IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Strategy and
Master Budget
Chapter 8
Objectives:
• Describe the role of budget in
planning, controlling, and performance
evaluation
• Discuss the importance of strategy
and its role in budgeting and identify
factors common to successful budgets
• Outline the budgeting process
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Role of Budget
• A budget is an organization’s operation plan for a
specified period
• It identifies the resources and commitments required to
fulfill the organization’s goals for the period.
• Budget is…






a plan of operations.
a basis for allocating resources.
a communication and authorization device.
a device for motivating and guiding implementation.
a guideline for operations and gauge for controlling operations.
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a basis for performance evaluation.
IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Budget Relationship
Strategic Goals
Long-Term Objectives
Capital Budgeting
Long-Range Plan
Short-Run Objectives
Master Budgets
Controls
Operations
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Master Budget
•
•
•
•
A master budget is a
comprehensive budget
for a specific period
It consists of many
interrelated operating
and financial budgets
A sales budget often is
regarded as the
cornerstone of the entire
budget
The starting point in
preparing a sales budget
is sales forecasts
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Sales Budget
• A sales budget shows expected sales in units at their
expected selling prices
• A firm prepares the sales budget for a period based on
the forecasted sales level, production capacity for the
budget period, and long-term plan and short-term goal
of the firm
• A sales budget is the cornerstone of budget preparation
because a firm can complete the plan for other
activities only after it identifies the expected sales level
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Sales Budget
Kerry Industrial Products Company
Sales Budget
For the First Quarter Ended June 30, 2007
Sale
Forecast
Sales in units
Selling price
per unit
Total sales
April
May
June
20,000
25,000
35,000
x $30
$600,000
Quarter
80,000
x $30
x $30
x $30
$750,000 $1,050,000 $2,400,000
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Production Budget
• A firm prepares a production budget after determining the number
of units that it expects to sell
• A production budget is a plan for acquiring the resources needed to
carry out the manufacturing operations to satisfy the expected
sales and maintain the desired ending inventory
• The total number of units to be produced depends on the budgeted
sales, the desired units of finished goods ending inventory, and the
units of finished goods beginning inventory.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Production Budget
Kerry expects to have 5,000 units on hand on April 1 and
wants to have 30% of the following month’s projected unit
sales on hand at the end of each month.
Determining the budgeted units of production:
Budgeted
Production
(in units)
=
Budgeted
Sales
(in units)
+
Desired
Ending
Inventory
(in units)
–
Beginning
Inventory
(in units)
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Production Budget
Kerry Industrial Products Company
Production Budget
For the Quarter Ended June 30,2007
April
May
June
Quarter
Budgeted sales in units
20,000
25,000
35,000
80,000
Desired ending inventory
7,500
10,500
30% of June’s
Units needed
27,500
35,500
budgeted sales
Beginning inventory
5,000
7,500
Budgeted production
22,500
28,000
July sales are budgeted at 40,000 units,
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Direct Material Budget
• The information in the production budget becomes
the basis for preparing several manufacturingrelated budgets
• A direct materials usage budget shows the direct
materials required for production and their
budgeted cost
Total direct
Desired direct
materials
+ materials
needed in
ending inventory
production
=
Total direct
Direct materials
materials
+ beginning
purchase for
inventory
the period
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Direct Material Budget
Each unit produced requires 3 pounds of alloy at a cost of $2.45
per pound. Kerry expects to manufacture 36,000 units in July. On
April 1, 7,000 pounds of alloy were in inventory.
Budgeted unit production in April is 22,500. At 3 pounds per unit
direct material needs are 67,500 pounds.
Desired ending inventory is 10 % of the next period’s production
needs. In May production needs will be 28,000 units, so 28,000 × 3
pounds = 84,000 × 10% = 8,400 pounds.
Determine the total cost of direct material purchase pf April.
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See Exhibit 8.8
IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Direct
Material
Budget
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Direct Material Budget
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Direct Labor Budget
• To prepare the direct labor budget, a company would
use its production budget
• The direct labor budget enables the personnel
department to plan for hiring and repositioning of
employees
• A good labor budget helps the firm to avoid emergency
hiring, prevent labor shortages, and reduce or
eliminate the need to lay off workers
• Firms usually prepare labor budget for each type of
labors. For example, for each skill requirement.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Direct Labor Budget
Each unit of output requires .5 hours of semi-skilled labor at
an average cost of $8.00 per hour, and .2 hours of skilled
labor at an average cost of $12.00 per hour.
