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 for the 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:

The forecast of sales for six months

Quantity needed for sales (unit)

1.000
900
800
700
600 Quantity needed for
500
400 sales
300
200
100
0
ay

e
ch
y

il
ry
r

n
Ap
ua

ar
ua

Ju
M
n

br
Ja

Fe

Month
Chart1. The forecast of sales for six month.
 SALES BUDGET
1st half of
January February March April May June
2009
Units 719 733 763 801 865 951 4,832
Price
104,500 104,500 104,500 104,500 104,500 104,500 627,000
(VND)
Revenue
75,135,500 76,638,210 79,703,738 83,688,925 90,384,039 99,422,443 504,972,856
(VND)

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 month’s sales.

PRODUCTION BUDGET
1st half of
January February March April May June
2009
Quantity needed
719 733 763 801 865 951 4,832
for sales
Opening stock 0 73 76 80 86 95 411

Closing stock 73 76 80 86 95 105 516

Production
792 736 767 807 874 961 4,937
units

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 month’s quantity
material needed for production.

DIRECT MATERIAL BUDGET FOR DRAPER (m)

 1st half of
January February March April May June
2009
Quantity needed
792 736 767 807 874 961 4,937
for production
Opening stock 0 73 77 81 87 96 414

Closing stock 73 77 81 87 96 106 520

Purchase
866 740 771 814 882 971 5,043
quantity
Cost/m (VND) 20,000 20,000 20,000 20,000 20,000 20,000 120,000

Purchase (VND) 17,313,520 14,792,568 15,412,034 16,277,776 17,646,078 19,410,686 100,852,662

DIRECT MATERIAL BUDGET FOR COTTON (kg)

1st half of
January February March April May June
2009
Quantity needed
238 221 230 242 262 288 1,481
for production
Opening stock 0 22 23 24 26 29 124

Closing stock 22 23 24 26 29 32 156

Purchase
260 222 231 244 265 291 1,513
quantity
Cost
60,000 60,000 60,000 60,000 60,000 60,000 360,000
per/kg(VND)
Purchase (VND) 15,587,448 13,308,031 13,870,830 14,649,999 15,881,470 17,469,617 90,767,396

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
 2009
Quantity needed
792 736 767 807 874 961 4,937
for production
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

 FIXED OVERHEAD BUDGET

1st half of
January February March April May June
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 15,600,000

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

Total indirect
3,200,000 3,200,000 3,200,000 3,200,000 3,200,000 3,200,000 19,200,000
wages

Indirect expenses

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

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

Total indirect
9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 9,000,000 54,000,000
expenses

Total production
12,200,000 12,200,000 12,200,000 12,200,000 12,200,000 12,200,000 73,200,000
overheads

II.
Administration
overheads

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

Depreciation for
350,000 350,000 350,000 350,000 350,000 350,000 2,100,000
infrastructure
Total
administration 19,150,000 19,150,000 19,150,000 19,150,000 19,150,000 19,150,000 114,900,000
overhead

III. SELLING
OVERHEADS

MKT and
2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 12,000,000
Advertising

Total selling
2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 12,000,000
overheads
 Variable overhead budget covers the variable overhead cost. In our business, they are
needle, thread and package used to make the finished pillow.

VARIABLE OVERHEAD BUDGET

1st half of
January February March April May June
2009
Needle, thread and
116 116 116 116 116 116 696
package cost per unit
Total units 792 736 767 807 874 961 4,937
TOTAL VARIABLE
91,911 85,412 88,917 93,642 101,334 111,467 572,684
OVERHEAD COSTS

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.
 INCOME STATEMENT BUDGET
1st half of
1st 2nd 3rd 4th 5th 6th
2009
Sales 75,135,500 76,638,210 79,703,738 83,688,925 90,384,039 99,422,443 504,972,856

Less cost of sales

Direct material 27,322,000 20,534,640 21,356,026 22,423,827 24,217,733 26,639,506 142,493,732

Direct labor 7,190,000 7,333,800 7,627,152 8,008,510 8,649,190 9,514,109 48,322,761

Variable overhead
7,273,500 7,407,138 7,703,424 8,088,595 8,735,682 9,609,250 48,817,589
cost
Contribution
33,350,000 41,362,632 43,017,137 45,167,994 48,781,434 53,659,577 265,338,774
margin
Less Fixed
overhead cost
Production
12,200,000 12,200,000 12,200,000 12,200,000 12,200,000 12,200,000 73,200,000
overheads
Administration
19,150,000 19,150,000 19,150,000 19,150,000 19,150,000 19,150,000 114,900,000
overheads
Selling overhead 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 12,000,000

Net profit 0 8,012,632 9,667,137 11,817,994 15,431,434 20,309,577 65,238,774

The six budgets above are created based on the company’s 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 company’s
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
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,
we’re 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 suitable
with the capacity of the company.