Budget and Budgetary Control

Sales Budget is one of the important functional budget. Sales estimate is the commencement of
budgeting may be made in quantitative terms. Sales budget is primarily concerned with forecasting
of what products will be sold in what quantities and at what prices during the budget period. Sales
budget is prepared by the sales executives taking into account number of relevant and influencing
factors.

Sales Budget
For the Year Ended December 31, 20XX
Quarter 1 Quarter 2 Quarter 3 Quarter 4

Estimated Sales (units)

(x) Selling Price per unit
Total gross sales
Less (-) Sales return and discount
Net Sales

Exercise-1: On January 1, 2020, Dhofar Company estimates that company will sell 50000 units
during the first month of 2020 with a 10% increase in sales each subsequent month. Each unit is sold
for OMR 15. Prepare a sales budget for Dhofar Company from January to April, 2020.

Exercise-2: Two article A and B are manufactured in a department. Sales for the year 2020 were
planned as follows:

product Quarter 1 Quarter 2 Quarter 3 Quarter 4

A 10000 12000 13000 15000

B 5000 4500 4000 3800
Selling price were OMR 20 per unit for A and OMR 40 for B respectively. Average sales return are
5% of Sales.

Required: Prepare Sales budget for the year 2020.

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Illustration: 3

Thomas Engineering Co. Ltd. Manufactures two articles X and Y. Its sales department has three
divisions: West, South and East. Preliminary sales budgets for the year ending 31 December 2003.
Based on the assessments of the divisional executives:

Product X : West 40,000 units: South 100,000 units and East 20,000 units
Product Y : West 60,000 units: South 80,000 units and East Nil

Sales Price X Rs. 2 and Y Rs. 3 in all areas.

Arrangements are made for the extensive advertising of product X and Y and it is estimated that
West division sales will increase by 20,000 units. Arrangements are also made to advertise and
distribute product Y in the Eastern area in the second half of 2003 when sales are expected to be
100,000 units.

Since the estimated sales of the South division represented an unsatisfactory target, it is agreed to
increase both the estimates by 10 %.

Prepare a sales budget for the year to 31 December 2003.

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Production Budget
Production budget is usually prepared on the basis of sales budget. But it also takes into account the
stock levels desired to be maintained. The estimated output of business firm during a budget period
will be forecast in production budget. The production budget determines the level of activity of the
produce business and facilities planning of production so as to maximum efficiency. The production
budget is prepared by the chief executives of the production department. While preparing the
production budget, the factors like estimated sales, availability of raw materials, plant capacity,
availability of labor, budgeted stock requirements etc. are carefully considered.

For the quarter ending 31st march 20XX

( Units ) Jan Feb March Total

Estimated Sales
Add Closing Stock

Total quantity required

Less Opening Stock

Quantity to be Produced (Units)

Exercise-4: Prepare a Production budget of Dhofar Company based on the sales Budget and the
following estimated stocks at the beginning and end of the future budget period:

Product Inventory: 1st Jan Inventory:31st December Sales (units)

X 4000 4000 48000
Y 4000 8000 40000

Exercise-5 : From the following data you are required to prepare Production budget. ABC Limited’s
manufacturing organization has three products.

Product Estimated stock as the Estimated stock as the Estimated Sales as per
Beginning of the budget period Closing of the budget period sales budget

X 12800 10000 43200

Y 7700 8000 38400
Z 15600 12000 46200

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Direct Materials Budget

Jan Feb March Total

Raw materials required for production

Add (+) Closing Stock
Total Raw material required
Less (-) Opening Stock
Raw material to be purchased
Cost = Units to be purchased*unit cost
(OMR)

Exercise-5

The management of an industrial company decided to sell 90,000 units of Blue diamond . The
engineering department of the company reported that the manufacturing of the product will require
two types of material—A and B. Each unit of the product will require 2 units of A and 3 unit of B. The
estimated cost of the A and B OMR. 5 and OMR. 7 respectively. The stock balances as decided by
management are:

Raw Material: Opening (Units) Closing (Units )

A 9000 15000
B 12000 9000
Finished Products:
Opening 18000 Units
Closing 16000 Units

You are asked to prepare a production budget and direct material purchase budget

Cash Budget

This budget represents the anticipated receipts and payment of cash during the budget period. The
cash budget also called as Functional Budget. Cash budget is the most important of all the functional
budget because; cash is required for the purpose to meeting its current cash obligations. If at any
time, a concern fails to meet its obligations, it will be technically insolvent. Therefore, this budget is
prepared on the basis of detailed cash receipts and cash payments.

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Illustration: 1
A company is expecting to have OMR 25,000 cash in hand on 1st April 2003 and it requires you to prepare an
estimate of cash position in respect of three months from April to June 2003, from the information given
below :

Sales Purchase Wages Expenses

February 70000 40000 8000 6000
March 80000 50000 8000 7000
April 92000 52000 9000 7000
May 100000 60000 10000 8000
June 120000 55000 12000 9000

Additional Information:
(a) Period of credit allowed by suppliers - two months.
(b) 25 % of sale is for cash and the period of credit allowed to customer for credit sale one month.
(c) Delay in payment of wages and expenses one month.
(d) Income Tax OMR. 25,000 is to be paid in June 2003.

Exercise-6
Ali is a sole trader who buys and sells mechanical goods. The following sales are expected over the
six-month period from November 2019 to April 2020

Purchases Sales

Nov OMR 30000 OMR 29000

Dec OMR 32000 OMR 14000

Jan OMR 24000 OMR 30000

Feb OMR 16000 OMR 22000

Mar OMR 24000 OMR 28000

Apr OMR 18000 OMR 20000

Additional Information:
1. Salaries are paid each month of OMR 12000, which are paid in month that they are incurred
2. Wages are paid each month of OMR 2000, which are paid in month that they are incurred.
3. On 1 Feb 2020, a new machine is purchased for OMR 8000.
4. Sales are all on credit and we allow a month credit period
5. Purchases are all in cash
6. The balance at the bank as at 31st December 2019 was OMR 1000

Prepare a cash budget for the four month period ending 30 April 2020.