Professional Documents
Culture Documents
Planning Control
involves developing involves the steps taken
objectives and by management to
preparing various increase the likelihood
budgets to achieve that the objectives set
those objectives. down while planning are
attained and that all
parts of the organization
are working together
toward that goal.
BUDGETING BASICS
Benefits of Budgeting
Detail
Budget
Detail
Budget
Detail
Production
Budget
Master
Budget
Summary of
a companys
plans.
Advantages of Budgeting
Define goal
and objectives
Communicating Think about and
plans plan for the future
Advantages
Coordinate Means of allocating
activities resources
Uncover potential
bottlenecks
Choosing the Budget Period
Operating Budget
Continuous or
Perpetual Budget
Top Management
Middle Middle
Management Management
Middle Middle
Management Management
Lower-level Lower-level
Management Management
Advantages of the Bottom-up
Budgeting (Self-Imposed Budgets)
1. Individuals at all levels of the organization are viewed as
members of the team whose judgments are valued by top
management.
2. Budget estimates prepared by front-line managers are
often more accurate than estimates prepared by top
managers.
3. Motivation is generally higher when individuals participate
in setting their own goals than when the goals are
imposed from above.
4. A manager who is not able to meet a budget imposed
from above can claim that it was unrealistic. Self-imposed
budgets eliminate this excuse.
How to overcome problems of
self-imposed budgets
Self-imposed budgets should be reviewed
by higher levels of management to prevent
budgetary slack (or budget padding).
Most companies issue broad guidelines in
terms of overall profits or sales. Lower level
managers are directed to prepare budgets
that meet those targets.
Advantages of the Top-down Budgeting
Cash
Budget Budgeted
Financial
Statements
Prepare a sales budget,
including a schedule of
expected cash collections.
The Sales Budget
Sales Production
Budget Budget
March 31
ending inventory
The Production Budget
From production
budget
The Direct Materials Budget
March 31
inventory
The Direct Materials Budget
May purchases
June purchases
Total cash
disbursements
Expected Cash Disbursement for Materials
April May June Quarter
Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases
June purchases
Total cash
disbursements $ 40,000
Total cash
disbursements $ 40,000 $ 72,300
Expected Cash Disbursement for Materials
April May June Quarter
Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases
50% x $88,600 44,300 44,300
50% x $88,600 $ 44,300 44,300
June purchases
50% x $56,800 28,400 28,400
Total cash
disbursements $ 40,000 $ 72,300 $ 72,700 $185,000
Prepare a direct
labor budget.
The Direct Labor Budget
At Royal, each unit of product requires 0.05 hours of
direct labor.
The Company has a no layoff policy so all employees
will be paid for 40 hours of work each week.
In exchange for the no layoff policy, workers agreed to
a wage rate of $10 per hour regardless of the hours
worked (Overtime paid as straight time).
For the next three months, the direct labor workforce will
be paid for a minimum of 1,500 hours per month.
Lets prepare the direct labor budget.
The Direct Labor Budget
Direct materials
budget and information
Ending Finished Goods Inventory Budget
Direct labor
budget
Ending Finished Goods Inventory Budget
Production
Budget
Prepare a selling and
administrative
expense budget.
Selling and Administrative Expense Budget
Cash Budgeted
Budget Income
Statement
Stacy Company
Budgeted Income Statement
For the Month Ended April 30
Number of Visitors
Adults 750,000
Children 250,000
Total Visitors 1,000,000
Prepare a Revenue
Budget
Revenue Budget
Based on the average price charged by Wonder World and
other historical data, the following revenues per visitor are
budgeted and approved by the top management:
2 250,000 X $9
3 1,000,000 X $4
4 1,000,000 X $6
Prepare a Cost of
Sales Budget and
Expense Budget
Cost of Sales Budget
For cost of sales on souvenirs and food and beverages, the
company normally makes use of the historical cost of sales
% and takes into account of any expected price changes
from the suppliers. For the coming year, the expected cost of
sales % is 50% on sales for both the souvenir shop and food
and beverages.
Cost of Sales
Souvenir Shop $2,000,000
Food and Beverage $3,000,000
Total $5,000,000
Expenses Budget
How the items are budgeted will depend on the nature of the items.