EMBA Presentation
October 20, 2013
BUDGETING
Overview
 Budgets Within the Architecture of the
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Organization
Types of Budgets
Budget Preparation Theories
Example of Preparing Sales, Production and
Raw Materials Budget
Example of Cash Flow Forecast
Budgeting and Organizational
Architecture
 Assigns Decision Rights – Gives manager the
right to spend or use organizational resources
 Measures Performance – Actual results to
forecast
 Rewards Performance – Basis to incentive
compensation and recognition for
accomplishing goals
Types of Budgets
 Strategic Plan
 Long Term Budget
 Operating Budget
Theory of Budget Preparation
 Participation
 Bottom-up, Top-down has been found to be a
very successful approach
 In a survey of 219 publicly traded firms, 79%
indicated lower-level managers were
significantly involved in the budget process
 75% stated budgeting was a managerial, not
accounting, function
Budget Preparation Theories
 Budget Ratcheting
 Uses past historical data for next year's budget
 Usually raises targets from prior year
 May cause for lower output this year to avoid higher
targets next year
 Line Item Budgets
 Reduce agency problems
 May restrict good management actions
Steps In Preparing the
Operating Budget
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Develop Sales Forecasts
Convert Sales Forecast to Production Budget
Prepare Raw Material Budget in Units
Prepare Raw Material Budget in Dollars
Prepare Selling, General and Administrative Budgets
Prepare Income Statement
Convert to Cash Forecast
Prepare Pro-forma Balance Sheets
The First Step to
Proper Planning of Production
PREPARATION OF THE SALES
BUDGET
Getting to the Sales Numbers
 Input from field sales personnel
 Get the numbers right!!!!
 Using the budget as a sales management tool
Example of Salesperson’s
Input
Customer Projected Sales Probability
Adjusted Sales
A
$1,000,000
.50
$500,000
B
$250,000
1.00
$250,000
C
$500,000
.75
$375,000
$1,000,000
.80
$800,000
Misc.
Sales Projections for
Production Budget
 January
 February
 March
 April
 May
5,000 Units
6,000 Units
8,000 Units
7,000 Units
6,000 Units
Production Assumptions
 Require 30% of next month’s sales on hand at
beginning of month
 Project to have 1,000 units on hand at
beginning of January
Calculation of Production
Required
Production Budget
Jan - Apr 2013
Jan
Feb
Projected Sales in Units
5,000
6,000
8,000
7,000
Projected Ending Inventory
1,800
6,800
2,400
8,400
2,100
10,100
1,800
8,800
(1,000)
(1,800)
(2,400)
(2,100)
5,800
6,600
7,700
6,700
Less Beginning Inventory
Required Production
Mar
Apr
May
6,000
Additional Assumptions
 10% of next month’s raw materials must be on hand
at beginning of month
 Project 5,000 units on hand at begining
 Production process uses 5 units of raw product for
each unit of finished product
 Raw product costs $10.00 per unit
 Direct labor cost is $15.00/hour and it takes one hour
to make each finished product
 Overhead is applied at $4.00 per DLH
Calculation of
Raw Materials Budget
Raw Materials Budget
Jan - Apr 2013
Jan
Required Production
Feb
Mar
Apr
5,800
6,600
7,700
6,700
29,000
33,000
38,500
33,500
3,300
3,850
3,350
32,300
36,850
41,850
Less Beginning Inventory
(5,000)
(3,300)
(3,850)
Required Purchases
27,300
33,550
38,000
Raw Materials
Projected Ending Inventory
Purchases in Dollars
$ 273,000 $ 335,500 $ 380,000
Cost of Goods Manufactured
Schedule
Cost of Goods Manufactured Schedule
Jan - Mar
Jan
Units Produced
5,800
Feb
6,600
Mar
7,700
Cost of Units Produced:
Raw Material (5800 x 5 x $10)
$ 290,000 $ 330,000 $ 385,000
Direct Labor (5800 x 1 x $15.00)
87,000
99,000
115,500
Overhead (5800 x1 x $4.00)
23,200
26,400
30,800
Total Cost
$ 400,200 $ 455,400 $ 531,300
Per Unit Cost
$
69.00 $
69.00 $
69.00
PREPARING THE CASH FORECAST
Must Be Done Prior to Preparation
of Pro-forma Balance Sheets
Harry's Habadashery
Projected Income Statements
Three Months Ending August 31, 2013
Jun
Jul
Aug
Sales
Cash Sales
On Account Sales
Total Sales
Expenses:
Cost of Goods Sold
Salaries/Wages
Rent
Utilities
Total Expenses
Net Income (Loss)
$
5,000 $ 10,000 $ 12,000
100,000
125,000
130,000
105,000
135,000
142,000
66,000
30,000
10,000
2,000
81,000
35,000
10,000
2,500
85,200
42,000
10,000
2,200
108,000
128,500
139,400
$ (3,000) $
6,500 $
2,600
Assumptions for Cash Flow
Calculation
 Company purchased $72,600 of
inventory in May, $89,100 in June, and
$93,720 in June
 Cash balance was $10,000 on June 1
 Salaries are paid on 7th and 22nd of
each month
 Salaries for May totaled $30,000
Additional Assumptions
 Rent is paid on first day of the month
 Utilities are paid on the 10th day of month
following; May utilities totaled $3,000
 All inventory is paid on the 10th day following
month of purchase
 Company has line of credit at Old Boise National
Bank in amount of $100,000
 Company always wants $10,000 in cash balance
at end of each month
Cash Inflow Assumptions
 April sales on account were $80,000
 May sales on account were $90,000
 Accounts Receivable are collected as follows:
 10% in month of sale
 75% in first month following
 10% in second month following
Cash Flow Forecast
Jun - Aug 2013
Jun
Cash Inflows:
Cash Sales
Sales on Account
$
Totals
5,000
85,500
Jul
$
10,000
96,500
Aug
$
12,000
116,750
90,500
106,500
128,750
10,000
3,000
30,000
72,600
10,000
2,000
32,500
89,100
10,000
2,500
38,500
93,720
115,600
133,600
144,750
Cash Over (Short)
Add Beginning Balance
(25,100)
10,000
(27,100)
10,900
(16,000)
10,800
Borrowings
(15,100)
26,000
(16,200)
27,000
(5,200)
16,000
Cash Outflows:
Rent
Utilities
Salaries and wages
Inventory
Totals
Ending Balance
$
10,900
$
10,800
$
10,800
Logical Flow of Master Budget
Procurement
Budget
Production
Budget
Sales
Budget
Ending
Inventory
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Cost of Goods
Manufactured
Budget
SG&A
Budget
Budgeted
Income
Statement
Factory
Overhead
Budget
Capital
Investment
Budget
Budgeted
Cash Flows
Master Budget
Budgeted
Balance
Sheet
Copyright by Frank Ilett, 2012