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I. Budgets

A budget is a useful tool for planning and controlling the finance of the company. The

budget consists of the forecast of the revenues and expenditures. Based on that, the

managers can set out a suitable plan; apply the strategy to control the finance

effectively. In addition, the actual performance of the company can be compared. It

provides the opportunity to review the performance and make improvement. In any

kind of business, budgeting is essential, especially for the start-up business. A

practical budget can help develop the business.

When start up the business, based on the capital that we have, we prepare the

budgets forthe first six months of running business (the first half of 2009). First of

all, we prepare the sales budget which is the forecast of sales quantity for each month

and the first half of 2009. We assume that sales in January will be break even.

Quantity for sales increases 2%, 4%, 5%, 8%, and 10% respectively in each month

from February to June. From July, the quantity still remains 10% increasing in sales:

Chart1. The forecast of sales for six month.

The forecast of sales for six months

0100200300400500600700800900

1.000

Jan

uary

Febr

uary

March

April

May

June

Month

Quantityneededforsales(unit)

Quantity needed f

sales

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Secondly, the production budget is created in order to estimate the quantity needed

for production meeting the sales forecast. It also consists of the opening inventory and

the closing inventory. Assuming that the opening inventory of January is zero and the

desired ending inventory equals to 10% of the following months sales.

PRODUCTION BUDGET

January February March April May June1st half of

2009

Quantity neededfor sales

719 733 763 801 865 951 4,832

Opening stock 0 73 76 80 86 95 411

Closing stock 73 76 80 86 95 105 516

Productionunits

792 736 767 807 874 961 4,937

Hereafter are the budgets for direct material needed for production. In order to

produce one unit of pillow, 1metre draper and 300gram soft cotton are needed. The

cost of material is listed as the table below. We also assume that the opening stock of

January is zero and the closing stock equals to 10% of the following months quantity

material needed for production.

DIRECT MATERIAL BUDGET FOR DRAPER (m)

SALES BUDGET

January February March April May June1st half of

2009

Units 719 733 763 801 865 951 4,832

Price(VND)

104,500 104,500 104,500 104,500 104,500 104,500 627,000

Revenue(VND)

75,135,500 76,638,210 79,703,738 83,688,925 90,384,039 99,422,443 504,972,856

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January February March April May June1st half of

2009

Quantity neededfor production

792 736 767 807 874 961 4,93

Opening stock 0 73 77 81 87 96 41

Closing stock 73 77 81 87 96 106 52

Purchasequantity

866 740 771 814 882 971 5,04

Cost/m (VND) 20,000 20,000 20,000 20,000 20,000 20,000 120,00

Purchase (VND) 17,313,520 14,792,568 15,412,034 16,277,776 17,646,078 19,410,686 100,852,66

DIRECT MATERIAL BUDGET FOR COTTON (kg)

January February March April May June1st half of

2009Quantity neededfor production

238 221 230 242 262 288 1,48

Opening stock 0 22 23 24 26 29 12

Closing stock 22 23 24 26 29 32 15

Purchasequantity

260 222 231 244 265 291 1,51

Costper/kg(VND)

60,000 60,000 60,000 60,000 60,000 60,000 360,00

Purchase (VND) 15,587,448 13,308,031 13,870,830 14,649,999 15,881,470 17,469,617 90,767,39

The wages for direct labor is under the direct labor budget. The budget is expressed in

term of rate per unit. A labor will receive the wage based on the finished products.

When the labor produces one unit of pillow, they will get the wage of 10,000 VND.

DIRECT LABOUR BUDGET

January February March April May June 1st half of

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2009

Quantity neededfor production

792 736 767 807 874 961 4,937

Rate/unit (VND) 10,000 10,000 10,000 10,000 10,000 10,000 60,000

Total (VND) 7,923,380 7,363,135 7,665,288 8,072,578 8,735,682 9,609,250 49,369,313

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FIXED OVERHEAD BUDGET

January February March April May June1st half o

2009

I. Production

overheads

Indirect wages

Salesperson 2,600,000 2,600,000 2,600,000 2,600,000 2,600,000 2,600,000 15,600,0

Security and parking 600,000 600,000 600,000 600,000 600,000 600,000 3,600,0

Total indirectwages

3,200,000 3,200,000 3,200,000 3,200,000 3,200,000 3,200,000 19,200,0

Indirect expenses

Renting a store 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 8,000,000 48,000,0

Utility 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 1,000,000 6,000,0

Total indirectexpenses

9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 54,000,0

Total productionoverheads

12,200,000 12,200,000 12,200,000 12,200,000 12,200,000 12,200,000 73,200,0

II.

