BUDGETING (PROFIT PLANNING)

BUDGETING(PROFIT PLANNING)• INTRODUCTION:A budget is a detailed plan for the future that is usuallyexpressed in formal quantitative terms. Budget is used two distinct

purpose Planning and Control.• Master Budget: The Master Budget consist of a number of separate but independent

budgets that formally layout the company’s sale production and financial goals. The master budget culminates in a cash budget, a budgeted income statement and a budgeted balance sheet.

• Company Selected for Budgeting project:• Wahid Industries (PAK FAN) is a Limited medium sized Electric Fan

manufacturing company in Pakistan. Wahid industries Ltd situated near G.T.Road Gujrat.

PRODUCT

I select the Pedestal Fan 24 inch Deluxe Model Export Quality for Budgeting year 1st July 2015 to 30th June 2016.

• Pedestal Fans with oscillation system.• Totally concealed, complete with guard & blades.• 1750mm flexible 3 core wire with 3 pin plug.• Superb finish & workmanship• Available in light blue, light green, grey, ivory and

stone colors.

PROVISION OF BUDGETING STRATEGY• Based on the seasonal nature of the fan industry Raw material and finished

goods inventories are maintained accordingly.• Labor hours are the limiting factor of the budget.• Budget is based on standard costing and to make things simple effect of inflation

and discount rate has been ignored. It also based on present value of money.• Budget is based on only one segment of the company i.e. Pedestal Fan section,

among various other segments such as Ceiling Fan, Plastic Fan, Washing Machine etc.

• Accordingly, Equity and Assets of the company have been apportioned among various segments.

• Raw material imports i.e. steel sheet, Enameled copper wire, Clad wire, Ball Bearings used and imported based on the international economic indicators e.g. LME rate, Dollar Exchange rate and Fuel Prices to gain benefit due to reduce prices.

• Whereas local purchases are also managed to reduce any stock out cost that may have incurred due to shortage of stock in season.

SALES BUDGET

Sales Budget Q1 Q2 Q3 Q4 Total

Sales in Units 15,000 10,000 25,000 25,000 75,000

Average Selling Price 3,500 3,500 3,500 3,500 3,500

Total sales revenue 52,500,000 35,000,000 87,500,000 87,500,000 262,500,000

Expected Cash CollectionsCash Receipt Q1 Q2 Q3 Q4 Total

A/Receivables Beg

50,000,000

-

- -

50,000,000

First quarter sales

21,000,000 15,750,000 15,750,000  

52,500,000

Second quarter sales

- 14,000,000 10,500,000

10,500,000

35,000,000

Third quarter sales

-

- 35,000,000

26,250,000

61,250,000

Fourth quarter sales

-

-

-

35,000,000

35,000,000

Total Cash Collections

71,000,000 29,750,000 61,250,000

71,750,000

233,750,000

Expected Cash Collections

Working:          

Cash Collections from last

year's fourth quarter sales

Rs.50,000,000.  

Company's strategy is to

collect 40 % of sales in the

1st quarter 30 % of

collected  

in the 2nd quarter and

remaining 30 % in third

quarter.  

Production budgetProduction Budget in Fans Q1 Q2 Q3 Q4 Total

Budgeted Sales in units (fans) 15,000 10,000 25,000 25,000 75,000

Add: Desired Ending Inentory- FG 2,500 6,250 6,250 3,750 3,750

Total Needs 17,500 16,250 31,250 28,750 78,750

Less Beginning Inventory- FG 3,350 2,500 6,250 6,250 3,350

Required production 14,150 13,750 25,000 22,500 75,400

 

Working:          

Beginning inventory 3350 fans in 1st July 2014  

Budgeted sales in year 2015 assumed Ending inventory 15000 fans= 15000*25%.  

Ending inventory 25 % of next quarter sales.  

  Q1 Q2 Q3 Q4  

  10000*25% 25000*25% 25000*25% 15000*25%  

           

Material BudgetDirect Materials Purchases Q1 Q2 Q3 Q4 Total

Required production 14,150 13,750 25,000 22,500 75,400

Total Raw material purchase cost all 41,246,563 45,154,688 72,028,125 62,148,938 220,578,314

           

Working:          

Ending inventory 15% of next quarter.  

Opening inventory is based on 1st quarter material requirement.          

Material Budget

05/03/23

GRAND TOTAL 41,246,563 45,154,688 72,028,125 62,148,938 220,578,313

Cash Disbursement for Materials Purchases Budget Q1 Q2 Q3 Q4 Total Accounts Payable, Beg Bal 2,357,890 - - - 2,357,890 First quarter purchase 32,997,250 8,249,313 - - 41,246,563 Second quarter purchase - 36,123,750 9,030,938 - 45,154,688 Third quarter purchase - - 57,622,500 14,405,625 72,028,125 Fourth quarter purchase - - - 49,719,150 49,719,150 Total 35,355,140 44,373,063 66,653,438 64,124,775 210,506,416

Working:          

Cash Disbursement from last year's fourth quarter Purchase Rs.2357890.  

Company's strategy last year is to paid 80 % of purchase in the 1st quarter  and paid 20 % in 2nd quarter.  

