Planning, Budgeting

and Forecasting

Section B
Part 1
CMA USA
RABEEH OVUNGAL
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Contents:
1) Strategic Planning 1 Page – 04
2) Strategic Planning 2 Page - 25
3) Budgeting Concepts Page – 42
4) Forecasting Techniques Page – 52
5) Learning Curve Page – 73
6) Budgeting Methodologies Page – 81
7) Budget 1 – Sales and Production Budget Page – 89
8) Budget 2 – Material Purchase and Usage Budget Page – 93
9) Budget 3 – Labour Budget, MOH Budget Page – 97
10) Budget 4 – COGM, COGS, NMOH Budget Page – 100
11) Budget 5 – Cash Budget Page – 105
12) Budget 6 – Budgeted Income Statement Page – 125
13) Budget 7 – Budgeted Balance Sheet Page – 130
Strategic Planning
Part 01 – Planning, Budgeting and Forecasting
• Planning is the first activity management must
undertake when creating yearly budgets and making
other critical decisions that will affect the
company’s future.
• The planning process not only defines the
company’s objectives and goals, but it also sets the
stage for prioritizing how to develop, communicate
and carry out accomplishing them.
• Planning is usually not a popular activity. Many
people think of planning as a waste of time, because
it takes time away from day-to-day activities.
• The process of planning can be as important as the
resulting plan, because the process forces
management to think about where the company is
and where management wants the company to be.
A plan brings about better coordination of company
efforts, since everyone is working toward the same
goals. And it provides clear performance standards,
enabling better monitoring and control of results.
Strategic Planning
▪ In order to increase profitability and sustain profit
growth, managers need to formulate strategies
that will give their companies competitive
advantage. Strategic planning is this formulation
of strategies.
▪ A company’s business model is its managers’ idea
of how the set of strategies and capital
investments the company makes should fit
together to generate above-average profitability
and, at the same time, profit growth.
▪ If the company and its competition are all
pursuing the same business model. One company
may implement the business model more
efficiently than its competitors, or its strategies
may differ in key areas. The business model along
with the strategies makes the different.
▪ Strategic plans are usually developed for a period
of five years or longer. The plan is updated, or
rolled forward, each year.

Strategic Planning
Strategic Planning
Strategic Plans (Long-Term Plans):
▪ Planning is done initially on a long-term basis (5 years). Long-term planning is
also called strategic planning. Strategic plans are broad, general, long-term
plans.
▪ Strategic plans are based on the objectives, mission, vision, goals of the
organization as determined by its board of directors and senior management.
▪ The company’s top management leads the strategic planning effort and makes
the final decisions. However, top management should seek input from
employees at all levels of the organization. Because they are closest with
production process.

Strategic plans focused on strategies, objectives, and goals of the company by

analyzing internal and external factors affecting the company.
• External Factors - Opportunity, Threat, limitations
• Internal Factors - Strength, Weakness, Competitive Advantage

Strategic Planning
Part of the strategic plan will be a review of the capacity and the capital resources
of the company.
• Capacity: is the ability of the company to produce its products or services.
• Capital Resources: are the buildings, equipment, tools, and other
infrastructure that the company uses to produce goods and provide
services.

Strategic planning is directional, rather than operational. This means that the
company’s leadership focuses on where it wants to go instead of specifically how
it will get there.

Strategic Planning
Intermediate and Short-Term Plans:
• The strategic plan is then broken down into tactical plans, also called intermediate
plans. Tactical plans are designed to implement specific parts of the strategic plan.
Upper and middle managers develop tactical plans.
• It is shorter than that of a strategic plan and longer than that of a short-term plan.
• Short-term or operational plans are developed from the tactical plans. Operational
plans focus on implementing the tactical plans to achieve operational goals, and
operational plans include budgeted amounts. Operational plans drive the day-to-
day operations of the company. Middle and lower-level managers develop
operational plans.
Short - is, the lower should be the level of management that does the planning.
Tactical - Upper and Middle Management
Strategic - Top Management
Most budgets are developed for a period of one year or less. The capital expenditures
budget is generally developed for a long period of time and the relevant impact for
each year is incorporated into that year’s operating and financial budgets

Strategic Planning
Strategic Planning
Other Types of Plans:
1) Single-purpose plans - developed for a specific item such as construction
of a fixed asset, the development of a new product, or the
implementation of a new accounting system.

2) Standing-purpose plans have relevance and use for many different

items. Plans such as marketing and operational plans are standing-
purpose plans.
Examples of standing plans include policies for hiring, employee
interaction, procedures for reporting internal issues, or
complaints to the HR department, etc. and regulations in terms
of what is permitted and what is prohibited in the workplace.

3) Contingency planning is planning that a company develops to prepare

for possible future events (especially negative events). Contingency
planning is “what if?” planning.

Strategic Planning
The Strategic Planning Process:
1) Defining the company’s mission, vision, values, and goals.
2) Analyzing the organization’s external competitive environment to
identify opportunities and threats.
3) Analyzing the internal operating environment to identify strengths,
weaknesses and limitations of the organization.
4) Formulating and selecting strategies that, consistent with the
organization’s mission and goals, will optimize the organization’s
strengths and correct its weaknesses and limitations for the purpose
of taking advantage of external opportunities while countering
external threats (SWOT analysis).
5) Developing and implementing the chosen strategies.

Strategic Planning
1) Defining the Company’s Mission, Vision, Values, and Goals
• A statement of the company’s mission, or its “reason to be.”
• Its vision, or a statement of a desired future state.
• A statement of the organization’s values.
• A statement of its major goals.
Mission
A company’s mission is what the company does. In writing the mission
statement, management should ask itself, “What is our business? What will
it be? What should it be?” In answering the questions, management should
think in terms of the customer:
• What customer groups are being served?
• What customer needs are being served?
• And by what means (skills, knowledge or distinctive competencies) are
customers’ needs being served?
The answers should be customer-centered rather than product-centered. A
company’s mission statement should be very broad, because customer
demands can shift quickly
Strategic Planning
Vision
The vision is what the company would like to achieve or become, and it
should be challenging. A good vision statement should challenge the company
by stating an ambitious future state that will
(1) Motivate employees at all levels
(2) Drive the strategies that the company’s management will formulate and
implement to achieve the vision.
Values
Values - how managers and employees should behave and do business. A
company’s values are the foundation of its organizational culture. The
organizational culture consists of the values, norms and standards that govern
how the company’s employees work to achieve the company’s mission and
goals.
Goals
Goals - A goal is a precise and measurable future state that the company wants
to achieve. The purpose of goal setting is to specify what needs to be done to
attain the company’s mission and vision.
Strategic Planning
Objectives of Goals
The acronym SMART is often applied as a reminder of an objectives requirement
objectives should be,

S – Specific
M – Measurable
A – Attainable
R – Realistic
T – Timely

Strategic Planning
2) Analyzing External and Internal Environments
Analyze the opportunities and threats in the external upfronting towards the
mission and vision of the company.
3 environment should be examined,
• Industry – patent, copyright, trademark etc.
• Nation environment – Legal and political factors
• Macroenvironment
▪ Economic growth/recession - customer spends or reduce the
use of money.
▪ Level of interest rates - interest rate is opposite to demand of
the company's product.
▪ Changes in currency exchange rates - appreciating local currency
increase demand for foreign products and vise versa.

Strategic Planning
Michael Porter, a leading authority on competitive strategy from Harvard
Business School, provided a well-known framework, known as the five forces
model, which can help managers analyze competitive forces in the
environment to identify opportunities and threats.

1. The risk of entry by potential

competitors.
2. The intensity of rivalry among
established companies within an
industry.
3. The bargaining power of buyers.
4. The bargaining power of
suppliers.
5. The closeness of substitutes to
an industry’s products

Strategic Planning
3) Analyzing the Internal Environments

• Internal analysis is to identify strengths, weaknesses and limitations

within the organization.

• The company’s resources and capabilities need to be assessed. Strengths

lead to superior performance, whereas weaknesses and limitations lead
to inferior performance.

• The primary objective of strategy is to create a sustained competitive

advantage, because that will lead to superior profitability and profit
growth.
1) Differentiation advantage
2) Cost Advantage

Strategic Planning
3) Analyzing the Internal Environments

• Distinctive competencies stem from two sources: resources and

capabilities
▪ Resources are factors that enable a company to create value for its
customers. They can be financial, physical, social/human,
technological, or organizational factors. Resources can be tangible or
intangible.

