ACG 2071
Module 9: Budgeting
Budgets – charts a course for a business by outlining the plans of the
business in financial terms
Objectives:
 Establishing specific goals
 Executing plans to achieve goals
 Periodically comparing actual results with goals
Management objectives:
 Planning
o A set of goals is often necessary to guide and focus
individual and group actions.
o Budgeting supports the planning process by
requiring all organizational units to establish their
goals for the upcoming period.
o Planning not only motivates employees to attain
goals but also improves overall decision making.
 Directing
o Once the budget plans are in place, they can be use
to direct and coordinate operations in order to
achieve the stated goals.
o Responsibility centers are led by a manager who
has the authority over and the responsibility for the
unit’s performance.
 Controlling
o Actual performance of an operation can be
compared against the planned goals
 Provides prompt feedback to employees
about their performance.
Created by: M. Mari
Fall 2007
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ACG 2071
Module 9: Budgeting
 Comparing actual results to the plan also
helps prevent unplanned expenditures.
Budgeting Systems
 vary among businesses because of such factors as organizational
structure, complexity of operations, and management philosophy.
 Differences in budget systems are even more significant among
different types of business such as manufacturers and service
businesses.
 Types of Budgets
o Continuous budgeting – maintains a 12-month projection
into the future. The 12-month budge is continually revised
by removing the data for the period just ended and adding
estimated budget data for the same period next year.
o Zero based budgeting – requires manager to estimate sales,
production, and other operating data as though operations
are being started for the first time.
o Static Budget – shows expected results of a responsibility
center for only one activity level. Once the budget has been
determined, it is not changed, even if the activity changes.
o Flexible budget – shows expected results of a responsibility
center for several activity levels.
Master Budget
o Manufacturing operations require a series of budgets that are linked
together in the master budget.
o Major parts of the master budget are:
o Budgeted income statement
 Sales budget
 Cost of goods sold budget
 Production budget
 Direct materials purchases budget
 Direct labor cost budget
 Factory overhead cost budget
 Selling and administrative expense budget
o Budgeted balance sheet
 Cash budget
Created by: M. Mari
Fall 2007
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ACG 2071
Module 9: Budgeting
 Capital expenditure budget
These budgets must be prepared in a specific order since the information
from a prior budget is needed to prepare the next budget.
Budgeted Income Statement –
 Sales Budget
o Indicates for each product
 the quantity of estimated sales and
 expected selling price.
o In estimating the quantity of sales for each product, past sales
volumes are often used as the starting point. They are revised
for factors that are expected to affect future sales. Once sales
volume is obtained, sales revenues can be computed.
o Example: Brite Lite sells two products in United States and
Canada. Product A is estimated to sell 5,000 units in the
United States and 10,000 units in Canada at $100 per unit.
Product B sells 20,000 units in United States and 6,000 units in
Canada at $50 per unit.
Brite Lite
Sales Budget
For year 2006
Product A
Product B
Units sold:
United States
Canada
Total units sold
Sales price per unit
Total sales
5,000
10,000
15,000
X $100
$1,500,000
20,000
6,000
26,000
X $50
1,300,000
$2,800,000
Once the sales budget is completed, the Production budget is prepared.
Created by: M. Mari
Fall 2007
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ACG 2071
Module 9: Budgeting
Production Budget:
o Coordinates with sales budget to ensure that production and
sales are kept in balance during the period
o Number of units manufactured to meet budgeted sales and
inventory needs for each product is set forth in the production
budget.
o Formula:
Expected units to be sold
+ Desired ending inventory
-Estimated beginning inventory
Total units to be produced
Example: Brite Lite expects to have beginning inventory of 3,000 units of
Product A and 5,000 units of Product B. The company would like its ending
inventory to be 10% of estimated sales.
Product A
Product B
Expected sales (in units)
15,000
26,000
Plus desired ending inventory
+ 1,500
+ 2,600
Minus estimated beginning inventory
- 3,000
- 5,000
Total production
13,500
23,600
Expected sales came in from the Sales Budget.
Desired ending inventory
Product A: Estimated sales 15,000 x 10% = 1,500 units
Product B: Estimated sales 26,000 x 10% = 2,600 units
Beginning inventory given in problem.
Direct Materials Purchase Budget:
 The production budget is the starting point for determining the
estimated quantities of direct materials to be purchased.
 Estimates purchase levels for the next year and costs.
 Formula:
Created by: M. Mari
Fall 2007
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ACG 2071
Module 9: Budgeting
Materials required for production
+ Desired ending materials inventory
-Estimated beginning materials inventory
Direct materials to be purchased
X cost per unit
Total direct materials cost
Example: Product A uses 2 lbs. of plastic and 3 lbs. of aluminum. Product
B uses ½ lb. of plastic, 1 lb. of aluminum, and 2 lbs. of paper. Aluminum
sells for $5 per lb. Plastic sells for $10 per lbs, and paper sells for $2 per lbs.
