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Preparation of Master Budget

Scenario

Suppose a paint company wants to prepare a budget for a year.
It will be an elaborate exercise involving several managers.
To simplify, we will prepare the budget for one product (REGAL) and only one quarter of the year.

Step 1: Sales Forecast

  • Last year sales (in KG):

    • April: 80,000
    • May: 100,000
    • June: 60,000

  • Forecasted Sales for this year:

    • April: 120,000 KG @ Rs. 140/kg
    • May: 150,000 KG @ Rs. 140/kg
    • June: 100,000 KG @ Rs. 120/kg (Includes Rs. 20 discount for dealers)

  • June is a slack season for the paint business.

Step 2: Production Policy and Planning

  • Marketing team expects sales forecast variation of ±20%
  • Production should carry inventory of 20% of next month’s sales
  • Beginning inventory for April: 0 stock
  • Expected July sales: 60,000 KG (used to calculate June closing inventory)
  • Second quarter is generally off-season due to monsoon

Step 3: Material Procurement

  • Material cost = 35% of selling price ≈ Rs. 50 per KG
  • Raw Materials: Pigments, Additives, Solvents, Oils, Resins
  • Required info:
    • Quantity required per KG of paint
    • Price per KG
    • Opening and closing stock values
  • July production: 70,000 KG (used for June closing stock planning)

Step 4: Labour Budget

  • Labour cost is mostly fixed (employees on permanent role)
  • No expansion planned; cost remains steady
  • Monthly labour cost: Rs. 12 lakhs (includes benefits)

Step 5: Manufacturing Expenses

  • Prepared by various departments based on budgeted production volume
  • Includes:
    • Packing Material
    • Repairs & Maintenance
    • Freight
    • Other Stores Items
  • Need breakup of fixed and variable components

Step 6: Marketing Budget

  • Prepared based on target sales and volume
  • Includes:
    • Advertisement
    • Distribution Expenses
    • Training Expenses
    • Dealer Rewards
  • Need breakup of fixed and variable components

Step 7: Administrative Expenses

  • Estimated by respective departments using last year’s data
  • Includes:
    • Legal
    • Communication
    • Travel
    • Audit
    • Printing & Stationery
    • Other administrative expenses

Step 8: Credit Policy

  • Types of Sales:

    • Cash Sales: 30%
    • Credit Sales: 70%
      • 30 days credit: 20%
      • 60 days credit: 50%

  • Cash Discount:

    • 2% for 30-day customers
    • 4% for 60-day customers
    • 30% of credit customers avail this discount and pay early

  • Raw material purchases: 30 days credit period

  • All other expenses: Paid in the same month

  • Opening balances:

    • Receivables: Rs. 100 lakhs
    • Payables: Rs. 30 lakhs

Step 9: Capital Expenses

  • No expansion, but some replacements planned

  • Capital Expenditure (first 3 months):

    • April: Rs. 15 lakhs (replacing equipment worth Rs. 10 lakhs)
    • May: Rs. 10 lakhs (replacing equipment worth Rs. 7 lakhs)
    • June: Rs. 20 lakhs (replacing equipment worth Rs. 15 lakhs)

  • Cost escalation exists

  • All equipment are fully depreciated

Step 10: Depreciation Policy

  • For income statement preparation

  • Fixed assets:

    • Manufacturing: Rs. 187.50 lakhs (Depreciation @10%)
    • Admin, selling, distribution: Rs. 62.50 lakhs (Depreciation @12%)

  • Computed on opening balance of assets

  • Purchase/sale of assets not considered for depreciation

Step 11: Cash Deficit/Surplus Management

  • Cash deficit funded via short-term loans @ 8% interest
  • Minimum cash balance: Rs. 15 lakhs

Step 12: Budgeted Financial Statements

  • Use all above inputs to prepare:
    • Budgeted Income Statement
    • Budgeted Balance Sheet
    • For the first three months of the year
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