WEEK 3 FNSACC503A Budgeting LESSON 3 Learning Material

FNSACC503A – Manage Budgets and Forecasts
CASE STUDY ‐ WEEK 3 – CHAPTER 4 – OPERATING BUDGETS (non‐manufacturing)
Key learning outcomes: By the end of the lesson, you should be able to prepare the following budgets for a
merchandising firm:
1. Purchases budget
2. COGS budget
3. Marketing expenses budget
4. Administration expenses budget
5. Financial expenses budget
6. Simple budgeted income statement
You should also be able to prepare a professional and support labour budget for a
professional services firm.
CHAPTER 4 – OPERATING BUDGETS (non-manufacturing)
* * * FOR THIS LESSON, PLEASE WORK THROUGH

THIS ENTIRE DOCUMENT * * *
WHAT YOU WILL FIND 1. The format of each type of budget that you have to know how to prepare
IN THIS DOCUMENT
2. The mark-up on cost formula
3. Case Study (VITAMINWATER) + SOLUTIONS
1. Overview : Operating Budgets

* Operating budgets:
 provide an overview of the costs associated with running a business.
 attach a cost estimate to each activity that will affect net profit.
For a merchandising firm, operating budgets include:

1. Purchases budget
2. COGS budget
3. Marketing (or selling and distribution) expenses budget
4. Administration expenses budget
5. Financial expenses budget
* The revenue budget is normally the starting point in the preparation of these budgets.
* Operating budgets are prepared so that their details can be included in the budgeted income statement. We will
have a look at the budgeted income statement so that you can see how our operating budgets are combined to
form part of this statement.
NSI Meadowbank TAFE (Lisa Genna) 1

1. BUDGET FORMATS
a. Purchases Budget
RECALL:
COGS = Opening (beginning) inventory + PLANNED PURCHASES – Closing (ending) inventory
THEREFORE: (by re-arranging the COGS formula)

PLANNED PURCHASES = COGS + Closing (ending) inventory - Opening (beginning) inventory
This is how we derive the format for our PURCHASES budget.
IN DOLLARS e.g. July
COGS $XX
Add: Ending inventory $XX
= TOTAL REQUIREMENTS $XX
Less: Beginning inventory $XX
= PLANNED PURCHASES $XX
IN UNITS e.g.July
Sales (UNITS) XX
Add: Ending inventory (UNITS) XX
= TOTAL REQUIREMENTS (UNITS) XX
Less: Beginning inventory (UNITS) XX
= PLANNED PURCHASES (UNITS) XX
x Cost per unit $XX
= PLANNED PURCHASES ($) $XX

b. COGS Budget
e.g. July
Beginning inventory $XX
Add: Planned purchases $XX
= TOTAL AVAILABLE FOR SALE $XX
Less: Ending inventory $XX
= COGS BUDGET $XX
c. Operating Expenses Budget
e.g. July
MARKETING EXPENSES BUDGET
XX $XX
XX $XX
Total marketing expenses budget $XX
ADMINISTRATION EXPENSES BUDGET
XX $XX
XX $XX
Total administration expenses budget $XX
FINANCIAL EXPENSES BUDGET
XX $XX
Total financial expenses budget $XX
TOTAL OPERATING EXPENSES BUDGET $XX

2. MARK-UP ON COST FORMULA
Total Sales = Total COGS x (1+MU%)

Therefore
Total COGS = Total Sales / (1+MU%)
On a per unit basis:
Selling Price per Unit = COGS per Unit x (1+MU%)

Therefore
COGS per Unit = Selling Price per Unit / (1+MU%)