▪ Capabilities refer to the company’s ability to coordinate its resources

and to put them to productive use. These capabilities are a function
of the way in which management makes decisions and manages its
internal rules, routines and procedures to achieve its organizational
objectives

Strategic Planning
Four generic distinctive competencies create competitive advantage.
These four factors are called “generic” distinctive competences because
any company can pursue them.
1) Superior efficiency
2) Superior quality
3) Superior innovation
4) Superior customer responsiveness

Strategic Planning
Durability of Competitive Advantage
Barriers to Imitation - The easiest distinctive
competencies to imitate are those based on firm-
specific tangible resources such as buildings,
plant, and equipment, which are visible to
competitors and can be readily purchased.
Intangible resources are more difficult to imitate.
Brand names symbolize a company’s reputation,
and are protected by law.

Capability of Competitors - Strategic

commitment is the company’s commitment
to a particular way of doing business that is to
developing a particular set of resources &
capabilities.

Industry Dynamism - how rapidly the industry is

changing. When an industry is changing rapidly, a
company with competitive advantage may
quickly find its market position overtaken by a
competitor with a new innovation.
Strategic Planning
Factors that leads to failure of a company
1) Inertia - reluctance to change strategies to adapt to changing
conditions in the company’s competitive environment.
2) Company’s prior strategic commitments - such as investments that
may limit its ability to imitate rivals and to be flexible, causing a
competitive disadvantage
3) Icarus paradox - The Icarus paradox is based on a Greek myth. Icarus
used a pair of wings that he stuck to his body with wax to escape from
an imprisonment. But he flew so well that he flew too close to the
sun. The heat of the sun melted the wax holding his wings together
and he plunged to his death. The same paradox can be applied to
many companies if they become too dazzled by their own success.
They believe the way to attain future success is to follow the same
strategies that made them successful in the past. They can become so
specialized and inner directed that they lose sight of reality and of
what is needed to maintain their competitive advantage.

Strategic Planning
Tactics to avoid failure
• Focus on all four generic building blocks of
competitive advantage: superior efficiency,
quality, innovation, and responsiveness to
customers.
• Practice continuous improvement and
continuous learning.
• Identify and adopt best practices through
benchmarking.
• Overcome the internal forces of inertia within
the organization that create barriers to
change.

Strategic Planning
Strategic Planning - 2
Part 01 – Planning, Budgeting and Forecasting
4) Formulating Strategies (SWOT Analysis)
• SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. The
purpose of SWOT analysis is to optimize the organization’s strengths and
correct or minimize its weaknesses to take advantage of external
opportunities while countering external threats.
• Management selects a set of strategies that will create and sustain a
competitive advantage for the company. It considers a range of strategies
1) Functional Level Strategy
2) Business Level Strategy
3) Corporate Level Strategy

1) Functional Level Strategy - for improving operations inside the company,

such as manufacturing, marketing, materials management, product
development, and customer service.

Strategic Planning
2) Business Level Strategy - Industry, competition, create competitive
advantage
• Decisions about customers’ needs and what needs are to be satisfied
• Decisions about what products should be offered and to which
customer groups they should be offered
• Decisions about how customer needs are to be satisfied, using the
company’s distinctive competencies.

Strategic Planning
3) Corporate Level Strategy - expansion, merger, acquisition etc.
Horizontal integration - is a corporate-level strategy that involves acquiring or
merging with competitors to achieve competitive advantages. Walt Disney + Pixar
Vertical integration - In vertical integration, a company expands its operations either
into an industry producing inputs to the company’s operations or forward into an
industry that uses the company’s products. Netflix
Strategic alliances - Strategic alliances are long-term cooperative relationships
between two or more companies to work together to develop a new product that
will benefit all the parties to the strategic alliance.
Spotify & Uber
Strategic outsourcing - Strategic outsourced services represent a set of operations
that are delegated by a company for management to a third-party service provider.
Samsung and Apple or Apple and Sony
Diversification - entering one or more new industries to take advantage of the
company’s distinctive competencies and business model, is another corporate-level
strategy. Diversification can be in a related industry or in an unrelated industry. TATA,
RELIANCE

Strategic Planning
5) Developing and Implementing the Chosen Strategies
Once a set of strategies has been chosen to achieve competitive advantage and
increase performance, the strategies must be translated into action. Translating
strategy into action is strategy implementation.
Strategy implementation takes place in the context of the organization’s
organizational design,
• Organizational Structure - specifies who should do what, how it should be
done, and how the various people and groups should work together to
increase efficiency, quality, innovation, and responsiveness to customers
• Control System - Control systems also provide feedback to managers on
how well the company and its employees are succeeding in increasing these
building blocks of competitive advantage. Managers with incentives to
motivate their employees to work.
• Organizational Culture - includes all the norms, values, beliefs, and
attitudes that people in an organization share. It is the company’s way of
doing things, and it controls the way its members interact with one another
and with outside stakeholders.

Strategic Planning
Other Planning Tools

Strategic Planning
Strategic Planning
Situation analysis is the systematic collection and evaluation of external and
internal forces that can affect the organization’s performance and choice of
strategies and assessing the organization’s current and future strengths,
weaknesses, opportunities, and threats (SWOT Analysis).

Strategic Planning
Political factors involve the way a country’s government behaves.
▪ Trade regulations, pricing regulations, and tariffs.
▪ Wage legislation, such as minimum wage requirements.
▪ Political stability or instability of the country, because when a
country is politically unstable, its citizens’ spending habits change.
▪ Product labeling requirements that must be adhered to.
▪ Industrial health and safety regulations.

Economic factors include exchange rates, inflation rates, interest rates and
economic growth or contraction and the effects they can have on a business
▪ The skill levels of the workforce and the cost of labor.
▪ The unemployment rate within the market, because if
unemployment is high, demand will be depressed.
▪ The country’s stage in the business cycle because that also
determines demand.
▪ The economic system in the countries where the business operates.
▪ Any intervention by the government in the market.

Strategic Planning
Social factors refer to a country’s culture, its population growth rate, the
average age of the population and the age distribution, and the attitudes of its
citizens toward things such as health and careers.
▪ Demographics can be used to see where in the country people live and
work.
▪ Education level, as education plays a major role in what kind of work
people do and how much disposable income they have.
▪ Attitudes of the population toward the environment.
▪ Leisure interests of the population.
Technological factors help a business determine what technology to focus on in
the future:
▪ New developments in technology affect how the business operates on a
day-to-day basis and how it delivers its services and interacts with its
customers and suppliers.
▪ Technology can impact the structure of the company’s value chain.
▪ Technology can affect the cost structure of the business. Technological
advancements can help a business reduce its costs and become more
profitable
Strategic Planning
Strategic Planning
Strategic Planning
Competitive Analysis
It is similar to SWOT analysis in some ways. It
involves analyzing the competitive environment
in which a business operates or is considering
operating. Competitive analysis includes:
▪ Defining the competitors.
▪ Analyzing the competitors’ strengths
and weaknesses.
▪ Analyzing the company’s own internal
strengths and weaknesses.
▪ Analyzing customer needs and wants.
▪ Studying impediments to the market
for both the company and its
competitors, such as patents, high
start-up costs, or a high level of
knowledge required for success.
▪ Developing a strategic plan that reflects
the findings from the above activities.

Strategic Planning
Strategic Planning
The Boston Consulting Group (BCG)
Growth-Share Matrix

• The BCG Growth-Share Matrix is a method of analyzing a company’s

portfolio of products to determine where each product is in its life cycle.
It was developed by the Boston Consulting Group in the 1970s.
• The BCG Matrix classifies products into four categories based on the
growth of the markets they are in and their share of those markets.
▪ Star - product is capable of generating substantial revenue, a star
product requires high levels of cash for investment.
▪ Question mark - In a rapidly growing market, the question mark’s
sales also grow rapidly, so question mark products consume a great
deal of cash for investment but, conversely, the cash generated by
the product is low because of its low market share.
▪ Cash Cow - Cash cows generate more cash than they consume
▪ Dog - A dog neither consumes many resources nor does it generate
much cash. It is usually barely breaking even. Investing in such a
product is not effective or efficient, because it depresses the
company’s return on assets.
Strategic Planning
Strategic Planning
Characteristics of Successful Strategic Plans
• Ongoing process
• Integrated throughout the organization
• All former assumptions should be challenged
• Long-term in nature
• Employees at all levels should have input
• Communicated clearly and often
• Develop a shared vision, increase the sense of joint ownership among the
staff

Strategic Planning
Budgeting Concepts
Part 01 – Planning, Budgeting and Forecasting
Plan - Management develops the plan, which consists of goals, objectives, and a proposed
plan of action for the future.

