material Budget
Once the production budget is prepared, it is necessary to consider

the requirement of materials to carry out the production activities.
This is concerned with purchase of direct materials to be made
during the budget period

The Manufacturing Manager has estimated the following:
Each unit will require 4 grams of material
Material in Ending Inventory is 20% of next month’s needs
December’s Ending Material Inventory was 4,800 g
Projected cost of material: $2.50/gram
Direct-Labour Budget
Direct labor budget shows the total direct labor cost and
number of direct labor hours needed for production. It
helps the management to plan its labor force
requirements.

The Personnel Manager has estimated that Direct Labour will be
projected at:
0.75 hours of Direct Labour per unit
Direct Labour Cost: $8.50/hour
Manufacturing Overhead Budget
The factory overhead budget shows all the planned manufacturing
costs which are needed to produce the budgeted production level of a
period

The Facilities Manager has estimated that the Manufacturing Overhead will be
projected at:
Variable Overhead Rate to be $8 per Direct Labour hours
Fixed Overhead Rate to be $3,000 per month
Cost of Production Budget –COGS Budget
After preparation of production budget, this budget is

prepared. Production cost budgets shows the cost of the
production determined in the production budget. Cost of
production budget is grouped into material cost budget,
labour cost budget and overhead cost budget. Overheads
may be further subdivided into fixed, variable
overheads. Therefore, separate budgets required for
each item
Sales & Administration (Overhead) Budget
Selling and administrative expense budget is a schedule of

planned operating expenses other than manufacturing
costs. It is a component of master budget and it is prepared
by all types of businesses (i.e. manufacturers, retailers and
service providers) before the preparation of budgeted
income statement. Usually it is divided in two sections: the
selling expenses and the administrative expenses
Admin Expenses
The Accounting Department Manager has provided the following
information:
Selling and Administrative Expenses are projected to be a monthly cost
of:
Salaries $6,000
Rent $1,500
Advertising $1,100
Telephone $300
Other $500
Cash Budget
This the budget represents the anticipated receipts and payment of
cash during the budget period. This budget is prepared on the basis
of detailed receipts and cash payments.
The estimated cash payments include the followings

•Cash purchase
•Payments to creditors
•Payment of wages
•Payments relate to production expenses
•Payments relate to selling and distribution expenses
•Income tax payments
•Dividend payments
Cash-in & Cash-out
Cash Receivable:
December’s Sales were $10,000
80% of sales is collected in the month in which they were made
20% of sales collected in the following month in which they were made
Bad Debts is negligible
Accounts Payable:
80% of Payables is paid for in the current month
20% of Payables is paid for in the following month
December’s Payables were $75,000
Federal Income Tax is estimated at 22% average.Harry’s Easy Baskets has a $20,000 cash
balance for the beginning of January
Pays Dividends of $8,000 to be paid in March
Pays projected Federal Income tax in March
Cash Budget
• Highlights importance of cash for organization’s continued existence
• Translates accrual-based information into cash flows
• Indicates effectiveness of credit practices
• Allows for planned cash borrowing or investing
• Used to prepare pro forma Cash Flow Statement
Beginning cash balance

+ Cash receipts (collections)
= Cash available for disbursements
– Cash disbursements
= Cash excess or deficiency
– Minimum desired cash balance
= Cash needed/available for investment or loan repayment
+/– Various financing measures
= Ending cash balance
Budgeted Income Statement
Cash Budgeted
Budget Income
Statement
After we complete the cash budget, we can prepare

the budgeted income statement.
Variance
Favorable
Variance
Unfavorable
Variance
P&L Variance
Bayou Division
Budget and Actual Results
August
Master
Actual Variance Budget
Sales (units) 80,000 100,000
Sales revenue $840,000 $1,000,000a
Less: Variable costs
Variable mfg. costs 329,680 380,000b
Variable selling and administrative 68,000 90,000c
Total variable costs $397,680 $ 470,000
Contribution margin $442,320 $ 530,000
Fixed costs:
Fixed manufacturing overhead 195,500 200,000
Fixed selling and administrative costs 132,320 140,000
Total fixed costs $327,820 $ 340,000
Profit $114,500 $ 190,000
a $10.00 per unit b $3.80 per unit c $0.90 per unit
P&L Variance
Bayou Division
Budget and Actual Results
August
Master
Actual Variance Budget
Sales (units) 80,000 20,000 U 100,000
Sales revenue $840,000 $160,000 U $1,000,000a
Less: Variable costs
Variable mfg. costs 329,680 50,320 F 380,000b
Variable selling and administrative 68,000 22,000 F 90,000c
Total variable costs $397,680 $ 72,320 F $ 470,000
Contribution margin $442,320 $ 87,680 U $ 530,000
Fixed costs:
Fixed manufacturing overhead 195,500 4,500 F 200,000
Fixed selling and administrative costs 132,320 7,680 F 140,000
Total fixed costs $327,820 $ 12,180 F $ 340,000
Profit $114,500 $ 75,500 U $ 190,000
a $10.00 per unit b $3.80 per unit c $0.90 per unit

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MBA Programme

TÍTULO Managing Financial Performance

Purposes of Budgeting Systems

Supervisor Supervisor Supervisor Supervisor

Flow of Budget Data

• Guide to align activities and resources with organizational goals

• Vehicle to promote employee participation, cooperation, and

• Tool to enhance planning, controlling, problem solving, and

3 Forecast results in planning Result of planning is budgeting

When the functional budgets have been completed, the

Master budget includes “operating budget” and “financial

Purchases Budget Overhead Budget

Financial Capital Budget

Ending Direct Direct Selling and

Sales estimate is the commencement of budgeting may be

Harry’s Easy Baskets is a manufacturing business that sells baskets, wants a

The Sales Manager has projected the following sales:

January 5,000 units

Harry’s Easy Baskets

Once the production budget is prepared, it is necessary to consider

Harry’s Easy Baskets

Harry’s Easy Baskets

Harry’s Easy Baskets

After preparation of production budget, this budget is

Selling and administrative expense budget is a schedule of

The estimated cash payments include the followings

Beginning cash balance

After we complete the cash budget, we can prepare

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