You are given the following additional information.

(a) Sales are budgeted as follows: £80,000 in January; £160,000 in February and £240,000 in subsequent months. Fifty per cent of the sales will be cash sales and the other fifty per cent credit sales. The period of credit extended to customes will be one month.

(b) The cost of raw materials will amount to 40% of the sales revenue. Half the materials cost for any one month will be paid in cash; the other half will be paid for during the month of purchase.

(c) The company intends to keep a stock of raw materials of £10,000 throughout the year.

(d) Direct wages will be incurred at the rate of £50,000 per month. No time lag is expected here.

Other expenses- depreciation on premises, plant and equipment will be calculated on a straight-line basis.The tools will be re-valued annually and it is expected that annual losses will amount to 20 per cent. All other expenses will be incurred at the rate of £40,000 per month - the time lag here will be one month.

You are asked to prepare the company’s Cash budget, a budgeted Profit and Loss account for the first six months of operations and a budgeted Balance Sheet as at 30 June 19x1.

	Jan	Feb	Mar	Apr	May	Jun	Memo
	£000	£000	£000	£000	£000	£000	£000
Opening balance			(14)
Cash inflow
Cash sales
Credit sales							120Dr
	------	------	------	------	-------	-------
Total
	------	------	-----	-----	------	------
Cash outflow
Raw mats. -cash
Raw mat. -credit							48Cr
Direct wages
Other expenses							40Cr
	------	------	------	------	------	------
Total
	------	------	------	------	------	------
Closing balance		(14)
	===	===	===	===	===	===

Students should note that:

(a) Depreciation never appears in a cash budget as it is a non-cash expense.

(b) In respect to credit transactions time lags have to be built into the cash budget

It is useful to have a memo column to record items which will appear in the balance sheet if required.

Budgeted Profit and Loss Account

For six months ending 30 June 19x1

	£	£			£
Cost of sales	480,000			Sales	1,200,000
Direct wages	300,000	780,000
	----------
Operating profit		420,000
		----------			-----------
		1,200,000			1,200,000
		=======			=======
Depreciation				Operating profit	420,000
Premises	7,500
Plant	4,000
Equipment	8,000
Tools	2,000
	-------	21,500
Other expenses		240,000
Net profit		158,500
		----------			----------
		420,000			420,000
		======			======

The profit and loss account is prepared on an accruals basis unlike the cash budget which is prepared on a receipts and payments basis. Also, depreciation appears as an expense in the profit and loss account.

Budgeted Balance Sheet

As at 30 June 19x1

Authorised and Issued Capital	£		£	£	£
		Fixed assets	Cost	Dep.	NBV
600,000 Ord. shares £1 each	600,000	Premises	300,000	7,500	292,500
Reserves		Plant	80,000	4,000	76,000
Profit and loss account	158,500	Equipment	160,000	8,000	152,000
		Tools	20,000	2,000	18,000
			---------	--------	---------
			560,000	21,500	538,500
			---------	---------
Current Liabilities		Current assets
Creditors	48,000	Materials	10,000
Accrued expenses	40,000	Debtors	120,000
		Cash	178,000		308,000
	--------		----------		----------
	846,000				846,000
	======				=====

Budgeted debtors, creditors and cash balance is obtained from the cash budget. Details of fixed assets can be obtained from the capital expenditure budget. Information about share capital, debentures etc. can also be obtained from the previous balance sheet.

Budgeting - the Control Process

Definition:

Budgetary control is the establishment of departmental budgets relating the responsibilities of executives and the continuous comparison of actual with budgeted results, either to secure by individual action the objective of that policy or to provide a basis for its revision. The budget itself is merely a plan on paper which of itself will not be effective unless there is a system of control which can monitor the organisation’s progress to achieving the objectives.

By means of comparing actual results with the budgets and identifying any differences (variances) which occur management can take remedial action or revise the budget if necessary. The annual budgets are broken down into months so the comparison is performed regularly and results in a budget report ipresented to the departmental managers. To ensure that management are not overburdened with accounting data exception reports may be furnished. These reports identify only significant variances that require management’s attention and consequently are more user friendly and should encourage an appropriate managerial response.