Budgeting
Chapter M5

Budgets
 Charts a course for a business by outlining the plans of the business in financial terms
90
80
70
60
50
40
30
20
10
0
1st
Qtr
3rd
Qtr
East
West
North

Objecitves
 Establish specific goals
 Executing plans to achieve goals
 Periodically comparing actual results with goals

Management meets objectives
 Planning
 Directing
 Controlling

Budgeting Systems
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Static budget
Flexible budget
Master budget
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Sales budget
Production budget
Direct materials purchase budget
Direct labor cost budget
Factory overhead cost budget
Selling and administrative budget
Cash budget

Sales Budget
 Indicates for each product the quantity of sales and expected selling price
 Example 1: Brite Lite sells two products in the US and Canada. Product A is estimated to sell 5,000 units in the US and 10,000 units in Canada at $100 per unit. Product B sells
20,000 units in US and 6,000 units in Canada at $50 per unit.

Sales Budget
Sales
United States
Canada
Total units sold
Sales price per unit
Total sales
Brite Lite
Sales Budget
For year 2005
Product A Product B
5000
10000
20000
6000
15000
$ 100.00
$
26000
50.00
1,500,000 1,300,000 $2,800,000

Production budget
 Coordinates with sales budget
 Expected units to be sold
 +Desired ending inventory
 -Estimated beginning inventory
 Production for period

Production budget
 Brite Lite plans to have beginning inventory of 3,000 units of A and 5,000 units of B. Ending inventory should be
10% of sales.

Production Budget
Brite Lite
Production Budget
For year 2004
Expected sales
Product A Product B
15000 units 26000 units
Desired ending inventory 1500
Total 16500
2600
28600
Estimated beg inventory -3000 -5000
Estimated production 13500 units 23600 units

Example 2
 Geo produces three products X, Y, and
Z. Sales are expected at 10,000 units to X, 15,000 units to Y, and 25,000 to Z.
Beginning inventory is estimated at
3,000 to X, 5000 to Y, 2,500 to Z.
Ending inventory is estimated at 1,500 to X, 4,000 to Y, and 4,000 to Z.
Complete production budget.

Example 2
Geo Products
Production Budget
For year 2005
Expected sales
Desired ending inventory
Total
Estimated beg inventory
Estimated production
Product X Product Y Product Z
10000 15000 25000
1500 4000
11500 19000
3000 5000
8500 14000
4000
29000
2500
26500

Direct Materials Purchases
Budget
 Estimates purchase levels for the next year and costs
 Materials required for production plus ending inventory minus beginning inventory

Direct Materials
 Product A uses 2 lbs of Tox and 3lbs of
Gox. Product B uses 1/2lb of Tox, 1lb of
Gox, 2lbs of Plox. Gox sells for $5 per lb, Tox $10lbs and Plox $2 lb. Beg inventory is 7,300, 3,600, and 5,200 lbs.
Ending inventory is 4,000lbs, 6,000lbs, and 8,000 lbs.

Direct Materials Budget
Product
A (production 13,500 units)
Gox
Gox 3lbs per unit X 13,500 units 40500 lbs
Tox 2lbs per unit X 13,500 units
B (production 23,600 units)
Gox 1lb per units X 23,600 units 23600 lbs
Tox 1/2 lb X 23,600 units
Plox 2lbs X 23,600 units
Total pounds of direct materials
Desired Ending Inventory
Estimated Beginning inventory
Total pounds of direct materials
64100
4000
68100
7300
60800
Cost per lb.
Total cost of direct materials
TOTAL
$ 5.00
$304,000
Tox
27000 lbs
Plox
11,800lbs
38800
6000
44800
3600
41200
$ 10.00
$412,000
47,200 lbs
47200
8000
55200
5200
50000
$ 2.00
$100,000
$816,000

Example 4:
 Dare uses two materials in the production of its products X and Y. The materials are A and
B. Product X requires 3 units of A and 1.5lbs of B for completion. Product Y requires 4 units of A and 1lb. Of B. A is $6 per unit and
B is $5 per unit. Estimated beginning inventory is 3,000 A and 4,000 of B. Desired ending inventory is 2,000 of A and 1,000 of B.
The company is expecting to product 10,000 units of X and 15,000 units of Y.

Example 4
Product
X ( 10,000 units)
A ( 3 units X 10,000 units)
B (1.5 lbs X 10,000 units)
Y ( 15,000 units)
A ( 4 units X 15,000 units)
B (1. lbs X 15,000 units)
Total pounds of direct materials
Desired Ending Inventory
Estimated Beginning inventory
Total pounds of direct materials
Cost per lb.
Total cost of direct materials
TOTAL
A B
30,000 units
15,000 lbs.
60,000 units
90000
2000
92000
3000
89000
$ 6.00
$534,000
15,000 lbs.
30000
1000
31000
4000
27000
$ 5.00
$135,000
$669,000

Direct Labor Budget
 Product A uses 6hrs of Dept 1 and 2hrs of Dept 2. Product B uses 4hrs of Dept
1 and 1.2hr in Dept 2. Labor is $10 per hour in Dept 1 and $7 per hour in Dept
2.

