Budgeting and Budgetary Control

Master Budget & Flexible Budget Performance Report

Steps in preparing the Master Budget:

1. Prepare the operating budgets

2. Prepare the supporting schedules
3. Prepare the financial budget

Review Problem I:

The Country Store is a retail outlet for a variety of hardware. The owner is eager
to prepare a budget, and is especially concerned with her cash position. The
company will have to borrow in order to finance purchases made in preparation
for high expected sales during the busy last quarter of the year. When the
company needs cash, borrowing occurs at the end of a month. When cash is
available for repayment, repayment occurs at the end of a month. The company
pays interest in cash at the end of every month at a monthly rate of 1% on the
amount outstanding during that month.

Prepare the master budget for the months of October, November and December.

The owner provides you with the following data in order to aid you in formulating
the budget:

Balance Sheet as of September 30

Assets
Cash 9,000
 Accounts receivable 48,000
Inventory 12,600
Plant and Equipment (net) 200,000
Total assets 2,69,600
Liabilities and Stockholders’ equity
Interest payable 0
Note payable 0
Accounts payable 18,300
Share capital 180,000
Retained earnings 71,300
Total liabilities and Stockholders’ 2,69,600
equity
Budgeted expenses (per month):

Salaries and wages 7,500

Freight-out as a % of sales 6%
Advertising 6,000
Depreciation 2,000
Other expenses as a % of sales 4%
Minimum inventory policy as a % of 30%
next month’s cost of goods sold
Budgeted Sales

September (actual) 60,000

October 70,000
November 85,000
December 90,000
January 50,000

Other data

Required minimum cash balance 8,000

Cash sales 20%
Credit sales (collected the following 80%
month)
Gross profit ratio 40%
Loan interest rate(interest paid in 12%
cash monthly)
Inventory paid for in
Month purchased 50%
Month after purchase 50%

Salaries and wages, freight-out, advertising and other expenses are paid in
cash in the month incurred.
Equipment for 19,750 cash will be purchased in October, and dividends of
4,000 will be paid in December.

Solution:
1. Sales Budget:

Particulars Oct Nov Dec Total

Budgeted Sales Rs. 70,000 Rs. 85,000 Rs. 90,000 Rs.
Revenue 245,000
1a. Schedule of Expected Cash Collections from Customers:

Particulars Oct Nov Dec Total

Rs Rs Rs Rs
Cash Sales 14,000 17,000 18,000 49,000
Collection of
Credit Sales
of:
Sept 48,000 48,000
Oct 56,000 56,000
Nov 68,000 68,000
Totals 62,000 73,000 86,000 221,000
Trade Receivables, Dec 31: Rs. 72,000 (Budgeted B/S)
2. Merchandise Purchase Budget:
Budgeted purchases = Budgeted COGS + Desired Ending Inventory –
Beginning Inventory

Particulars Oct Nov Dec Jan

Rs Rs Rs Rs
Budgeted 42,000 51,000 54,000 30,000
 Cost of Goods
Sold ( 60% of
Sales)
Add: Desired 15,300 16,200 9,000
Ending
Inventory
( 30% of next
month COGS)
Total 57,300 67,200 63,000
Inventory
Needs
Less: 12,600 15,300 16,200
Beginning
Inventory
Budgeted 44,700 51,900 46,800
Merchandise
Purchases
2a. Schedule of Expected Cash Disbursements for Merchandise
Purchases:

Particulars Oct Nov Dec Total

Rs Rs Rs
Disbursement
s for
merchandise
purchases for
the month of:
Sept 18,300 18,300
Oct 22,350 22,350 44,700
Nov 25,950 25,950 51,900
Dec 23,400 23,400
Totals 40,650 48,300 49,350 138,300
Trade Payable: Rs. 23,400 (Budgeted B/S)
3. Selling and Administrative Expenses Budget:

Particulars Oct Nov Dec Total

Rs Rs Rs Rs
 Cash Expenses
Freight-Out 4,200 5,100 5,400 14,700
Advertising 6,000 6,000 6,000 18,000
Salaries and 7,500 7,500 7,500 22,500
Wages
Other 2,800 3,400 3,600 9,800
Expenses
Total Cash 20,500 22,000 22,500 65,000
Expenses
Depreciation 2,000 2,000 2,000 6,000
Total 22,500 24,000 24,500 71,000
Budgeted
Selling and
Administrative
Expenses

4. Capital Expenditure Budget:

Oct Nov Dec Total

Purchase of Rs. 19,750 Rs. 19750
Equipment
5. Cash Budget
For the quarter ended December 31……

Particulars Oct Nov Dec Total

Rs Rs Rs Rs
Beginning 9,000 8,000 8,000 9,000
Cash Balance
Cash Receipts 62,000 73,000 86,000 221,000
Total Cash 71,000 81,000 94,000 230,000
Available
Less: Cash
Disbursement
s for
Merchandise 40,650 48,300 49,350 138,300
Purchases
Selling and 20,500 22,000 22,500 65,000
 Administrative
Expenses
Capital 19,750 0 0 19,750
Expenditure
Dividends 0 0 4,000 4,000
Interest 0
Total Cash 80,900 70,300 75,850 227,050
Disbursement
s
Cash Surplus (9,900) 10,700 18,150 2,950
( Deficit)
Financing
Borrowing 17,900 17,900
Repayment (2,521) (9,996) (12,517)
Interest (179) (154) (333)
Total 17,900 15,200 5,383 5.050
Financing
Ending Cash 8,000 8,000 8,000 8,000
Balance
6. Budgeted Income Statement
For the quarter ended December 31….

Rs Rs
Sales 245,000
Cost of Goods Sold
Beginning Inventory 12,600
Budgeted Purchases 143,400
Less: Desired Ending (9,000) 147,000
Inventory
Gross Profit 98,000
Selling and
Administrative
Expenses
Freight-Out 14,700
Advertising Expense 18,000
Salaries and Wages 22,500
Expense
 Other Expenses 9,800
Depreciation Expense 6,000
Total Selling and 71,000
Administrative
Expense
Operating Income 27,000
Interest Expense 333
Net Income 26,667
7. Statement of Retained Earnings:

Rs
Beginning balance 71,300
Net Income 26,667
Dividends (4,000)
Ending balance 93,967

8. Budgeted Balance Sheet

December 31

Assets Rs
Cash 8,000
Trade Receivables 72,000
Inventory 9,000
Equipment, net ( 200,000 + 19,750 213,750
– 6,000)
Total Assets 302,750
Liabilities and Stockholders’ Equity
Trade Payables 23,400
Note Payable 5,383
Share Capital 180,000
Retained Earnings 93,967
Total Liabilities and Stockholders’ 302,750
Equity
Review Problem II:

Required production in units = Budgeted Sales of the Quarter + Desired Ending

Inventory – Beginning Inventory

A Ltd. Produces and sells a single product. Sales budget for the calendar year 2021
by quarter is as follows:

Quarter No. of units to be sold

I 12,000
II 15,000
III 16,500
IV 18,000
The company’s policy for ending inventories:

Finished goods: 20% of following quarter budgeted sales.

Direct Materials: 30% of following quarter production needs.

The budgeted ending inventory of finished goods for quarter IV: 4,000 units, for
direct materials: 50,000 lbs.

The standard cost details per unit:

Direct materials 10 lbs @ 50 paisa per lb

Direct labor 1 hour 30 minutes @ Rs. 4 per hour.

Variable overheads 1 hour 30 minutes@ Re 1 per hour

Fixed overheads 1 hour 30 minutes @ Rs. 2 per hour based on a budgeted

production volume of 90,000 direct labor hours for the year.

Prepare a quarterly production budget for 20x1 and the total costs.

If the budgeted selling price is Rs. 17, what would be the budgeted profit for the
year?
In which quarter of the year is the company expected to break even?

Solution:

Production Budget

For the year ended…………..

QI Q II Q III Q IV Total
Budgeted 12,000 15,000 16,500 18,000 61,500
Sales in
Units
Desired 3,000 3,300 3,600 4,000 4,000
Ending
Inventory
( FG)
Total 15,000 18,300 20,100 22,000 65,500
Inventory
Needs ( FG)
Less: 2,400 3,000 3,300 3,600 2,400
Beginning
Inventory
Budgeted 12,600 15,300 16,800 18,400 63,100
Production
in Units

Direct Materials Purchases Budget

For the period ended…….

Particulars QI Q II Q III Q IV Total

Direct 126,000 153,000 168,000 184,000 631,000
Materials
Needed in
Production
Desired 45,900 50,400 55,200 50,000 50,000
Ending
Inventory
Total 171,900 203,400 223,200 234,000 681,000
Inventory
Needed
Less: 37,800 45,900 50,400 55,200 37,800
Beginning
Inventory
Budgeted 134,100 157,500 172,800 178,800 643,200
Purchases
in Units
Unit Cost Rs. 0.50 Rs. 0.50 Rs. 0.50 Rs. 0.50 Rs. 0.50
Budgeted Rs. 67,050 Rs. 78,750 Rs. 86,400 Rs. 89,400 321,600
Cost of
Direct
Material
Purchases

Direct Labor Budget

Q1 Q2 Q3 Q4 Total
Direct labor 18,900 22,950 25,200 27,600 94,650
hours
needed in
production
X Direct Rs. 4 Rs. 4 Rs. 4 Rs. 4 Rs. 4
labor hour
rate
Budgeted 75,600 91,800
cost of
direct labor
Static budgets and flexible budgets:

A budget prepared for only one level of activity is a static budget. A budget which
adjusts to different levels of activity is a flexible budget.

Review Problem III:

a. X Ltd. produces a standard product. The estimated costs per unit are as
follows:

Rs
Raw Materials 10
Direct wages 8
Direct expenses 2
Variable overheads 3
23
Semi variable overheads at 100% activity level (10,000 units) are expected to be
Rs. 40,000, and these overheads vary in steps of Rs. 2,000 for each change in
output of 1000 units. Fixed overheads are expected to be Rs. 50,000. Selling price
per unit is expected to be Rs. 40.

Prepare a flexible budget at 50%, 70% and 90% level of activity.

b. During the same period, the following expenses were incurred for
producing 7,000 units:

Rs
Raw Materials 69,500
Direct wages 56,600
Direct expenses 14,100
Variable overheads 35,100
Fixed overheads 70,000
2,45,300
Present a performance report to the management in a suitable form, if the
actual revenues totaled Rs. 264,000.
Solution:

X Ltd.

Flexible Budget Performance Report

For the period ended……

Particulars Actuals Revenue & Flexible Activity / Static/

Spending Budget Volume Planning
Variances Variances Budget
Activity 7,000 units 7,000 units 10,000
Level units

Rs Rs Rs Rs Rs
Revenue 264,000 16,000 U 280,000 120,000 U 400,000
Direct 69,500 500 F 70,000 30,000 F 100,000
Materials
Direct 56,600 600 U 56,000 24,000 F 80,000
Wages
Direct 14,100 100 U 14,000 6,000 F 20,000
Expenses
Variable 35,100 100 U 35,000 15,000 F 50,000
Overhead
Fixed 70,000 None 70,000 None 70,000
Overheads
Total 245,300 300 U 245,000 75,000 F 320,000
Expenses
Operating 18,700 16,300 U 35,000 45,000 U 80,000
Income