Master budget formulas guide

Accounting Ahead | Original study resource | accountingahead.com.au

Master budget formulas guide

SMA EXAM REFERENCE PACK | MODULE 3 | PRINT AND KEEP WITH YOUR NOTES

Work in this order. Each budget uses figures from the one before it, so begin with sales and work down. An early

mistake carries into every later budget. The worked example at the end follows one small imagined business, so you

can watch the numbers flow through.

How the budgets link

1. Sales budget

units x selling price

2. Production budget

units to make

3. Direct materials

usage, then purchases

4. Direct labour

hours x wage rate

5. Overhead

variable + fixed

Cost of goods sold and budgeted

income statement

6. Cash budget

receipts - payments = closing cash

Budgeted balance sheet

assets and liabilities at the end

sales revenue cash from customers

Navy boxes are the operating budgets, prepared first. Pale boxes are the financial budgets, which pull the operating

budgets together into profit, cash and the balance sheet.

Operating budgets: the formulas

Result you work out Given, or from an earlier budget Stock (inventory) figure

1. Sales budget

Everything else is planned around expected sales, so this comes first.

Sales revenue = Budgeted units sold x Budgeted selling price per unit

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2. Production budget (units)

Units to make: expected sales, adjusted for the finished-goods stock you want to hold.

Units to produce = Budgeted units sold + Desired closing finished

goods - Opening finished goods

3. Direct materials budget

Two steps: material used in production, then material to purchase.

Materials needed for production = Units to produce x Material per unit (kg, metres)

Materials to buy = Materials needed for

production + Desired closing

materials - Opening materials

Multiply the quantity to buy by the price per kg or metre to get purchases in dollars.

4. Direct labour budget

Hours needed for production, then what those hours cost.

Labour hours = Units to produce x Hours per unit

Labour cost = Labour hours x Wage rate per hour

5. Manufacturing overhead budget

Split overhead into a variable part that moves with activity and a fixed lump sum.

Variable overhead = Budgeted driver quantity (for

example, labour hours) x Variable overhead rate per driver

unit

Fixed overhead = Total of the fixed costs: rent, insurance, supervision, depreciation

Cost of goods sold budget

The production cost of the units that are sold.

Cost of goods sold = Opening finished goods + Cost of goods

manufactured - Closing finished goods

Cost of goods manufactured = direct materials used + direct labour + manufacturing overhead.

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Financial budgets: the formulas

Budgeted income statement

Profit for the period, built from the operating budgets.

Gross margin = Sales revenue - Cost of goods sold

Operating profit = Gross margin - Selling and administration

expenses

6a. Cash budget: cash receipts

Credit customers pay later, so split each month's sales by when the cash arrives.

Cash received this

month = This month's sales x %

collected this month + Last month's sales x %

collected one month later + Older sales x % still to

collect

6b. Cash budget: cash payments

Do the same for suppliers, then add every other cash payment.

Cash paid for purchases = This month's purchases x % paid this

month + Last month's purchases x % paid one

month later

Add wages, overhead and other expenses in the month they are paid. Leave out depreciation and other non-cash items.

6c. Cash budget: closing cash

This month's closing cash is next month's opening cash.

Closing cash = Opening cash + Cash received - Cash paid

Below the minimum cash balance? Show borrowing. A surplus? Show repayment or a short-term investment.

Worked example: Wattle and Pine (imagined)

Wattle and Pine makes timber stools and sells them for $200 each. Budgeted sales are 320 stools in April, 380

in May, 450 in June and 500 in July; March sales were 260 stools ($52,000). The business keeps closing stock

of stools equal to 20% of next month's sales. Each stool uses 3 metres of timber at $5 a metre and half an hour

of labour at $42 an hour. Desired closing timber is 300 metres in April, 350 in May and 330 in June; there are

280 metres at the start of April. Customers pay 40% in the month of sale and 60% the month after.

Sales budget

Sales budget April May June

Stools sold 320 380 450

x Selling price $200 $200 $200

= Sales revenue $64,000 $76,000 $90,000

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Production budget

Production budget (stools) April May June

Budgeted sales 320 380 450

+ Desired closing stock (20% of next month's sales) 76 90 100

- Opening stock (64) (76) (90)

= Units to produce 332 394 460

Link the months. April's closing stock (76) is May's opening stock, and May's closing stock (90) is June's opening

stock. Check each pair before moving on.

Direct materials budget

Direct materials budget April May June

Units to produce 332 394 460

x Timber per stool (metres) 3 3 3

= Timber needed (metres) 996 1,182 1,380

+ Desired closing timber 300 350 330

- Opening timber (280) (300) (350)

= Timber to buy (metres) 1,016 1,232 1,360

x Price per metre $5 $5 $5

= Purchases $5,080 $6,160 $6,800

Watch out. Materials follow production: start from units to produce (332), not units sold (320).

Direct labour budget

Direct labour budget April May June

Units to produce 332 394 460

x Hours per stool 0.5 0.5 0.5

= Labour hours 166 197 230

x Wage rate per hour $42 $42 $42

= Labour cost $6,972 $8,274 $9,660

Cash budget: receipts from customers

Cash receipts April May June

40% of this month's sales $25,600 $30,400 $36,000

60% of last month's sales (April: 60% of March's

$52,000)

$31,200 $38,400 $45,600

= Cash received $56,800 $68,800 $81,600

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