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Week 11:

Budgeting

LO 1

Nature and Objectives of


Budgeting
Budgets play an important role for
organizations of all sizes and forms.
E.g. government agencies, churches,
hospitals, small businesses, and
manufacturing companies.
Budgeting involves:
(1) establishing specific goals
(2) executing plans to achieve the goals
(3) periodically comparing actual results
with the goals.

LO 1

Objectives of Budgeting
Budgeting affects the following
managerial functions:
Planning, which involves setting goals
to guide decisions and help motivate
employees.
Directing, which involves decisions
and actions to achieve budgeted goals.
Controlling, which involves comparing
actual performance against the
budgeted goals.

LO 1

Objectives of Budgeting
A budgetary unit of a company is
called a responsibility center.
Each responsibility center is led by a
manager who has the authority and
responsibility for achieving the
centers budgeted goals.

LO 1

Objectives of Budgeting
As time passes, the actual performance
of a responsibility center can be
compared against the budgeted goals.
This provides prompt feedback to
managers and employees about their
performance.
If necessary, responsibility centers can
use such feedback to adjust their
activities in the future.

LO 1

Human Behavior and Budgeting


Human behavior problems can arise
in the budgeting process in the
following situations:
The budgeted goals
are set too tight, which
are very hard or impossible
to achieve.
This may have a negative
effect on the company
achieving its goals.

LO 1

Human Behavior and Budgeting


Human behavior problems can arise
in the budgeting process in the
following situations:
The budgeted goals
are set too loose, which
are very easy to
achieve.
Budget padding is
called budgetary slack.

LO 1

Human Behavior and Budgeting


Human behavior problems can arise
in the budgeting process in the
following situations:
The budgeted goals
conflict with the
objectives of the company
and
employees.
Goal conflict occurs
when
employees or
managers self-interest
differs from the
companys goals.

LO 2

Budgeting Systems
The budgetary period for operating
activities normally includes the fiscal
year of a company.
A variation of fiscal-year budgeting,
called continuous budgeting,
maintains a 12-month projection into
the future. budgeting requires
Zero-based
managers to estimate sales,
production, and other operating data
as though operations are being
started for the first time.

LO 2

Static Budget
A static budget shows the expected
results of a responsibility center for
only one activity level. The budget
does not change even if the activity
changes.
A static budget is used by many
service companies and for some
Disadvantage:
administrative do
functions
of for
not adjust
manufacturing
companies.
changes
in revenues
and expenses
that occur as volumes change.

LO 2

Flexible Budget
Flexible budgets show the expected
results of a responsibility center for
several activity levels.
A flexible budget is, in effect, a
series of static budgets for different
levels of activity.

LO 2

Flexible Budget
If Colter Manufacturing Companys Assembly
Department spent $70,800 to produce 10,000
units, how much over or under budget would
the department manager be when using a
flexible budget?
The firm
would be
under
budget by
$200
($71,000
$70,800).

LO 3

Master Budget
An integrated set of operating,
investing, and financing budgets for
a period of time.

LO 3

Master Budget
For a manufacturing company, the
master budget consists of the following
integrated budgets:
Operating Budgets
Sales budget
Cost of goods sold budget:
Production budget
Direct materials purchases budget
Direct labor cost budget
Factory overhead cost budget
Selling and administrative expenses budget

Budgeted Income Statement

Financing Budget
Cash budget
Investing Budget
Capital expenditures budget

Budgeted Balance Sheet

LO 4

Sales Budgets
The sales budget begins by
estimating the quantity of sales.
Once sales quantities are estimated,
the expected sales revenue can be
determined by multiplying the
volume by the expected unit sales
price.

LO 4

Sales Budgets
The prior years sales quantities are
revised for such factors as the following:
Backlog of unfilled sales orders
Planned advertising and promotion
Productive capacity
Projected pricing changes
Findings of market research studies
Expected industry and general economic
conditions

LO 4

Sales Budgets
Elite Accessories Inc. manufactures
wallets and handbags that are sold in
two regions, the East and West regions.
Elite Accessories estimates the
following sales quantities and prices for
2012.

LO 4

Production Budget
Estimates the number of units to be
manufactured to meet budgeted
sales and desired inventory levels.
Elite Accessories Inc. expects the
following inventories of wallets and
handbags:

LO 4

Production Budget
Sales
Budget

Production
Budget

Expected
Expected units
units to
to be
be sold
sold
+Desired
+Desired units
units in
in ending
ending inventory
inventory
Estimated
Estimated units
units in
in beginning
beginning
inventory
inventory
Total
Total units
units to
to be
be produced
produced

LO 4

Direct Materials Purchases Budget


Estimates the quantities of direct
materials to be purchased to support
the budgeted production and desired
inventory levels.

LO 4

Direct Materials Purchases


Budget
Sales
Budget

Production
Budget
Direct
Direct
Materials
Materials
Purchases
Purchases
Budget
Budget

Materials
Materials needed
needed for
for production
production
+
+ Desired
Desired ending
ending materials
materials inventory
inventory
Estimated
Estimated beginning
beginning materials
materials
inventory
inventory
Direct
Direct materials
materials to
to be
be purchased
purchased

LO 4

Direct Labor Cost Budget


Sales
Budget
Estimates the
direct labor hours
and related cost
needed to support
budgeted
production.

