Prepare Operational Budgets PDF

Prepare Operational
Budgets

Table of Contents
INTRODUCTION...........................................................................................................................3
ASSESSMENT ACTIVITY 1.........................................................................................................3
Task 1.1........................................................................................................................................3
Task 1.2........................................................................................................................................4
Task 1.3........................................................................................................................................4
Task 1.4........................................................................................................................................5
Task 1.5........................................................................................................................................5
Task 1.6........................................................................................................................................6
Task 1.7........................................................................................................................................7
Task 1.8........................................................................................................................................8
Task 1.9........................................................................................................................................8
ASSESSMENT ACTIVITY 2.......................................................................................................10
Task 2.1......................................................................................................................................10
Task 2.2......................................................................................................................................10
Task 2.3......................................................................................................................................10
Task 2.4......................................................................................................................................11
Task 2.5......................................................................................................................................11
Task 2.6......................................................................................................................................12
Task 2.7......................................................................................................................................13
Task 2.8......................................................................................................................................14
Task 2.9......................................................................................................................................15
CONCLUSION..............................................................................................................................16
ASSESSMENT ACTIVITY 3 – PRESENTATION.....................................................................17
INTRODUCTION ........................................................................................................................17
CONCLUSION..............................................................................................................................19
REFERENCES..............................................................................................................................20

INTRODUCTION
Budgets are significant aspects of business organisation and essential to assess actual
performance of organisation during a particular period. Budgets are not only provide a
framework for assessment of performance bust also gives a detailed comparison of financial data
to make vital decisions. Operational budget is kind of budget of that gives a detailed estimation
of cost and expenditures associated with different functions and operations. It is generally
prepared on annual basis or for short term period (McDonald and Wilson, 2016). This type of
budget includes items such as labour, marketing, administration and other production related
costs. This report exhibits a complete discussion about budget, various types of budgets and
importance of budget of different budgets in business organisation along with practical sums
related to preparation of budgets like cash budgets, purchase budgets, sales budgets based on
different criteria, income statement and statement of financial position.
ASSESSMENT ACTIVITY 1
Task 1.1
Budget: Budget is the estimation of the expense which will be incurred and the incomes
which can be generated in a specific period of time. Budget is used as a internal tool in an
organisation by the management to know the estimation of profit or loss and to redevelop their
strategies to convert the loss in profit. Budget can be prepared before acquiring a new assets to
estimate the cost and the to check whether the assets purchased is in the budget of the company
or not.
Types of budget: Following are the types of budget use by the organisation to see the
estimation:
 Master Budget: Master budget is defined as a overall budget to carry out an operation or
to know the estimation of the profit or loss of the company. It is known as a summary of
all the other types of budget (Raudla, 2012).
 Static Budget: A budget that is left unaltered even if there is a change in the factor
related to sales volume or income is called the static budget. This type of budget remains
fixed during the whole accounting period.

 Sales Budget: A sale budget is a budget which is prepared to to see the estimated total
sales revenue and all the selling expense including the cost of goods sold during the year
to know the estimated operating profit (Engel, 2015).
Budgetary control principles: Budgetary control is a system that helps the organisation
to control its cost including the cost of preparation of the budget and than comparing it with the
actual performance to maximize the profit. The basic principles of budgetary control is to
compare the budgeted performance with the actual performance and calculate the variance and
also to find out the reason for the differences.
Task 1.2
Yes, it is very important to discuss the budget with colleagues and peers to determine the
scope and nature of budget planning. As budgeting is the most important part of any financial
planning. Discussing it with peers and colleagues will help to understand the parts of budget as
in an organisation there are many people working under different department. Budgeting will
help the organisation to keep the track of expense. It is considered as an essential tool to convert
the general plan into a specific plan to achieve the greater result for the organisation. In the
budget sufficient details are given to anticipate the cost and all the expenses and the income
which will be generated through the operation for which the budget is prepared (Singer, 2012). It
helps the line managers to work with caution and care and also guides the mangers in
formulating policies which can help the organisation to achieve the organisational goal. By
discussing the budget with peers and colleagues helps to decentralize the obligations. Profit
mindedness environment is created in the organisation which motivates the employees to work
more efficiently. Budget also helps the top level of management to measure its performance of
different departments in an organisation. Through budget sales department can see the product
which are no giving profit and can also stop the sales of these products and services.
Task 1.3
Expected fees 350000.00
Marketing expense:
Fixed Advertising (6,800 per annum) 81600.00
Advertising (4 % of Expected fees) 14000.00
Financial expense
Interest paid (1,400 per month) 16800.00