3. CASE STUDY Today’s date: 2 June 2013
Congratulations on securing a position in the Accounts Department of Australian Beverages Limited (ABL). Before we
get started, here is some information about our business and the industry within which we operate.
Our core business focuses on the distribution of carbonated soft drinks (CSDs), but sales across the Soft Drinks
Distribution Industry are going down due to health-conscious consumers moving away from sugary, high-calorie
beverages. Our Managing Director is aware of the need for us to identify further growth options given the predicted
continuing decline in the CSD market and at the end of last year, he finalised the integration of a bottled water
business acquisition which will add to our existing beverage portfolio.
Bottled water is the fastest growing category in the non-alcoholic beverages market in Australia with sales revenue of
$1.483 billion in 2012. Next financial year (year ended 30 June 2014) we are going to focus on the distribution of
enhanced water products.
Enhanced water is a category of beverages marketed as water, but it contains a wide variety of additional ingredients
ranging from natural flavours, sweeteners, vitamins and minerals. Most enhanced waters are lower in calories per
gram than non-diet soft drinks. The marketing of enhanced water usually capitalises on the healthy image of water
combined with the perceived health, taste or functional benefits of one or more additional ingredients. Our target
demographic includes both young and middle-aged adults.
Our leading brand is VITAMINWATER and we are going to start selling this product in drink carts specially designed to
appeal to the health-conscious consumer. We are going to trial the drink cart concept in and around gyms across
NSW starting 1 July 2013 and we need you to help us prepare the operating budgets for this part of our
business which we are going to present to management for approval at the next board meeting. Extracts from the
sales budgets for the first year of operation for the various products will be given to you. We have made the
assumption that all cart sales will be similar so you will only have to prepare the operating budgets for one cart which
we will then use as a guide for every cart across the state.

1. Purchases Budget
1. Shows the purchases needed to satisfy anticipated sales and desired inventory levels.
2. For a retail business, it represents the finished goods purchases required to satisfy budgeted sales levels.
3. A purchases budget can be prepared:
* by product, period or area or some combination of these
* in $ or units
Our aim in all of the following examples is to produce a PURCHASES BUDGET in dollars. In EXAMPLE (a) we are
provided with the info. that we need in $ i.e. no conversion to $ required. However, in EXAMPLE (b), we are provided
with the info. that we need in UNITS. Therefore, we have to prepare the PURCHASES BUDGET in units and then
convert it into $ at the end.
1a. PURCHASES BUDGET – IN DOLLARS

You are provided with the following sales budget in dollars by month for the period 1 July 2013 to 31 December 2013:
ABL : VITMAMINWATER (Berry Flavour) Drink Cart Sales Budget in DOLLARS : July 2013 to December 2013
Month $
July 15,500
August 17,700
September 18,500
October 19,400
November 21,200
December 14,300
Additional information:
* For this particular flavour, the mark-up on cost is 100%.
* Beginning inventory is to be 120% of cost of sales for each month.
Required:
Please can you prepare the purchases budget in DOLLARS for the quarter ending 30 September 2013.

Solution:
ABL : VITMAMINWATER (Berry Flavour) Drink Cart Purchases Budget in DOLLARS:

Quarter ending 30 September 2013
Month Sales ($) Cost of sales Beginning Ending

($) inventory ($) inventory ($)
July $15,500 X 0.5 = $7,750 X 1.2 = $9,300 $10,620
August $17,700 X 0.5 = $8,850 X 1.2 = $11,100

$10,620
September $18,500 X 0.5 = $9,250 X 1.2 = $11,640

$11,100
Step 1: Find cost of sales ($).
MARK-UP CALCULATIONS:
Total Sales = Total COGS x (1+MU%)
Therefore Total COGS = Total Sales / (1+MU%)

Step 2: Calculate beginning inventory values ($).
Step 3: Calculate ending inventory values ($)
*September ending inventory value = October beginning inventory value
* October sales budget of $19,400 x 0.5 x 1.2 = $11,640
July August September Total ($)
COGS $7,750 $8,850 $9,250 $25,850
Add: Ending inventory $10,620 $11,100 $11,640 $11,640
TOTAL REQUIREMENTS $18,370 $19,950 $20,890 $37,490
Less: Beginning inventory $9,300 $10,620 $11,100 $9,300
PURCHASES BUDGET $9,070 $9,330 $9,790 $28,190
Step 4: Prepare purchases budget.
NOTE: Total for ENDING inventory and BEGINNING inventory.

