Manacc Budgeting

8/10/2019 Manacc Budgeting

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Chapter23-2

Study Objectives

1. Indicate the benefits of budgeting.

2. State the essentials of effective budgeting.

3. Identify the budgets that comprise the master

budget.4. Describe the sources for preparing the

budgeted income statement.

5. Explain the principal sections of a cash budget.

6. Indicate the applicability of budgeting innonmanufacturing companies.


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Chapter23-3

Preview of Chapter

Budgeting is critical to financial well-being

Use budgets in planning and controlling operations

Specific focus is on how budgeting is used as aplanning toolby management.


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Chapter23-4

Budgetary Planning

Budgeting

Basics

Preparing the

Operating

Budgets

Budgeting in

Non-

manufacturing

Companies

Budgeting & accounting

Benefits

Essentials of effective

budgeting

Length of budget period

Budgeting processBudgeting and human

behavior

Budgeting and long-

range planning

The master budget

Sales

Production

Direct materials

Direct labor

Manufacturing

overheadSelling and

administrative

expense

Budgeted income

statement

Merchandisers

Service

Not-for-profit

Preparing the

Financial

Budgets

Cash

Budgeted

balance sheet


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Chapter23-5

Budgeting Basics

Budget

A formal written statement of managements plansfor a specified future time period, expressed in

financial termsPrimary way to communicate agreed-uponobjectives to all parts of the company

Promotes efficiency

Control device- important basis for performanceevaluation once adopted


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Chapter23-6

Budgeting Basics Role of Accounting

Historical accounting data on revenues, costs, andexpenses help in formulating future budgets

Accountants normally responsible for presenting

managementsbudgeting goals in financial terms

The budget and its administration are, however,entirely managements responsibility


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Chapter23-7

Budgeting Basics - Benefits

Requires all levels of management toplan aheadand formalize goals on a recurring basis

Providesdefinite objectivesfor evaluating

performance at each level of responsibilityCreates anearly warning systemfor potentialproblems

LO 1: Indicate the benefits of budgeting.


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Facilitatescoordination of activitieswithin thebusiness

Results ingreater management awarenessof the

entitys overall operations and the impact ofexternal factors

Motivates personnelthroughout organization to

meet planned objectives



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A budget is

anaid to managementnot a substitutefor management.


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Chapter23-10

Which of the following is nota benefit of budgeting?

a. Management can plan ahead.

b. An early warning system is provided forpotential problems.

c. It enables disciplinary action to be taken atevery level of responsibility.

d. The coordination of activities is facilitated.

Lets Review



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Chapter23-11

Effective Budgeting

Depends on a sound organizational structurewithauthority and responsibility for all phases ofoperations clearly defined

Based on research and analysiswith realistic goals

Accepted by all levels of

management

LO 2: State the essentials of effective budgeting.


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Chapter23-12

The Budget Period

May be prepared forany period of timeMost common - one yearSupplement with monthly and quarterly budgetsDifferent budgets may cover different timeperiods

Long enoughto provide an attainable goal andminimize seasonal or cyclical fluctuations

Short enoughfor reliable estimates

Continuous twelve-month budgetDrop the month just ended and add a futuremonthKeeps management planning a full year ahead



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Chapter23-13

The Budgeting Process

Base budget goals on past performanceCollect data from organizationalunits

Begin several months before end ofcurrent year

Develop budget within theframework ofasales forecast

Shows potential industry salesShows companys expected share



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Chapter23-14

The Budgeting Process

Factors considered in Sales Forecasting: General economic conditions

Industry trends

Market research studies Anticipated advertising and promotion

Previous market share

Price changes Technological developments



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Chapter23-15

Budgeting and Human Behavior

Participative Budgeting

May inspire higher levels of performance ordiscourage additional effort

Depends on how budget developed andadministered

Invite each level of management to participate

This bottom-to-top approach is calledParticipative Budgeting



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Chapter23-16


Advantages:More accurate budget estimatesbecause lowerlevel managers have more detailed knowledge oftheir area

Tendency to perceive process as fairdue toinvolvement of lower level management

Overall goal- produce a budget considered fairand achievable by managers while still meetingcorporate goals

Risk of unreliable budgets greater when they aretop-down



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Disadvantages:Can be time consumingand costly

Can foster budgetarygaming throughbudgetary slack:

situation where managersintentionally

underestimate budgeted revenues oroverestimate budgeted expenses so thatbudget goals are easier to meet



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Chapter23-18



Flow of budget data from lower management to top levels


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Chapter23-19

Budgeting Versus Long Range Planning


Three basic differences between Budgetingand Long Range Planning:

Time period involved

Emphasis

Detail presented

Time period:

Budgeting is short-term usually one yearLong range planning - at least five years


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The essentials of effective budgeting do notinclude:

a. Top-down budgeting.

b. Management acceptance.

c. Research and analysis.

d. Sound organizational structure.

Lets Review



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Chapter23-21

The Master Budget

A set of interrelated budgets that constitutes a plan

of action for a specified time periodContains two classes of budgets:

Operating budgets:Individual budgets that result in the preparationof the budgeted income statement establishgoals for sales and production personnel

Financial budgets:The capital expenditures budget, the cash

budget, and the budgeted balance sheet focusprimarily on cash needs to fund operations andcapital expenditures

LO 3: Identify the budgets that comprise the master budget.


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Chapter23-22

The Master Budget - Components



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Chapter23-23

Operating Budgets: Sales Budget

First budget prepared

Derived from the sales forecast

Managements best estimateof sales revenuefor the budget period

Every other budget depends on the salesbudget

Prepared by multiplying

expected unit sales volume for each producttimes

anticipated unit selling price



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Chapter23-24

Operating Budgets: Sales Budget

Expected sales volume: 3,000 units in the firstquarter with 500-unit increments for eachfollowing quarter

Sales price: $60 per unit


Example Hayes Company


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Chapter23-25

Operating Budgets: Production Budget

Shows the units that must be producedto meetanticipated sales

Derived from sales budget plus the desired changein ending finished goods (ending finished goods lessthe beginning finished goods units)

Required production in units formula:

Essential to have a realistic estimate of endinginventory



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Operating Budgets: Production Budget

Hayes Co. believes it can meet future sales needs withan ending inventory of 20% of next quarters sales


ExampleHayes Company


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Chapter23-27

Operating Budgets: Direct Materials Budget

Shows both the quantity

and

cost

of directmaterials to be purchased

Derived from the direct materials units requiredfor production (from the production budget) plus

the desired change in ending direct materials units

Budgeted cost of direct materials to bepurchased = required units of direct materials Xanticipated cost per unit



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Key component in budgeting process desired ending inventory

An ending inventory of 10% of nextquarters production requirements issufficient

The manufacturing of each unit

requires 2 pounds of raw materials atan expected price of $4 per pound




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Operating Budgets: Direct Labor Budget

Shows both the quantity of hours andcost of direct labornecessary tomeet production requirements

Critical in maintaining a labor forcethat can meet expected production

Total direct labor cost formula:



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Operating Budgets: Direct Labor Budget

Direct labor hours from the production budget

Two hours of direct labor required for each unit

Anticipated hourly wage rate $10




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Chapter

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Operating Budgets: Manufacturing Overhead

Shows the expected manufacturing overhead

costs for the budget periodDistinguishes between fixedand variableoverhead costs


Example Hayes CompanyFixed cost amounts are assumed

Expected variable costs per directlabor hour:

indirect materials: $1.00indirect labor: $1.40utilities: $0.40maintenance: $0.20


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Chapter

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Operating Budgets: Manufacturing Overhead



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Operating Budgets: Selling and Administrative

Projection of anticipated operating expenses

Distinguishes between fixedand variablecosts



Fixed cost amounts are assumed

Expected variable costs per unit sold(from sales budget):

sales commissions: $3.00freight-out: $1.00


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Operating Budgets: Selling and Administrative



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A sales budget is:

a. Derived from the production budget.

b. Managements best estimate of sales revenue for

the year.c. Not the starting point for the master budget.

d. Prepared only for credit sales.

Lets Review



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Chapter

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Operating Budgets:Budgeted Income Statement

Important end-product of the operating budgetsIndicates expected profitabilityof operations

Provides a basis for evaluatingcompany performance

Prepared from the operating budgetsSales BudgetProduction Budget

Direct Materials Budget

Direct Labor Budget

Manufacturing Overhead Budget

Selling and Administrative Expense Budget

LO 4: Describe the sources for preparing the budgeted income statement.

O ti B d t


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Chapter

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To find cost of goods sold:First, determine the unit cost of one Kitchen-mate

Second, determine Cost of Goods Sold by multiplying unitssold times unit cost:

15,000 units X $44 = $660,000



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Additional estimated data for budgeted income statement:Interest Expense - $100 Income Taxes - $12,000



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Each of the following budgets is used in preparing thebudgeted income statement exceptthe:

a. Sales budget.

b. Selling and administrative budget.c. Capital expenditure budget.

d. Direct labor budget.

Lets Review



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Chapter

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Financial Budgets: Cash Budget

Shows anticipated cash flows

Often considered to be the most important outputin preparing financial budgets

Contains three sections: Cash Receipts

Cash Disbursements

Financing

Shows beginning and ending cash balances

LO 5: Explain the principal sections of a cash budget.

B d


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Chapter

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Basic Format


F l B d C h B d


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Cash Receipts SectionIncludes expected receipts from theprincipal sourcesofrevenue usually cash sales and collections on credit sales

Shows expected interest and dividends receipts as well asproceeds from planned sales of investments, plant assets,and capital stock

Cash Disbursements SectionIncludes expected cash paymentsfor direct materials andlabor, taxes, dividends, plant assets, etc.

