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Learning Guide: Accounts and Budget Service
Learning Guide: Accounts and Budget Service
Learning Guide
Unit of Competence Prepare Operational Budgets
Module Title Preparing Operational Budgets
LG Code: BUF ACB4 11 0812
INTRODUCTION
INFORMATION SHEET
Planning is the basic managerial function. It helps in determining the course of
action to be followed for achieving organizational goals. It is decision in advance,
what to do, when do, how to do and who will do a particular task? Plans are
framed to achieve better results. Control is the process of checking whether the
plans are being adhered to or not, keeping record of progress, comparing it with
the plans and then taking corrective measures for future, if there is any deviation
every business enterprise needs the use of control techniques for surviving in the
highly competitive and changing economic world. There are various control
devices in use. Budgets are the most important tool of profit planning and
control. They also act as instrument of co-ordination.
Meaning of a Budget
A budget is the monetary or/and quantitative expression of business plans and
policies to pursued in the future period of time. The term budgeting is used for
preparing budgets and other procedures for planning, co-ordination and control
of business enterprise. According to I.C.W.A, London “A budget is a financial
and/or quantitative statement prepared prior to a defined period of time, of the
policy to be pursued during that period for the purpose of attaining a given
objective”.
The second major part of the master budget is the financial budget, which
consists of the capital budget, cash budget, and ending balance sheet.
Step 3a- Cash Budget
The cash budget is a statement of planned cash receipts and disbursements. The
cash budget is heavily affected by the level of operations summarized in the
budgeted income statement.
The total cash available before financing equals the beginning cash balance plus
cash receipts. Cash receipts depends on collections from customers’ accounts
receivable and cash sales and n their operating income sources.
CASH DISBURSEMENT FOR
1. Purchases depend on the credit terms expended by suppliers and the bill
paying habits of the buyer
2. Payroll depends on wage, salary and commission terms and on payroll
dates.
3. Some costs and expenses depend on contractual terms for installment
payments, mortgage payments, rents, leases and miscellaneous items.
4. other disbursements include outlays for fixed assets, long term investments,
dividends and the like
Management determines the minimum cash balance desired depending on the
nature of the business and credit arrangements.
Financing requirements depend on how the total cash available compares with
the total cash needed. Needs include the disbursements plus the desired ending
cash balance. If the total cash available is less than the cash needed, borrowing is
necessary to cover the planned deficiency. If there is an excess, loans may be
repaid. The pertinent outlays for interest expenses are usually contained in this
section of the cash budget.
TTLM Development Manual Date: october 12,2013
Compiled by KH, Acct department
Axum poly technique college
Training, Teaching and Learning Materials
Cash budgets help management to avoid having unnecessary idle cash, on the
one hand, and unnecessary cash deficiencies, on the other. A well managed
financing program keeps cash balances from becoming too large or too small.
Step 3b Budgeted Balance sheet
The final step in preparing the master budget is to construct the budgeted
balance sheet that projects each balance sheet item in accordance with the
business plan as expressed in the previous schedules.
When the complete master budget is formulated, management can consider all
the major financial statements as a basis for changing the course of events:
Illustration
To illustrate the budgeting process we will use as an example the ABC company
as follows:-
Given data
1. The budgeted period:- July-Sep. 20----- (for 3 months)
2. The actual balance sheet, June 30th,20---- is shown below
ABC Company
Balance sheet
June 30th, 20------
ASSETS LIABILITY & CAPITAL
3A. Cash budget ABC Company cash budget for 3 months ending Sep 30, 20----
July Aug. sep Remark
Beginning cash balance 20000 20000 21600
Add. Cash collection 20000 52000 67200
Total cash available
before financing(W) 40000 72000 88800
Less cash disbursements
Purchase 30800 48200 43680
Expense 9200 12200 8260
Equipment __--____ 10000 _---__
Total cash disbursements (X) 40000 70400 51940
TTLM Development Manual Date: october 12,2013
Compiled by KH, Acct department
Axum poly technique college
Training, Teaching and Learning Materials
Additional
1. interest on the principal paid September 30,20------
Interest = Principal x Rate x Time
16,000 x 9/100 x 3/12 = 360.00
2. loans out standing September 30,20------
1st Loan = 20,000 – 16,000 = 4,000
2nd Loan 20,000
Total 24,000
TTLM Development Manual Date: october 12,2013
Compiled by KH, Acct department
Axum poly technique college
Training, Teaching and Learning Materials
Review Exercises
Multiple choice
Answer the following selected multiple choice questions
1. The financial budget process includes
a. the cash budget
b. the capital budget
c. the budget statement of cash flows
d. the budgeted balance sheet
e. all of the above
2. The master budget process usually begins with the
TTLM Development Manual Date: october 12,2013
Compiled by KH, Acct department
Axum poly technique college
Training, Teaching and Learning Materials
a. production budget
b. operating budget
c. financial budget
d. capital budget
e. sales budget
3. The production budget process usually begins with the
a. direct labour budget
b. direct materials budget
c. manufacturing overhead budget
d. sales budget
e. ending inventory budget
4. A continuous ( rolling) budget
a. presents the plan for only one level of activity and does not adjust to
changes in the level of activity
b. presents the plan for a range of activity so the plan can be adjusted for
changes in activity
c. is a plan that is revised monthly or quarterly, dropping one period and
adding another
d. is one of the budget that is part of along range strategic plan, unchanged
unless the strategy of the company changes
e. work best for a company that can reliably forecast its sales revenue and
expenses.
5. Which one of the following management considerations is usually addressed
first in strategic planning?
a. Outsourcing
b. Overall goods of the firm
TTLM Development Manual Date: october 12,2013
Compiled by KH, Acct department
Axum poly technique college
Training, Teaching and Learning Materials
c. Organizational structure
d. Recent annual begets
e. Being an industry leader
6. The James Company, a wholesaler, budgeted the following sales for the
indicated months
June 2004 July 2004 August 2004
Sales on account 1800,000 1,920,000 2,040,000
Cash sales 240,000 250,000 260,000
Total sales 2,040,000 2,170,000 2,300,000
All merchandise is marked up to sell at its invoice cost plus 25%. Merchandise
inventories at the beginning of each month are at 30% of that month’s projected
cost of goads sold.
Select the best answer for each of the following items from the above given
information
I. The cost of goods sold for the month of June 2004 is anticipated to be
a. 1,632,000
b. 1,428,000
c. 1, 836,000
d. 1,530,000
e. None of these
II. Merchandise purchase for July 2004 are anticipated to be
a. 1,736,000
b. 1, 926,600
c. 1,767,200
d. 1,658,700
TTLM Development Manual Date: october 12,2013
Compiled by KH, Acct department
Axum poly technique college
Training, Teaching and Learning Materials
e. None of these
Problem 1
Given data:-
1. The budgeted period:- April- July (4 months) 200x
2. The actual balance sheet March 31st ,200x is shown below
THE COOKING HUT COMPANY
BALANCE SHEET
MARCH 31ST 200X
April 50,000
May 80,000
June 60,000
July 50,000
August 40,000
Required:-
Prepare a master budget for four months ending August, 20----.
Review questions
1. What are the major benefits of budgeting?
2. Why is the sales forecast the starting point for budgeting?
3. Differentiate between an operating budget and a financial budget
4. Explain in detail the classification of budgets according to
a. Time
b. Functions and
c. Flexibility
5. Discuss the procedures for preparing the following begets
a. Sales budget
b. Operating budget
c. Master budget