1b. PURCHASES BUDGET - UNITS

You are provided with the following sales budget in units by month for the period 1 July 2013 to 31 December 2013:
ABL : VITMAMINWATER (Cherry Flavour) Drink Cart Sales Budget in UNITS : July 2013 to December 2013
Month Units
July 1,550
August 1,700
September 1,850
October 1,940
November 2,120
December 1,430
Management has a policy that for budgeting purposes, beginning inventory should be equal to 80% of that month’s
sales. The selling price per bottle of VITAMINWATER (Cherry Flavour) is $3.50 and the purchase price is $1.20 per
bottle.
Required:
Please can you prepare the purchases budget in UNITS for the quarter ending 30 September 2013. We need to know
the number of units to be purchased so that we can plan our ordering requirements.

Solution:
ABL : VITMAMINWATER (Cherry Flavour) Drink Cart Purchases Budget in UNITS:

Month Sales Beginning inventory Ending inventory

(units) (units) (units)
July 1,550 X 0.8 = 1,240 1,360
August 1,700 X 0.8 = 1,360 1,480
September 1,850 X 0.8 = 1,480 1,552
Step 1: Calculate beginning inventory levels (units).
Step 2: Calculate ending inventory values (units)

* September ending inventory value = October beginning inventory value
* October sales budget in units of 1,940 x 0.8 = 1,552
July August September Total
Sales (units) i.e. in place of COGS 1,550 1,700 1,850 5,100
Add: Ending inventory (units) 1,360 1,480 1,552 1,552
TOTAL REQUIREMENTS (units) 2,910 3,180 3,402 6,652
Less: Beginning inventory (units) 1,240 1,360 1,480 1,240
Purchases (units) 1,670 1,820 1,922 5,412
Cost per unit X $1.20 X $1.20 X $1.20 X $1.20
Step 3: Prepare purchases budget (units and dollars).
NOTE: Total for ENDING inventory and BEGINNING inventory.

1c. PURCHASES BUDGET – MULTIPLE PRODUCTS

You are provided with the following sales budget by month for the period 1 July 2013 to 30 June 2014:
ABL : VITMAMINWATER (A, B and C) Drink Cart Sales Budget in UNITS and DOLLARS : Year ending 30 June 2014
TYPE Sales Volume Sales Price Total Sales Cost of sales Beginning Ending
(units) ($) ($) ($) inventory ($) inventory ($)
A 18,500 $4.50 $83,250 / (1.5) = $3,000 $3,330

$55,500
B 25,400 $5.50 $139,700 / (1.5) = $2,500 $2,700

$93,133
C 19,000 $4.75 $90,250 / (1.5) = $2,900 $3,200

$60,167
For these particular products, mark-up on cost is 50%.
Required:
Please can you prepare the purchases budget in DOLLARS for the year ending 30 June 2013. We need to know the
number of units to be purchased so that we can plan our ordering requirements.
MARK-UP CALCULATIONS:
Selling Price = COGS x (1+MU%)
Therefore COGS = Selling Price / (1+MU%)

Solution:
ABL : VITMAMINWATER (A, B and C) Drink Cart Purchases Budget in DOLLARS:

Year ending 30 June 2013
VITAMIN A VITAMIN B VITAMIN C Total ($)
COGS $55,500 $93,133 $60,167 $208,800
NOTE: in this case (i.e. for multiple products) you will be given the beginning and ending inventory values – you
won’t have to work them out. These values cannot be calculated as was the case previously (i.e. with the budget
prepared by month) because with multiple products, the ending inventory value of one product is obviously not the
beginning inventory value of the next product.
NOTE: Total for ENDING inventory and BEGINNING inventory (i.e. note the different between total in EXAMPLE (a)
and total in EXAMPLE (b)).

