Purposes of Budgeting Systems1-*Budgeta detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.PlanningFacilitating Communication and CoordinationAllocating ResourcesControlling Profit and OperationsEvaluating Performance and Providing Incentives

Types of Budgets1-*DetailBudgetDetailBudgetDetailBudgetMasterBudgetCovering allphases ofa companysoperations.SalesProductionMaterials

Types of Budgets1-*Budgeted Financial StatementsBalance SheetIncome StatementStatement of Cash Flows

Types of Budgets1-*1999200020012002Continuous or Rolling BudgetThis budget is usually a twelve-month budget that rolls forward one month as the current month is completed.L o n g R a n g e B u d g e t sCapital budgets with acquisitions that normally cover several years.Financial budgets with financial resource acquisitions.

1-*Budgeted Income StatementCash BudgetSales of Services or GoodsEndingInventoryBudget Work in Processand FinishedGoodsProductionBudgetDirectMaterialsBudgetSelling andAdministrativeBudgetDirectLabor BudgetOverheadBudgetEndingInventoryBudget Direct MaterialsBudgeted Balance SheetBudgeted Statement of Cash Flows

1-*Activity-Based Costing versus Activity-Based BudgetingResourcesCost objects: products and services produced, and customers served.ActivitiesResourcesForecast of products and services to be produced and customers served.Activities

Sales Budget1-*Breakers, Inc. is preparing budgets for the quarter ending June 30.Budgeted sales for the next five months are:April 20,000 unitsMay 50,000 unitsJune 30,000 unitsJuly 25,000 unitsAugust 15,000 units.The selling price is $10 per unit.

Sales Budget1-*

Sales

AprilMayJuneQuarter

Budgeted sales (units)20,00050,00030,000100,000

Selling price per unit$10$10$10$10

Total Revenue$200,000$500,000$300,000$1,000,000

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Production

AprilMayJuneJuly

Sales in units20,00050,00030,00025,000

Add: desired ending inventory10,0006,0005,0003,000

Total needed30,00056,00035,00028,000

Less: begin-ning inventory4,00010,0006,0005,000

Production in units26,00046,00029,00023,000

May sales (sales budget)50,000

Percent of inventory desired20%

Desired ending inventory10,000

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Materials

AprilMayJuneQuarter

Production in units26,00046,00029,000101,000

Materials per unit5555

Production needs130,000230,000145,000505,000

Add: desired ending inventory23,00014,50011,50011,500

Total needed153,000244,500156,500516,500

Less: beginning inventory13,00023,00014,50013,000

Materials to be purchased140,000221,500142,000503,500

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Labor

AprilMayJuneQuarter

Production in units26,00046,00029,000101,000

Direct labor hours0.050.050.050.05

Labor hours required1,3002,3001,4505,050

Guaranteed labor hours1,5001,5001,500

Labor hours paid1,5002,3001,5005,300

Wage rate$10$10$10$10

total direct labot cost$15,000$23,000$15,000$53,000

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Overhead

AprilMayJuneQuarter

Production in units26,00046,00029,000101,000

Variable mfg. OH rate$1$1$1$1

Variable mfg. OH costs$26,000$46,000$29,000$101,000

Fixed mfg. OH costs50,00050,00050,000150,000

Total mfg. OH costs$76,000$96,000$79,000$251,000

Less: noncash costs20,00020,00020,00060,000

Cash disbursements for manufacturing OH$56,000$76,000$59,000$191,000

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Eding Inv.

Production costs per unitQuantityCostTotal

Direct materials5.00lbs.$0.40$2.00

Direct labor0.05hrs.$10.00$0.50

Manufacturing overhead0.05hrs.$49.70$2.49

$4.99

Budgeted finished goods inventory

Ending inventory in units3,000

Unit product cost$4.99

Ending finished goods inventory$14,970

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Selling

AprilMayJuneQuarter

Sales in units20,00050,00030,000100,000

Variable selling and admin. rate$0.50$0.50$0.50$0.50

Variable expense$10,000$25,000$15,000$50,000

Fixed selling and admin. expense70,00070,00070,000210,000

Total expense80,00095,00085,000260,000

Less: noncash expenses10,00010,00010,00030,000

Cash disburse-ments for selling & admin.$70,000$85,000$75,000$230,000

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Cash in

AprilMayJuneQuarter

Accounts rec. - March 31$30,000$30,000

April sales

70% x $200,000140,000140,000

25% x $200,000$50,00050,000

May sales

70% x $500,000350,000350,000

25% x $500,000$125,000125,000

June sales

70% x $300,000210,000210,000

Total cash collections$170,000$400,000$335,000$905,000

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Cash Materials

AprilMayJuneQuarter

Accounts pay. March 31$12,000$12,000

April purchases

50% x $5600028,00028,000

50% x $56000$28,00028,000

May purchases

50% x $88,60044,30044,300

50% x $88600$44,30044,300

June purchases

50% x $56,80028,40028,400

Total cash payments for materials$40,000$72,300$72,700$185,000

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Cash

AprilMayJuneQuarter

Beginning cash balance$40,000$30,000$30,000$40,000

Add: cash collections170,000400,000325,000905,000

Total cash available210,000430,000355,000945,000

Less: disbursements

Materials40,00072,30072,700185,000

Direct labor15,00023,00015,00053,000

Mfg. overhead56,00076,00059,000191,000

Selling and admin.70,00085,00075,000230,000

Equipment purchase0.0143,70048,300192,000

Dividends49,0000.00.049,000

230,000400,000270,000900,000

Excess (deficiency) of Cash available over disbursements(20,000)30,00085,00045,000

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Sheet11

AprilMayJuneQuarter

Excess (deficiency) of Cash available over disbursements$(20,000)$30,000$95,000$45,000

Financing:

Borrowing50,0000.00.050,000

Repayments0.00.0(50,000)(50,000)

Interest0.00.0(2,000)(2,000)

Total financing50,0000.0(52,000)(2,000)

Ending cash balance$30,000$30,00043,000$43,000

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Sheet14

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Sheet15

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Sheet16

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Production Budget1-*The management of Breakers, Inc. wants ending inventory to be equal to 20% of the following months budgeted sales in units. On March 31, 4,000 units were on hand. Lets prepare the production budget.

