Budgeting is the process of forecasting revenues and expenses of the company for a specific time period and examples of which includes sales budget prepared to make projection of the sales of the company and production budget prepared to make projection of the production of the company etc.
Budgeting Examples
The following examples of Budgeting provide an understanding of the various type of budgets which can be prepared by an organization. In the present competitive world where there is competition prevailing everywhere, budgeting plays an important role as it helps in controlling the cost of the organization and maximizing the profits. It helps in providing awareness to the organization about its future working and requirements. All the examples of the BudgetingBudgetingBudgeting is a method used by businesses to make precise projections of revenues and expenditure for a future specific period of time while taking into account various internal and external factors prevailing at that time.read more are different, and one should take the use of the same as per the requirement. Like when the sales are to be analyzed, the sales budgetSales BudgetThe sales budget forecasts the quantity that the entity expects to sell and the amount of revenue generated from the sale of such amount expected in the future, based on the management’s judgment related to the competition, economic conditions, market demands, and market demands past trends.read more is prepared, and when the production is to be analyzed, then the production budget is prepared.
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For eg:
Source: Budgeting Examples (wallstreetmojo.com)
Example #1 – Incremental Budget
For the year 2018-19, Fin International Ltd paid the total salary paid of $ 400,000 to its employees. The budget is required to be prepared for the year 2019-20 concerning the salary of the employees. The management estimates that during the next year, six new employees will be hired, and to each employee, the salary of $ 25,000 will be given to each new employee.
Also, it is decided by the company to give an increment to the existing employees of 10%. What will be the budget of the salary for the company for the year 2019 –20?
Solution:
Using incremental budgeting, the budget for the salary will be:
= Previous year salary + Percentage of increment on previous salary + Salary of 6 new employees
- = $ 400,000 + 10% * $ 400,000 + ($ 25,000 * 6)
- = $ 400,000 + $ 40,000 + ($ 25,000 * 6)
- = $ 400,000 + $ 40,000 + $ 150,000
Total Salary Budget = $ 590,000
Example #2 – Sales Budget
Sports international ltd plans to produce balls in the upcoming year ending on 2019. It forecasted the sales to be $ 4,000 in quarter 1, $ 5,000 in quarter 2, $ 6,000 in quarter 3 and $ 7,000 in quarter 4. The selling price of the product for the first two quarters will be $ 5 which is expected to be increased to $ 6 in quarter 3 and quarter 4 by the sales manager of the company.
Also, it is expected that the sales discount and the allowance percentage of the company will continue to be the same in the budgeted period as well, which is 2 % of the gross sales. Prepare the sales Budget for the upcoming year ending in 2019 of Sports international ltd.
Solution:
Following is the sales budget of Sports international ltd for the year ended on December 31, 2019
The sales budget shows the sales forecasted by the company for the coming year in both units and value using the information inputs from various sources.
Example #3 – Business Budget
The Income and expense details of Mid-term International Ltd are given as below. Prepare the Business budget for the year ended in December 2018.
Income in the present situation shows the sales of the company per quarter and the other incomes earned by the company during the year. The expenses are divided into operating expenseOperating ExpenseOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more and non-operating expensesNon-operating ExpensesNon operating expenses are those payments which have no relation with the principal business activities. These are the non-recurring items that appear in the company's income statement, along with the regular business expenses.read more. In this business budget, the difference between the budgeted amount and the actual amount is shown, which will help the company in analyzing the variancesAnalyzing The VariancesVariance analysis is the process of identifying and analyzing the difference between the standard numbers that a company expects to accomplish and the actual numbers that they achieve, in order to help the firm analyze positive or negative consequences.read more.
Example #4 – Production Budget
Pen international ltd plans to produce marker pens in the upcoming year ending in 2019. It forecasted the sales to be $ 7,000 in quarter-1, $ 8,000 in quarter-2, $ 9,000 in quarter-3 and $ 10,000 in quarter-4. The planned ending inventory is estimated to be $ 1,000 at the end of each quarter by the production manager of the company, which in the beginning was $ 1,500.
Prepare the Production BudgetProduction BudgetProduction Budget is a type of financial planning that relates to the units of product that management believes the company should produce in the coming period to match the estimated sales quantity, which is based on the management's assessment of market competition, economic conditions, production capacity, consumer prevailing market demands, and historical trends.read more for the upcoming year ending in 2019 of Pen international ltd.
Solution:
Following is the Production budget of Pen international ltd for the year ended on December 31, 2019:
The production budget shows the calculation of the number of units to be produced by the organization. As the production manager decreases the Planned ending units of inventory from $1,500 to $1,000 even though the production is expected to increase per quarter, it seems to be the risky forecast as there is cut in the safety stock of the company.
Conclusion
Budgeting thus helps out in estimating an organization’s revenue and expenses for the future. It helps in performing various activities like planning, developing, testing, and implementation of various projects and programs. As there are different types of budgets, the approach depends upon the phase in which the organization currently is and the type of business it is doing. Like new startup will prefer the zero-based budgetingZero-based BudgetingZero-based budgeting refers to the budgeting method whereby the expenses and income on the list start from zero. There is no reference point for the budget items, and each of these expenses is individually interpreted as per requirement.read more or incremental budgeting over other budgets.
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