Budget - The plan developed by management leads to the formulation of the annual
profit plan, also called the budget. The terms “profit plan” and “budget” will be used
interchangeably throughout this section.

Feedback - Budgets can lead to changes in plans and strategies

Master Budget - Once the plans and the budget have been coordinated and the profit
plan has been adopted for the coming period, as the organization carries out its plans to
achieve the goals it has set, the master budget is the documented

Control Tool - corrections with actual plans and finding the variances and its explanation
why its happened and take necessary actions for it.

Find out the new trend

Budgeting Concept
Advantages of Budgets
1) Promote coordination and communication among organization units and
activities.
2) Provide a framework for measuring performance.

3) Provide motivation for managers and employees to achieve the

company’s plans.

4) Promote the efficient allocation of organizational resources.

5) Provide a means for controlling operations.
6) Provide a means to check on progress toward the organization’s goals.

Budgeting Concept
Time Frames for Budgets
• Budget is usually prepared on fiscal year for proper comparing with actual results.
• A comparison between actual results and planned results is called a variance report.
• Budget usually rolling budget.

Methods of Developing the Budget

Participative - budget is developed from the bottom up. All the people affected by the
budget are involved in the budget development process

Authoritative - budget is developed from the top down. Senior management prepares
all the budgets for every segment of the organization

Consultative - budget is a combination of authoritative and participative budget

development methods. Senior management asks for input from lower-level managers
but then develops the budget with no joint decision-making or negotiation involved

Budgeting Concept
Budgetary slack is the difference between the amount
budgeted and the amount the manager actually expects.
Building in budgetary slack is the practice of underestimating
planned revenues and overestimating planned costs to make the
overall budgeted profit more achievable.

Budgeting Concept
Characteristics of Successful Budgeting Processes
1. Attitude of top management toward it.
2. Process must have the support of management at all levels.
3. Budget need to feel it is their budget.
4. Budget should be a motivating device.
5. See it as a planning and coordinating tool to help them do a better job.
6. The budget should be able to be revised if necessary, budget should be flexible.
7. The budget should be technically correct and the numbers in it should be reasonably
accurate.
8. Cost management efforts should be linked to budgeting.
9. The development of the budget should be linked to corporate strategy.
10. Communication is vital.

Budgeting Concept
Establishing Standards
1) Standard input
2) Standard price
3) Standard cost

Sources of Standards
1) Activity analysis
2) Historical data
3) Target costing
4) Strategic decisions
5) Benchmarking

Budgeting Concept
1) Activity Analysis

Activity analysis involves identifying and evaluating all the input factors and
activities required to complete a job, a project, or an operation
efficiently. Activity analysis is the most accurate way of determining
standard costs if it isproperly executed. Activity analysis should be
performed by people from several different areas, including product
engineers, industrial engineers, management accountants, and the
production workers.

Product engineers specify the components to be used in the

manufacturing ofa product. Industrial engineers analyze the procedures
required to complete the manufacturing process. Production workers are
interviewed to gain their input. Management accountants work with the
engineers to complete the analysis.

Budgeting Concept
2) Historical Data

Analysis of historical data is much less expensive than an activity analysis for
determining standard costs. However, a standard cost based on the past
may perpetuate past inefficiencies. A standard based on the past does not
incorporate continuous improvements, which are an important
consideration in the competitive environment in which businesses operate
today.

3) Target Costing

Target costing is used when a firm has a specific selling price at which it
needs to sell its product to be competitive. The target cost is the cost that
yields the required profit margin for the product, given a set selling price.
Standards are then determined that would allow the product can be
manufactured at the target cost.

Budgeting Concept
4) Strategic Decisions

Strategic decisions can also affect a product’s standard cost. If management

has made a strategic decision to pursue kaizen, the Japanese term for
continuous improvement, that decision will impact the standard because
the standard will be set at the most challenging level at all times in order to
effect continuous improvement.

5) Benchmarking

In benchmarking, the best performance anywhere can be chosen as the

attainable standard. Using the best-performing company as a standard can
help a firm maintain its competitive edge. However, the benchmark must be
evaluated in light of the company’s own unique situation.

Budgeting Concept
Forecasting Techniques
Part 01 – Planning, Budgeting and Forecasting
1) Regression Analysis
2) Multiple Regression Analysis
3) Probability

Forecasting Technique
1) Regression Analysis
Regression analysis is it statistical method usually to determine the impact of one
variable has on another variable. It is often used by management accountant to
analysis cost behavior, forecast variable such as sales level.

y = dependent variable

y = a + bx x = independent variable
a = vertical height (constant)
b = slope of line

Forecasting Technique
Forecasting Technique
Regression Analysis

𝐚 = 𝐲ത − 𝐛ത
𝐱
𝐲 = 𝐚 + 𝐛𝐱
σ 𝐱𝐲 − 𝐧ത
𝐱𝐲ത
𝐛= 𝟐 𝟐
𝚺𝐱 − 𝐧ത 𝐱

Forecasting Technique
Advertisment (X) Sales (Y)
100 50
200
300
70
85
𝐲 = 𝐚 + 𝐛𝐱
400 120
1000 325
𝐚 = 𝐲ത − 𝐛ത
𝐱

σ 𝐱𝐲 − 𝐧ത
𝐱𝐲ത
𝐛=
𝚺𝐱 𝟐 − 𝐧ത
𝐱𝟐

Forecasting Technique
Advertisment (X) Sales (Y) XY 𝟐

100 50 5000 10,000 𝐲 = 𝐚 + 𝐛𝐱

200 70 14,000 40,000 1000
300 85 25,500 90,000 ഥ=
𝒙 = 𝟐𝟓𝟎
4
400 120 48,000 1,60,000
1000 325 92,500 3,00,000 325
ഥ=
𝒚 = 𝟖𝟏. 𝟐𝟓
4

σ 𝐱𝐲 − 𝐧ത𝐱𝐲ത 𝟗𝟐, 𝟓𝟎𝟎 − 𝟒 × 𝟐𝟓𝟎 × 𝟖𝟏. 𝟐𝟓

𝐛= = = 𝟎. 𝟐𝟐𝟓
𝚺𝐱 𝟐 − 𝐧ത𝐱 𝟐 𝟑, 𝟎𝟎, 𝟎𝟎𝟎 − 𝟒 × 𝟐𝟓𝟎 × 𝟐𝟓𝟎

𝐚 = 𝐲ത − 𝐛ത𝐱 = 𝟖𝟏. 𝟐𝟓 − 𝟎. 𝟐𝟐𝟓 × 𝟐𝟓𝟎 = 𝟐𝟓

𝐲 = 𝟐𝟓 + 𝟎. 𝟐𝟐𝟓𝐱
Forecasting Technique
140

Advertisment (X) Sales (Y)

120
100 50
200 70
100
300 85
400 120
80

60
Advertisment (X) Sales (Y)

40
100 47.5
200 70
300 92.5
20
400 115

0
0 50 100 150 200 250 300 350 400 450

Forecasting Technique
1) Co – Efficient of Co – Relation (r)

• It measures the relationship between two variables X & Y.

• It is a number between -1 and 1 that expresses how closely connected
are correlated two variables are

0
-1 1
No
Perfect Correlation Perfect
Negative Positive
correlation correlation

Forecasting Technique
1) Co – Efficient of Co – Relation (r)
2) Co – Efficient of determination (𝐫 𝟐 )
3) T – Value or T – Statistics
4) Standard Error Estimated

Forecasting Technique
1) Co – Efficient of Co – Relation (r)

• It measures the relationship between two variables X & Y.