  Q1 Q2 Q3 Q4    41246563*80% 41246563*20%          45154688*80% 45154688*20%          72028125*80% 72028125*20%  

        62148938*80%  

Direct Labor BudgetDirect Labor Budget Q1 Q2 Q3 Q4 Total

Units to be produced 14,150 13,750 25,000 22,500 75,400

DL hours needed per unit 15 15 15 15 15

DL hours needed 212,250 206,250 375,000 337,500 1,131,000

Cost per hour - Rs. 10 10 10 10 10

Total budgeted DL 2,122,500 2,062,500 3,750,000 3,375,000 11,310,000

Working:          

Labour take time 15 hrs. to complete one pedestal fan.  

One hr. rate cost Rs.10.          

Manufacturing Overhead BudgetOverhead Budget Q1 Q2 Q3 Q4 Total

DL hours needed 212,250 206,250 375,000 337,500 1,131,000

Variable overhead rate /hour 2 2 2 2 2

Budgeted variable overhead 424,500 412,500 750,000 675,000 2,262,000

Budgeted fixed overhead 400,000 400,000 400,000 400,000 400,000

Total overhead 824,500 812,500 1,150,000 1,075,000 3,862,000

Less Depreciation 200,000 200,000 200,000 200,000 800,000

Cash disbursement for FOH 624,500 612,500 950,000 875,000 3,062,000

Working:     Rs.    

Total manufacturing Overhead a 3862000  

Budgeted Direct Labour hrs. b 1131000  

Predetermined Overhead rate (a/b)     3    

Selling and Admn. Exp Budget

Selling and Administrative Expense Budget Q1 Q2 Q3 Q4 Total

Units sold 15,000 10,000 25,000 25,000 75,000

Var S&A rate 0.75 0.75 0.75 0.75 0.75

Budgeted variable S&A 11,250 7,500 18,750 18,750 56,250

Budgted fixed S&A 1,740,000 1,740,000 1,740,000 1,740,000 6,960,000

Total S&A 1,751,250 1,747,500 1,758,750 1,758,750 7,016,250

Less Depreciation 50,000 50,000 50,000 50,000 200,000

Cash disbursement for S&A 1,701,250 1,697,500 1,708,750 1,708,750 6,816,250

Cash BudgetCash Budget Q1 Q2 Q3 Q4 Total

Beg Bal. Cash 2,000,000 32,884,110 13,699,047 1,661,859 2,000,000

Cash Receipts 71,000,000 29,750,000 61,250,000 71,750,000 233,750,000

Cash Available 73,000,000 62,634,110 74,949,047 73,411,859 235,750,000

           

Cash disbursements          

Materials 35,355,140 44,373,063 66,653,438 64,124,775 210,506,415

Labor 2,122,500 2,062,500 3,750,000 3,375,000 11,310,000

Overhead 624,500 612,500 950,000 875,000 3,062,000

S&A 1,701,250 1,697,500 1,708,750 1,708,750 6,816,250

Dividends 187,500 187,500 187,500 187,500 750,000

Purchase equip 125,000 2,000 37,500 36,500 201,000

Total disbursements 40,115,890 48,935,063 73,287,188 70,307,525 232,645,665

           

Ending cash balance/ex.sh 32,884,110 13,699,047 1,661,859 3,104,334 3,104,335

Repay   - - - -

Interest   - - - -

Borrowing - FAPC II - - - - -

Cash at end of period 32,884,110 13,699,047 1,661,859 3,104,334 3,104,335

Ending Finished Good InventoryEnding F.G. Inv Budget Quantity Cost per Unit Total

Production Cost per Fan             Direct Material 3750 2925 10968750Direct Labour 3750 150 562500Manufacturing Overheads 3750 51 191250              

Ending Finished Goods Inventory 3750 3126 11722500

Working Working MATERIALS PRICES DIRECT LABOUR PRICES

BLADE 225 HOURS RATE 10

GUARD 500 TOTAL HOURS 15

MOTOR 1200   150

BASE 400 Working  

ROD 200 TOTAL OVERHEADS 3862000

PAINT & OTHERS 400 D.L HRS. NEEDED 1131000

    = 3.4147

  2925 T.HR*RATE 15*3.4 51

Budgeted Income StatementBudgeted income statementSales (75000*3500) 262,500,000 less COGS 234,450,000 Gross margin   28,050,000 Selling and admin 7,016,250 Interest expense - Net income before tax   21,033,750      

WORKING CGS  

Required Prod*per unit 235700400

75400*3126

Add: Opening FG Inventory 10472100

3350*3126  

  246172500

Less: Ending FG Inventory 11722500

3750*3126  

CGS 234450000

Budgeted Balance SheetBudgeted Balance sheet 

Cash   3,104,335 Accounts Receivable   35,000,000    Inventory: raw materials   6,208,313 Inventory: Finished Goods   11,722,500

Land   800,000 Building and Equip   30,201,826

Accum. Deprec.   - 24,000,000 Total Assets   63,036,974    Acct Payable   12,429,788

Capital stock   500,000 Retained Earnings   50,107,186 Total Liabilities and Stockholders 63,036,974

Thank you