Production Budget1-*From salesbudgetMarch 31ending inventoryEnding inventory becomes beginning inventory the next month

Production

AprilMayJuneQuarter

Sales in units20,00050,00030,000100,000

Add: desired end. inventory10,0006,0005,0005,000

Total needed30,00056,00035,000105,000

Less: beg. inventory4,00010,0006,0004,000

Units to be produced26,00046,00029,000101,000

May sales (sales budget)50,000

Percent of inventory desired20%

Desired ending inventory10,000

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Sheet1

May sales50,000units

Desired percent20%

Desired inventory10,000units

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Sheet3

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Sheet4

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Sheet5

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Sheet6

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Sheet7

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Sheet8

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Sheet9

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Sheet10

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Sheet11

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Sheet12

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Sheet13

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Sheet14

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Sheet15

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Sheet16

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Direct-Material Budget1-*At Breakers, five pounds of material are required per unit of product.Management wants materials on hand at the end of each month equal to 10% of the following months production.On March 31, 13,000 pounds of material are on hand. Material cost $.40 per pound. Lets prepare the direct materials budget.

Direct-Material Budget1-*From our productionbudget 10% of the following months production March 31 inventory

Materials

AprilMayJuneQuarter

Production in units26,00046,00029,000101,000

Materials per unit5555

Production needs130,000230,000145,000505,000

Add: desired ending inventory23,00014,50011,50011,500

Total needed153,000244,500156,500516,500

Less: beginning inventory13,00023,00014,50013,000

Materials to be purchased140,000221,500142,000503,500

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Direct-Material Budget1-*

Materials

AprilMayJuneQuarter

Production in units26,00046,00029,000101,000

Materials per unit5555

Production needs130,000230,000145,000505,000

Add: desired ending inventory23,00014,50011,50011,500

Total needed153,000244,500156,500516,500

Less: beginning inventory13,00023,00014,50013,000

Materials to be purchased140,000221,500142,000503,500

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Sheet1

June Ending Inventory

July production in units23,000

Materials per unit5

Total units needed115,000

Inventory percentage10%

June desired ending inventory11,500

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Sheet1

July Production

Sales in units25,000

Add: desired ending inventory3,000

Total units needed28,000

Less: beginning inventory5,000

Production in units23,000

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Direct-Labor Budget1-*At Breakers, each unit of product requires 0.1 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 $8 per hour regardless of the hours worked (No overtime pay).For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month.Lets prepare the direct labor budget.

Direct-Labor Budget1-*From ourproductionbudgetThis is the greater oflabor hours required orlabor hours guaranteed.

Labor

AprilMayJuneQuarter

Production in units26,00046,00029,000101,000

Direct labor hours0.100.100.100.10

Labor hours required2,6004,6002,90010,100

Guaranteed labor hours3,0003,0003,000

Labor hours paid3,0004,6003,00010,600

Wage rate$8$8$8$8

Total direct labot cost$24,000$36,800$24,000$84,800

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Overhead Budget1-*Here is Breakers Overhead Budget for the quarter.

Sheet1

AprilMayJuneQuarter

Indirect labor$17,500$26,500$17,900$61,900

Indirect material7,00012,6008,60028,200

Utilities4,2008,4005,20017,800

Rent13,30013,30013,30039,900

Insurance5,8005,8005,80017,400

Maintenance8,2009,4008,20025,800

$56,000$76,000$59,000$191,000

Sheet2

Sheet3

Selling and Administrative Expense Budget1-*At Breakers, variable selling and administrative expenses are $0.50 per unit sold.Fixed selling and administrative expenses are $70,000 per month.The $70,000 fixed expenses include $10,000 in depreciation expense that does not require a cash outflows for the month.

Selling and Administrative Expense Budget1-*From ourSales budget

Selling

AprilMayJuneQuarter

Sales in units20,00050,00030,000100,000

Variable S&A rate$0.50$0.50$0.50$0.50

Variable expense$10,000$25,000$15,000$50,000

Fixed S&A expense70,00070,00070,000210,000

Total expense80,00095,00085,000260,000

Less: noncash expenses10,00010,00010,00030,000

Cash disbursements$70,000$85,000$75,000$230,000

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Cash Receipts Budget1-*At Breakers, all sales are on account.The companys collection pattern is:70% collected in the month of sale,25% collected in the month following sale,5% is uncollected.The March 31 accounts receivable balance of $30,000 will be collected in full.

Cash Receipts Budget1-*

Cash in

AprilMayJuneQuarter

Accounts rec. - 3/31$30,000$30,000

April sales

70% x $200,000140,000140,000

25% x $200,000$50,00050,000

May sales

70% x $500,000350,000350,000

25% x $500,000$125,000125,000

June sales

70% x $300,000210,000210,000

Total cash collections$170,000$400,000$335,000$905,000

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Cash Disbursement Budget1-*Breakers pays $0.40 per pound for its materials.One-half of a months purchases are paid for in the month of purchase; the other half is paid in the following month.No discounts are available.The March 31 accounts payable balance is $12,000.

Cash Disbursement Budget1-*140,000 lbs. $.40/lb. = $56,000

Cash Disbursement Budget1-*Breakers:Maintains a 12% open line of credit for $75,000.Maintains a minimum cash balance of $30,000.Borrows and repays loans on the last day of the month.Pays a cash dividend of $25,000 in April.Purchases $143,700 of equipment in May and $48,300 in June paid in cash.Has an April 1 cash balance of $40,000.

Cash Budget(Collections and Disbursements)1-*To maintain a cashbalance of $30,000,Breakers must borrow$35,000 on its line of credit.From our CashReceipts BudgetFrom our Cash DisbursementsBudgetFrom our Direct Labor BudgetFrom our Overhead BudgetFrom our Selling and Administrative Expense Budget

Cash Budget(Collections and Disbursements)1-*Breakers mustborrow anaddition $13,800to maintain acash balanceof $30,000.

