University of Portsmouth
Costing Fundamentals
Lecture 8 - Introduction to Budgeting 2
A budget is a quantitative statement, for a defined
period of time, which may include planned
revenues, expenses, assets, liabilities and cash
flows. CIMA
Ÿ
Other budgets:
Sales budget
Debtors budget
Creditors budget
Production cost budget
Raw materials budget
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University of Portsmouth
Costing Fundamentals
Sales budget
The sales budget is derived by the sales manager who
forecasts the amount of goods that will be sold in the
forthcoming year. He will usually base his forecast on the
current year adjusted for any known differences such as price
increases. The sales budget will determine how much the
production department will make.
Example:
Kirkwood plc has two products Alpha and Omega. It is forecast
that the sales of Alpha will run at 500 units through out January
to June. However Omega will start at 1000 units and rise by
100 units per month. Each Alpha sells at £35 each and Omega
£50 each. Prepare a sales budget.
Jan
£
Alpha
Omega
Total sales
Feb
£
March April
£
£
17,500
50,000
67,500
May
£
June
£
Total
£
105,000
375,000
480,000
Debtors budget
The debtors budget begins with the opening debtor. This is
usually taken from the debtor on the closing balance sheet from
the previous period. As we make sales on credit the debtor
balance increases and as we receive cash payments from our
customers the debtor balance decreases. Each month we
calculate the closing debtor. This closing debtor will become
the opening debtor for the next period.
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University of Portsmouth
Costing Fundamentals
Example
The debtor balance on Kirkwood’s balance sheet at December
31st is £50,000. It’s customers pay one month in arrears using
the sales budget prepare the debtor budget.
Jan
£
Opening
debtor
Add
Credit
sales
Total
Less
cash
received
Closing
debtor
Feb
£
March
£
April
£
May
£
June
£
Total
£
50,000
50,000
67,500
480,000
117,500
50,000
530,000
437,500
67,500
92,500
What will be the closing debtor on the balance sheet dated 31st
June?
Creditors budget
The creditor budget begins with the opening creditor. This is
usually taken from the creditor on the closing balance sheet
from the previous period. As we make purchases on credit the
creditor balance increases and as we make cash payments to
our suppliers the creditor balance decreases. Each month we
calculate the closing creditor. This will become the opening
creditor for the next period.
Example
The creditor balance on Kirkwood’s balance sheet at December
31st is £10,000. It pays it’s suppliers one months in arrears,
purchases are expected to be £12,000 in January and will
increase by £1000 per month. Prepare the creditor budget.
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University of Portsmouth
Costing Fundamentals
Creditors budget
Jan
£
Feb
£
March
£
April
£
May
£
June
£
Total
£
Opening
creditor
10,000
10,000
Add Credit
Purchases
12,000
87,000
22,000
Total
10,000
Less
cash paid
12,000
Closing
creditor
97,000
80,000
17,000
Production cost budget
The production budget will be linked to the sales budget. We
should only manufacture up to the levels that we have forecast
will sell. Both Alpha and Omega cost the same to manufacture,
Direct Materials are £10 per unit, Direct Labour £12 per unit
and Production overhead £5 per unit.
Prepare a production cost budget
Alpha (units)
Omega (units)
Total sales
(units)
Direct Materials
Direct Labour
Production
Overhead
Total cost
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Jan
£
Feb
£
500
1,000
1,500
500
1,100
1,600
March April
£
£
500
500
1,200 1,300
1,700 1,800
May
£
June
£
Total
£
500
1,400
1,900
500
1,500
2,000
3,000
7,500
10,500
15,000
10,500
7,500
105,000
73,500
52,500
33,000
231,000
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University of Portsmouth
Costing Fundamentals
Raw materials budget
The raw material budget helps to forecast how much material
we need to buy. Let’s assume that the purchases in the
creditors budget are all raw material we can construct a raw
materials budget. The opening stock is £20,000 and the
material used comes from the production budget.
Construct a raw materials budget.
Jan
£
Opening
Stock
Add
Material
Purchases
Total
Less used
in
production
Closing
Stock
Feb
£
March
£
April
£
May
£
June
£
Total
£
20,000
17,000 14,000
11,000
8,000
5,000
20,000
12,000
13,000 14,000
15,000
16,000
17,000
87,000
32,000
15,000
30,000 28,000
16,000 17,000
26,000
18,000
24,000
19,000
22,000
20,000
107,000
105,000
17,000
14,000 11,000
8,000
5,000
2,000
2,000
Seminar Preparation
1. Knox plc has the following sales forecast for it’s two
products: Beta and Gamma.
The Beta will sell at 1000 units in January rising by 50 units per
month. From January to March each Beta will sell at £20 the
price will rise in April to £25.
The Gamma will sell 2,000 units in January rising by 100 units
per month. The gamma will sell at £10 each.
Required:
Knox’s sales budget from January to June.
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University of Portsmouth
Costing Fundamentals
2. Thomas Iger has an opening creditor of £2900 (£400
October, £1200 November and £1300 December). Creditors
will be paid 3 months in arrears. Credit purchases in January
will be £2000 rising by £200 per month until March and then
suffering a 10% decline in April after which it will remain
constant.
Required:
Prepare Thomas Iger’s creditor budget for January to June.
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University of Portsmouth
Costing Fundamentals
Sales budget
Kirkwood plc
Jan
£
Alpha
Omega
Total sales
Feb
£
March April
£
£
17,500 17,500
50,000 55,000
67,500 72,500
17,500 17,500
60,000 65,000
77,500 82,500
May
£
June
£
Total
£
17,500
70,000
87,500
17,500
75,000
92,500
105,000
375,000
480,000
June
£
Total
£
Debtors budget
Opening
debtor
Credit
sales
Total
Less
cash
received
Closing
debtor
Jan
£
Feb
£
March
£
April
£
May
£
50,000
67,500
72,500
77,500
82,500
87,500
50,000
67,500
72,500
77,500
82,500
87,500
92,500
480,000
117,500
50,000
140,000
67,500
150,000
72,500
160,000
77,500
170,000
82,500
180,000
87,500
530,000
437,500
67,500
72,500
77,500
82,500
87,500
92,500
92,500
Feb
£
March
£
April
£
May
£
June
£
Creditor budget
Jan
£
Total
£
Opening
creditor
10,000
12,000 13,000
14,000
15,000
16,000
10,000
Add Credit
Purchases
12,000
13,000 14,000
15,000
16,000
17,000
87,000
22,000
Total
10,000
Less
cash paid
12,000
Closing
creditor
25,000 27,000
12,000 13,000
29,000
14,000
31,000
15,000
33,000
16,000
97,000
80,000
13,000 14,000
15,000
16,000
17,000
17,000
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University of Portsmouth
Costing Fundamentals
Production cost budget
Alpha (units)
Omega (units)
Total sales
(units)
Direct Materials
Direct Labour
Production
Overhead
Total
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Jan
£
Feb
£
500
1,000
1,500
500
1,100
1,600
March April
£
£
500
1,200
1,700
May
£
500
1,300
1,800
500
1,400
1,900
June
£
Total
£
500 3,000
1,500 7,500
2,000 10,500
15,000
10,500
7,500
16,000 17,000
11,200 11,900
8,000 8,500
18,000
12,600
9,000
19,000
13,300
9,500
20,000
14,000
10,000
105,000
73,500
52,500
33,000
35,200 37,400
39,600
41,800
44,000
231,000
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