3. COGS Budget
1. The COGS budget is prepared using information from the PURCHASES budget.
2. Information from the COGS budget is then used to prepare part of the budgeted INCOME STATEMENT.
2. COGS BUDGET - DOLLARS

Required:
Using the information provided in relation to our BERRY FLAVOURED drink (provided again for your below), please can
you prepare the Cost of Goods Sold Budget in DOLLARS for the quarter ending
30 September 2013.
ABL : VITMAMINWATER (Berry Flavour) Drink Cart Purchases Budget in DOLLARS:

COGS $7,750 $8,850 $9,250 $25,850
Solution:
ABL : VITMAMINWATER (Berry Flavour) Drink Cart COGS Budget in DOLLARS:

Beginning inventory $9,300 $10,620 $11,100 $9,300
Add: Planned purchases $9,070 $9,330 $9,790 $28,190
TOTAL AVAILABLE FOR SALE $18,370 $19,950 $20,890 $37,490
Less: Ending inventory $10,620 $11,100 $11,640 $11,640
COGS BUDGET $7,750 $8,850 $9,250 $25,850

4. Operating Expenses Budgets

Marketing expenses
 expenses that relate to attracting sales, making sales and delivering products
e.g. advertising, sales commission, cartage/freight outward
Administration expenses
 expenses that relate to the general office and the overall administration of the organisation
e.g. salaries & wages for office staff, stationery, rent, depreciation on office furniture and equipment
Financial expenses
 expenses that relate to the financial aspects of the business
e.g. salaries & wage for credit department staff, bad debts, interest on loans, discount allowed
3. BUDGETS FOR OPERATING EXPENSES - DOLLARS

Required:
Next we would like you to organise a meeting with each of the relevant department heads and using the information
that you gather, please prepare the following operating expenses budgets for the
quarter ending 30 September 2013:
a. A marketing expenses budget (HOD: Tim Johnson)
b. An admin. expenses budget (HOD: Jodie Smith)
c. A financial expenses budget (HOD: Bill Wong)

Here is a summary of the expense information that you gathered in your meetings with the relevant department
heads:
Expense details
Casual wages – cart attendant (salesperson) $22,200 p.a. apportioned equally each month.
Sales commissions 5% of sales (use information provided below)
Advertising 2% of sales
Stationery $840 p.a. apportioned equally each month
Mobile telephone costs $4,200 p.a. apportioned equally each month
Superannuation (sales staff) $9% of total payroll
Workers compensation insurance (sales staff) 8% of total payroll
Rent $31,080 p.a. apportioned equally each month
Cleaning fees $3,300 p.a. apportioned equally each month
Depreciation (straight line method)

a. mini trucks (used for deliveries) 20% p.a. on cost of $84,000
b. drinks cart fitout 15% p.a. on cost of $68,000
c. drinks cart equipment 15% p.a. on cost of $19,200
d. office computer hardware and software $20% p.a. on cost of $35,000
Interest on loan:
* July $1,205
* August $1,345
* September $1,186
Bank charges $432 p.a. apportioned equally each month
Assume that budgeted sales and COGS for the quarter are as follows:
* July : Sales = $46,000; COGS = $23,000
* August : Sales = $53,000; COGS = $26,500
* September : Sales = $49,000; COGS = $24,500

Solution:
Step 1: Identify the relevant expenditure (i.e. mark with ‘M’, ‘A’ or ‘F’).
Step 2: Calculate the monthly amount for each expense.
Step 3: Prepare the relevant operating expenses budget.
ABL : Drink Cart Marketing Expenses Budget in DOLLARS:

Item July August September Total ($)
Casual wages – cart attendant $1,850 $1,850 $1,850 $5,550