Cash Budget(Collections and Disbursements)1-*At the end of June, Breakers has enough cash to repaythe $48,800 loan plus interest at 12%.

Cash

AprilMayJuneQuarter

Beginning cash balance$40,000$30,000$30,000

Add: cash collections170,000400,000335,000

Total cash available210,000430,000365,000

Less: disbursements

Materials40,00072,30072,700

Direct labor24,00036,80024,000

Mfg. overhead56,00076,00059,000

Selling and admin.70,00085,00075,000

Equipment purchase0.0143,70048,300

Dividends25,0000.00.0

Total disbursements215,000413,800279,000

Excess (deficiency) of Cash available over disbursements$(5,000)$16,200$86,000

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Cash Budget(Collections and Disbursements)1-*

Cash Budget(Financing and Repayment)1-*Ending cash balance for Aprilis the beginning May balance.

Sheet1

BorrowingRateAnnual InterestMonths OutstandingInterest Expense

$35,00012%=$4,2002 mths=$700

13,80012%=1,6561 mth.=138

$838

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Sheet11

AprilMayJuneQuarter

Excess (deficiency) of Cash available over disbursements$(5,000)$16,200$86,000$37,200

Financing:

Borrowing35,00013,80048,800

Repayments0.00.0(48,800)(48,800)

Interest0.00.0(838)(838)

Total financing35,00013,800(49,638)(838)

Ending cash balance$30,000$30,000$36,362$36,362

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Cost of Goods Manufactured1-*

Sheet1

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000

20080,000140,000100,000

30080,000170,000150,000

40080,000200,000200,000

50080,000230,000250,000

60080,000260,000300,000

70080,000290,000350,000

80080,000320,000400,000

Sheet2

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000100,000

20080,000140,000100,000Profit

30080,000170,000150,00080,000

40080,000200,000200,000

50080,000230,000250,00060,000

60080,000260,000300,000

70080,000290,000350,00040,000

80080,000320,000400,000

20,000

0

`

(20,000)100200300400500600700

Units

(40,000)

(60,000)

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

100200300400500600700800

Units

Sheet3

Sheet4

A. Traditional Format

ACCUTIME COMPANY

Income Statement

For the Year Ended December 31, 20x1

Sales$500,000

Less:380,000

Gross margin$120,000

Less: Operating expenses:

Selling expenses$35,000

Administrative expenses35,00070,000

Net income$50,000

B. Contribution Format

ACCUTIME COMPANY

Income Statement

For the Year Ended December 31, 20x1

Sales$500,000

Less: Variable expenses:

Variable manufacturing$280,000

Variable selling15,000

Variable administrative5,000300,000

Contribution margin$200,000

Less: Fixed expenses:

Fixed manufacturing$100,000

Fixed selling20,000

Fixed administrative30,000150,000

Net income$50,000

Sheet5

TargetTarget

after-tax=before-tax(1-t)

net incomeincome

Sheet6

Direct material (see schedule 3 for details):

Raw-material inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,800a

Add: Purchases of raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,400,000b

Raw material available for use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,464,800b

Deduct: Raw-material inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,800a

Direct material used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,400,000b

Direct labor (see schedule 4 for details) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000

Manufacturing overhead (see schedule 5 for details) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000

Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Add:Work-in-process inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0c

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Deduct:Work-in-process inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0c

Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Add: Finished-goods inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,750d

Cost of goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,256,750

Deduct: Finished-goods inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,750d

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

AprilMayJuneQuarter

Direct material:

Beg.material inventory5,2009,2005,8005,200

Add: Materials purchases$56,000$88,600$56,800$201,400

Material available for use$61,200$97,800$62,600$206,600

Deduct: End. material inventory$9,200$5,800$4,600$4,600

Direct material used$52,000$92,000$58,000$202,000

Direct labor$24,000$36,800$24,000$84,800

Manufacturing overhead$56,000$76,000$59,000$191,000

Total manufacturing costs$132,000$204,800$141,000$477,800

Add: Beg. Work-in-process inventory$3,800$16,200$9,400$3,800

Subtotal$135,800$221,000$150,400$481,600

Deduct: End.Work-in-process inventory$16,200$9,400$17,000$17,000

Cost of goods manufactured119,600211,600133,400464,600

Add: Beg. finished-goods inventory$18,400$46,000$27,600$18,400

Cost of goods available for sale$138,000$257,600$161,000$483,000

Deduct: End. finished-goods inventory$46,000$27,600$23,000$23,000

Cost of goods sold92,000230,000138,000460,000

MBD00559E2F.xls

Sheet1

191000

10600

Breakers, Inc.18.0188679245

Budgeted Income Statement

For the Three Months Ended June 30

Revenue (100,000 $10)$1,000,000

Cost of goods sold (100,000 $4.60)460,000

Gross margin540,000

Operating expenses:

Selling and admin. Expenses$260,000

Interest expense838

Total operating expenses260,838

Net income$279,162

Sheet2

Sheet3

Sheet4

Sheet5

Sheet6

Cost of Goods Sold1-*

Sheet1

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000

20080,000140,000100,000

30080,000170,000150,000

40080,000200,000200,000

50080,000230,000250,000

60080,000260,000300,000

70080,000290,000350,000

80080,000320,000400,000

Sheet2

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000100,000

20080,000140,000100,000Profit

30080,000170,000150,00080,000

40080,000200,000200,000

50080,000230,000250,00060,000

60080,000260,000300,000

70080,000290,000350,00040,000

80080,000320,000400,000

20,000

0

`

(20,000)100200300400500600700

Units

(40,000)

(60,000)

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

100200300400500600700800

Units

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Sheet4

A. Traditional Format

ACCUTIME COMPANY

Income Statement

For the Year Ended December 31, 20x1

Sales$500,000

Less:380,000

Gross margin$120,000

Less: Operating expenses:

Selling expenses$35,000

Administrative expenses35,00070,000

Net income$50,000

B. Contribution Format

ACCUTIME COMPANY

Income Statement

For the Year Ended December 31, 20x1

Sales$500,000

Less: Variable expenses:

Variable manufacturing$280,000

Variable selling15,000

Variable administrative5,000300,000

Contribution margin$200,000

Less: Fixed expenses:

Fixed manufacturing$100,000

Fixed selling20,000

Fixed administrative30,000150,000

Net income$50,000

Sheet5

TargetTarget

after-tax=before-tax(1-t)

net incomeincome

Sheet6

Direct material (see schedule 3 for details):

Raw-material inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,800a

Add: Purchases of raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,400,000b

Raw material available for use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,464,800b

Deduct: Raw-material inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,800a

Direct material used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,400,000b

Direct labor (see schedule 4 for details) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000

Manufacturing overhead (see schedule 5 for details) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000

Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Add:Work-in-process inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0c

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Deduct:Work-in-process inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0c

Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Add: Finished-goods inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,750d

Cost of goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,256,750

Deduct: Finished-goods inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,750d

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

AprilMayJuneQuarter

Direct material:

Beg.material inventory5,2009,2005,8005,200

Add: Materials purchases$56,000$88,600$56,800$201,400

Material available for use$61,200$97,800$62,600$206,600

Deduct: End. material inventory$9,200$5,800$4,600$4,600

Direct material used$52,000$92,000$58,000$202,000

Direct labor$24,000$36,800$24,000$84,800

Manufacturing overhead$56,000$76,000$59,000$191,000

Total manufacturing costs$132,000$204,800$141,000$477,800

Add: Beg. Work-in-process inventory$3,800$16,200$9,400$3,800

Subtotal$135,800$221,000$150,400$481,600

Deduct: End.Work-in-process inventory$16,200$9,400$17,000$17,000

AprilMayJuneQuarter

Cost of goods manufactured119,600211,600133,400464,600

Add: Beg. finished-goods inventory$18,400$46,000$27,600$18,400

Cost of goods available for sale$138,000$257,600$161,000$483,000

Deduct: End. finished-goods inventory$46,000$27,600$23,000$23,000

Cost of goods sold92,000230,000138,000460,000

MBD00559E2F.xls

Sheet1

191000

10600

Breakers, Inc.18.0188679245

Budgeted Income Statement

For the Three Months Ended June 30

Revenue (100,000 $10)$1,000,000

Cost of goods sold (100,000 $4.60)460,000

Gross margin540,000

Operating expenses:

Selling and admin. Expenses$260,000

Interest expense838

Total operating expenses260,838

Net income$279,162

Sheet2

Sheet3

Sheet4

Sheet5

Sheet6

Budgeted Income Statement1-*

Sheet1

191000

10600

Breakers, Inc.18.0188679245

Budgeted Income Statement

For the Three Months Ended June 30

Revenue (100,000 $10)$1,000,000

Cost of goods sold460,000

Gross margin540,000

Operating expenses:

Selling and admin. expenses$260,000

Interest expense838

Total operating expenses260,838

Net income$279,162

Sheet2

Sheet3

Sheet4

Sheet5

Sheet6

Budgeted Statement of Cash Flows1-*

Sheet1

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000

20080,000140,000100,000

30080,000170,000150,000

40080,000200,000200,000

50080,000230,000250,000

60080,000260,000300,000

70080,000290,000350,000

80080,000320,000400,000

Sheet2

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000100,000

20080,000140,000100,000Profit

30080,000170,000150,00080,000

40080,000200,000200,000

50080,000230,000250,00060,000

60080,000260,000300,000

70080,000290,000350,00040,000

80080,000320,000400,000

20,000

0

`

(20,000)100200300400500600700

Units

(40,000)

(60,000)

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

100200300400500600700800

Units

Sheet3

Sheet4

A. Traditional Format

ACCUTIME COMPANY

Income Statement

For the Year Ended December 31, 20x1

Sales$500,000

Less:380,000

Gross margin$120,000

Less: Operating expenses:

Selling expenses$35,000

Administrative expenses35,00070,000

Net income$50,000

B. Contribution Format

ACCUTIME COMPANY

Income Statement

For the Year Ended December 31, 20x1

Sales$500,000

Less: Variable expenses:

Variable manufacturing$280,000

Variable selling15,000

Variable administrative5,000300,000

Contribution margin$200,000

Less: Fixed expenses:

Fixed manufacturing$100,000

Fixed selling20,000

Fixed administrative30,000150,000

Net income$50,000

Sheet5

TargetTarget

after-tax=before-tax(1-t)

net incomeincome

Sheet6

Direct material (see schedule 3 for details):

Raw-material inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,800a

Add: Purchases of raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,400,000b

Raw material available for use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,464,800b

Deduct: Raw-material inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,800a

Direct material used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,400,000b

Direct labor (see schedule 4 for details) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000

Manufacturing overhead (see schedule 5 for details) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000

Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Add:Work-in-process inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0c

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Deduct:Work-in-process inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0c

Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Add: Finished-goods inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,750d

Cost of goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,256,750

Deduct: Finished-goods inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,750d

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

AprilMayJuneQuarter

Direct material:

Beg.material inventory5,2009,2005,8005,200

Add: Materials purchases$56,000$88,600$56,800$201,400

Material available for use$61,200$97,800$62,600$206,600

Deduct: End. material inventory$9,200$5,800$4,600$4,600

Direct material used$52,000$92,000$58,000$202,000

Direct labor$24,000$36,800$24,000$84,800

Manufacturing overhead$56,000$76,000$59,000$191,000

Total manufacturing costs$132,000$204,800$141,000$477,800

Add: Beg. Work-in-process inventory$3,800$16,200$9,400$3,800

Subtotal$135,800$221,000$150,400$481,600

Deduct: End.Work-in-process inventory$16,200$9,400$17,000$17,000

AprilMayJuneQuarter

Cost of goods manufactured$119,600$211,600$133,400$464,600$26,000

Add: Beg. finished-goods inventory$18,400$46,000$27,600$18,400

Cost of goods available for sale$138,000$257,600$161,000$483,000$30,000

Deduct: End. finished-goods inventory$46,000$27,600$23,000$23,000

Cost of goods sold92,000230,000138,000460,000

Sheet7

AprilMayJuneQuarter

Cash flows from operating activities:

Cash receipts from customers170,000400,000335,000905,000

Cash payments:

To suppliers of raw material$(40,000)$(72,300)$(72,700)$(185,000)

For direct labor$(24,000)$(36,800)$(24,000)$(84,800)

For manufacturing-overhead expenditures$(56,000)$(76,000)$(59,000)$(191,000)

For selling and administrative expenses$(70,000)$(85,000)$(75,000)$(230,000)

For interest0.00.0$(838)$(838)

Total cash payments$(190,000)$(270,100)$(231,538)$(691,638)

Net cash flow from operating activities(20,000)129,900103,462213,362

Cash flows from investing activities:

Purchase of equipment0.0$(143,700)$(48,300)$(192,000)

Net cash used by investing activities0.0(143,700)(48,300)(192,000)

Cash flows from financing activities:

Payment of dividends$(25,000)0.00.0$(25,000)

Principle of bank loan$35,000$13,8000.0$48,800

Repayment of bank loan0.00.0$(48,800)$(48,800)

Net cash provided by financing activities10,00013,800(48,800)0.0

Net increase in cash(10,000)0.06,362(3,638)

Balance in cash, beginning$40,000$30,000$30,000$40,000

Balance in cash. end of month30,00030,00036,36236,362

MBD0059B721.xls

MBD0059D636.xls

Sheet11

AprilMayJuneQuarter

Excess (deficiency) of Cash available over disbursements$(5,000)$16,200$86,000$37,200

Financing:

Borrowing35,00013,80048,800

Repayments0.00.0(48,800)(48,800)

Interest0.00.0(838)(838)

Total financing35,00013,800(49,638)(838)

Ending cash balance$30,000$30,000$36,362$36,362

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MBD00559E2F.xls

Sheet1

191000

10600

Breakers, Inc.18.0188679245

Budgeted Income Statement

For the Three Months Ended June 30

Revenue (100,000 $10)$1,000,000

Cost of goods sold (100,000 $4.60)460,000

Gross margin540,000

Operating expenses:

Selling and admin. Expenses$260,000

Interest expense838

Total operating expenses260,838

Net income$279,162

Sheet2

Sheet3

Sheet4

Sheet5

Sheet6

Budgeted Balance Sheet1-*Breakers reports the following account balances on June 30 prior to preparing its budgeted financial statements:Land - $50,000Building (net) - $148,000Common stock - $217,000Retained earnings - $46,400

1-*25%of Junesales of $300,00011,500 lbs. at$.40 per lb.5,000 units at$4.60 per unit.50% of Junepurchases of $56,800

Sheet1

Royal Company

Budgeted Income Statement

For the Three Month Ended June 30, 19X1

Sales (100,000 units @ $10)$1,000,000

Cost of goods sold (100,000 @ $4.99)499,000

Gross margin501,000

Selling and administrative expenses230,000

Operating income271,000

Interest expense2,000

Net income$269,000

Breakers, Inc.

Budgeted Balance Sheet

June 30

Current assets

Cash$36,362

Accounts receivable75,000

Raw materials inventory4,600

Work-in-process inventory17,000

Finished goods inventory23,000

Total current assets155,962

Property and equipment

Land50,000

Building148,000

Equipment192,000

Total property and equipment390,000

Total assets$545,962

Accounts payable$28,400

Common stock217,000

Retained earnings300,562

Total liabilities and equities$545,962

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Fin

Royal Company

Budgeted Income Statement

For the Three Month Ended June 30, 19X1

Sales (100,000 units @ $10)$1,000,000Beginning balance$46,400

Cost of goods sold (100,000 @ $4.99)499,000Add: net income279,162

Gross margin501,000Deduct: dividends(25,000)

Selling and administrative expenses230,000Ending balance$300,562

Operating income271,000

Interest expense2,000

Net income$269,000

Royal Company

Budgeted Balance Sheet

June 30, 19X1

Current assets

Cash$43,000

Accounts receivable75,000

Raw materials inventory4,600

Finished goods inventory24,950

Total current assets147,550

Property and equipment

Land50,000

Building175,000

Equipment192,000

Total property and equipment417,000

Total assets$564,550

Accounts payable$28,400

Common stock200,000

Retained earnings336,150

Total liabilities and equities$564,550

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1-*Budgeted Income StatementCash BudgetSales of Services or GoodsEndingInventoryBudget Work in Processand FinishedGoodsProductionBudgetDirectMaterialsBudgetSelling andAdministrativeBudgetDirectLabor BudgetOverheadBudgetEndingInventoryBudget Direct MaterialsBudgeted Balance SheetBudgeted Statement of Cash FlowsWhen the interactions of the elements of the master budget are expressed as a set of mathematical relations, it becomes a financial planning model that can be used to answer what if questions about unknown variables.

Budget Administration1-*The Budget Committee is a standing committee responsible for . . .overall policy matters relating to the budget.coordinating the preparation of the budget.

International Aspects of Budgeting1-*Firms with international operations face special problems when preparing a budget.Fluctuations in foreign currency exchange rates.High inflation rates in some foreign countries.Differences in local economic conditions.

Budgeting Product Life-Cycle Costs1-*Product planningand conceptDesign.Preliminarydesign.Detailed designand testing.Production.Distributionand customerservice.

Behavioral Impact of Budgets1-*Budgetary Slack: Padding the BudgetPeople often perceive that their performance will look better in their superiors eyes if they can beat the budget.