• It is a number between -1 and 1 that expresses how closely connected
are correlated two variables are

𝑛 σ 𝑥𝑦 − σ 𝑥 σ 𝑦
𝑟=
𝑛𝛴𝑥 2 − σ 𝑥 2 𝑛 σ 𝑦 2 − 𝛴𝑦 2

Forecasting Technique
Advertisment (X) Sales (Y) XY 𝟐 𝟐

100 50 5000 10,000 2500

200 70 14,000 40,000 4900
1000
ഥ=
𝒙 = 𝟐𝟓𝟎
300 85 25,500 90,000 7225 4
400 120 48,000 1,60,000 14,400 325
1000 325 92,500 3,00,000 29,025 ഥ=
𝒚 = 𝟖𝟏. 𝟐𝟓
4

𝐲 = 𝟐𝟓 + 𝟎. 𝟐𝟐𝟓𝐱
𝑛 σ 𝑥𝑦 − σ 𝑥 σ 𝑦
𝑟=
𝑛𝛴𝑥 2 − σ 𝑥 2 𝑛 σ 𝑦 2 − 𝛴𝑦 2

4 × 92500 − 1000 × 325

𝑟= = 𝟎. 𝟗𝟖𝟑𝟏𝟓
(4 × 3,00,000 − 1000 2 )(4 × 29025 − 3252 )

Forecasting Technique
2) Co – Efficient of determination (𝐫 𝟐 )
• It is a square of coefficient of correlation.
• It is the percentage of the total amount of change in dependent
variable that can be explained by the changes in independent variable.
• Value between 0 to 1

2
2
𝑛 σ 𝑥𝑦 − σ 𝑥 σ 𝑦
𝑟 =
𝑛𝛴𝑥 2 − σ 𝑥 2 𝑛 σ 𝑦 2 − 𝛴𝑦 2

Forecasting Technique
Advertisment (X) Sales (Y) XY 𝟐 𝟐

100 50 5000 10,000 2500

1000
200 70 14,000 40,000 4900 ഥ=
𝒙 = 𝟐𝟓𝟎
4
300 85 25,500 90,000 7225
400 120 48,000 1,60,000 14,400 325
ഥ=
𝒚 = 𝟖𝟏. 𝟐𝟓
1000 325 92,500 3,00,000 29,025 4

𝑛 σ 𝑥𝑦 − σ 𝑥 σ 𝑦
𝑟= 𝐲 = 𝟐𝟓 + 𝟎. 𝟐𝟐𝟓𝐱
𝑛𝛴𝑥 2 − σ 𝑥 2 𝑛 σ 𝑦 2 − 𝛴𝑦 2

4 × 92500 − 1000 × 325

𝑟= = 𝟎. 𝟗𝟖𝟑𝟏𝟓
(4 × 3,00,000 − 1000 2 )(4 × 29025 − 3252 )

𝒓𝟐 = 0.983152 = 𝟎. 𝟗𝟔𝟔𝟓

Forecasting Technique
Advertisment (X) Sales (Y) XY 𝟐 𝟐

100 50 5000 10,000 2500

200 70 14,000 40,000 4900 1000
ഥ=
𝒙 = 𝟐𝟓𝟎
300 85 25,500 90,000 7225 4
400 120 48,000 1,60,000 14,400 325
1000 325 92,500 3,00,000 29,025 ഥ=
𝒚 = 𝟖𝟏. 𝟐𝟓
4

𝟐 𝐲 = 𝟐𝟓 + 𝟎. 𝟐𝟐𝟓𝐱
𝒓 = 𝟎. 𝟗𝟔𝟔𝟓
96.65% of the change in sale can be explained by the amount of
advertisement expenditure. It also means that 3.35% or (100 – 96.65)
of the changes are by the other factors than advertisement expenses

Forecasting Technique
3) T – Value or T – Statistics
• T Value measures whether an independent variable as a varied long-
term relationship to the depended variable.
• Generally T value should be more than two.

n−2
T − Value = r ×
1 − r2

Forecasting Technique
Advertisment (X) Sales (Y) XY 𝟐 𝟐

100 50 5000 10,000 2500

200 70 14,000 40,000 4900
1000
ഥ=
𝒙 = 𝟐𝟓𝟎
300 85 25,500 90,000 7225 4
400 120 48,000 1,60,000 14,400 325
1000 325 92,500 3,00,000 29,025 ഥ=
𝒚 = 𝟖𝟏. 𝟐𝟓
4

𝐲 = 𝟐𝟓 + 𝟎. 𝟐𝟐𝟓𝐱
n−2
T − Value = r × 𝒓𝟐 = 𝟎. 𝟗𝟔𝟔𝟓
1 − r2
𝒓 = 𝟎. 𝟗𝟓𝟑𝟏𝟓
4−2
T − Value = 0.95315 × = 7.543
1 − 0.9665
Here these two variables sales and advertisement
have long-term relationship Forecasting Technique
4) Standard Error Estimated
• T Value measures whether an independent variable as a varied long-
term relationship to the depended variable.
• Generally T value should be more than two.

Error term (∈) = Yactual − Yestimate

σ ∈2
Standard Error Estimate =
N−2

Standard error estimate

Percentage of Error =
Average actual Y
Forecasting Technique
Sales (Y - actual) Y (estimate) ∈𝟐
50 47.5 2.5 6.25
70 70 0 0
85 92.5 -7.5 56.25
120 115 5 25
87.5

σ ∈2 87 ⋅ 5
Standard Error Estimate = = = 𝟔 ⋅ 𝟔𝟏𝟒𝟑
N−2 4−2

Standard error estimate

Percentage of Error =
Average actual Y

6.6143
= = 0.0814 = 𝟖. 𝟏𝟒%
81.25

Forecasting Technique
2) Multiple Regression Analysis
Also called Multiple Linear Regression Analysis

𝑦 = 𝑎 + 𝑏1 𝑥1 + 𝑏2 𝑥2 + 𝑏3 𝑥3 + …
• It has more than one independent variable.
• 𝑥 can be advertisement, price, customer preferences, market conditions etc.

Forecasting Technique
3) Probability
Expected value method uses possible outcomes. Use of expected value is to
choose between two or more alternatives. The actual results can vary based
on possible economic conditions.

Sales Probability
1000 10% Expected Sales =
1500 30% 1000 × 10% + 1500 × 30% + 1800 × 15%
1800 15% + 2100 × 20% + 2300 × 25%
2100 20%
Expected Sales = 1815
2300 25%

Forecasting Technique
 Learning Curve
Part 01 – Planning, Budgeting and Forecasting
The term learning curve refers to the idea that efficiency increases the more
experience a person had with a given task. The time required for performing
the task decreases, when the number of times the task has been performed
increases.
There are two types of learning curve model

1) Cumulative Average Time Learning Model

2) Incremental Unit Time Model

Learning Curve
 Cumulative time average learning Model
This based on the assumptions that the average time required per unit
decreases at a constant rate, each time when the quantity of amount
produced doubles.

Hours required produce 1st unit = 10 hours

Learning Curve = 80%

Incremental Average Cumilative Cumilative Incremental

Unit Time/ Unit Unit Hours Hours
1 10 1 10 10
1 8 2 16 6
2 6.4 4 25.6 9.6
4 5.12 8 40.96 15.36
8 4.096 16 65.536 24.516

Learning Curve
No. of units in a batch = 10 units
Hours required produce 1st batch = 50 hours
Learning Curve = 70%

Incremental Average Cumilative Cumilative Incremental

Unit Time/ Unit Unit Hours Hours
10 5 10 50 50
10 3.5 20 70 20
20 2.45 40 98 28
40 1.715 80 137.2 39.2
80 1.2005 160 192.08 54.88
160 0.84035 320 268.912 76.832

Learning Curve
Learning Curve Formula

Cumulative Time required

Hours = for first unit
× 2 × Learning Curve n

Learning Curve
Learning Curve = 90%
No. Of units in a batch = 100 units
Time required for the first unit = 5 hours
Calculate
a) Cumulative hours when cumulative units at 200
b) Average time per unit after two times doubling
c) Average time per unit for the second batch of 100 units

answer
a)

1
= 500 × 2 × 90%

= 900 hours

Learning Curve
Learning Curve = 90%
No. Of units in a batch = 100 units
Time required for the first unit = 5 hours
Calculate
a) Cumulative hours when cumulative units at 200
b) Average time per unit after two times doubling
c) Average time per unit for the second batch of 100 units

answer
b)

2
= 500 × 2 × 90%
= 1620 hours

1620
Average Per unit = = 4.05 hours
400
Learning Curve
Learning Curve = 90%
No. Of units in a batch = 100 units
Time required for the first unit = 5 hours
Calculate
a) Cumulative hours when cumulative units at 200
b) Average time per unit after two times doubling
c) Average time per unit for the second batch of 100 units

answer
c) 1st Batch = 500
2nd Batch = 900 – 500 = 400

400
Average Per unit = = 4 hours
100

Learning Curve
Budgeting Methodologies
Part 01 – Planning, Budgeting and Forecasting
1. Project Budget
2. Activity Based Budget
3. Incremental Budget
4. Zero Based Budget
5. Rolling Budget
6. Flexible Budget

Budgeting Methodologies
Project budget
• It is a budget for specific project.
• Time frame maybe very short or more long term depending upon the
length of the project.
• It contains all of the projects cost so that it's individual impact can be
easily measured
• Example, film industry, aircraft, construction of roads etc.

