4310 - Chapter 13

Planning and Budgeting

Budgeting

• A quantitative plan of what we expect in the future

• Personal budgets

• Purposes– Planning– Control

Budgeting

• Strategic Plans– Critical success factors– Objectives– Organization goals– Long-range plan

• Master Budget

Advantages

• Planning for future makes you think about what will happen

• If shortfalls are seen, something can be done about it ahead of time (obtain a line of credit, hire more workers, get contracts with other suppliers)

• Avoid bottlenecks

• You have to know what to expect in order to control resources

Budgeting

• Time Horizon– Long term (strategic planning)– Medium term (tactical and capital budget)– Day to day (master budget)

• Detail– Little (strategic planning)– More (tactical and capital budgeting)– Most (master budget)

Budgeting

• Participation by Employees– Top management (strategic planning)– Middle and top management (tactical and capital

budgeting)– Everyone (master budget)

• Other behavioral considerations– If budgets used for performance evaluation, employees

will try to make them even if not properly prepared

– PEOPLE EMHASIZE WHAT GETS REWARDED!!

Master Budget

• Operating Budget (income statement items)– Revenues– Production (including DM, DL, and OH)– Marketing and administrative

• Financial Budget– Cash– Budgeted financial statements

Sales Budget

• Units of sales

• X selling price per unit

• = Dollars of sales

• Units of sales goes to Production budget

• Dollars of sales goes to Income statement

• Schedule of cash collections of sales goes to cash budget

Production Budget

• Units of sales

• + Desired ending inventory

• = Units needed

• - Beginning inventory

• = Units to be produced

• Units to be produced goes to DM, DL, OH budgets

Purchases Budget

• Finished units to be produced• X DM needed per finished unit• = Material needs• + Desired ending inventory of DM• - Beginning inventory of DM• = DM to be purchased

• Goes to income statement and cash budget

Direct Labor Budget

• Finished units to produce

• X standard time allowed per unit

• = Standard labor time needed

• X per hour labor cost

• = Total direct labor cost

• Goes to income statement and cash budget

Manufacturing Overhead Budget

• Predicted activity base

• X variable OH rate

• = Total Variable OH

• + Fixed OH in total

• = Total Manufacturing overhead cost

• Goes to income statement and cash budget

Cost of Goods Sold Budget

• Start with beginning finished goods inventory

• Add Cost of goods manufactured• Subtract ending finished goods inventory• = Cost of Goods Sold

• Goes to income statement

Marketing and Administrative Budget

• Predicted sales dollars

• X variable marketing and admin. rate

• = Total variable marketing and admin. cost

• + Fixed marketing and admin. total cost

• =Total marketing and admin. cost

• Goes to income statement and cash budget

Budgeted Income Statement

• Sales (from sales forecast)• Cost of goods sold

– Beginning inventory (from previous balance sheet)– COGM - compute cost per unit from DM, DL, OH

budgets x units manufactured OR Actual purchases made for a retailer

– Ending inventory budgets

• Marketing and administrative expenses (from M&A budget)

• Compute to arrive at budgeted net income

Cash Budget

• Beginning Balance

• + Cash receipts for period

• = Cash available

• - Cash disbursements for period

• = Excess (Deficiency) over cash available

• Financing (loans, interest payments, stock sales, etc.)

• Ending cash balance

Cash Collections

• Cash sales

• Cash collections of credit sales– Collected for this month’s sales– Collected for prior month’s sales– Minus sales discounts

• Any other cash receipts (sales of property, plant & equipment, dividends received, etc.)

Cash Disbursements

• Purchases– Cash purchases– Credit purchases

• Percentage paid this month less discount taken

• Percentage paid of prior month’s purchases

– Operating expenses– NOT DEPRECIATION– Equipment payments– Dividend payments

Budgeted Balance Sheet

• Assets– Cash (from cash budget)– Accts. Rec. (credit sales that have not been collected)– Inventory (from production and purchases budgets)– Property, plant & Equipment (Beg. Balance + changes)

• Liabilities– Accounts Payable (from purchases budget)– Notes Payable (from cash budget)

• Owners’ equity– Common stock (Beg. Balance + Changes)– Retained earnings (Beg. Bal. + Net income – Divs.)

Other Issues in Budgeting

• Budgeting in retail and wholesale organizations

• Budgeting in service organizations

• Ethical problems in budgeting

• Budgeting under uncertainty