Five Star Hotel Marketing Plan Project

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Lesson 12: Budgetary Control
A budget is a financial and /or quantitative statement, prepared for the purpose of attaining a given objective. It is a plan for the organization to carry out their future operations. The entire plan for the budget period is expressed in the form of a Master budget which is a summary budget prepared from all the subsidiary budgets and showing the budgeted profits & loss account for the budget period and the budgeted balance sheet as at the end of the budget period. Budgetary control is a means of control in which the actual state of affairs is compared with that of planned activities so that any appropriate action can be taken with regard to any deviations.

12.1 Master budget: All the sub departmental budgets (subsidiary budgets) are put together and they are called master budget. Once the master budget is approved, three statements can be prepared based on that. 1. Budgeted income statement for the budgeted period 2. Budgeted balance sheet 3. Cash budget

12.2 Subsidiary budgets: Before preparing the master budget, subsidiary budgets are built-up. These include: Sales budget Production budget Purchase budget Debtors’ budget Direct labor budget Research & development budget Creditors’ budget Finished goods stock budget Selling & distribution budget Administration cost budget BBA224 CDCE‐University of Peradeniya Page 1

Materials usage budget Production overhead budget Capital expenditure budget Cash budget Some of the above budgets are explained through the following example. Example: Derrick PVT company manufactures three products: A, B and C. Data for the preparation of budgets for the month of January, 2011 are given as follows: Sales: Product A B C Quantity 1,000 2,000 1,500 Price (Rs.) /Unit 100 120 140

Materials used : Material Unit cost (Rs.) Quantities used: A B C Stock Details: Finished goods: Quantities

M1 4 4 3 2

M2 6 2 3 1

M3 9 ‐ 2 1

A 1‐Jan 31‐Jan 1,000 1,100

B 1,500 1,650

C 500 550

Materials stock: Units

1‐Jan 31‐Jan

M1 M2 M3 26,000 20,000 12,000 31,200 24,000 14,400

SALES BUDGET Product A B C Sales units 1,000 2,000 1,500 Price /unit 100 120 140 Sales Volume (Rs.) 100,000 240,000 210,000 550,000

BBA224

CDCE‐University of Peradeniya

Page 2

PRODUCTION BUDGET: Sales budget Add: Closing stock Less: Opening stock Production (Units) A 1,000 1,100 2,100 1,000 1,100 B 2,000 1,650 3,650 1,500 2,150 C 1,500 550 2,050 500 1,550

MATERIAL USAGE BUDGET: Product A B C Material utilization M1 1,100 x 4 = 4,400 2,150 x 3 = 6,450 1,550 x 2 = 3,100 13,950 M2 1,100 x 2 = 2,200 2,150 x 3 = 6,450 1,550 x 1 = 1,550 10,200 M3 2,150 x 2 = 4,300 1,550 x 1 = 1,550 5, 850

PURCHASES BUDGET: M1 Material usage budget Add: Closing stock Less: Opening stock Purchase quantity (units) Purchases (in Rs) 13,950 31,200 45,150 26,000 19,150 19,150 x4= 76,600 M2 10,200 24,000 34,200 20,000 14,200 14,200 x6 = 85,200 M3 5,850 14,400 20,250 12,000 8,250 8,250 x 9 = 74,250

Total purchases 12.3 Cash budget:

= Rs. 236, 050

Cash planning is very important in term of liquidity. As the name implies, the cash budget deals with cash inflows and cash outflows. It excludes expenses of a non-cash nature such as depreciation. It enables management to anticipate any deficits so that the necessary financing may be made and to decide upon a policy for placing any cash surpluses. The cash budget is a statement that shows the estimates of cash receipts and cash payments arising from the planned levels of activities. All the cash surpluses are not net profit. Eg. Issues of share capital and debentures, an increase in bank overdraft.

BBA224

CDCE‐University of Peradeniya

Page 3

Layout of cash budget for the period from January to April
Details CASH RECEIPTS: Cash received from debtors Cash sales Proceeds from share issues Sales of debentures Sales of assets Total CASH PAYMENTS: Payments to creditors Payments of salaries & wages Bought a vehicle Purchases for...
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