Participative Budgeting1-*Flow of Budget Data

Chapter 9: Profit Planning and Activity-Based BudgetingA budget is a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time. The procedures used to develop a budget constitute a budgeting system. Budgeting systems have five primary purposes: (1) planning, (2) facilitating communication and coordination, (3) allocating resources, (4) controlling profit and operations and (5) evaluating performance and providing incentives. (LO1)

Different types of budgets serve different purposes. A master budget, or profit plan, is a comprehensive set of detailed budgets covering all phases of an organizations operations for a specified period of time. (LO1)Budgeted financial statements, often called pro forma financial statements, show how the organizations financial statements will appear at a specified time if operations proceed according to plan. Budgeted financial statements include a budgeted income statement, a budgeted balance sheet, and a budgeted statement of cash flows. (LO1)A capital budget is a plan for the acquisition of capital assets, such as buildings and equipment. A financial budget is a plan that shows how the organization will acquire its financial resources, such as through the issuance of stock or incurrence of debt. Budgets are developed for specific time periods. Short-range budgets cover a year, a quarter, or a month, whereas long-range budgets cover periods longer than a year. Rolling budgets are continually updated by periodically adding a new incremental time period, such as a quarter, and dropping the period just completed. Rolling budgets are also called revolving budgets or continuous budgets. (LO1)The master budget comprises many separate budgets, or schedules, that are interdependent. Based on the sales budget, a company develops a set of operational budgets that specify how its operations will be carried out to meet the demand for its goods or services. A manufacturing company develops a production budget, which shows the number of product units to be manufactured and ending inventory budgets. From the production budget, a manufacturer develops budgets for the direct materials, direct labor, and overhead that will be required in the production process. A budget for selling and administrative expenses also is prepared. The operational portion of the master budget is similar in a merchandising firm, but instead of a production budget for goods, a merchandiser develops a budget for merchandise purchases. A merchandising firm will not have a budget for direct materials. Based on the sales budget for its services, a service industry firm develops a set of budgets that show how the demand for those services will be met. Every business prepares a cash budget. This budget shows expected cash receipts, as a result of selling goods or services, and planned cash disbursements, to pay the bills incurred by the firm. The final portion of the master budget includes a budgeted income statement, a budgeted balance sheet, and a budgeted statement of cash flows. (LO2)

Applying ABC concepts to the budgeting process yields activity-based budgeting or ABB. Under ABB, the first step is to specify the products or services to be produced and the customers to be served. Then the activities that are necessary to produce these products and services are determined. Finally, the resources necessary to perform the specified activities are quantified. Conceptually, ABB takes the ABC model and reverses the flow of the analysis. ABC assigns resource costs to activities, and then it assigns activity costs to products and services produced and customers served. ABB, on the other hand, begins by forecasting the demand for products and services as well as the customers to be served. These forecasts then are used to plan the activities for the budget period and budget the resources necessary to carry out the activities. (LO3)Using ABB to prepare the Master Budget. We will prepare each type of budget that make up the master budget. Breakers, Inc. is preparing budgets for the quarter ending June 30. The unit sales are projected for the months of April through August. The selling price per unit is budgeted at $10. (LO4) The projected units are multiplied by $10 for each month to determine the budgeted revenue for the months of April, May, June and the quarter. (LO4)Now that the sales budget is complete, the production budget can be prepared. The purpose of the production budget is to ensure that production meets budgeted sales and provides sufficient ending inventory. Production must be adequate to meet budgeted sales and provide for sufficient ending inventory. (LO4)

Management has determined that the ending inventory should be equal to 20% of the sales for the following month. At the end of March, there were 4,000 units on hand. (LO4)The number of units projected to be sold in the first month is obtained from the sales budget. (LO4)

The desired ending inventory is calculated by multiplying the projected sales for the next month, May, by 20%. This is added to the projected sales to determine the units needed for April. (LO4)

The ending inventory for the previous month, March, is deducted from the amount needed to determine the number of units that must be produced. (LO4)

The ending inventory for the first month, April, becomes the beginning inventory for the second month. The May and June production budget are prepared in the same manner as April. (LO4)

Sales in units for the quarter is the sum of April, May and June sales. Since the end of June is also the end of the quarter, the ending inventory for the quarter is the same as the ending inventory for June. Since the beginning of April is also the beginning of the quarter, the beginning inventory for the quarter is the same as Aprils beginning inventory. Total units needed for the quarter is the sum of the sales units and the ending inventory. The beginning inventory is subtracted from the total units needed to arrive at the units to be produced for the quarter. (LO4)Five pounds for materials are required to produce on unit. Management has determined that direct materials ending inventory should be 10% of the next months production. There are 31,000 pounds of direct materials in Marchs ending inventory. The cost is 40 cents per pound. (LO4)The first row in the direct materials budget is the units to be produced each month and for the quarter. This information is obtained from the production budget. (LO4)

For each month, the units to be produced needs to be multiplied by 5 pounds to determine the amount of direct materials needed in each month. The ending inventory for April is 10% of Mays direct material needs. The desired ending inventory for April is added to the production needs for April. (LO4)

The beginning inventory is subtracted from the total direct material needed for the month to arrive at the materials to be purchased. (LO4)

The calculations are the same for each month. As in the production budget, the ending inventory for the quarter is the same as the ending inventory for June and the beginning inventory for the quarter is the same as the beginning inventory in April. (LO4) The ending direct material inventory for June requires a bit more explanation. The projections for July must be expanded upon to determine the production budget for July, which will provide the information necessary to calculate the materials needed for Junes ending inventory. (LO4) Each unit can be produced in one tenth of an hour. Breakers pays employees for 40 hours each week. The wage rate is $8 per hour and there is no overtime pay. Management has projected that direct laborers will be paid for a minimum of 3,000 hours per month for the next three month. (LO4)The direct labor budget starts with the units to be produced from the production budget. (LO4)

The production for each month and the quarter is multiplied by one tenth of an hour to determine the labor hours required. (LO4)

