CHAPTER
5
Operational Budgets
Learning Objective 1
Describe the
importance of
personal
budgeting.
What are the Purposes of
Budgeting ?
OVERALL PURPOSE:
Define Disposable Income
What are the Characteristics of Good
Personal Budgeting?
Example: Monthly Budget
Gross salary. . . . . . . . . . . . . . .
Withholdings:
Federal income taxes . . . . . . . $250
State income taxes . . . . . . . . .
150
Other withholdings. . . . . . . . . . 150
Net take-home pay . . . . . . .
Fixed expenses:
House mortgage expense. . . . $450
Car payment expense. . . . . . .
250
Insurance expense . . . . . . . . .
100
Disposable income. . . . . . . .
Utilities expense . . . . . . . . . . . . $ 65
Food expense. . . . . . . . . . . . . .
200
Miscellaneous expenses. . . . . . 350
Net surplus. . . . . . . . . . . . . .
$2,000
(550)
$1,450
(800)
$ 650
(615)
$ 35
Learning Objective 2
Identify the purposes
of budgeting for
organizations.
Describe Two Types of Planning
List Reasons for Budgeting
Learning Objective 3
Explain the
budgeting process
and its behavioral
implications in
organizations.
Budgeting Process
Who or what is the budget committee?
What are two issues of the budgeting
process?
List Behavioral Considerations
1.
2.
3.
Describe the Top-Down Approach
to Budgeting
Top
Management
Manager
Manager
Manager
Describe the Bottom-Up Approach
to Budgeting
Top
Management
Manager
Manager
Manager
Learning Objective 4
Construct an operating
budget and it components
for manufacturing firms.
Master Budget—Manufacturing
Planning Process
Capital Project
Plans
Strategic Goals
and Plans
Short-Term
Objectives
Operating Budget
Production
Budget
Direct
Materials
Budget*
Direct
Labor
Budget*
Budgeted
Product Sheet
Financial Budgeting
* * * *
Capital Expenditures
Budget
Cash Budget
Sales Budget*
Manufacturing
Overhead
Budget*
Selling/Admin.
Expense
Budget*
* These budgets all flow into
the cash budget below.
Budgeted
Income Statement
Budgeted
Balance Sheet
Budgeted
Cash Flows
Master Budget—Manufacturing
Define each budget.
Sales Budget
Example: Sales Budget
Selling price per bike . . . . . . $
Expected sales (units). . . . .
100
x 100
Expected revenues . . . . . . . $10,000
Master Budget—Manufacturing
Define each budget.
Sales Budget
Production
Budget
Example: Production Budget
Expected sales. . . . . . . . . . . . . . .
100
Add desired ending inventory. . . . 105
Total number of bikes needed . .
205
Less beginning inventory . . . . . . .
70
Bikes to be produced . . . . . . . . . .
135
Note: Ending inventory is estimated at 80%
of the next period’s sales.
Master Budget—Manufacturing
Define each budget.
Sales Budget
Production
Budget
Direct Materials
Budget
Example: Direct Materials Budget
Direct materials usage:
Direct
Materials
Metal
Plastic
AmountUnit
Total
Required
Cost
Cost
2,700 lbs.
$2.00/ft. $5,400
405 lbs.
$1.00/ft.
$ 405
Example: Direct Materials Budget
Direct materials purchases:
Desired ending inventory. . . . .
Needed for production. . . . . . .
Total needed . . . . . . . . . . . . . .
Less beginning inventory. . . . .
Materials to be purchased . . . .
Unit cost. . . . . . . . . . . . . . . . . .
Total cost . . . . . . . . . . . . . . . .
Metal Plastic
2,100
315
2,700
405
4,800
720
2,800
210
2,000
510
x $2
x $1
$4,000
$ 510
Master Budget—Manufacturing
Define each budget.
Sales Budget
Production
Budget
Direct Materials
Budget
Direct Labor
Budget
Example: Direct Labor Budget
Number of bikes to produce. . . .
Direct labor hours per bike. . . . .x
Total hours required. . . . . . . . .
Rate per hour. . . . . . . . . . . . . . . .x
135
3
405
$5
Total direct labor cost. . . . . . . . $2,025
Master Budget—Manufacturing
Define each budget.
Sales Budget
Production
Budget
Direct Materials
Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget
Example: Manufacturing
Overhead Budget
Variable costs:
Indirect materials costs. . . . . . . . .
Indirect labor costs . . . . . . . . . . . .
Total variable costs. . . . . . . . . . .
$ 220
600
$ 820
Fixed costs:
Insurance expense. . . . . . . . . . . .
Depreciation expense. . . . . . . . . .
Total fixed costs . . . . . . . . . . . . .
Total manufacturing overhead . . .
$
200
600
$ 800
$1,620
Master Budget—Manufacturing
Define each budget.
Sales Budget
Direct Materials
Budget
Production
Budget
Selling and
Administrative
Expense Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget
Budgeted
Product
Cost Sheet
Budgeted Product Cost Sheet
Input
Required
Cost
Inputs
Metal
$2.00/ft.
20
Plastic
$1.00/ft.
3
Direct labor
$5.00/hr.
3
Fixed OH
$1.98/hr.
3
Variable OH
$2.02/hr.
3
Total variable cost per bike . . . . .
Total fixed MOH
$1,620
Divide by Production Volume
135 bikes
Fixed MOH cost allocated per bike
Total
Cost
per Bike
$40.00
3.00
15.00
5.94
6.06
$70.00
12.00
$82.00
Master Budget—Manufacturing
Define each budget.
Sales Budget
Direct Materials
Budget
Production
Budget
Selling and
Administrative
Expense Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget
Example: Selling and
Administrative Budget
Variable expenses:
Sales commissions . . . . . . . . . . . . . . $
Total variable expenses. . . . . . . . . . $
400
400
Fixed expenses:
Salaries expense . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . .
Advertising expense. . . . . . . . . . . . .
Total fixed expenses. . . . . . . . . . . .
Total selling and
administrative expenses. . . . . . . . .
$1,000
100
200
$1,300
$1,700
Learning Objective 5
Compare the operating
budget for a manufacturing
firm to that of a
merchandising or service
firm..
Master Budget—Merchandising
Define each budget.
Sales Budget
Purchases
Budget
Selling and
Administrative
Expense Budget
Budgeted
Income
Statement
Master Budget—Service
Define each budget.
Revenue Budget
Production
Budget
Supplies
Budget
Wages and
Salaries Budget
Selling/Admin.
Expense Budget
Overhead
Budget
Cash Budget
Pro-Forma Income
Statement
Pro-Forma
Balance Sheet
Pro-Forma Statement
of Cash Flows
Expanded Material
Learning Objective 6
Create the
cash budget.
Master Budget—Manufacturing
Define each budget.
Sales Budget
Direct Materials
Budget
Production
Budget
Selling and
Administrative
Expense Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget
Cash Budget
Example: Cash Budget
Cash balance, beginning . . . . . . . . .
Add collections from customers . . . .
(1)Total cash available. . . . . . . . . .
Less disbursements for:
Direct materials . . . . . . . . . . . . .
$ 3,000
Direct labor. . . . . . . . . . . . . . . . .
2,000
Equipment purchase . . . . . . . . .
2,000
(2)Total disbursements. . . . . . . . . .
Minimum cash balance desired. . . . .
Total cash needed. . . . . . . . . . . . . . .
Excess (or deficiency) of cash available before financing. . . . .
(3) Financing needed . . . . . . . . . . .
Ending cash balance [(1) – (2) + (3)]
$ 4,900
10,100
$15,000
$ 7,000
6,000
$13,000
$ 2,000
0
$ 2,000
Expanded Material
Learning Objective 7
Prepare proforma financial
statements.
Example: Pro-Forma
Income Statement
Sales revenue . . . . . . . . . . . . . . . . . . . . . . . .
Cost of goods sold:
Beginning finished goods inventory. . . . . . . .
Manufacturing costs:
Direct materials used. . . . . . . . . . . . . . . . . .
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing overhead . . . . . . . . . . . . . . .
Total cost of goods available for sale . . . . . .
Less ending finished goods inventory. . . . . .
Cost of goods sold. . . . . . . . . . . . . . . . . . . . .
Gross margin. . . . . . . . . . . . . . . . . . . . . . . . .
Selling and administrative expenses. . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . .
Income before taxes . . . . . . . . . . . . . . . . . . .
$10,000
$ 4,900
$ 5,805
2,025
1,620
9,450
$14,350
(7,350)
(7,000)
$ 3,000
1,700
$ 1,300
0
$ 1,300
Pro-Forma Balance Sheet
ASSETS
Current assets:
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . 3,000
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . 7,350 $ 25,350
Long-term operating assets:
Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 12,000
Less accumulated depreciation. . . . . . . . . . . . . (3,300)
8,700
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 34,050
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . $ 8,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,000 $ 15,000
Stockholders’ equity:
Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,850
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . .
7,200
19,050
Total liabilities and stockholders’ equity. . . . . . . . .
$ 34,050
Example: Pro-Forma Statement of
Cash Flows
Cash flows from operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Add (subtract) adjustments:
Depreciation . . . . . . . . . . . . . . . . . . . . . . . $ 700
Increase in finished goods . . . . . . . . . . . . (2,450)
Increase in accounts receivable. . . . . . . . 5,550
Net cash provided by operating activities . .
3,800
$ 5,100
Cash flows from investing activities:
Purchase of equipment . . . . . . . . . . . . . . $(2,000)
Net cash used in investing activities . . . .
(2,000)
Cash flows from financing activities:
Cash obtained from borrowing . . . . . . . . $ 7,000
Net cash used in financing activities. . . .
7,000
Net increase in cash. . . . . . . . . . . . . . . . . .
$ 1,300
$ 10,100
Learning Objective 8
Distinguish between
static and flexible
budgets.
Define Static versus
Flexible Budgeting
•Static Budgeting:
•Flexible Budgeting
Static Budget
Cost per unit:
Direct materials . . . . . . . . . . . . . . . . . . . . . . . . .
Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Manufacturing overhead . . . . . . . . . . . . . . . . . .
Total unit cost . . . . . . . . . . . . . . . . . . . . . . . .
1.20
0.80
0.50
$2.50
Budgeting production (units) . . . . . . . . . . . . . . . 5,000
Budgeted manufacturing costs:
Direct materials. . . . . . . . . . . . . . . . . . . . . .
$ 6,000
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . .
4,000
Manufacturing overhead. . . . . . . . . . . . . . .
2,500
Total manufacturing costs. . . . . . . . . . . . $12,500
Static Budget—
Performance Report
Actual Budgeted Difference
Production (units)
4,800
5,000
(200)
Manufacturing costs:
Direct materials. . . . . . . . .$ 5,500 $ 6,000 $ (500)
Direct labor . . . . . . . . . . . . 3,800 4,000
(200)
Manufacturing overhead . 2,450 2,500
(50)
Total actual and budgeted
manufacturing costs . . . . $11,750 $12,500 $ (750)
Flexible Budget
What are the three steps to prepare
a flexible budget?
Flexible Budget
Manufacturing Range of Production (units)
Costs per Unit 4,800
5,000
5,200
Direct materials . $1.20
$ 5,760
$ 6,000
$ 6,240
Direct labor. . . . . . 0.80
3,840
4,000
4,160
Manufacturing
overhead. . . . . . 0.50
2,400
2,500
2,600
Total. . . . . . . . $2.50
$12,000
$12,500
$13,000
Flexible Budget—
Performance Report
Actual production (units) . . . . . . . . . . . . . . . . . .
Budgeted production (units) . . . . . . . . . . . . . . .
Difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actual Budgeted
4,800
5,000
(200)
Difference
Direct materials. . . . . . . . . .
Direct labor . . . . . . . . . . . . .
Manufacturing overhead . .
$ 5,500 $ 5,760
3,800
3,840
2,450
2,400
$ (260)
(40)
50
Total costs . . . . . . . . . . . .
$11,750 $12,000
$ 250
Chapter 5 Managerial Accounting
is Finished