Chapter 13A
Budgeting
Budgeting
A budget is a financial plan for a
business.
Objectives of budgeting:
• Establishing specific goals (Planning)
• Executing plans to achieve the goals
(Directing)
• Periodically comparing actual results with
the goals (Controlling)
Human Behavior
and Budgeting
 Importance of setting a reasonable budget:
• Budgets set too tightly discourage employees
when expectations are too high.
• Budgets set too loosely lead to budgetary
slack – called “padding” the budget.
• Goal conflict occurs when the employees’ or
managers’ self-interest differs from the
company’s goals or objectives.
Choosing the Budget Period
Operating Budget
2011
2012
The annual operating budget
may be divided into quarterly
or monthly budgets.
2013
2014
A continuous budget is a 12month budget that rolls forward
one month as the current month
is completed.
Developing Budget Estimates
Zero-based budgeting requires
managers to estimate sales, production,
and other data as though operations are
being started for the first time.
More common methods involve revising
last year’s budget.
Master Budget
A master budget is a series of budgets
that are linked together.
Major parts of a master budget include:
Relationship of the Various Income Statement Budgets
Sales Budget
Production Budget
Total units
to be
sold
+
Desired
ending =
inventory
Total
units
needed
Total
units
needed
Expected
- beginning
inventory
=
Units
to be
produced
Production Budget
Calculation of the Purchases Budget
Raw material
needed
+
for
production
Desired
ending =
raw
material
inventory
Units to be
Produced
(Production
Budget) * DM
needed for each
unit
Price of Raw
Materials *Units of
Raw Materials
Total
raw
material
needs
Total
raw
material
needs
-
Expected
raw
material
beginning
inventory
=
Raw
material
to be
purchased
Raw Material Requirements
Wallet:
Leather: 0.30 square yard per unit
Lining: 0.10 square yard per unit
Handbag:
Leather: 1.25 square yards per unit
Lining: 0.50 square yard per unit
Direct Materials Purchases Budget
Direct Labor Requirements
Wallet:
Cutting Dept: 0.10 hour per unit
Sewing Dept: 0.25 hour per unit
Handbag:
Cutting Dept: 0.15 hour per unit
Sewing Dept: 0.40 hour per unit
Direct Labor Cost Budget
Factory Overhead
Cost Budget
Estimated Inventories
January 1, 2009:
Finished Goods: $1,095,600
Work in Process: $214,400
December 31, 2009:
Finished Goods: $1,565,000
Work in Process: $220,000
Selling and Administrative
Expenses Budget