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– Second level
Budgeting
– Fourth level
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» Fifth level
Student Version
6-1
11-1
3/23/2016
1
1
Describe budgeting, its
objectives, and its
impact on human
behavior.
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1
Objectives of Budgeting
1. Planning involves setting goals as a
guide for making decisions.
2. Directing involves decisions and
actions to achieve budgeted goals.
3. Controlling involves comparing actual
performance against the budgeted
goals.
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1
Responsibility Centers
A budgetary unit of a company is
called responsibility center. Each
responsibility center is led by a
manager who has the authority and
responsibility for achieving the
center’s budgeted goals.
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1
Controlling Through Feedback
As time passes, the actual performance of
an operation can be compared against the
planned goals. This provides prompt
feedback to employees about their
performance. If necessary, employees can
use such feedback to adjust their activities
in the future.
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1
Budgetary Slack
Although it is desirable to establish
attainable goals, it is undesirable to
plan lower goals than may be
possible. Such budget “padding” is
termed budgetary slack.
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1
Goal Conflict
Goal conflict occurs when
individual self-interest differs
from business objectives or
when different departments are
given conflicting objectives.
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2
Describe the basic elements
of the budget process, the
two major types of
budgeting, and the use of
computers in budgeting.
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2
Continuous Budgeting
A variation of fiscal-year
budgeting, called
continuous budgeting,
maintains a twelve-month
projection into the future.
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2
Zero-Based Budgeting
Zero-based budgeting
requires managers to
estimate sales, production,
and other operating data as
though operations are being
started for the first time.
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2
Static Budget
A static budget shows the expected
results of a responsibility center for
only one activity level. The budget
does not change even if the activity
changes.
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2
Flexible Budget
Flexible budgets show the expected
results of a responsibility center for
several activity levels.
• A flexible budget is, in effect, a
series of static budgets for different
levels of activity.
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3
Describe the master
budget for a
manufacturing
company.
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3
Master Budget
The master budget is an
integrated set of operating,
investing, and financing
budgets for a period of time.
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4
Prepare the basic
income statement
budgets for a
manufacturing company.
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4
Sales Budget
The sales budget begins by estimating
the quantity of sales. Once sales
quantities are estimated, the expected
sales revenue can be determined by
multiplying the volume by the
expected unit sales price.
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4
Production Budget
The production budget estimates
the number of units to be
manufactured to meet budgeted
sales and desired inventory levels.
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4
Sales
Budget
Production Budget
Expected units of sales
+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced
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4
Wallets
Sales
Budget
Production Budget
From Exhibit 8
528,000
+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced
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4
Direct Materials Purchases Budget
Sales
Budget
Production Budget
Direct Materials
Purchases
Budget
Materials needed for production
+ Desired ending materials inventory
– Estimated beginning materials inventory
Direct materials to be purchased
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4
Exhibit 10
Direct Materials Purchase Budget
Note A: 520,000 units × 0.30 sq. yd. per unit = 156,000 sq. yds.
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(continued)
4
Exhibit 10
Direct Materials Purchase Budget (continued)
Note A: 520,000 units × 0.10 sq. yd. per unit = 52,000 sq. yds.
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(continued)
4
Exhibit 10
Direct Materials Purchase Budget (continued)
Note B: 292,000 units × 1.25 sq. yd. per unit = 365,000 sq. yds.
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(continued)
4
Exhibit 10
Direct Materials Purchase Budget (concluded)
Note B: 292,000 units × .50 sq. yd. per unit = 146,000 sq. yds.
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4
Direct Labor Cost Budget
The direct labor cost budget
estimates the direct labor hours
and related cost needed to
support budgeted production.
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Sales
Budget
Production Budget
Direct Materials
Purchases
Budget
Direct Labor
Cost Budget
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4
Exhibit 11
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Direct Labor Cost Budget
Note A: 520,000 units × 0.10 hr. per unit = 52,000
hrs.
(continued)
4
Exhibit 11
Direct Labor Cost Budget (continued)
Note A: 520,000 units × 0.25 hr. per unit = 130,000 hrs.
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(continued)
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Exhibit 11
Direct Labor Cost Budget (continued)
Note B: 292,000 units × 0.15 hr. per unit = 43,800 hrs.
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(continued)
4
Exhibit 11
Direct Labor Cost Budget (concluded)
Note B: 292,000 units × 0.40 hr. per unit = 116,800 hrs.
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4
Factory Overhead Cost Budget
The factory overhead cost
budget estimates the cost for
each item of factory
overhead needed to support
budgeted production.
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4
Exhibit 12
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Factory Overhead Cost Budget
4
Exhibit 13
Cost of Goods Sold Budget
Direct materials
purchases budget
Direct labor cost
budget
Factory overhead
cost budget
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4
Selling and Administrative
Expenses Budget
The sales budget is often used as the
starting point for the selling and
administrative expenses budget. This
budget is normally supported by
departmental schedules.
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4
Sales
Budget
Cost of
Goods
Sold Budget
Selling &
Administrative
Expenses
Budget
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Production Budget
Direct Materials
Purchases
Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget
4
Exhibit 14
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Selling and Administrative Expenses Budget
4
Exhibit 15
Budgeted Income Statement
Sales budget
Cost of goods
sold budget
Selling and
administrative
expenses
budget
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5
Prepare balance sheet
budgets for a
manufacturing company.
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5
Exhibit 16
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Schedule of Collections from Sales
5
Exhibit 17
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Schedule of Payments for Manufacturing Costs
5
Exhibit 18
Cash Budget
Schedule of
collections
from sales
Schedule of
cash
payments for
manufacturing
costs
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5
Capital Expenditure Budget
The capital expenditure budget
summarizes plans for acquiring
fixed assets. Such expenditures
are necessary as machinery and
other fixed assets wear out or
become obsolete.
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5
Budgeted Balance Sheet
The budgeted balance sheet is
prepared and based on the operating,
financing, and investing budgets of
the master budget. It is similar to a
normal balance sheet except that
estimated amounts are used.
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