Budgeting Methodologies
Activity based budget
• Activity-based budgeting (ABB) is a system that records, researches,
and analyzes activities that lead to costs for a company.
• Every activity in an organization that incurs a cost is scrutinized for
potential ways to create efficiencies. Budgets are then developed
based on these results.

Budgeting Methodologies
Incremental budget
• Incremental budgeting is the process of creating a new budget by
making minor changes to the current budget.
• An incremental budget uses the current year’s budget as a baseline,
which finance teams then adjust by incremental amounts. You can
perform either additions or subtractions to the current budget to create
new quantities.

Budgeting Methodologies
Zero based budget
• Zero-based budgeting (ZBB) is a method of budgeting in which all expenses
must be justified for each new period.
• The process of zero-based budgeting starts from a "zero base," and every
function within an organization is analyzed for its needs and costs. The
budgets are then built around what is needed for the upcoming period,
regardless of whether each budget is higher or lower than the previous
one.

Budgeting Methodologies
Rolling Budget
• A rolling budget is continually updated to add a new budget period as the
most recent budget period is completed.
• Thus, the rolling budget involves the incremental extension of the existing
budget model. By doing so, a business always has a budget that extends
one year into the future.

Budgeting Methodologies
Flexible Budget
• Flexible budgets are essentially budgets that can be adjusted depending
upon revenue and cost changes throughout the fiscal year, accounting for
expected unpredictability.
• Companies first account for the fixed costs they expect, or at least costs that
they don’t expect to change as the year progresses. They then allow for
fluctuating variable costs, reviewing costs periodically to make real-time
adjustments.

Budgeting Methodologies
 Sales Budget
Production Budget
Budget Preparation 1
Part 01 – Planning, Budgeting and Forecasting
Types of Budget
1) Sales Budget
2) Production Budget
3) Material Purchased Budget
4) Direct Material Usage Budget
5) Labour Budget
6) Manufacturing Overhead Budget
7) Cost of Good Manufactured Budget
8) Cost of Goods Sold Budget
9) Non Manufacturing Overhead Budget
10) Cash Budget
11) Budgeted Income Statement
12) Budgeted Balance Sheet

Budgeting
 Sales Budget
Purticulars April May June Quarter
Sales Unit 20,000 25,000 35,000 80,000
Selling Price 30 30 30 30
Budgeted Sales Revenue $ 6,00,000 $ 7,50,000 $ 10,50,000 $ 24,00,000

Sales Budgeting
 Production Budget
Company expects to have 5000 units as opening inventory of finished goods on April 1st
and wish to maintain 30% of followings months predicted sales in closing inventory.
Expected Sales in July is 40,000 units.

Production Budget
Purticulars April May June Quarter
Sales Unit 20,000 25,000 35,000 80,000
(+) Closing FG 7500 10,500 12,000 12,000
(-) Opening FG 5000 7500 10,500 5000
Budgted Production 22,500 28,000 36,500 87,000

Production Budgeting
Material Purchase Budget
Material Usage Budget
Budget Preparation 2
Part 01 – Planning, Budgeting and Forecasting
 Material Purchase Budget
Assume one unit output required 3 units of raw material inputs. Ending raw
material inventory is 10% of raw material required for next month. Opening raw
material of April is 7000 units at $2.4 per unit. July production 36000 units.

Production Budget
Purticulars April May June Quarter
Sales Unit 20,000 25,000 35,000 80,000
(+) Closing FG 7500 10,500 12,000 12,000
(-) Opening FG 5000 7500 10,500 5000
Budgted Production 22,500 28,000 36,500 87,000

Material Purchase Budget

 Material Purchase Budget
Assume one unit output required 3 units of raw material inputs. Ending raw material
inventory is 10% of raw material required for next month. Opening raw material of April is
7000 units at $2.4 per unit. July production 36000 units.

Material Purchase Budget

Purticulars April May June Quarter
RM Required 67,500 84,000 1,09,500 2,61,000
8400 10950 10800
10,800
(+) Closing FG (84,000 × 10%) (1,09,500 × 10%) (36,000 × 3 × 10%)
(-) Opening FG 7000 8400 10,950 7000
RM Purchase 68,900 86,550 1,09,350 2,64,800
Purchase Cost/ Unit $2.45 $2.50 $2.60
Budgeted RM to Purchase $1,68,805 $2,16,375 $2,84,310 $6,69,490

Material Purchase Budget

 Direct Material Usage Budget
Assume one unit output required 3 units of raw material inputs. Ending raw material
inventory is 10% of raw material required for next month. Opening raw material of April is
7000 units at $2.4 per unit.
Direct Material Usage Budget
Purticulars April May June Quarter
Purchase Cost $1,68,805 $2,16,375 $2,84,310 $6,69,490
(-) Closing FG $20,580 $27,375 $28,080 $28,080
(+) Opening FG $16,800 $20,580 $27,375 $16,800
Budgeted Direct Material
$1,65,025 $2,09,580 $2,83,605 $6,58,210
Usage
Purchase Cost/ Unit $2.45 $2.50 $2.60
Material Purchase Budget
Purticulars April May June Quarter
RM Required 67,500 84,000 1,09,500 2,61,000
(+) Closing FG 8400 10,950 10,800 10,800
(-) Opening FG 7000 8400 10,950 7000
RM Purchase 68,900 86,550 1,09,350 2,64,800
Purchase Cost/ Unit $2.45 $2.50 $2.60
Budgeted RM to Purchase $1,68,805 $2,16,375 $2,84,310 $6,69,490 Material Usage Budget
 Labour Budget
Manufacturing Overhead Budget
Budget Preparation 3
Part 01 – Planning, Budgeting and Forecasting
 Labour Budget
Company has skilled and semi skilled labors.
Skilled Labors = 0.2 hours per output = $12 per hour
Semi Skilled Labors = 0.5 hours per output = $8 per hour
Production Budget
Purticulars April May June Quarter
Budgted Production 22,500 28,000 36,500 87,000

Labour Budget
Purticulars Per unit April May June Quarter
Production 22,500 28,000 36,500 87,000
Skilled Hours 0.2 4500 5,600 7,300 17,400
Semi Skilled Hour 0.5 11,250 14,000 18,250 43,500
Skilled Wage 12 $54,000 $67,200 $87,600 $2,08,800
Semi Skilled Wage 8 $90,000 $1,12,000 $1,46,000 $3,48,000
Total Direct Labour Cost $1,44,000 $1,79,200 $2,33,600 $5,56,800

Labour Budget
Manufacturing Overhead Budget
Manufacturing Overhead Budget
Purticulars April May June Quarter
Indirect Labour 15750 19,600 25,550 60,900
Power 3150 3920 5110 12,180
Fringe Benefit 47250 58,800 76,650 182,700
Suppliers 1890 2352 3066 7,308
Maintance 1260 1568 2044 4,872
Total Variable MOH 69,300 86,240 1,12,420 2,67,960
Depreciation 30,000 30,000 40,000 100,000
Insurance Premium 2500 2500 2500 7,500
Property Tax 900 900 900 2,700
Super Vision 8900 8900 8900 26,700
Power 1250 1250 1250 3,750
Maintance 750 750 750 2,250
Total Fixed MOH 44,300 44,300 54,300 142,900
Total Overhead 113,600 130,540 1,66,720 4,10,860

MOH Budget
Cost of Goods Manufactured Budget
Cost of Goods sold Budget
Non MOH Budget
Budget Preparation 4
Part 01 – Planning, Budgeting and Forecasting
Cost of Goods Manufactured Budget
Cost of goods manufactured Budget
Purticulars April May June Quarter
Direct Material Used 1,65,025 2,09,580 2,83,605 6,58,210
Direct Labour Used 1,44,000 1,79,200 2,33,600 5,56,800
Manufacturing Overhead 1,13,600 1,30,540 1,66,720 4,10,860
(-) Closing WIP 0 0 0 0
(+) Opening WIP 0 0 0 0
Budgeted COGM 4,22,625 5,19,320 6,83,925 16,25,870
Direct Material Usage Budget
Purticulars April May June Quarter
Budgeted Direct Material
$1,65,025 $2,09,580 $2,83,605 $6,58,210
Usage
Labour Budget
Purticulars April May June Quarter
Total Direct Labour Cost $1,44,000 $1,79,200 $2,33,600 $5,56,800
Manufacturing Overhead Budget
Purticulars April May June Quarter
COGM Budget
Total Overhead 1,13,600 1,30,540 1,66,720 4,10,860
 Cost of Goods Manufactured Budget
Cost of goods manufactured Budget
Purticulars April May June Quarter
Direct Material Used 1,65,025 2,09,580 2,83,605 6,58,210
Direct Labour Used 1,44,000 1,79,200 2,33,600 5,56,800
Manufacturing Overhead 1,13,600 1,30,540 1,66,720 4,10,860
(-) Closing WIP 0 0 0 0
(+) Opening WIP 0 0 0 0
Budgeted COGM 4,22,625 5,19,320 6,83,925 16,25,870
COGM per unit 18.7833 18.547 18.737
(422625 ÷ 22500) (519320 ÷ 28000) (683925 ÷ 36500)