The labor hours required is compared to the guaranteed of labor hours. The labor hours to be paid is the greater of the two for each month. The labor hours to be paid for the quarter is the sum of the labor hours paid for the three months. (LO4)

The labor hours paid is multiplied by the $8 wage rate to determine the total direct labor cost. (LO4)The manufacturing-overhead budget shows the cost of overhead expected to be incurred in the production process during the budget period. Breakers manufacturing overhead budget lists the expected cost of each overhead item by month. At the bottom of the schedule, the total budgeted overhead for each month is shown. (LO4)

Management at Breakers has projected the variable selling and administrative expenses to by 50 cents per unit sold. The fixed selling and administrative costs are projected to be $70,000 per month. $10,000 of the fixed expenses is for depreciation, which does not require a cash outflow. This information will be important when the cash disbursements budget is prepared. (LO4)Once again, we start with the units sales for each month and the quarter from the sales budget. (LO4)

The sales for each month and the quarter are multiplied by the variable selling and administrative cost rate of 50 cents to determine the variable S&A costs. This is added to the fixed S&A costs of $70,000 for each month to arrive at the total S&A expenses for each month. Dont forget that the fixed S&A expenses for the quarter is the sum of fixed S&A expenses for the three months. (LO4)

The noncash expenses are deducted from the total expenses to determine the amount of cash disbursements required for each month and the quarter for selling and administrative expenses. (LO4)All sales at Breakers are on account. The company has experienced the following collection pattern: 70% collected in the month of the sale, 25% is collected in the month following the sale, 5% becomes uncollectible. The accounts receivable balance at the end of March is $30,000 and is expected to be collected in full in April. (LO4)During April, the remained of Marchs sales will be collected, which is the $30,000 accounts receivable balance on March 31. 70% of Aprils sales are also expected to be collected in April. Therefore, the total collections expected in April is $170,000. (LO4)

Mays collections will be 25% of Aprils sales and 70% of Mays sales. Junes collections will be 25% of Mays sales and 70% of Junes sales. The collections for the quarter is the sum of the collections for the three months. (LO4)Breakers pays 40 cents per pound for its materials. The company pays for half of its materials purchases in the month of the purchase and the remaining half is paid for in the following month. There are no discounts available to Breakers. The balance in accounts payable is $12,000 at the end of March. (LO4)The purchases for each month is multiplied by 40 cents to determine the cost of materials purchased for the month. This cost is then multiplied by 50%. 50% of Aprils materials purchases will be paid for in April, the remaining 50% will be paid in May. This pattern is followed in May and June to determine the cash disbursements for materials for each month. (LO4)

The cash disbursements for each month are added together to determine the cash disbursements for the quarter. (LO4)Breakers will also make cash disbursements for payments on an open line of credit, loans, a cash dividend, and equipment purchases. All borrowings and repayments occur on the last day of each month. (LO4)The cash budget is a combination of the cash receipts budget, the cash disbursements for materials budget and other cash disbursements required, such as for direct materials, overhead, etc. The cash budget starts with the beginning cash balance for April. This is also the beginning cash balance for the quarter. The cash collections for the month are found on the cash receipts budget and added to the beginning cash balance to arrive at the total cash available. (LO4)

The cash outflow for materials is found on the cash disbursements budget. (LO4)

The cash outflow for wages can be found on the direct labor budget. (LO4)

Cash outflow requirements for manufacturing overhead can be found on the overhead budget. (LO4)

Cash outflow for S&A costs can be found on the selling and administrative expense budget. (LO4)

There are no equipment purchases made in April, but there are dividends paid. The disbursements are totalled and them subtracted from the total cash available for the month. In April, there is a cash deficit. (LO4)Cash collections and disbursements are determined in the same manner for the month of May. Although there is not a cash deficit at the end of May, the $16,200 available is still below the $30,000 minimum balance requirement by $13,800. (LO4)Junes collections and disbursements budget follows the same format. There will be enough cash at the end of June to repay the amounts borrowed in April and May plus the 12% interest. (LO4)The beginning cash balance for the quarter is Aprils beginning cash balance. The cash collections for the quarter are added to determine the total cash available for the quarter. Each items cash disbursements are totalled for the quarter and then added together to determined the total cash disbursements for the quarter. The disbursements for the quarter are then deducted from the collections for the quarter. There is a $37,200 cash surplus for the quarter. (LO4)No lets discuss the financing and repayment needs.

Because there is a cash deficit in April, Breakers must borrow $35,000 to maintain the $30,000 minimum balance required. The ending cash balance for April becomes the beginning cash balance for May. (LO4)

Cash collections and disbursements are determined in the same manner for the month of May. Although there is not a cash deficit at the end of May, the $16,200 available is still below the $30,000 minimum balance requirement by $13,800. (LO4)Therefo re, Breakers must borrow an additional $13,800 at the end of May to have a $30,000 cash balance for the beginning of June. (LO4)

The $35,000 borrowed at the end of April requires a $700 interest payment and the $13,800 borrowed at the end of May requires an interest payment of $138. The total to be repaid for principle and interest is $49,638. The ending cash balance for June is also the ending cash balance for the quarter. (LO4)

The borrowings for the quarter is the sum of the borrowings in April and May. The repayments and interest for the quarter occurred in June. The ending cash balance for the quarter is the ending cash balance for June since the end of June is also the end of the quarter. (LO4)The cost of goods manufactured schedule is prepared from the direct materials budget, the direct labor budget and the overhead budget. The ending work-in-process inventory amounts are estimates provided by management. The amounts for direct materials are in dollars, not units. The direct materials beginning inventory, purchases and ending inventory amounts were taken from the direct materials budget. These amounts were multiplied by the cost of 40 cents per pound to arrive at the dollar amounts. (LO4)The cost of goods sold schedule starts where the cost of goods manufactured left off. The cost of goods manufactured at the beginning of April can be divided by the units manufactured, 26,000, to arrive at a unit cost of $4.60. The 4,000 units in finished goods inventory at the beginning of April is multiplied by the unit cost to determine the beginning inventory cost. The ending inventory for each month is also multiplied by $4.60 to determine the cost of the ending inventory. Remember, the ending inventory for one month becomes the beginning inventory for the following month. The beginning inventory for the quarter is the same as the beginning inventory for April and the ending inventory for the quarter is the same as the ending inventory for June. (LO4)Now that the cost of goods manufactured and cost of goods sold schedules are complete, the budgeted income statement can be prepared. (LO4)