Sales commissions $2,300 $2,650 $2,450 $7,400
Advertising $920 $1,060 $980 $2,960
Superannuation @ 9% of wages +
commission $374 $405 $387 $1,166
Workers comp. insurance @ 8% of wages +
commission $332 $360 $344 $1,036
Depreciation:
a. mini trucks $1,400 $1,400 $1,400 $4,200
b. drinks cart fitout $850 $850 $850 $2,550
c. drinks cart equipment $240 $240 $240 $720
TOTAL MARKETING EXPENSES BUDGET $8,266 $8,815 $8,501 $25,582
WORKINGS – Marketing Expenses Budget
Month Workings
July
* sales commission $46,000 x 5% = $2,300
* advertising $46,000 x 2% = $920
August
* advertising $53,000 x 2% = $1,060
September
* advertising $49,000 x 2% = $980

ABL : Drink Cart Admin. Expenses Budget DOLLARS:

Stationery $70 $70 $70 $210

Mobile telephone costs $350 $350 $350 $1,050
Rent $2,590 $2,590 $2,590 $7,770
Cleaning fees $275 $275 $275 $825
Depreciation:
d. office computer hardware and software $583 $583 $583 $1,749
TOTAL ADMIN. EXPENSES BUDGET $3,868 $3,868 $3,868 $11,604
ABL : Drink Cart Financial Expenses Budget DOLLARS:

Interest on loan $1,205 $1,345 $1,186 $3,736

Bank charges $36 $36 $36 $108
TOTAL FINANCIAL EXPENSES BUDGET $1,241 $1,381 $1,222 $3,844

5. Budgeted Income Statement

4. BUDGETED INCOME STATEMENT - DOLLARS
Required:
Now that you have prepared all the operating expenses budget for the quarter ending 30 September 2013, please can
you prepare the BUDGETED INCOME STATEMENT for the same period. This statement will be presented to
management for approval at the next board meeting.
Solution:
ABL : Drink Cart BUDGETED INCOME STATEMENT:

Sales $46,000 $53,000 $49,000 $148,000

LESS: COGS $23,000 $26,500 $24,500 $74,000
GROSS PROFIT $23,000 $26,500 $24,500 $74,000
LESS: Operating expenses

Marketing expenses $8,266 $8,815 $8,501 $25,582
Admin. expenses $3,868 $3,868 $3,868 $11,604
Financial expenses $1,241 $1,381 $1,222 $3,844
Total operating expenses $13,375 $14,064 $13,591 $41,030
NET PROFIT $9,625 $12,436 $10,909 $32,970

6. Professional & Support Labour Budgets

The only difference between the operating budgets of a merchandising firm and that of a professional services firm is
that instead of preparing a PURCHASES and COGS budgets, you will prepare a PROFESSIONAL AND SUPPORT
LABOUR budget.
MASTER BUDGETS (chapter 1 : budgeting fundamentals)

PROFESSIONAL
MERCHANDISING MANUFACTURING
SERVICES*
Budget income statement
Sales Fees income Sales
Professional and
Purchases >> COGS Production + Ending Inventories
support labour costs
e.g. dentist + dental * direct materials (usage + purchases)
assistant * direct labour
* factory overhead
>> COGS
Marketing expenses Marketing expenses Marketing expenses
Admin. expenses Admin. expenses Admin. expenses
Financial expenses Financial expenses Financial expenses
When preparing the FEES INCOME budget, we used the formula P x Q. When preparing the cost side of the budget,
we will be substituting P for C i.e. cost. The methodology is the same, but instead we are working out how much it
costs to run the firm in terms of both professional and support labour costs.

5. PROFESSIONAL & SUPPORT LABOUR BUDGETS - DOLLARS

Grant Thornton is an accounting firm in the City.
You are provided with the following information for the quarter ending 30 September 2013:
 Budgeted client hours are 950 for July, 980 for August and 995 for September
 Professional labour costs an average of $50 per hour and support labour costs an average of $25 per hour
 It is estimated that 40% of client hours will require professional labour. Support labour will service the
remaining 60%.
Required:
Prepare the professional & support labour budget for the quarter ending 30 September 2013.
Solution:
Grant Thornton : Professional & Support Labour Budget:

Professional Labour (40%) Support Labour (60%)