Financing SectionShows expected borrowings and repaymentsof borrowedfunds plus interest



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Must prepare insequence

Ending cash balance ofone period is the

beginning cash balancefor the next

Data obtained fromother budgets and from

managementOften prepared for theyear on a monthly basis


Fi i l B d C h B d


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Example Hayes Company AssumptionsJanuary 1, 2008 cash balance:$38,000

Sales:collect 60% in quarter sold; 40% in next quarter;collect December 31, 2007 Accounts Receivable in Quarter 1

Expected sale of short term investments:$2,000 in Quarter 1

Direct Materials:pay 50% in quarter purchased; 50% in nextpay December 31, 2007 Accounts Payable in Quarter 1

Direct Labor:pay 100% in quarter incurred

Manufacturing Overhead and Selling/Administrative Expenses:pay (except depreciation) in quarter incurred

Expected purchase of truck: $10,000 cash in Quarter 2Estimated annual income taxes: Equal payment each quarter

Loans:Pay in earliest quarter with sufficient cash (i.e., cash on handexceeds the $15,000 minimum required balance)


Fi i l B d t C h B d t


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Usually prepare schedule of collections from customers


Fi i l B d t C h B d t


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Prepare schedule of cash payments for direct materials

Now prepare the Cash Budget based on the assumptionsand preceding schedules




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Contributes to more effective cash management

Shows managers the need for additional financingbefore actual need arises

Indicates when excess cash will be available



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Chapter

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Financial Budgets: Budgeted Balance Sheet

A projection of financialposition at the end ofthe budgeted period

Developed from thebudgeted balance sheetfor the preceding yearand the budgets for the

current year




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Chapter

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Additional data:



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Chapter

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Expected direct materials purchases in Read Companyare $70,000 in the first quarter and $90,000 in thesecond quarter. Forty percent of the purchases arepaid in cash as incurred, and the balance is paid in thefollowing quarter. The budgeted cash payments for

purchases in the second quarter are:

a. $96,000

b. $90,000

c. $78,000

d. $72,000

Lets Review


Budgeting: Merchandisers


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Chapter

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Sales Budget: starting point and key factor indeveloping the master budget

Use apurchases budgetinstead of a productionbudget

Doesnotuse the manufacturing budgets (directmaterials, direct labor, manufacturing overhead)

To determine budgeted merchandise purchases:

LO 6: Indicate the applicability of budgeting innon-manufacturing companies.



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Example Lima CompanyBudgeted sales for July $300,000 and for August $320,000

Cost of Goods Sold: 70% of sales

Desired ending inventory: 30% of next months Cost ofGoods Sold

LO 6: Indicate the appliability of budgeting in

nonmanufacturing companies.

B d ti S i C i


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Chapter

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Budgeting: Service Companies

Critical factor in budgeting is coordinatingprofessional staff needs with anticipated services

Problems if overstaffed:Disproportionately high labor costs

Lower profits due to additional salariesIncreased staff turnover due to lack ofchallenging work

Problems if understaffed:

Lost revenues because existing and future clientneeds for services cannot be metLoss of professional staff due to excessive workloads

LO 6: Indicate the applicability of budgeting innon-manufacturing companies.

B d ti N t f P fit C i


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Chapter

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Budgeting: Not-for-Profit Companies

Just as important as for profit-oriented company

However, budget process differs significantly fromthat of a profit-oriented company

Budget on the basis of cash flows(expenditures andreceipts), not on a revenue and expense basis

The starting point is usuallyexpenditures, not receipts

Managements task is to findreceipts needed to support

planned expendituresBudget must be strictly followed,overspending often illegal

LO 6: Indicate the applicability of budgeting in

non-manufacturing companies.


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Chapter

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The budget for a merchandiser differs from a budgetfor a manufacturer because:

a. A merchandise purchases budget replaces theproduction budget.

b. The manufacturing budgets are not applicable.

c. None of the above.

d. Both (a) and (b) above

Lets Review

LO 6: Indicate the applicability of budgeting in

non-manufacturing companies.

Ch R B f E 23 8


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Chapter

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Chapter Review - Brief Exercise 23-8

Perine Company has completed all of its operatingbudgets. The sales budget for the year shows 50,000units and total sales of $2,000,000. The total unitcost of making one unit of sales is $22. Selling and

administrative expenses are expected to be$300,000. Income taxes are estimated to be$150,000.

Prepare a budgeted income statement for the year

ending December 31, 2008.

Chapter Review Brief Exercise 23 8


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Chapter

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Chapter Review - Brief Exercise 23-8

Perine Company

Budgeted Income StatementFor Year Ending December 31, 2008

Sales $2,000,000

Cost of Goods Sold (50,000 units @ $22) 1,100,000

Gross Profit 900,000Selling & Administrative Expenses 300,000

Income from Operations 600,000

Income Tax Expense 150,000

Net Income $450,000


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Ch t

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Manacc Budgeting

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