Bank charges (200 per month) 2400.00
Administration expense:
Accounting staff cost (8,000 per month) 96000.00
Stationary (280 per month) 3360.00
Depreciation of office equipment (8,500 per year) 8500.00
Depreciation of motor vehicles (12,400 per year) 12400.00
Rent (2,000 per month) 24000.00
Travelling expense (22,000 per year) 22000.00
Work cover (3% of total salaries) 2880.00
Superannuation ( 9% of total salaries) 302.40
Telecommunication (1,000 per month) 12000.00
Task 1.4
Budgeted Profit and loss statement
GST -
Inclusive
GST
payable
GST
Input Tax
credit
GST -
Exclusive Amount
Fees
Revenues 396000 - 18000 378000
Less expense
Salaries 52500 -
Long service
leave 1050 -
Telephone [phone]
Bank charge 1000 -
Insurance 2332 212 2120
Rent 11000 1000 10000

Profit 322398 1732 18000 360680
Task 1.5
Month October November December Total
Projected Sales in units 200 280 450 930
Add Closing stock 140 225 160 525
Equals available 340 505 610 1455
less Opening stock 100 140 225 465
Required purchases in units 240 365 385 990
Purchase Price
=
$ 39/130% =
30
Purchases cost $ 7200 10950 11550 29700
Task 1.6
Working: Nov Dec Jan Feb Mar
Sales 295000 360000 350000 365000 380000
Cash Sales @ 40% 118000 144000 140000 146000 152000
Credit Sales @ 60% 177000 216000 210000 219000 228000
Amount of Credit sales
received
Nov 141600 35400
Dec 172800 43200
Jan 168000 42000
Feb 175200
JAN FEB MAR QUARTER
Cash receipt (40%) 140000 146000 152000 438000

Cash from last month (80%) 172800 168000 175200 516000
Cash from two month ago (20%) 35400 43200 42000 120600
Total cash from sales 348200 357200 369200 1074600
Add: GST 10% 34820 35720 36920 107460
Total Cash Receipt 383020 392920 406120 1182060

Nov Dec Jan Feb Mar
Purchase (60% of sales) 177000 216000 210000 219000 228000
Credit Purchase 177000 216000 210000 219000 228000
Amount of Credit purchase
paid 177000 216000 210000 219000
Cash payments
JAN FEB MAR QUARTER
Cash purchase last month 216000 210000 219000 645000
Add: GST 10% 21600 21000 21900 64500
Total cash Payments 237600 231000 240900 709500
The summary statement
JAN FEB MAR QUARTER
Total actual receipt 383020 392920 406120 1182060
Total cash Payments 237600 231000 240900 709500
Surplus 145420 161920 165220 472560
Opening balance -35400 110020 271940 346560
Closing cash balance 110020 271940 437160 819120
Task 1.7
October November December January
Sales 2992000 3308800 3555200 3203200
Pan Tel Trading
Calculation of Purchases for October to December 2016
October November December Quarter

Sales unit 17,000 unit 18,800 unit 20,200 unit
Cost of Goods Sold 1360000 1504000 1616000 4480000
Closing Inventory (20% of
next month's COGS) 300800 323200 291200 915200
(18200*80*20/
100)
Opening Inventory 0 300800 323200 624000
Purchases ($) 1660800 1526400 1584000 4771200
Purchases (Number)
(Purchase amount/$80) 20760 19080 19800 59640
Task 1.8
VARIANCE ANLYSIS REPORT
Income/ expense
Budget
$
Actual
$ Variance
Favourable or
unfavourable
Sales 640000 655000 -15000 Unfavourable
Less: Variable costs
Cost of sales 458000 494500 -36500 Unfavourable
Delivery and Installation costs 19200 13100 6100 Favourable
Sales commissions 12800 16375 -3575 Unfavourable
TOTAL VARIABLE 490000 523975 -33975 Unfavourable
Less: Fixed costs
Advertising 5200 5500 -300 Unfavourable
Energy 2800 3200 -400 Unfavourable
Insurance 2400 2400 0 -
Office supplies 3700 3300 400 Favourable
Printing & stationery 6000 5500 500 Favourable
TOTAL FIXED 20100 19900 200 Favourable