Month No. Hours Hourly Total Prof. No. Hours Hourly Total Total ($)
(Q) Rate Labour (Q) Rate (C) Support
(C) ($) Labour
($)
July 950 x 40% = $50 $19,000 950 x 60% $25 $14,250 $33,250
380 = 570
August 950 x 40% = $50 $19,600 950 x 60% $25 $14,700 $34,300
392 = 588
September 950 x 40% = $50 $19,900 950 x 60% $25 $14,925 $34,825
398 = 597
Total 1,170 $58,500 1,755 $43,875 $102,375
i.e. Cost per hour (C) x No. hours (Q)

WEEK 3 FNSACC503A Budgeting LESSON 3 Learning Material

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CHAPTER 4 – OPERATING BUDGETS (non-manufacturing)

* * * FOR THIS LESSON, PLEASE WORK THROUGH

3. Case Study (VITAMINWATER) + SOLUTIONS

1. Overview : Operating Budgets

For a merchandising firm, operating budgets include:

THEREFORE: (by re-arranging the COGS formula)

This is how we derive the format for our PURCHASES budget.

IN DOLLARS e.g. July

Add: Ending inventory $XX

= TOTAL REQUIREMENTS $XX

Less: Beginning inventory $XX

= PLANNED PURCHASES $XX

Add: Ending inventory (UNITS) XX

= TOTAL REQUIREMENTS (UNITS) XX

Less: Beginning inventory (UNITS) XX

= PLANNED PURCHASES (UNITS) XX

x Cost per unit $XX

= PLANNED PURCHASES ($) $XX

Beginning inventory $XX

Add: Planned purchases $XX

= TOTAL AVAILABLE FOR SALE $XX

Less: Ending inventory $XX

= COGS BUDGET $XX

c. Operating Expenses Budget

MARKETING EXPENSES BUDGET

Total marketing expenses budget $XX

ADMINISTRATION EXPENSES BUDGET

Total administration expenses budget $XX

FINANCIAL EXPENSES BUDGET

Total financial expenses budget $XX

TOTAL OPERATING EXPENSES BUDGET $XX

2. MARK-UP ON COST FORMULA

Total Sales = Total COGS x (1+MU%)

Total COGS = Total Sales / (1+MU%)

On a per unit basis:

Selling Price per Unit = COGS per Unit x (1+MU%)

COGS per Unit = Selling Price per Unit / (1+MU%)

3. CASE STUDY Today’s date: 2 June 2013

1a. PURCHASES BUDGET – IN DOLLARS

ABL : VITMAMINWATER (Berry Flavour) Drink Cart Purchases Budget in DOLLARS:

Month Sales ($) Cost of sales Beginning Ending

July $15,500 X 0.5 = $7,750 X 1.2 = $9,300 $10,620

August $17,700 X 0.5 = $8,850 X 1.2 = $11,100

September $18,500 X 0.5 = $9,250 X 1.2 = $11,640

Step 1: Find cost of sales ($).

Total Sales = Total COGS x (1+MU%)

Therefore Total COGS = Total Sales / (1+MU%)

July August September Total ($)

COGS $7,750 $8,850 $9,250 $25,850

Add: Ending inventory $10,620 $11,100 $11,640 $11,640

TOTAL REQUIREMENTS $18,370 $19,950 $20,890 $37,490

Less: Beginning inventory $9,300 $10,620 $11,100 $9,300

PURCHASES BUDGET $9,070 $9,330 $9,790 $28,190

Step 4: Prepare purchases budget.

NOTE: Total for ENDING inventory and BEGINNING inventory.

1b. PURCHASES BUDGET - UNITS

ABL : VITMAMINWATER (Cherry Flavour) Drink Cart Purchases Budget in UNITS:

Month Sales Beginning inventory Ending inventory

July 1,550 X 0.8 = 1,240 1,360

August 1,700 X 0.8 = 1,360 1,480

September 1,850 X 0.8 = 1,480 1,552

Step 1: Calculate beginning inventory levels (units).

Step 2: Calculate ending inventory values (units)