Example
Product
Product A ( 13,500 units)
Dept 1: 13,500 * 6 hrs
Dept 2: 13,500 * 2hrs
Product B ( 26,500 units)
Dept 1: 26,500 * 4 hrs
Dept 2: 26,500 * 1/2hrs
Total hours of production
Direct labor cost per hour
Total cost of direct materials
TOTAL
Dept 1
81000
Dept 2
26000
106000
187,000
$ 10.00
13,250
39,250
$ 7.00
$1,870,000 $274,750
$2,144,750

Factory Overhead Budget
Indirect labor $25,000, utilities $45,000, maintenance
$40,000 and insurance $60,000
Indirect labor
Utilities expense
Maintenance expense
Insurance expense
Total factory overhead
$ 25,000.00
$ 45,000.00
$ 40,000.00
$ 60,000.00
$ 170,000.00

Cost of goods sold budget
 Is composed of the budgets for production, direct materials, direct labor and factory overhead

Cash Budget
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Is one of the most important elements of budgets
Presents the expected receipts and payments of cash for a period of time
Divided into
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Cash receipts
Cash payments
Other items

Cash Receipts Budget
 Magna has estimated sales of
$1,080,000 in January, $1,240,000 in february, and March of $970,000.
Accounts receivable has a balance on
January 1 of $370,000. The company expects 10% of its sales to be in cash.
Of the credit sales 60% will be collected in the month of the sale and remainder the next month.

Cash Sales
 January: $1,080,000 X 10% =
$108,000
 Feb: $1,240,000 X 10% = $124,000
 March: $970,000 X 10% = $97,000

Credit Receipts
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January collections:
60% of Jan collected in January
Credit sales: $1,080,000 X 90%
Collection: $972,000 X 60% = $583,200
Dec sales: $370,000 value of Accts receivable
Feb collections:
40% of Jan credit sales
$972,000 X 40% = $388,800
60% of Feb credit sales
$1,240,000 X 90% X 60% = $669,600

Credit Receipts
 March:
 Feb: 40% of credit sales
 $1,160,000 X 40% = $446,400
 March: 60% of credit sales
 $970,000 X 90% X 60% = $523,800

Cash Receipts Budget
Cash receipts
Cash collections
December sales
January sales
February sales
March sales
January February
$108,000
$370,000
$124,000
$583,200 $388,800
March
$97,000
$669,600 $446,400
$523,800
Total credit collections $953,200 $1,058,400 $970,200
Total cash receipts $1,061,200 $1,182,400 $1,067,200

Cash Payments Budget
 Reduction in cash from manufacturing, selling and administrative, capital expenditure, and other expenses
 Assume manufacturing costs are $840,000,
$780,000, and $812,000 for Jan through
March. Beg balance in accounts payable is
$190,000. Depreciation expense is $24,000 per month included in mfg costs. Mfg costs are paid 75% in month incurred and remainder next month.

Cash Payment Budget
 January
 Mfg cost $840,000
 Depreciation 24,000
 Net 816,000
 Current mo: $816,000 X 75% =$612,000
 Next mo: $816,000 X 25% = $204,000

Cash Payment Budget
 February:
 Mfg cost $780,000
 Depre 24,000
 Net $756,000
 Current: $756,000 X 75% = $567,000
 Next: $756,000 X 25% = $189,000

Cash Payment Budget
 March:
 Mfg $812,000
 Dep 24,000
 Net 788,000
 Current: $788,000 X 75% = $591,000

Cash Payment Budget
Manufacturing costs
December
January
February
March
January February March
$190,000
$612,000 $204,000
$567,000 $189,000
$591,000
$802,000 $771,000 $780,000

Completing the Budget
 Cash balance on Jan 1 is $280,000
 Quarterly tax on 3/31 is $150,000
 Quarterly interest paid 1.10 is $22.500
 Selling expense $160,000, $165,000 and
$145,000
 Interest revenue 3/21 is $24,500
 Capital expenditures 2/28 is $274,000
 Minimum cash balance is $340,000

Cash Budget
January
Estimated cash receipts
Cash sales
Credit receipts
Interest revenue
Total cash receipts
Estimated cash payments
Manufacturing costs
Selling expenses
Capital expenditures
$108,000
$953,200
$1,061,200
$802,000
$160,000
Interest expense
Tax payment
Total cash payments
$22,500
$984,500
Net cash increase(decrease) $76,700
Cash balance at beg of month $280,000
Cash balance at end of mo.
$356,700
Minimum cash balance
Excess ( deficiency)
$340,000
$16,700
February
$124,000
$1,058,400
$1,182,400
$771,000
$165,000
$274,000
$1,210,000
-$27,600
$356,700
$329,100
$340,000
-$10,900
March
$97,000
$970,200
$24,500
$1,091,700
$780,000
$145,000
$150,000
$1,075,000
$16,700
$329,100
$345,800
$340,000
$5,800