Administration

overheads

Office salary 18,800,000 18,800,000 18,800,000 18,800,000 18,800,000 18,800,000 112,800,0

Depreciation forinfrastructure

350,000 350,000 350,000 350,000 350,000 350,000 2,100,0

Totaladministration

overhead19,150,000 19,150,000 19,150,000 19,150,000 19,150,000 19,150,000 114,900,0

III. SELLINGOVERHEADS

MKT andAdvertising

2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 12,000,0

Total sellingoverheads

2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 12,000,0

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Variable overhead budget covers the variable overhead cost. In our business, they are

needle, thread and package used to make the finished pillow.

Fixed overhead budget covers the production overhead, administration overhead and

selling overhead costs. They are the fixed cost that our company has to pay every

month.

Finally, we prepare the income statement budget which is the summary of the

revenues, expenses of the company each month, and how much net profit we get. In

detail, we assume that sales for January will be breakeven, then the net profit equals

to zero.

VARIABLE OVERHEAD BUDGET

January February March April May June 1st half of2009

Needle, thread andpackage cost per unit

116 116 116 116 116 116 696

Total units 792 736 767 807 874 961 4,937

TOTAL VARIABLEOVERHEAD COSTS

91,911 85,412 88,917 93,642 101,334 111,467 572,684

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The six budgets above are created based on the companys capacity and the real

situation. They are the important source of information that we can use to make

appropriate decisions about financing and measure the achievement of the companys

objectives. (Managing Financial Resources and Decisions course book, p171)

II. Comments:

In order to make the business afloat, we should take into account about budgeting

because it is the useful way for planning and controlling. Planning helps create

objectives and decide what to do in advance. Based on what was planned, controlling

evaluates the current situation and the actual performance against the plan. It helps

make suitable decisions about implementing plans more effectively.

More detail, for planning, first of all, we know that how many hand-made pillows we

want to sell in order to break even in the first month. Moreover, we can set up

appropriate strategies for next months in order to make profit which increase month by

month. For example, quantity needed for sales in the second month needs to increase

INCOME STATEMENT BUDGET

1st 2nd 3rd 4th 5th 6th1st half o

2009

Sales 75,135,500 76,638,210 79,703,738 83,688,925 90,384,039 99,422,443 504,972,85

Less cost of sales

Direct material 27,322,000 20,534,640 21,356,026 22,423,827 24,217,733 26,639,506 142,493,73

Direct labor 7,190,000 7,333,800 7,627,152 8,008,510 8,649,190 9,514,109 48,322,76

Variable overheadcost

7,273,500 7,407,138 7,703,424 8,088,595 8,735,682 9,609,250 48,817,58

Contributionmargin

33,350,000 41,362,632 43,017,137 45,167,994 48,781,434 53,659,577 265,338,77

Less Fixedoverhead cost

Production

overheads 12,200,000 12,200,000 12,200,000 12,200,000 12,200,000 12,200,000 73,200,00Administration

overheads19,150,000 19,150,000 19,150,000 19,150,000 19,150,000 19,150,000 114,900,00

Selling overhead 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 12,000,00

Net profit 0 8,012,632 9,667,137 11,817,994 15,431,434 20,309,577 65,238,77

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2% compare to the first month and so on. Then, we can start making profit from the

second month. Secondly, we can absolutely evaluate the performance by comparing

the actual sale to master budget. Then, the CFO can manage cash flow effectively

and makes decision whether needs to seek other source of finance or not. Another

advantage of budget is that it concerns about the cost. In other words, we can

manage the cost if it is too high. For example, we try to find another material to

substitute draper and soft cotton if the price of material increases too much, or we can

consider about other cheaper options rather than investing in new items. In addition,

were able to make a long term plan for handmade pillow production in 3-5 years, and

expand the business. For example, releases more kind of pillow and potential to

export to other countries in the Southeast Asia. Last but not least, we can do better

and better by using suitable marketing policy. Keep in mind that marketing not only

increase quantity for sale at the moment but also give a chance for company

continues developing in future.

In conclusion, budgeting is important to do business. It is the tool to plan and control

the performance of the company. If the company can follow the plan, and control the

performance to achieve plan, we can assure that the business will afloat. However,

preparing budgets must be based on the reality. Plan must be practical and suitablewith the capacity of the company.