Production
Budget
Direct
Direct

Materials
Materials
Purchases
Purchases
Budget
Budget
Direct
Direct Labor
Labor
Cost
Cost Budget
Budget

LO 4

Factory Overhead Cost Budget


Sales
Budget
Estimates the
cost for each item
of factory
overhead needed
to support
budgeted
production.

Production
Budget
Direct
Materials
Direct
Materials
Purchases
Purchases
Budget
Budget

Direct
DirectLabor
Labor
Cost
CostBudget
Budget
Factory
Factory
Overhead
Overhead
Cost
CostBudget
Budget

LO 4

Cost of Goods Sold Budget


Prepared by integrating the following
budgets:
Direct materials purchases budget
Direct labor cost budget
Factory overhead cost budget

LO 4

Cost of Goods Sold Budget


Sales
Budget
Cost of
Goods
Sold
Budget

Production
Budget
Direct
Materials
Direct
Materials
Purchases
Purchases
Budget
Budget

Direct
DirectLabor
Labor
Cost
CostBudget
Budget
Factory
Factory
Overhead
Overhead
Cost
CostBudget
Budget

LO 4

Selling and Administrative Expenses


Budget
Normally supported by departmental
schedules.
The sales budget is often used as the
starting point for this budget.

LO 4

Selling and Administrative Expenses


Budget
Sales
Budget

Cost of
Goods
Sold Budget
Selling &
Administrative
Expenses
Budget

Production
Budget
Direct
Materials
Direct
Materials
Purchases
Purchases
Budget
Budget

Direct
DirectLabor
Labor
Cost
CostBudget
Budget
Factory
Factory
Overhead
Overhead
Cost
CostBudget
Budget

LO 4

Budgeted Income Statement


Prepared by integrating the following
budgets:
Sales budget
Cost of goods sold budget
Selling and administrative expenses
budget

Learning Objective 5
1. Describe budgeting, its objectives,
and its impact on human behavior.
2. Describe the basic elements of the
budget process, the two major types
of budgeting, and the use of
computers in budgeting.
3. Describe the master budget for a
manufacturing company.
4. Prepare the basic income statement
budgets for a manufacturing
company.
5. Prepare balance sheet budgets for a

LO 5

Cash Budget
Estimates the expected receipts
(inflows) and payments (outflows) of
cash for a period of time.

LO 5

Estimated Cash Receipts


January

February

March

Receipts from cash sales:


Cash sales (10% x current
months salesNote A). $108,000$124,000$

Note A:

$108,000 = $1,080,000 x 10%


$124,000 = $1,240,000 x 10%
$ 97,000 = $ 970,000 x 10%

97,000

LO 5

Estimated Cash Receipts


January

February

Receipts from cash sales:


Cash sales (10% x current
months salesNote A).$108,000$124,000$

March

97,000

Receipts from sales on account:


Collections from prior months
sales (40% of previous months
credit salesNote B)..$370,000$388,800$446,400

Note B:

$370,000, given as Jan. 1, 2012, Accts. Rec. balance


$388,800 = $1,080,000 x 90% x 40%
$446,400 = $1,240,000 x 90% x 40%

LO 5

Estimated Cash Receipts


January

February

Receipts from cash sales:


Cash sales (10% x current
months salesNote A).$108,000$124,000$

March

97,000

Receipts from sales on account:


Collections from prior months
sales (40% of previous months
credit salesNote B)..$370,000$388,800$446,400
Collections from current months
sales (60% of current months
credit salesNote C)583,200
Note C:

$583,200 = $1,080,000 x 90% x 60%


$669,600 = $1,240,000 x 90% x 60%
$523,800 = $ 970,000 x 90% x 60%

669,600 523,800

LO 5

Estimated Cash Payments


To estimate cash payments for
manufacturing costs, a schedule of
payments for manufacturing costs is
prepared.

LO 5

Estimated Cash Payments


January February
March
Payments of prior months manufacturing costs {[25% x previous
months manufacturing costs
(less depreciation)]Note A}..$190,000$204,000
$189,000

From
From Exhibit
Exhibit 17
17

Note A:

$190,000, given as January 1, 2012, Accounts


Payable balance
$204,000 = ($840,000 $24,000) x 25%
$189,000 = ($780,000 $24,000) x 25%

LO 5

Estimated Cash Payments


January February
March
Payments of prior months manufacturing costs {[25% x previous
months manufacturing costs
(less depreciation)]Note A}..$190,000$204,000
$189,000
Payments of current months
manufacturing costs {[75% x
current months manufacturing
costs (less depreciation)]
Note B}. $612,000 $567,000$591,000
Note B:

$612,000 = ($840,000 $24,000) x 75%


$567,000 = ($780,000 $24,000) x 75%
$591,000 = ($812,000 $24,000) x 75%

LO 5

Capital Expenditures Budget


Summarizes plans for acquiring fixed
assets. Such expenditures are
necessary as machinery and other
fixed assets wear out or become
obsolete.
In addition, purchasing additional
fixed assets may be necessary to
meet increasing demand for the
companys product.

LO 5

Budgeted Balance Sheet


Prepared based on the operating,
financing, and investing budgets of
the master budget.
It is similar to a normal balance
sheet except that estimated amounts
are used.

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