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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 1:1. Sales Forecast

  • KG):

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

    • this
  • April:
    • KG@Rs.140/kg
  • May:
    • KG@Rs.140/kg
  • June:
    • KGdealers)
  • MonthLast yearYear salesSales (inKG) Forecasted Sales for(KG) Selling year:

    Price
      (Rs./KG)
    April80,000120,000 140
    May 100,000 150,000 140
    June 60,000 100,000 120 @ Rs. 120/kg (Includes Rs. 20 discountdealer fordiscount)
    July* —60,000—

    June is a slack seasonseason. July data used for theinventory paint business.planning.

Step 2:

2. Production Policy and Planning

  • Marketing teamSales expectsForecast sales forecast variation ofVariation: ±20%
  • Production shouldInventory carryPolicy: inventoryMaintain ofclosing stock = 20% of next month’s salesforecasted sales.
  • Beginning inventory for April: April Opening Stock: 0 stock KG
  • Expected July sales:Forecast: 60,000 KG (used tofor calculate JuneJune’s closing inventory)
  • Second
quarter

Production isBudget

generallyoff-seasonduetomonsoon
Month Sales (KG)Closing Inventory (20% of Next Month)Opening InventoryProduction Required (KG)
April120,00030,000 (May forecast)0150,000
May150,00020,000 (June forecast)30,000140,000
June100,00012,000 (July forecast)20,00092,000
Total370,000——382,000

Step

3. 3:Raw Material Procurement

Planning

  • Material cost =Cost: 35% of selling price ≈ (~Rs. 5050/kg)

    per KG
  • Raw Materials:

    Materials Pigments,Required:

    Additives,
    • Pigments: 0.66 KG/unit (Rs. 40/KG)
    • Additives: 0.1 KG/unit (Rs. 100/KG)
    • Solvents, Oils, Resins
    • Required info:
      • Quantity required per KG of paint
      • Price per KG
      • Opening and closing stock values
    • July production: 70,000 KG (usedDetails 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 expensesmentioned)

    Pigment

    StepPurchase 8:Budget Credit(30% Policy

    buffer)

    MonthOpening StockRequired (Production x 0.66)Closing StockTo be Procured
    April25,000 KG99,000 KG27,720 KG101,720 KG
    May27,720 KG92,400 KG18,216 KG82,896 KG
    June18,216 KG60,720 KG13,860 KG56,364 KG
    Total———240,980 KG
    • Total Pigment Cost: Rs. 96,39,200

    TypesAdditives ofPurchase Sales:Budget (10% buffer)

    • Total Required: 37,400 KG
    • Rate: Rs. 100/KG
    • Total Additive Cost: Rs. 37,40,000

    Other Materials (Summarized):

    • CashTotal SalesRaw Material Cost (Q1): 30%Rs. 1,89,15,800

    4. Labour Budget

    • Monthly Cost: Rs. 12,00,000 (fixed)
    • CreditQuarter SalesTotal: Rs. 36,00,000

    5. Manufacturing Expenses

    ItemVariable Rate (Rs./KG)Fixed/Month (Rs.)
    Packing Material0.502,00,000
    Repairs0.20
    Freight0.15
    Stores0.80
    • Total Manufacturing Expenses (Q1): Rs. 12,30,300

    6. Selling & Distribution Budget

    ItemVariable Rate (Rs./KG)Fixed/Month (Rs.)
    AdvertisementRs. 84,00,000
    DistributionRs. 3—
    Training Expenses—2,00,000
    Dealers Rewards—5,00,000
    • Total Selling & Distribution (Q1): Rs. 73,70,000

    7. Administrative Expenses (All fixed)

    Expense TypeTotal (Rs.)
    Legal1,20,000
    Communication1,20,000
    Travel6,00,000
    Audit90,000
    Printing & Stationery2,40,000
    Other Admin Expenses1,50,000
    Miscellaneous3,00,000
    Total (Q1)16,20,000

    8. Credit Policy & Discounts

    • Sales Mix:

      • Cash Sales: 30%

      • Credit Sales: 70%

        • 30 daysDays credit:Credit: 20%
        • 60 daysDays credit:Credit: 50%

    • Cash Discount:Discount (Early Payment):

      • 2% for 30-day credit customers
      • 4% for 60-day credit 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:

    9. Capital Expenses

    Expenditure (CapEx)
    MonthCapEx (Rs.)
    April15,00,000
    May10,00,000
    June20,00,000
    Total45,00,000
    • Note: All replaced equipment fully depreciated

    10. Depreciation Policy

    • Manufacturing Assets: Rs. 187.5 lakhs at 10%
    • SG&A Assets: Rs. 62.5 lakhs at 12%
    • Method: Straight-line on opening balance only
    • Total Depreciation (Q1): Rs. 6,56,250

    11. Cash Budget Summary

    • NoOpening expansion,Cash: butRs. some replacements planned30,00,000

    • CapitalMinimum ExpenditureCash (first 3 months)Required:

      • 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 exists15,00,000

    • AllSurplus equipmentInvestment: areExcess fullyafter depreciated

      minimum
      • cash

    Step 10: Depreciation Policy

    • For income statement preparationretained

    • FixedCollection assets:Efficiency (Rs. 100 Sales):

      • Manufacturing:Collected in same month: Rs. 187.50 lakhs (Depreciation @10%)50.28
      • Admin,Collected selling,next distribution:month: Rs. 62.50 lakhs (Depreciation @12%)
      14
    • After

      Computedtwo onmonths: openingRs. balance of assets

      35
    • Discount

      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:Given: 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 year0.72

    12. Income Statement Summary (Q1)

    ParticularsAmount (Rs.)
    Sales Revenue4,98,00,000
    Cost of Goods Sold (COGS)2,41,00,000
    Gross Profit2,56,00,000
    Selling & Distribution73,70,000
    Admin Expenses16,20,000
    Discount to Customers3,58,000
    Additional Depreciation1,87,500
    Net Profit (Before Tax)1,64,38,353
    Interest Income (Invested Cash)1,00,501

    13. Budgeted Balance Sheet (End of Q1)

    • Equity: No change
    • Reserves: Increased by Rs. 1.64 crore
    • Payables (June Purchase): Rs. 44,85,080
    • Inventory: Raw Material + Finished Goods = Rs. 15,28,262
    • Receivables: Rs. 1,32,00,000
    • Cash Balance: Rs. 15,00,000
    • Investments: Rs. 1,19,60,420
    • Total Assets & Liabilities: Rs. 5,21,62,933 (Balanced)
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