budgeting. advantages of budgeting advantages communicate plans think about and plan for the future...

Budgeting

Advantages of Budgeting

Advantages

Communicateplans

Think about andplan for the future

Allocateresources

Uncover potentialbottlenecks

Coordinateactivities

Define goalsand objectives

Budget Planning and Control

• Planning -- involves developing objectives and preparing various budgets to achieve these objectives.

• Control Control -- involves the steps taken by management that attempt to ensure the objectives are attained.

Choosing the Budget Period

Operating BudgetOperating Budget

2011 2012 2013 2014

The annual operating budget may be divided into quarterly

or monthly budgets.

The Basic Framework of Budgeting

DetailBudget

DetailBudget

DetailBudget

MasterBudget

Summary ofa company’s

plans.

Sales

Pu

rchases

SG

&A

The Master Budget-Manufacturer

SalesBudget

Selling andAdministrative

Budget


DirectMaterialsBudget

EndingInventoryBudget

ProductionBudget


Budget

DirectLabor

Budget

ManufacturingOverhead

Budget

SalesBudget




ProductionBudget


Budget

DirectLabor

Budget


Budget

CashBudget

SalesBudget

Budgeted Financial Statements

The Master Budget-Merchandiser

SalesBudget


Budget




PurchasesBudget


Budget


Budget

SalesBudget




PurchasesBudget


Budget

DirectLabor

Budget

CashBudget

SalesBudget

Budgeted Financial Statements

The Budgeted Income Statement

Cash Budget

BudgetedIncome

Statement

Complete

d

After we complete the cash budget, After we complete the cash budget, we can prepare the budgeted income we can prepare the budgeted income

statement.statement.

And the Budgeted Balance Sheetand Cash Flow Statement

Cashpaymentsfor S & A

Cashpayments

for inventory

Inventorypurchases

budget

Incomestatement

S & Aexpensebudget

Balancesheet

Cashreceipts

Salesbudget

Cashbudget

Statement ofcash flows

Cash Receiptsand Payments

Schedules

OperatingBudgets

Pro formaFinancial

StatementsStartStart

The Sales Budget

Detailed schedule showing expected Detailed schedule showing expected sales for the coming periods expressed sales for the coming periods expressed

in units and dollars.in units and dollars.

Budgeting ExampleRoyal Company is preparing budgets for the Royal Company is preparing budgets for the

quarter ending June 30.quarter ending June 30.Budgeted sales for the next five months are:Budgeted sales for the next five months are:

April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units.15,000 units.

The selling price is $10 per unit.The selling price is $10 per unit.

Royal Company is preparing budgets for the Royal Company is preparing budgets for the quarter ending June 30.quarter ending June 30.

Budgeted sales for the next five months are:Budgeted sales for the next five months are: April April 20,000 units20,000 units May May 50,000 units50,000 units June June 30,000 units30,000 units July July 25,000 units25,000 units August August 15,000 units.15,000 units.

The selling price is $10 per unit.The selling price is $10 per unit.

The Sales Budget

April May June QuarterBudgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unitTotal sales

The Sales Budget

April May June QuarterBudgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unit 10$ 10$ 10$ 10$ Total sales 200,000$ 500,000$ 300,000$ 1,000,000$

Expected Cash Collections• All sales are on account.All sales are on account.

• Royal’s collection pattern is:Royal’s collection pattern is: 70% collected in the month of sale,70% collected in the month of sale, 25% collected in the month following sale,25% collected in the month following sale, 5% is uncollectible.5% is uncollectible.

• The March 31 accounts receivable balance of The March 31 accounts receivable balance of $30,000 will be collected in full.$30,000 will be collected in full.

• All sales are on account.All sales are on account.

• Royal’s collection pattern is:Royal’s collection pattern is: 70% collected in the month of sale,70% collected in the month of sale, 25% collected in the month following sale,25% collected in the month following sale, 5% is uncollectible.5% is uncollectible.

• The March 31 accounts receivable balance of The March 31 accounts receivable balance of $30,000 will be collected in full.$30,000 will be collected in full.

Expected Cash Collections


From the Sales Budget for April.From the Sales Budget for April.From the Sales Budget for April.From the Sales Budget for April.


From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.From the Sales Budget for May.

The Production Budget

ProductionProductionBudgetBudget

Sales Sales BudgetBudget

andandExpectedExpected

CashCashCollectionsCollections

Complete

d

Production must be adequate to meet budgetedProduction must be adequate to meet budgetedsales and provide for sufficient ending inventory.sales and provide for sufficient ending inventory.

The Direct Materials BudgetThe Direct Labor Budget

The Overhead Budget

Inventory Purchases Budget The total amount of inventory needed for each

month is equal to the amount of the cost of budgeted sales plus the desired ending

inventory.

7-26

Inventory Purchases BudgetHH’s policy is that ending inventory should be HH’s policy is that ending inventory should be equal to 25% of next month’s projected cost of equal to 25% of next month’s projected cost of goods sold. At HH, cost of goods sold normally goods sold. At HH, cost of goods sold normally

equal 70% of sales.equal 70% of sales.

Suppliers require HH to pay 60% of inventory Suppliers require HH to pay 60% of inventory purchases in the month goods are purchased purchases in the month goods are purchased and the remaining 40% in the month after the and the remaining 40% in the month after the

purchase.purchase.

Let’s prepare the inventory purchases budget Let’s prepare the inventory purchases budget and the schedule of cash payments for and the schedule of cash payments for

inventory purchases.inventory purchases.

January’s cost of goods sold is budgeted at January’s cost of goods sold is budgeted at $140,000.$140,000.

7-27

Sales BudgetExhibit 7.2Sales Budget

7-28

$145,600 × 40% = $58,240

$145,600 × 40% = $58,240

$145,600 × 60% = $87,360$145,600 × 60% = $87,360

Selling and Administrative Expense Budget

The details of the Selling and Administrative (S&A) Budget are shown on the next screen. It

is important to note that sales commission (based on 2% of sales) is paid in the month following the sale, while supplies expense

(based on 1% of sales) is paid in the month of the sale. The utility expense is paid in the

month following the usage of the electricity, gas, and water.

The details of the Selling and Administrative (S&A) Budget are shown on the next screen. It

is important to note that sales commission (based on 2% of sales) is paid in the month following the sale, while supplies expense

(based on 1% of sales) is paid in the month of the sale. The utility expense is paid in the

month following the usage of the electricity, gas, and water.

The Cash BudgetThe cash budget is divided into The cash budget is divided into fourfour sections: sections:1.1. Cash receipts listing all cash inflows excluding borrowingCash receipts listing all cash inflows excluding borrowing

2.2. Cash disbursements listing all payments excluding repayments of principal Cash disbursements listing all payments excluding repayments of principal and interestand interest

3.3. Cash excess or deficiencyCash excess or deficiency

4.4. The financing section listing all borrowings, repayments and interestThe financing section listing all borrowings, repayments and interest

The cash budget is divided into The cash budget is divided into fourfour sections: sections:1.1. Cash receipts listing all cash inflows excluding borrowingCash receipts listing all cash inflows excluding borrowing

2.2. Cash disbursements listing all payments excluding repayments of principal Cash disbursements listing all payments excluding repayments of principal and interestand interest

3.3. Cash excess or deficiencyCash excess or deficiency

4.4. The financing section listing all borrowings, repayments and interestThe financing section listing all borrowings, repayments and interest

Cash BudgetHH plans to purchase, for cash, store fixtures HH plans to purchase, for cash, store fixtures

with a cost of $130,000 in October. HH with a cost of $130,000 in October. HH borrows or repays principal and interest on the borrows or repays principal and interest on the last day of each month. Any money borrowed last day of each month. Any money borrowed from the bank bears interest at an annual rate from the bank bears interest at an annual rate of 12% (1% per month). The management at of 12% (1% per month). The management at

HH wants to maintain a cash balance of at HH wants to maintain a cash balance of at least $10,000 at the end of every month. least $10,000 at the end of every month. Borrowings must be in $1000 increments.Borrowings must be in $1000 increments.

HH plans to purchase, for cash, store fixtures HH plans to purchase, for cash, store fixtures with a cost of $130,000 in October. HH with a cost of $130,000 in October. HH

borrows or repays principal and interest on the borrows or repays principal and interest on the last day of each month. Any money borrowed last day of each month. Any money borrowed from the bank bears interest at an annual rate from the bank bears interest at an annual rate of 12% (1% per month). The management at of 12% (1% per month). The management at

HH wants to maintain a cash balance of at HH wants to maintain a cash balance of at least $10,000 at the end of every month. least $10,000 at the end of every month. Borrowings must be in $1000 increments.Borrowings must be in $1000 increments.

Pro Forma Income Statement

End of Chapter 7

budgeting. advantages of budgeting advantages communicate plans think about and plan for the future...

Documents

cash budget

sales sales budget50

expected sales

desired ending inventory10

labor hours required1

labor hours paid1

direct labor hours0

desired ending inventory23