TOTAL COSTS 510100 543875 -33775 Unfavourable
NET INCOME 129900 111125 18775 Favourable
Task 1.9
Forecasting Techniques: The technique of using the past data or historical data to
analyse and predict the future trends and make plans according to the new data is called
forecasting. The following are the types of forecasting:
 Direct or Bottom-up methods: In this technique different department make their own
forecast after collecting the data from different aspects such as sales data, production
data, purchases data, etc. This data later on is brought together and clubbed to find out the
forecast about the company's future (Shin and Jang, 2013).
 Indirect or Top-Down Methods: In direct or top down method firstly the budget is
forecasted for the main trade activities and later on the individual department are given
their share. In this type of forecasting technique no department is given the free hand to
set their forecasting the responsibility of giving the budget to different departments goes
with the top level management executives.
 Scientific Methods: In this type of forecasting methods the management relies upon the
past data and make the future prediction about the growth of the company. In this
methods the previous years data must be properly organised and should be interpreted in
the terms of causal relationship. The scientific method of forecasting is basically based on
the causal relationship. In this method forecaster uses many different tools only to guide
in making the interpretation of the data (Hamilton, Koehler and Lösel, 2013).
Double entry accounting: Double entry system is a fundamental accounting concept that
says that every transaction taken place in business will have a impact on at least two accounts. It
means that the every entry passed in the journals or ledger account will affect both sides of two
accounts i.e., the debit side and the credit side. If one account is debited then the other respective
account will be credited in order to maintain the balance of the accounting equation, which is
assets = liabilities+capital. In double entry system errors and omissions are easily traceable as
they impact on at least two accounts which helps to easily find out the errors or omission ( Tsofa,
Molyneux and Goodman, 2016).

Variance analysis: Variance is the difference between the actual performance and
budgeted performance. The critical analysis of this difference to find out the reason and
formulating new strategies to overcome the difference. When the variance is analysed by the
management on the basis of trend this analysis becomes the effective tool. This tool also helps
the management to answer the questions like why there is a change in budgeted and actual
performance. Variance analysis is also used for forecasting as it uses the patterns from the past
data in order to develop the new theory about the business performance in future (McCord, Liu
and Singh, 2013).

ASSESSMENT ACTIVITY 2
Task 2.1
Budget objectives:
 Primary objective of budget is to provide a systematic structure. Structure is very
important before starting a task. Structure gives us a framework to work and gives the
company a basis to plan that what should the company do to maximize its profit. As in
Johnson trading, a predefined structure will help the organisation grow and keep track of
the employees performance.
 It provide organisation to predict the inflows and outflows of the cash from the company.
It is very helpful for the organisations which are growing rapidly or have an uneven sales
patterns. These types of firms faces the problem related to cash crises. Through budgeting
these company can predict the inflow or the outflow of the cash in the near future and can
save the company for facing these types of problems. As Johnson trading is a trading
company and these type of companies usually have the uneven sales or some time
seasonal sales and can face the problems of cash crises but with the help of budget this
problem is not faced.
 Budget provide assistance to organisation to allocate the uses of resources efficiently.
With the help of the budget many organisation try to allocate their resources for the
purchase of assets or getting into new business.
Task 2.2
Actual unit sales for 2016 March April May June Total
20000 22000 25000 28000 95000
Forecast sales units 22000 24200 27500 30800 104500
Selling price per unit
($8+60% Mark Up) 8.6 8.6 8.6 8.6
Total sales in $ 189200 208120 236500 264880 898700

Task 2.3
PRODUCTION BUDGET March April May June
Forecast unit sales 22000 24200 27500 30800
Plus Finished goods stock
closing 4400 4840 5500 6160
Total units required 22000 29040 33000 36960
less Finished goods stock
opening - 4400 4840 5500
Equals production units required 22000 24640 28160 31460
Cost per unit in $ 8 8 8 8
Cost of production in $ 176000 197120 225280 251680
Task 2.4
CASH BUDGET March April May June Total
Collections from Trade
Debtors
40 % In month of sale 75680 83248 94600 105952 359480
55% in month following
sale 114466 130075 145684 0 390225
Subtotal 190146 213323 240284 105952 749705
GST collected 19014.6 21332.3 24028.4 10595.2 74970.5
TOTAL RECEIPTS 209160.6 234655.3 264312.4 116547.2 824675.5
Payments
To trade creditors for
purchases [100%] 176000 197120 225280 251680 850080
Direct labour 52800 59136 67584 75504 255024
Factory overhead 52800 59136 67584 75504 255024
Expenses
Fixed 8000 8000 8000 8000 32000

Variable 28380 31218 35475 39732 134805
GST paid 3638 3921.8 4347.5 4773.2 16680.5
TOTAL PAYMENTS 321618 358531.8 408270.5 455193.2 1543613.5
SURPLUS/ DEFICIT -112457.4 -123876.5 -143958.1 -338646 -718938
Bank balance opening -40000 -152457.4 -276333.9 -420292 -889083.3
Bank balance closing -152457.4 -276333.9 -420292 -758938 -1608021.3
Task 2.5
Manufacturer’s Budgeted Income Statement for the period ending 30 June 2017:
SALES 898700
Less COST OF GOODS SOLD
Opening Finished Goods Stock 117920
Plus Cost of production 850080
Less Closing finished goods stock 167200
GROSS PROFIT 97900
Less Expenses from ordinary
activities
Selling, administrative and financial
Fixed 32000
Variable 134805
NET PROFIT from ordinary activities -68905

Task 2.6
Budget Balance Sheet as at 30 June 2017
$$ $
OWNERS' EQUITY
Capital 420080
Add / Less Net profit / loss -68905
Less Drawings
Total owners' equity 351175
ASSETS
Current assets 731203
Cash at bank -758938
Finished goods stock 167200
GST paid 16680.5
Trade debtors 731203
Total current assets 156145.5 156145.5
Non-current assets
Property, plant & equipment 650000
Less Accumulated depreciation 130000
Investments
Other financial assets
Total non-current assets 520000 520000
TOTAL ASSETS 676145.5
Less LIABILITIES
Current liabilities
GST collected 74970.5
Total current liabilities 74970.5 74970.5
Non-current liabilities
Mortgage on property 250000

Total non-current liabilities 250000 250000
TOTAL LIABILITIES 324970.5
NET ASSETS 351175
Task 2.7
Stakeholders are individuals, group of individuals or organisations which are highly
affected by decisions and actions of business organisation. Stakeholders are by their nature and
interest classified as internal or external stakeholders. Internal stakeholders includes managers,
employees and owners etc. which are internally associated with organisation whereas external
stakeholders includes suppliers, shareholders, investors, Customers etc. which are affected by
decisions and actions of organisation but not not a part of organisation or internally connected
(Sponem and Lambert, 2016). Discussion and negotiation of various budgets with stakeholders
ensures achievement of business objectives and also improvement areas in budgets can be easily
identified. Stakeholder consultation is essential to prepare a effective and appropriate budget.
Stakeholders consultation generally includes building productive and strong relationship on long
term basis. It helps organisation to identify and analyse new trends and potential challenges
which could affect organisation's functions and operations in near future. Following are the
methods of Stakeholder consultation are as follows:
Focus groups / workshops: In Focus group or workshop is generally a small group of people is
chosen by company to discuss about various aspects of budget or a representative of different
stakeholders are selected by company. Managerial personnels help in discussions by providing a
brief detail of budget and record the entire session along with opinions to improve budget. This
method is significant at initial budget development process to make continuous improvement as
per feedback of stakeholders (Tharani, 2013).
Surveys and opinion polls: Surveys and opinion polls is popular and most widely used method
of consultation. It can be through postal or written means, one to one interaction, internet or via
telephone. In this method a standardised formate or letter is used by organisation to obtain
opinion or feedback but it covers a large number of stakeholders. Sometimes organisation in
order to improve their budgets provide special benefits or incentives to encourage feedback or