1. Operating Budgets: Non-Manufacturing Budgets
Chapter 4
Operating Budgets:
Non-Manufacturing Budgets
Publication Title: Business Budgeting
Chapter: Chapter 4

2. Purchases Budget
A purchases budget shows the estimated purchases of a business for a period. In a retail business, it represents the finished goods purchases required to satisfy the budgeted sales level. It may be expressed in units and in dollar values. They may be prepared by: Product Period Area or a combination of these.
Business Budgeting - Chapter 4

3. Purchases Budgets by Product
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Chapter: Chapter 4

4. Purchases Budgets by Period
The previous purchase budgets have been produced for one period only, i.e, a particular month. Budgets can be expanded to cater for more than one period.
Publication Title: Business Budgeting
Chapter: Chapter 4

5. Purchases Budgets by Area
Companies that have outlets in more than one area may require a budget that distinguishes between different stores or areas.
Publication Title: Business Budgeting
Chapter: Chapter 4

6. Purchases Budget for a Retail Business
Example : Retail business
Cut Price Electricals Ltd have the following expected sales of toasters:
Closing stock is required to be 50% of the following months sales. The cost of each toaster is $30.
Required: Prepare a Purchases Budget for the three months to 31 December.
Business Budgeting - Chapter 4

7. Solution
Business Budgeting - Chapter 4

8. Calculating Cost of Sales
Distinguish between “mark-up” and “margin” Mark-up: The amount added to the cost price to arrive at the selling price.
Business Budgeting - Chapter 4

9. Determining the selling price
Example
An item is purchased for $10 and is sold at a 50% mark-up on cost. What is its selling price?
The selling price = Cost Price x (1 + mark-up)
=$10 x = $15
Business Budgeting - Chapter 4

10. Determining the cost price
Example
An item sells for $28. The mark-up on cost is 40%. What is its cost price?
The selling price = Cost Price x (1 + mark-up)
Cost price = selling price
1 + mark-up
Cost price = $28
1.4
= $20
Business Budgeting - Chapter 4

11. Calculating Cost of Sales
Distinguish between “mark-up” and “margin” Margin: Is that part of the selling price or total sales that represents profit.
Business Budgeting - Chapter 4

12. Determining the cost price
Example Sales are $30,000. The margin on sales is 30%. What is the cost price of the goods sold? The cost price = Sales Price x (1 - margin) = $30,000 x 0.7 = $21,000
Business Budgeting - Chapter 4

13. Cost of Goods Sold Budget ( Retail, Trading businesses )
A Cost of Goods Sold Budget shows the estimated cost of purchase and/or production of the goods expected to be sold during the period. Calculation of Cost of Goods Sold
Opening Inventory +
Purchases (and other costs involved in obtaining goods) =
Goods Available for Sale -
Closing Inventory
Cost of Goods Sold
Business Budgeting - Chapter 4

14. Cost of Goods sold Budget
Example From the following information, provided by Berko Books, prepare a Cost of Goods Sold Budget and a Budgeted Trading Statement for the three months ending 30 September.
Business Budgeting - Chapter 4

15. Cost of Goods sold Budget
Solution
Business Budgeting - Chapter 4

16. Capital Budgeting
Capital Budgeting is a process used to evaluate investment opportunities(projects) that have medium to long term effects on the operations of the organisation.
Publication Title: Business Budgeting
Chapter: Chapter 4

17. Capital Budgeting
Examples include: • Whether to keep existing equipment or replace with new equipment • Whether to expand operations into new markets • Whether to purchase or lease new motor vehicles
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Chapter: Chapter 4

18. Independent or SingleProjects
These are stand-alone projects that can be evaluated without reference to any other alternative course of action. Examples of independent projects include: • To add or delete a product • To undertake additional advertising • To add plant capacity
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19. Mutually Exclusive Projects
Examples of mutually exclusive capital project decisions include whether to: • Manufacture or purchase component parts used in the production process • Buy or lease a machine • Choose from a number of different machines, each able to perform the same work output but with varying degrees of labour input
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20. Payback Period
The payback period method of project evaluation, measures the time (in years) it takes to recoup the original investment based on the annual cash inflows
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21. Advantages/Disadvantages
Advantages of the Payback Period Method:
• Easy to understand
• Quick to calculate
• Useful for firms requiring full return on investment within the early years of an asset’s economic life
• Uses cash flows instead of profit
Disadvantages:
Time value of money is ignored — inflation can diminish purchasing power of money.
• Cash flows after cut off point are ignored.
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22. Accounting Rate of Return (ARR)
An accounting measure which utilises accounting concepts in the measurement of net income (net profit after tax) and accounting concepts for the measurement of the investment required to undertakethe project.
Publication Title: Business Budgeting
Chapter: Chapter 4

23. Accounting Rate of Return (ARR)
Accounting rate of return on average investment is calculated as follows:
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24. Discounted Cash Flow Techniques of Project Evaluation
Discounted Cash Flow (DCF) techniques estimate the present value of cash inflows and cash outflows applicable to a project using an appropriate discount factor (interest rate).
There are two main DCF methods used to evaluate capital investment projects:
• Net Present Value (NPV)
• Internal Rate of Return (IRR)
Publication Title: Business Budgeting
Chapter: Chapter 4

25. Net Present Value Publication Title: Business Budgeting
Chapter: Chapter 4

26. Net Present Value (NPV)
The NPV of an investment project is simply the present value of the cash inflows less the present value of the cash outflows. Projects with a positive NPV will increase the value of the firm to shareholders and thus further the objective of maximising shareholder wealth.
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27. Capital Rationing
Firms typically have limited capital and may set a capital budget limit for any period. If capital must be rationed, projects should be selected in descending rank order
Publication Title: Business Budgeting
Chapter: Chapter 4

28. Expense Budgets
An expenses budget shows all of the operating expenses of a business for a period.
Total expense may be broken up into expense categories:
Marketing expenses
Administration expenses
Financial expenses
Business Budgeting - Chapter 4

29. Individual Expense Budgets
For certain types of businesses one or two expenses are larger than most others or are specific to that business or industry. For example: Advertising. It is then necessary to have greater control over these individual expenses within the larger expense budget.
Business Budgeting - Chapter 4

30. Example
Bucks Fizz Cola expect to incur the following marketing expenses in the month of September on Sales of $80,000 Required: Prepare a Marketing expenses budget
Business Budgeting - Chapter 4

31. Solution
Business Budgeting - Chapter 4

32. Service Industry budget
For firms that supply services rather than sell goods. For a service industry time can not be stored. Any uncharged time will reduce potential service revenue.
Business Budgeting - Chapter 4

33. Budgeted Income Statement
A Budgeted Income Statement shows the estimated net profit of a business for a period. Example 1: The following information is provided by Shopfront Traders for the three months to end September 30. Required: Prepare a Budgeted Income Statement
Business Budgeting - Chapter 4

34. Solution
Budgeted Income Statement
Business Budgeting - Chapter 4

35. Budgeted Balance Sheet
Example Cala Way started business on the first of January with $10,000. During the next six months the design studio expects to invoice and collect $90,000 from customers.Budgeted Expenses for the period are as follows: Advertising $ 500 Courier $1,000 Office Supplies $2,000 Insurance $4,000 Rent $8,000 Wages $44,500 GST has been ignored in this question.
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36. Budgeted Balance Sheet
Required (a) Budgeted Income Statement (b) Budgeted Balance Sheet
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Chapter: Chapter 4

37. Budgeted Balance Sheet
Solution
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Chapter: Chapter 4

38. Budgeted Balance Sheet
Solution
Publication Title: Business Budgeting
Chapter: Chapter 4