Chapter 22
1
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Learn why managers use budgets
Understand the components of the master
budget
Prepare an operating budget
Prepare a financial budget
Use sensitivity analysis in budgeting
Prepare performance reports for responsibility
centers and account for traceable and common
shared fixed costs
2
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
1
Learn why managers use budgets
3
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
To plan and control actions and the related
revenues and expenses
To incorporate management’s strategic and
operational plans
Planning technology upgrades
Planning capital asset replacements, improvements,
or expansions.
Compare actual results with budgeted amounts
to determine corrective actions
4
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
5
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
6
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Identifies areas where the actual results differed
from the budget
7
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
2
Understand the components of the master budget
8
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Master budget—the set of budgeted financial
statements and supporting schedules for the entire
organization
Budget includes three types of budgets:
The operating budget
The capital expenditures budget
The financial budget
Contain projected amounts, not actual amounts
9
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
10
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
The following are some of the components
included in the master budget.
a.
b.
c.
d.
e.
f.
Budgeted balance sheet
Sales budget
Capital expenditures budget
Budgeted income statement
Cash budget
Inventory, purchases, and cost of goods sold
budget
g. Budgeted statement of cash flows
List in order of preparation the items of the
master budget.
11
1. _____
2. ______
3. ______
4. ______
5. ______
6. ______
7. ______
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
3
Prepare an operating budget
12
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
First three components
Sales budget
Inventory, purchases, and cost of goods sold budget
Operating expenses
Feed into the budgeted income statement
13
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Cornerstone of master budget
Projected sales are calculated as:
Each product multiplied by expected units sold
14
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Budget determines:
Cost of goods sold for the budgeted income
statement
Ending inventory for the budgeted balance sheet
Purchases for the cash budget
Familiar equation is used
Beginning inventory + Purchases – Ending
inventory = Cost of goods sold
Rearrange equation to solve for unknowns
Purchases = Cost of goods sold + Ending
inventory – Beginning inventory
15
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
70% cost of goods sold figure uses sales budget created
earlier
Desired ending inventory is derived from company
policies
Desired ending inventory becomes beginning inventory
for16 next period (month, quarter, or year)
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Prepared after sales budget and cost of goods
sold budget
Shows estimated expenses for the period
Includes fixed and/or variable expenses
17
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
18
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Prepared after sales budget, cost of goods sold budget
and operating expense budget
21
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Grippers sells its rock-climbing shoes worldwide.
Grippers expects to sell 8,500 pairs of shoes for $180
each in January, and 3,500 pairs of shoes for $190 each
in February. All sales are cash only.
Prepare the sales budget for January and February.
22
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Review your results from S22-3. Grippers expects cost of goods sold
to average 60% of sales revenue, and the company expects to sell
4,100 pairs of shoes in March for $260 each. Grippers’ target ending
inventory is $10,000 plus 50% of the next month’s cost of goods sold.
Use this information and the sales budget prepared in S22-3 to prepare
Grippers’ inventory, purchases, and cost of goods sold budget for
January and February.
23
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
4
Prepare a financial budget
24
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Cash budget
Budgeted balance sheet
Budgeted statement of cash flows
25
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Statement of budgeted cash receipts and
payments
Details how to go from the beginning cash
balance to the desired ending balance
Four major parts:
Cash collections from customers
Cash payments for purchases
Cash payments for operating expenses
Cash payments for capital expenditures
Depends on operating budget
26
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Cash collections from customers
27
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Payments for operating expenses
Payments during the month of purchase—assume 50%
Payments following the month of purchase—assume 50%
28
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Use the operating expenses budget and payment information to
compute cash payments for operating expenses
Payment of 50% of current month’s salary and commissions
Payment of 50% of prior months salary and commissions
Payment for rent and miscellaneous expenses in the same month
29
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
30
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
31
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
32
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Most important part of the budgeting system
Getting managers and employees to accept the budget
Managers must motivate employees to accept the budget’s
goals
Do not build in slack–becomes less accurate
33
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Refer to the Grippers sales budget that you prepared in
S22-3. Now assume that Grippers’ sales are collected as
follows:
November sales totaled $400,000 and December sales
were $425,000.
50% in the month of the sale
30% in the month after the sale
18% two months after the sale
2% never collected
Prepare a schedule for the budgeted cash collections for
January and February. Round answers to the nearest
dollar.
34
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
35
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Refer to the Grippers inventory, purchases, and cost of
goods sold budget your prepared in S22-4. Assume
Grippers pays for inventory purchases 50% in the month
of purchase and 50% in the month after purchase.
Prepare a schedule for the budgeted cash payments for
purchases for January and February.
36
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Grippers has $12,500 in cash on hand on January
1. Refer to S22-5 and S22-6 for cash collections
and cash payment information. Assume Grippers
has cash payment for operating expenses including
salaries of $50,000 plus 1% of sales, all paid in the
month of sale. The company requires a minimum
cash balance of $10,000.
Prepare a cash budget for January and February.
Will Grippers need to borrow cash by the end of
February?
37
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
38
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
5
Use sensitivity analysis in budgeting
39
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Technology makes it more cost-effective for
managers to:
Conduct sensitivity analysis on their own unit’s
budget
Combine individual unit budgets to create the
companywide master budget
Master budget models the company’s planned
activities
Must support key strategies
40
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Sensitivity analysis
Spreadsheet programs used for budgeting make
sensitivity analysis cost-effective
41
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
42
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Individual operating units roll up budgets to
prepare company-wide budget
Budget management software is used
Allows management to conduct sensitivity
analysis on unit data
Managers can spend less time compiling and
summarizing data and more time analyzing it
43
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Maplehaven Sporting Goods Store has the following sales budget:
Riverbed Sporting Goods Store
Sales Budget
April - July
Cash sales, 80%
Credit sales, 20%
Total sales, 100%
April
$40,800
10,200
$51,000
May
$64,000
16,000
$80,000
June
$51,200
12,800
$64,000
July
$40,800
10,200
$51,000
April-July
Total
$246,000
Suppose June sales are expected to be $80,000 rather than $64,000.
44
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
6
Prepare performance reports for responsibility
centers and account for traceable and common
shared fixed costs
45
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
A system for evaluating the performance of each
responsibility center and its manager
Four types:
Cost center
Revenue center
Profit center
Investment center
Decentralization highlights the need for reports on
individual segments
46
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
47
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
48
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Performance reports compare budgeted and
actual amounts
Reporting at all levels
Management by exception
49
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Departments that provide services to multiple
departments or divisions for the company
Usually do not generate revenues
Similar to the shared production overhead
Nonproduction related service departments
50
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Costs directly associated with an individual product,
division, or business segment
Would disappear if the company discontinued the
product , division or segment
Assigning traceable fixed costs
51
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
52
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Traceable service costs = $30,000
Base is number of orders
53
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
$30,000 / $400,000 equals $0.075 cost per order
Apply to divisions based upon number of orders
The DVD division can further split the traceable cost
between Excel DVDs and Specialty DVDs
54
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Show the results of the segment or division for which a particular
manager is responsible
55
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
56
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.
Copyright
All rights reserved. No part of this publication may be reproduced,
stored in a retrieval system, or transmitted, in any form or by any
means, electronic, mechanical, photocopying, recording, or
otherwise, without the prior written permission of the publisher.
Printed in the United States of America.
57
Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall.