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
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