Kerry Industrial Production Company
Direct Labor Budget
For the Quarter Ended June 30, 2007
April
May
June
Budgeted production
22,500
28,000
36,500
Semi-skilled labor costs $ 90,000
$ 112,000
$ 146,000
Skilled labor costs
54,000
67,200
87,600
Total labor costs
$ 144,000
$ 179,200
$ 233,600
22,500 × .5 × $8.00 = $90,000
Quarter
87,000
$ 348,000
208,800
$ 556,800
22,500 × .2 × $12.00 = $54,000
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Factory Overhead
Budget
• A factory overhead budget often includes all production
costs other than direct materials and direct labor
• Unlike direct materials and direct labor, manufacturing
overhead costs include costs that vary in direct
proportion with the units manufactured as well as costs
that vary with either the kind of facilities the firm has or
the way in which the firm carries out it operations
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Factory Overhead
Budget
The variable overhead rate is $4.40 per direct labor hour. Fixed
factory overhead is $44,300 during April and May, and $54,300
in June.
Kerry Industrial Production Company
Factory Overhead Budget
For the Quarter Ended June 30, 2007
April
May
June
Production
Budgeted production
Budget
22,500
28, 000
36,500
Semi-skilled hours required
11,250
14, 000
18,250
Labor
Budget
Skilled labor hours required
4,500
5, 600
7,300
Total direct labor hours
15,750
19, 600
25,550
Variable factory overhead
($4.40 per hour)
$
$
$ 112,420
69,300
86, 240
Fixed factory overhead
44,300
44, 300
54,300
Quarter
87,000
43,500
17,400
60,900
$
267,960
142,900
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Also see Exhibit 8.10
IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Cost of Goods Manufactured
Budget
• The cost of goods manufactured production cost and the
cost of goods sold budget reports the total budgeted
cost of units sold for a period
• Upon completion of the cost of goods manufactured and
sold budget for a period, two items in this budget appear
in other budgets for the same period
• The income statement budget uses the cost of goods
sold to determine the gross margin of the period, and
the balance sheets includes the finished goods ending
inventory it total assets
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Selling and General
Administrative Expense
Budget
• A selling and general administrative expense
budget delineates plans for all nonmanufacturing expenses
• This budget serves as a guideline for selling
and administrative activities during the budget
period
• Many selling and general
administrative expenditures
are discretionary
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Cash Budget
• A cash budget depicts effects of all budgeted activities on cash
• By preparing a cash budget, management can:
1. take steps to ensure having sufficient cash on hand to carry out the
planned activities
2. allow sufficient time to arrange for additional financing that may be needed
during the budget period (and thus avoid high costs of emergency
borrowing)
3. plan for investments of excess cash on hand to earn the highest possible
return
• A cash budget includes all items that affect cash flows and pulls
data from almost all parts of the master budget
• A cash budget generally includes three major sections:
1. Cash available
2. Cash disbursements
3. Financing
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Cash Budget: Receipts
 Management at Kerry expects 70% of all sales to be for
cash and credit card sales, of which 40% are credit card
sales that result in a 3% processing fee.
 Of the company’s accounts receivable 80% are paid in the
month following the month of sale, and 60% of these are
paid within the discount period (2% discount allowed).
 Of the remaining accounts receivable, 15% are collected in
the second month following the month of sale, and 5% of
accounts receivable eventually prove uncollectible.
 Sales during March were $450,000.
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Cash Budget
Total sales
Total cash sales
Customers paying cash
Credit card collections
Collection on account:
Within discount period
After the discount period;
Previous month
Two months earlier
Cash collections
Kerry Industrial Production Company
Cash Receipts Budget
For the Quarter Ended June 30, 2007
April
May
June
$
600,000
$
750,000
$ 1,050,000
420,000
525,000
735,000
252,000
315,000
441,000
162,960
203,700
285,180
$
$
Quarter
2,400,000
1,680,000
1,008,000
651,840
63,504
84,672
105,840
254,016
43,200
18,000
539,664
57,600
20,250
681,222
72,000
27,000
931,020
172,800
65,250
2,151,906
$
$
$
$420,000 × 40% × 97% = $162,960
$450,000 × 30% × 80% × 40% = $43,200
$450,000 × 30% × 80% × 60% x 98% = $63,504
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$400,000 × 30% × 15% = $18,000
IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Budget Income
Statement
• The budgeted income statement estimates the
expected operating income from the budgeted
operations
• A budgeted income statement allows management
a glimpse of the likely operating result upon
completion of the budgeted operation
• Once the budget income statement has been
approved, it becomes the benchmark against
which the performance of the period is evaluated
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IES 342 Industrial Cost Analysis & Control | Dr. Karndee Prichanont, SIIT
Budget Balance Sheet
• The last step in a budget preparation cycle
usually is to prepare the budget balance sheet
• The starting point in preparing the budget
balance sheet is the expected financial
positions at the end of the current operating
period--the beginning balances of the budget
period
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