Production Budget
Purticulars April May June Quarter
Sales Unit 20,000 25,000 35,000 80,000
(+) Closing FG 7500 10,500 12,000 12,000
(-) Opening FG 5000 7500 10,500 5000
Budgted Production 22,500 28,000 36,500 87,000 COGM Budget
 Cost of Goods Sold Budget
Company’s FG on April 1st is assume to have a unit cost of $18.
Cost of goods sold Budget
Purticulars April May June Quarter
COGM 4,22,625 5,19,320 6,83,925 16,25,870
COGM per unit $18.78 $18.55 $18.74
(+) Opening FG 90,000 1,40,875 1,94,745 90,000
(-) Closing FG 1,40,875 1,94,745 2,24,852 2,24,852
Budgeted COGS 3,71,750 4,65,450 6,53,818 14,91,018

Production Budget
Purticulars April May June Quarter
Sales Unit 20,000 25,000 35,000 80,000
(+) Closing FG 7500 10,500 12,000 12,000
(-) Opening FG 5000 7500 10,500 5000
Budgted Production 22,500 28,000 36,500 87,000 COGS Budget
Non Manufacturing Overhead Budget
Non Manufacturing Overhead Budget
Purticulars April May June Quarter
(a) Selling Expenses
Variable Selling Expenses
Sales Commition 30,000 37,500 52,500 120,000
Delivery Expenses 2000 2500 3500 8,000
Bad Debt Expenses 9000 11,250 15,750 36,000
Total Variable Selling Expenses 41,000 51,250 71,750 164,000
Fixed Selling Expenses
Salary 8000 8000 8000 24,000
Advertisment 50,000 50,000 50,000 15,00,000
Delivery Expenses 6000 6000 6000 18,000
Depreciation 20,000 20,000 20,000 60,000
Total Fixed Selling Expenses 84,000 84,000 84,000 2,52,000
(b) Administration Expenses
Salary 25,000 25,000 25,000 75,000
Accounting and Data Processing 12,000 12,000 12,000 36,000
Depreciation 7000 7000 7000 21,000
Other Expenses 6000 6000 6000 18,000
Total Administration Expenses 50,000 50,000 50,000 150,000
Total Overhead 175,000 185,250 205,750 566,000
NMOH Budget
 Cash Budget
Budget Preparation 5
Part 01 – Planning, Budgeting and Forecasting
Cash Budget
• Having adequate cash at all times is crucial for business survival.
• It helps in utilizing opportunities
• The cash budget brings together the anticipated effects of all budgeted
activities relating to cash it also shows the expected cash collections and
payments during the budget.
• The cash budget generally include,
a) cash receipt
b) cash disbursement
c) investing or financing

• Investing means depositing the surplus funds to get the additional income as
financing arranges additional funds if the cash balance is expected to fall
below the desired minimum balance.

Cash Budget
 Cash Budget
Purticulars April May June Quarter
Cash Reciept
(a) Cash Sale
Liquid Cash
Credit Card
(b) Credit Sales
with discount
without discount
following month cheque
Total Reciept
Cash Disbursment
(a) Purchase
within month
following month
(b) Direct Labout
(c) MOH
(d) NMOH
(e) Equipment Purchase
Total Cash Disbursment
Net Amount
Opening Cash Balance
Net Cash Balance
Financing
(a) Borrowing
(b) Repayment
Interest
Closing Balance
Cash Budget
Company desired minimum balance of the company is $50,000 each month.
Company expects to have $75,000 cash in hand on April 1st. The firm expects 70%
of its sales to be cash sales, the firm also estimates that 40% of cash customers
uses their credit sales for the purchases (bank charges 3%).
Company sends statement to its customers on 1st of each month with a term of
“2/10 net 30”, 80% of them will pay within the month. Among this 60% are paid
within the discount period. 15% of them sending their cheques in the following
month. 5% bad debt.
The typical credit term for the company is purchase of direct material is “net 30”
Firm pays 60% of its purchase in the month of purchase and it remains the
following month. All other expenses are paid as incurred.
February Sales $ 4,00,000
March Sales $ 4,50,000
March Purchase $ 1,55,000
Firm has revolving 30 days credit with 1% interest per month. The amount that
must be withdrawn should be the increments of 5000
Equipment purchased in January for $2,00,000 will be delivered in May month as
cash on delivery.
Cash Budget
 100% Sales

70% Cash 30% Credit Sale

40% Credit Card 60% Liquid Cash

(3% bank charge) 5% Bad Debt

15% Next Month

80% Within Month

60% With Discount 40% Without Discount

Cash Budget
Cash Budget
 Purticulars April May June Quarter
Sales Unit 20,000 25,000 35,000 80,000
Selling Price 30 30 30 30
Budgeted Sales Revenue $ 6,00,000 $ 7,50,000 $ 10,50,000 $ 24,00,000

Cash Budget
February

Cash Budget
March

Cash Budget
April

Cash Budget
May

Cash Budget
June

Cash Budget
Cash Budget
Cash Budget
 Cash Budget
Purticulars April (6L) May (7.5L) June (10.5L) Quarter
Cash Disbursment
(a) Purchase
within month 101,283 129,825 170,586 401,694
following month 62,000 67,522 86,550 216,072
(b) Direct Labour 144,000 179,200 233,600 556,800
(c) MOH 83,600 100,540 126,720 310,860
(d) NMOH 139000 147000 163000 449,000
(e) Equipment Purchase 0 200000 0 200,000
Total Cash Disbursment 529,883 824,087 780,456 2,134,426

Material Purchase Budget

Purticulars April May June Quarter
Budgeted RM to Purchase $1,68,805 $2,16,375 $2,84,310 $6,69,490

Within Month = 60%

Next Month = 40%
March Purchase $ 1,55,000 Cash Budget
 Cash Budget
Purticulars April (6L) May (7.5L) June (10.5L) Quarter
Cash Disbursment
(a) Purchase
within month 101,283 129,825 170,586 401,694
following month 62,000 67,522 86,550 216,072
(b) Direct Labour 144,000 179,200 233,600 556,800
(c) MOH 83,600 100,540 126,720 310,860
(d) NMOH 139000 147000 163000 449,000
(e) Equipment Purchase 0 200000 0 200,000
Total Cash Disbursment 529,883 824,087 780,456 2,134,426
Labour Budget
Purticulars Per unit April May June Quarter
Production 22,500 28,000 36,500 87,000
Skilled Hours 0.2 4500 5,600 7,300 17,400
Semi Skilled Hour 0.5 11,250 14,000 18,250 43,500
Skilled Wage 12 $54,000 $67,200 $87,600 $2,08,800
Semi Skilled Wage 8 $90,000 $1,12,000 $1,46,000 $3,48,000
Total Direct Labour Cost $1,44,000 $1,79,200 $2,33,600 $5,56,800
Cash Budget
 Cash Budget
Purticulars April (6L) May (7.5L) June (10.5L) Quarter
Cash Disbursment
(a) Purchase
within month 101,283 129,825 170,586 401,694
following month 62,000 67,522 86,550 216,072
(b) Direct Labour 144,000 179,200 233,600 556,800
(c) MOH 83,600 100,540 126,720 310,860
(d) NMOH 139000 147000 163000 449,000
(e) Equipment Purchase 0 200000 0 200,000
Total Cash Disbursment 529,883 824,087 780,456 2,134,426
Manufacturing Overhead Budget
Purticulars April May June Quarter
Indirect Labour 15750 19,600 25,550 60,900
Power 3150 3920 5110 12,180
Fringe Benefit 47250 58,800 76,650 182,700
Suppliers 1890 2352 3066 7,308
Subtract the
Maintance 1260 1568 2044 4,872
Total Variable MOH 69,300 86,240 1,12,420 2,67,960
depreciation amount
Depreciation 30,000 30,000 40,000 100,000 from total overhead
Insurance Premium 2500 2500 2500 7,500
Property Tax 900 900 900 2,700
Super Vision 8900 8900 8900 26,700
Power 1250 1250 1250 3,750
Maintance 750 750 750 2,250
Total Fixed MOH 44,300 44,300 54,300 142,900
Total Overhead 113,600 130,540 1,66,720 4,10,860
Cash Budget
 Cash Budget
Purticulars April (6L) May (7.5L) June (10.5L) Quarter
Cash Disbursment
(a) Purchase
within month 101,283 129,825 170,586 401,694
following month 62,000 67,522 86,550 216,072
(b) Direct Labour 144,000 179,200 233,600 556,800
(c) MOH 83,600 100,540 126,720 310,860
(d) NMOH 139000 147000 163000 449,000
(e) Equipment Purchase 0 200000 0 200,000
Total Cash Disbursment 529,883 824,087 780,456 2,134,426
Non Manufacturing Overhead Budget
Purticulars April May June Quarter
(a) Selling Expenses
Variable Selling Expenses
Sales Commition 30,000 37,500 52,500 120,000
Delivery Expenses 2000 2500 3500 8,000
Bad Debt Expenses 9000 11,250 15,750 36,000
Total Variable Selling Expenses 41,000 51,250 71,750 164,000 Subtract the
Fixed Selling Expenses depreciation amount
Salary 8000 8000 8000 24,000
Advertisment 50,000 50,000 50,000 15,00,000 and bad debt from
Delivery Expenses 6000 6000 6000 18,000 total overhead
Depreciation 20,000 20,000 20,000 60,000
Total Fixed Selling Expenses 84,000 84,000 84,000 2,52,000
(b) Administration Expenses
Salary 25,000 25,000 25,000 75,000
Accounting and Data Processing 12,000 12,000 12,000 36,000
Depreciation 7000 7000 7000 21,000
Other Expenses 6000 6000 6000 18,000
Total Administration Expenses 50,000 50,000 50,000 150,000 Cash Budget
Total Overhead 175,000 185,250 205,750 566,000
 Cash Budget
Purticulars April (6L) May (7.5L) June (10.5L) Quarter
Cash Disbursment
(a) Purchase
within month 101,283 129,825 170,586 401,694
following month 62,000 67,522 86,550 216,072
(b) Direct Labour 144,000 179,200 233,600 556,800
(c) MOH 83,600 100,540 126,720 310,860
(d) NMOH 139000 147000 163000 449,000
(e) Equipment Purchase 0 200000 0 200,000
Total Cash Disbursment 529,883 824,087 780,456 2,134,426

