WHAT IS budget

What is budget

A budget is generally a list of all planned expenses and revenues. It is a plan for saving and spending In other terms, a budget is an organizational plan stated in monetary terms.

In summary, the purpose of budgeting is to:

Provide a forecast of revenues and expenditures i.e. construct a model of how our business might perform financially speaking if certain strategies, events and plans are carried out.

Enable the actual financial operation of the business to be measured against the forecast.

Types of Budgets

 There are many types of budgets  as fellow,

Sales budget

Production budget

Raw material purchase budget

Direct labor budget

Manufacturing overhead budget

Cash budget etc,

But we will explain only firstly four budgets.

Sales budget

A sales budget is a detailed schedule showing the expected sales for the budget period; typically, it is expressed in both rupees and units of production. An accurate sales budget is the key to the entire budgeting in some way. If the sales budget is sloppily done then the rest of the budgeting process is largely a waste of time.

The sales budget will help determine how many units will have to be produced. Thus, the production budget is prepared after the sales budget. The production budget in turn is used to determine the budgets for manufacturing costs including the direct materials budget, the direct labor budget, and the manufacturing overhead budget. These budgets are then combined with data from the sales budget and the selling and administrative expenses budget to determine the cash budget. In essence, the sales budget triggers a chain reaction that leads to the development of the other budgets. The selling and administrative expenses budget is both dependent on and a determinant of the sales budget. This reciprocal relationship arises because sales will in part be determined by the funds committed for advertising and sales promotion.

The sales budget is the starting point in preparing the master budget. All other items in the master budget including production, purchase, inventories, and expenses, depend on it in some way. The sales budget is constructed by multiplying the budgeted sales in units by the selling price

Who we prepared a sales budget

Production budget

The production budget is prepared after the sales budget. The production budget lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. Production needs can be determined as follows.

Budgeted sales in units------------------- Add desired ending inventory------------ Total need--------------------------------------- less beginning inventory-------------------- Required production--------------------------

2000    20 -------- 40000   5000 -------- 35000 =====

Production requirements for a period are influenced by the desired level of ending inventory. Inventories should be carefully planned. Excessive inventories tie up funds and create storage problems. Insufficient inventories can lead to lost sales or crash production efforts in the following period.

Direct material purchase budget

The production budget is the starting point for determining the estimated quantities of direct materials to be purchased.  Multiplying these quantities by the expected unit purchase price determines the total cost of direct materials to be purchased.

                Materials needed for production
             + Desired ending materials inventory
              - Estimated beginning materials inventory
                Direct materials to be purchased

Steps:  Preparing a Direct Materials Purchases Budget

Record projected units to be produced (from Production Budget).

Multiply by the Raw Materials Needed per Unit to calculate the amount of materials needed.

Calculate the desired ending inventory (usually a percentage of next quarter's needs).

Add to calculate Total Materials needed.

Subtract the beginning inventory (which is last quarter's ending inventory) to calculate the Raw Materials Needed to be Purchased.

Calculate the Cost of Raw Materials based on price per kilogram.

Complete the Schedule of Expected Cash Disbursements according to percentages provided.

ADIL&COMPANY

DIRECT MATERIAL PURCHASE BUDGET

FOR THE YEAR 2005

	Rs.
Planned production R.M required for one unit Total need +Desired Ending inventory Total _Expected Opening inventory R.M to be produced	5,000 5 25,000 20,000 45,000 15,000 30,000

 

Direct Labor Budget

Expected labor cost is dependent upon expected production volume (production budget). Labor requirements are based on production volume multiplied by direct labor-hours per unit. Direct labor-hours needed for production are then multiplied by direct labor cost per hour to derive budgeted direct labor costs. For example, assume budgeted production of 790 units, direct labor-hours per unit of 5, and direct labor cost per hour of $5. The expected labor cost equals:

Expected Production                                                                                 200 units

Direct labor-hour per unit                                                                            5

Direct labor-hours                                                                                       1000

Direct labor cost per hour                                                                                2

Total direct labor cost                                                                    Rs.       2000

Presentation Data

          MANAGEMENT ACCOUNTING

BUDGETING

MR.TAHIR MEHMOOD

M.COM

BATCH#6

ID#100645003

PREPARED BY: MUHAMMAD AMIR SHAHZAD

UNIVERSITY OF MANAGEMENT AND TECHNOLOGY