A budgeted income statement for the quarter ending June 30 can now be prepared for Breakers. Revenue is taken from the sales budget. Cost of goods sold is taken from the cost of goods sold schedule. Gross margin is revenue less cost of goods sold. The operating expenses is taken from the selling and administrative expense budget and the cash budget. Net income is gross margin less total operating expenses. (LO4)The information for the budgeted statement of cash flows can be taken from the cash budget. (LO4)Account balances for property, plant and equipment and stockholders equity accounts are needed before preparing the budgeted balance sheet. (LO4)The budgeted balance sheet is prepared for the date June 30. Cash is taken from the cash budget or the budgeted statement of cash flows. Accounts receivable is 25% of June sales. (Recall the collections pattern from the cash collections schedule.) The raw materials, work-in-process and finished goods inventory amounts can be taken from the cost of goods manufactured and costs of goods sold schedules. The amount for equipment can be taken from the cash disbursements budget or the budgeted statement of cash flows. (LO4)

The accounts payable balance is 50% of Junes purchases for direct materials. (Recall the cash disbursements pattern for direct materials.) The ending retained balance is the beginning balance plus net income less dividends paid. (LO4)Managers must make assumptions and predictions in preparing budgets because organizations operate in a world of uncertainty. One way of coping with that uncertainty is to supplement the budgeting process with a financial planning model. A financial planning model is a set of mathematical relationships that express the interactions among the various operational, financial, and environmental events that determine the overall results of an organizations activities. A financial planning model is a mathematical expression of all the relationships expressed in a master budget flow chart. In a fully developed financial planning model, all of the key estimates and assumptions are expressed as general mathematical relationships. Then the model is run on a computer many times to determine the impact of different combinations of these unknown variables. What if questions can be answered about such unknown variables as inflation, interest rates, the value of the dollar, demand, competitors actions, union demands in forthcoming wage negotiations, and a host of other factors. The widespread availability of personal computers and electronic-spreadsheet software has made financial planning models a more common management tool. (LO5)

In small organizations, the procedures used to gather information and construct a master budget are usually informal. In contrast, larger organizations use a formal process to collect data and prepare the master budget. Such organizations usually designate a budget director or chief budget officer, which is often the controller. A budget committee, consisting of key senior executives, often is appointed to advise the budget director during the preparation of the budget. This committee is responsible for policy matters relating to the budget and coordinating the preparation of the budget. The authority to give final approval to the master budget usually belongs to the board of directors. By exercising its authority to make changes in the budget and grant final approval, the board of directors can have considerable influence on the overall direction the organization takes.

E-budgeting is an increasingly popular, Internet-based budgeting tool that can help streamline and speed up an organizations budgeting process. The e in e-budgeting stands for both electronic and enterprisewide; employees throughout an organization, at all levels and around the globe, can submit and retrieve budget information electronically via the Internet. Managers in organizations using e-budgeting have found that it greatly streamlines the entire budgeting process. In the past, these organizations have compiled their master budgets on hundreds of spreadsheets, which had to be collected and integrated by the corporate controllers office. (LO6)

Firms with international operations face a variety of additional challenges in preparing their budgets. First, a multinational firms budget must reflect the translation of foreign currencies into U.S. dollars. Since almost all the worlds currencies fluctuate in their values relative to the dollar, this makes budgeting for those translations difficult. Although multinationals have sophisticated financial ways of hedging against such currency fluctuations, the budgeting task is still more challenging. Second, it is difficult to prepare budgets when inflation is high or unpredictable. While the United States has experienced periods of high inflation, some foreign countries have experienced hyperinflation, sometimes with annual inflation rates well over 100 percent. Predicting such high inflation rates is difficult and further complicates a multinationals budgeting process. Finally, the economies of all countries fluctuate in terms of consumer demand, availability of skilled labor, laws affecting commerce, and so forth. Companies with offshore operations face the task of anticipating such changing conditions in their budgeting processes. (LO6)

A relatively recent focus of the budgeting process is to plan for all of the costs that will be incurred throughout a products life cycle, before a commitment is made to the product. Product life-cycle costs encompass the following five phases in a products life cycle: Product planning and concept design. Preliminary design. Detailed design and testing. Production. Distribution and customer service.In order to justify a products introduction, the sales revenues it will generate over its life must be sufficient to cover all of these costs. Thus, planning these life-cycle costs is a crucial step in making a decision about the introduction of a new product. (LO7)

When a supervisor provides a departmental cost projection for budgetary purposes, there is an incentive to overestimate costs. When the actual cost incurred in the department proves to be less than the inflated cost projection, the supervisor appears to have managed in a cost-effective way. At least that is the perception of many managers, and, in the behavioral area, perceptions are what count most. These illustrations are examples of padding the budget. Budget padding means underestimating revenue or overestimating costs. The difference between the revenue or cost projection that a person provides and a realistic estimate of the revenue or cost is called budgetary slack. (LO8)Most people will perform better and make greater attempts to achieve a goal if they have been consulted in setting the goal. The idea of participative budgeting is to involve employees throughout an organization in the budgetary process. Such participation can give employees the feeling that this is our budget, rather than the all-too-common feeling that this is the budget you imposed on us. While participative budgeting can be very effective, it also can have shortcomings. Too much participation and discussion can lead to uncertainty and delay. Also, when those involved in the budgeting process disagree in significant and irreconcilable ways, the process of participation can accentuate those differences. Finally, the problem of budget padding can be severe unless incentives for accurate projections are provided. (LO8)