Given in the question

Equipment purchased in January for $2,00,000 will be delivered in May month as

cash on delivery.

Cash Budget
Cash Budget
Budgeted Income Statement
Budget Preparation 6
Part 01 – Planning, Budgeting and Forecasting
Budgeted Income Statement
Assume that the tax rate is 30%.
Budgeted Income Statement
Purticulars April May June Quarter
Sales 6,00,000 7,50,000 10,50,000 24,00,000
(-) COGS 3,71,750 4,65,450 6,53,818 14,91,018
Gross Profit 2,28,250 2,84,550 3,96,182 9,08,982
(-) Sales and Administrative 1,75,000 1,85,250 2,05,750 5,66,000
EBIT 53,250 99,300 1,90,432 3,42,982
(-) Interest 0 0 1100 1100.00
(-) Tax 15,975 29,790 56,799 1,02,564
Net Income 37,275 69,510 1,32,532 2,39,317
Budgeted Income Statement
Assume that the tax rate is 30%.
Budgeted Income Statement
Purticulars April May June Quarter
Sales 6,00,000 7,50,000 10,50,000 24,00,000
(-) COGS 3,71,750 4,65,450 6,53,818 14,91,018
Gross Profit 2,28,250 2,84,550 3,96,182 9,08,982
(-) Sales and Administrative 1,75,000 1,85,250 2,05,750 5,66,000
EBIT 53,250 99,300 1,90,432 3,42,982
(-) Interest 0 0 1100 1100.00
(-) Tax 15,975 29,790 56,799 1,02,564
Net Income 37,275 69,510 1,32,532 2,39,317

Sales Budget
Purticulars April May June Quarter
Sales Unit 20,000 25,000 35,000 80,000
Selling Price 30 30 30 30
Budgeted Sales Revenue $ 6,00,000 $ 7,50,000 $ 10,50,000 $ 24,00,000
Budgeted Income Statement
Assume that the tax rate is 30%.
Budgeted Income Statement
Purticulars April May June Quarter
Sales 6,00,000 7,50,000 10,50,000 24,00,000
(-) COGS 3,71,750 4,65,450 6,53,818 14,91,018
Gross Profit 2,28,250 2,84,550 3,96,182 9,08,982
(-) Sales and Administrative 1,75,000 1,85,250 2,05,750 5,66,000
EBIT 53,250 99,300 1,90,432 3,42,982
(-) Interest 0 0 1100 1100.00
(-) Tax 15,975 29,790 56,799 1,02,564
Net Income 37,275 69,510 1,32,532 2,39,317
Cost of goods sold Budget
Purticulars April May June Quarter
COGM 4,22,625 5,19,320 6,83,925 16,25,870
COGM per unit $18.78 $18.55 $18.74
(+) Opening FG 90,000 1,40,875 1,94,745 90,000
(-) Closing FG 1,40,875 1,94,745 2,24,852 2,24,852
Budgeted COGS 3,71,750 4,65,450 6,53,818 14,91,018
Budgeted Income Statement

▪ Sales = sales given in sales budget

▪ COGS = cogs given in COGS budget
▪ Gross Profit = Sales – COGS
▪ Sales and Administrative = sales and administrative is the total overhead
amount in the NMOH budget.
▪ EBIT = Gross Profit – Sales and Administrative
▪ Interest = A $ 1100 is payable in June month for the borrowing in cash
budget. Please refer cash budget
▪ Tax = It is the 30% amount of ( EBIT – interest )
▪ Net Income = EBIT – Interest – Tax
Budgeted Balance Sheet
Budget Preparation 7
Part 01 – Planning, Budgeting and Forecasting
Budgeted Balance Sheet
Company estimates that on June 30, the balance of office supplies will be
$38,906 and sales tax payable will $7812.

Balance Sheet (March 31st)

Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 62,000 Cash 75,000
Sales tax payable 4500 Accounts Recievable 1,53,000
RM Inventory 16,800
FG Inventory 90,000
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 3,500
Retained Earnings 6,04,500 PPE
Land 40,000
Building and Equipment
Accumulated 5,96,000
Depreciation (1,68,000)
9,74,300 9,74,300
Budgeted Balance Sheet
Company estimates that on June 30, the balance of office supplies will be
$38,906 and sales tax payable will $7812.

Balance Sheet (June 30th)

Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080
FG Inventory 2,24,852
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 38,906
Retained Earnings 8,43,817 PPE
Land 40,000
Building and Equipment
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218
 Balance Sheet (June 30th)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080
FG Inventory 2,24,852
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 38,906 It is the pending
Retained Earnings 8,43,817 PPE amount of June
Land 40,000 (40% of $2,84,310)
Building and Equipment of material
Accumulated 6,15,000 purchase.
Depreciation (3,49,000)
13,71,218 13,71,218

Material Purchase Budget

Purticulars April May June Quarter
RM Required 67,500 84,000 1,09,500 2,61,000
(+) Closing FG 8400 10,950 10,800 10,800
(-) Opening FG 7000 8400 10,950 7000
RM Purchase 68,900 86,550 1,09,350 2,64,800
Purchase Cost/ Unit $2.45 $2.50 $2.60
Budgeted RM to Purchase $1,68,805 $2,16,375 $2,84,310 $6,69,490
Budgeted Balance Sheet
Company estimates that on June 30, the balance of office supplies will be
$38,906 and sales tax payable will $7812.

