Budgeting

Budgeting is a quantitative plan of action for a future period. It is commonly used as a short-term

planning and control technique.

Master Budget

The master budget is an overall plan made up of all the subsidiary budgets prepared by the

different departments. The budget committee usually follows the following sequence in

constructing the master budget.

1. Sales Budget

All other budgets depend on the sales budget. As it is the first step it must be accurate and

reliable. The sales manager predicts based on reports, surveys and general economic conditions

and forecasts the number of units they could sell in the coming year.

Example

Pizza Comp supplies two types of frozen pizzas to supermarkets. The selling price of Hawaiian

and Seafood pizzas is $10 and $12 respectively. The estimated sales volume is:

Type Units

Hawaiian 20,000

Seafood 10, 000

Required:

Prepare the sales budget.

 2. Production Budget

This is the budget for the production of finished goods (which comprises DM, DL and MOH).

The volume/units produced depend on; the sales budget, the beginning inventory from the

last period and the desired ending inventory.

The formula for production (units) is:

Sales units + Desired Ending Inventory units – Beginning Inventory units.

Example

Pizza Company has an opening Inventory of 12,000 Hawaiian and 8,000 units Seafood. It desires

to have 11,000 Hawaiian and 6,000 Seafood.

Required:

Prepare the production budget.

3. Direct Materials Budget

The formula for direct materials is:

Production Requirements (units) + Desired Ending Inventory (units) – Beginning

Inventory (units).

Example

One Hawaiian Pizza requires 1 kg of material P1 and 1/2kg of raw material P2. One Seafood

Pizza requires 1kg of P1 and 1/4kg of P2. Pizza Comp has 30,000kg of P1 and 25,000kg of P2.
It is desired that there should be 20,000kg of P1 and 18,000 kg of P2 at the end of the period. P1

costs $0.80 per kg while P2 costs $2 per kg.

Required:

Prepare the raw materials purchases budget.

4. Direct Labour Budget

The formula for direct labour cost is:

Production units * Direct Labour Hours per unit * Rate per hour

Example

American Pizza has two departments – Mixing and Baking. The following shows the labour

hours required for each unit of Hawaiian and Seafood in each department.

Mixing Baking

Hawaiian 0.1 hour 0.25 hour

Seafood 0.1 hour 0.25 hour

Labour Rate $2/hour $4/hour

Required:

Prepare the direct labour budget.