Balance Sheet (June 30th)

Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080
FG Inventory 2,24,852
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 38,906
Retained Earnings 8,43,817 PPE
Land 40,000
Building and Equipment
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218
 Balance Sheet (June 30th)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080
FG Inventory 2,24,852
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 38,906 It is the total income
Retained Earnings 8,43,817 PPE tax payable in this
Land 40,000
quarter from
Building and Equipment
budgeted income
Accumulated 6,15,000
Depreciation (3,49,000)
statement
13,71,218 13,71,218

Budgeted Income Statement

Purticulars April May June Quarter
Sales 6,00,000 7,50,000 10,50,000 24,00,000
(-) COGS 3,71,750 4,65,450 6,53,818 14,91,018
Gross Profit 2,28,250 2,84,550 3,96,182 9,08,982
(-) Sales and Administrative 1,75,000 1,85,250 2,05,750 5,66,000
EBIT 53,250 99,300 1,90,432 3,42,982
(-) Interest 0 0 1100 1100.00
(-) Tax 15,975 29,790 56,799 1,02,564
Net Income 37,275 69,510 1,32,532 2,39,317
 Balance Sheet (June 30th)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000 Retained Earing is the
Income Tax Payable 1,02,565 RM Inventory 28,080 accumulated net
FG Inventory 2,24,852 profit, new net
Shareholders Equity Non Current Asset income is added to
Common Stock 3,03,300 Office Supplies 38,906 previous retained
Retained Earnings 8,43,817 PPE
earnings,
Land 40,000
604500 + 239317 =
Building and Equipment
843817
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218

Balance Sheet (March 31st) Budgeted Income Statement

Liabilities Amount Asset Amount Purticulars April May June Quarter
Current Liability Non Current Asset Sales 6,00,000 7,50,000 10,50,000 24,00,000
Accounts Payable 62,000 Cash 75,000
(-) COGS 3,71,750 4,65,450 6,53,818 14,91,018
Sales tax payable 4500 Accounts Recievable 1,53,000
Gross Profit 2,28,250 2,84,550 3,96,182 9,08,982
RM Inventory 16,800
(-) Sales and Administrative 1,75,000 1,85,250 2,05,750 5,66,000
FG Inventory 90,000
Shareholders Equity Non Current Asset EBIT 53,250 99,300 1,90,432 3,42,982
Common Stock 3,03,300 Office Supplies 3,500 (-) Interest 0 0 1100 1100.00
Retained Earnings 6,04,500 PPE (-) Tax 15,975 29,790 56,799 1,02,564
Land 40,000 Net Income 37,275 69,510 1,32,532 2,39,317
Building and Equipment
Accumulated 5,96,000
Depreciation (1,68,000)
9,74,300 9,74,300
 Balance Sheet (June 30th)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080
FG Inventory 2,24,852
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 38,906
Retained Earnings 8,43,817 PPE
Land 40,000
Building and Equipment
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218

Cash amount is mentioned in budgeted cash statement, the closing amount of June,
refer next page
 Cash Budget
Purticulars April (6L) May (7.5L) June (10.5L) Quarter
Cash Reciept
(a) Cash Sale
Liquid Cash 252,000 315,000 441,000 1,008,000
Credit Card 162960 203700 285180 651,840
(b) Credit Sales
with discount 63,504 84,672 105,840 254,016
without discount 43,200 57,600 72,000 172,800
following month cheque 18000 20250 27000 65,250
Total Reciept 539,664 681,222 931,020 2,151,906
Cash Disbursment
(a) Purchase
within month 101,283 129,825 170,586 401,694
following month 62,000 67,522 86,550 216,072
(b) Direct Labour 144,000 179,200 233,600 556,800
(c) MOH 83,600 100,540 126,720 310,860
(d) NMOH 139000 147000 163000 449,000
(e) Equipment Purchase 0 200000 0 200,000
Total Cash Disbursment 529,883 824,087 780,456 2,134,426
Net Amount 9,781 -142,865 150,564 17,480
Opening Cash Balance 75,000 84,781 51,916 75,000
Net Cash Balance 84,781 -58,084 202,480 92,480
Financing
(a) Borrowing - 110,000 -
(b) Repayment - 110,000 110,000
Interest - - 1100 1100
Closing Balance 84,781 51,916 91,380 91,380
 Balance Sheet (June 30th)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080 Accounts receivable is
FG Inventory 2,24,852 receivables from our credit
Shareholders Equity Non Current Asset sales. So June and May cash
Common Stock 3,03,300 Office Supplies 38,906
Retained Earnings 8,43,817 PPE
pending which are
Land 40,000 mentioned below.
Building and Equipment
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218

June May
 Balance Sheet (June 30th)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080 It is the closing raw
FG Inventory 2,24,852
material in June
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 38,906
Retained Earnings 8,43,817 PPE
Land 40,000
Building and Equipment
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218

Direct Material Usage Budget

Purticulars April May June Quarter
Purchase Cost $1,68,805 $2,16,375 $2,84,310 $6,69,490
(-) Closing RM $20,580 $27,375 $28,080 $28,080
(+) Opening RM $16,800 $20,580 $27,375 $16,800
Budgeted Direct Material
$1,65,025 $2,09,580 $2,83,605 $6,58,210
Usage
Purchase Cost/ Unit $2.45 $2.50 $2.60
 Balance Sheet (June 30th)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080 It is the closing
FG Inventory 2,24,852
finished goods in
Shareholders Equity Non Current Asset
June
Common Stock 3,03,300 Office Supplies 38,906
Retained Earnings 8,43,817 PPE
Land 40,000
Building and Equipment
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218

Cost of goods sold Budget

Purticulars April May June Quarter
COGM 4,22,625 5,19,320 6,83,925 16,25,870
COGM per unit $18.78 $18.55 $18.74
(+) Opening FG 90,000 1,40,875 1,94,745 90,000
(-) Closing FG 1,40,875 1,94,745 2,24,852 2,24,852
Budgeted COGS 3,71,750 4,65,450 6,53,818 14,91,018
 Balance Sheet (June 30th)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080
There is no change
FG Inventory 2,24,852
Shareholders Equity Non Current Asset
in Land, because
Common Stock 3,03,300 Office Supplies 38,906 there were no
Retained Earnings 8,43,817 PPE mentioned about
Land 40,000 change in land, no
Building and Equipment purchase or no sale.
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218
Balance Sheet (March 31st)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 62,000 Cash 75,000
Sales tax payable 4500 Accounts Recievable 1,53,000
RM Inventory 16,800
FG Inventory 90,000
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 3,500
Retained Earnings 6,04,500 PPE
Land 40,000
Building and Equipment
Accumulated 5,96,000
Depreciation (1,68,000)
9,74,300 9,74,300
 Balance Sheet (June 30th)
Liabilities Amount Asset Amount
Current Liability Non Current Asset Old Book Value
Accounts Payable 1,13,724 Cash 91,380 168,000 + 596,000 = 764,000
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080
FG Inventory 2,24,852 Purchase of new equipment
Shareholders Equity Non Current Asset
must be added to total building
Common Stock 3,03,300 Office Supplies 38,906
Retained Earnings 8,43,817 PPE and equipment
Land 40,000
764,000 + 200,000 = 964,000
Building and Equipment
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218
New depreciation accumulated
is calculated by adding all
Balance Sheet (March 31st)
Liabilities Amount Asset Amount depreciating mentioned in
Current Liability Non Current Asset MOH and NMOH budget to
Accounts Payable 62,000 Cash 75,000 this previous depreciation
Sales tax payable 4500 Accounts Recievable 1,53,000
RM Inventory 16,800 1,68,000 + 1,81,000 = 3,49,000
FG Inventory 90,000
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 3,500
Retained Earnings 6,04,500 PPE
Land 40,000
Building = 964,000 – 349,000
Building and Equipment = 6,15,000
Accumulated 5,96,000
Depreciation (1,68,000)
9,74,300 9,74,300
 Balance Sheet (June 30th)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080 1,00,000 + 60,000 + 21,000
FG Inventory 2,24,852 = 1,81,000
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 38,906 168,000 + 181,000
Retained Earnings 8,43,817 PPE = 3,49,000
Land 40,000
Building and Equipment
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218
Balance Sheet (March 31st)
Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 62,000 Cash 75,000 168,000 + 596,000 = 764,000
Sales tax payable 4500 Accounts Recievable 1,53,000
RM Inventory 16,800 764,000 + 200,000 = 964,000
FG Inventory 90,000
Shareholders Equity Non Current Asset Building = 964,000 – 349,000
Common Stock 3,03,300 Office Supplies 3,500
Retained Earnings 6,04,500 PPE
= 6,15,000
Land 40,000
Building and Equipment
Accumulated 5,96,000
Depreciation (1,68,000)
9,74,300 9,74,300
Budgeted Balance Sheet
Company estimates that on June 30, the balance of office supplies will be
$38,906 and sales tax payable will $7812.

Balance Sheet (June 30th)

Liabilities Amount Asset Amount
Current Liability Non Current Asset
Accounts Payable 1,13,724 Cash 91,380
Sales tax payable 7812 Accounts Recievable 3,33,000
Income Tax Payable 1,02,565 RM Inventory 28,080
FG Inventory 2,24,852
Shareholders Equity Non Current Asset
Common Stock 3,03,300 Office Supplies 38,906
Retained Earnings 8,43,817 PPE
Land 40,000
Building and Equipment
Accumulated 6,15,000
Depreciation (3,49,000)
13,71,218 13,71,218
THE END

Type equation here.