Beginning inventory is 7,300, 3,600, and 5,200 lbs. Ending inventory is
4,000 lbs, 6,000 lbs, and 8,000 lbs.
Ending Inventory (lbs)
Plastic
Aluminum
Paper
4,000
6,000
8,000
Required: Prepare a direct material purchase budget.
Created by: M. Mari
Fall 2007
Page 5 of 12
Beginning inventory
(lbs.)
7,300
3,600
5,200
ACG 2071
Module 9: Budgeting
Direct Materials Purchase Budget
AL
Plastic
Product A (13,500 units)
13,500 x 3 lbs.
13,500 x 2 lbs.
13,500 x 0 lbs.
Product B (23,600 units)
23, 600 x 1lbs.
23,600 x ½ lbs.
23,600 x 2 lbs.
Total needed for production
+ Desired Ending inventory
Total units needed
- Beginning Inventory
Total direct materials purchased
Unit cost for material
Total costs
Paper
Total
40,500
27,000
0
23.600
11,800
64,100
4,000
68,100
-7,300
60,800
X $5
$304,000
38,800
6,000
44,800
-3,600
41,200
X $10
$412,000
47,200
47,200
8,000
55,200
-5,200
50,000
X $2
$100,000 $816,000
Direct Labor Budget:
o Production budget also provides the starting point for preparing the
direct labor cost budget.
Example: Department 1 has a labor cost of $10 per hour. Product A uses 6
hours in Department 1 and Product B uses 4 hours. Department 2 has a
labor cost of $7 per hours. Production A uses 2 hours of Department 2’s
labor and Product B uses ½ hour. Prepare a direct labor budget.
Department 1
Department 2
Total
Product A (13,500 units)
6 hours per unit x 13,500
2 hours per unit x 13,500
Product B (23,600 units)
4 hours x 23,600 units
½ hour x 23,600 units
Total hours per department
Labor cost per hour
Total
Created by: M. Mari
Fall 2007
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81,000
27,000
94,400
175,400
X $10
$1,754,000
11,800
38,800
X $7
$271,600
$2,025,600
ACG 2071
Module 9: Budgeting
Factory Overhead Budget
Example: Indirect labor $25,000, Utilities $45,000, Maintenance $40,000,
and insurances and taxes $60,000.
Factory Overhead Budget
Indirect labor
Utilities
Maintenance
Insurance & Taxes
Total
$ 25,000
45,000
40,000
60,000
$170,000
Cost of goods sold budget:
o Is composed of the budgets for production, direct materials, direct
labor and factory overhead.
Cost of Goods Sold Budget
Finished goods inventory, January
Work in process inventory, January
Direct materials
Direct materials inventory, January
Direct materials purchases
Cost of direct materials available
$
1,095,600.00
$ 214,400.00
$
99,000.00
$ 2,587,500.00
$ 2,686,500.00
Less direct materials inventory, December
Cost of direct materials placed in production
Direct labor
$ 104,400.00
$ 2,582,100.00
$ 4,851,600.00
Factory overhead
$ 2,089,080.00
Total manufacturing costs
Total work in process during period
$ 9,522,780.00
$ 9,737,180.00
Less work in process inventory, December
$ 220,000.00
Cost of goods manufactured
Cost of finished goods available for sale
$ 9,517,180.00
$ 10,612,780.00
Less finished goods inventory, December
Cost of Goods Sold
$
$
1,565,000.00
9,047,780.00
Note: the above example does not match the examples before it. The
numbers in red came from the appropriate budgets.
Selling and Administrative Budget:
o Sales budget is often used as the starting point for estimating the
selling and administrative expenses.
Created by: M. Mari
Fall 2007
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ACG 2071
Module 9: Budgeting
Selling and Administrative Expenses Budget
Selling expenses
Sales salaries expense
Advertising expense
$ 715,000.00
$ 360,000.00
Travel expense
Total selling expenses
Administrative expenses
Officer's salaries expense
Office salaries expense
Office rent expense
Office supplies expense
$ 115,000.00
$ 1,190,000.00
$ 360,000.00
$ 258,000.00
$ 34,500.00
$ 17,500.00
Total administrative expense
$
25,000.00
Total selling and administrative expense
$ 695,000.00
$ 1,885,000.00
Budgeted Income Statement:
o Prepared from the completed budgets.
Budgeted Income Statement
Revenue from sales
$ 13,336,000.00
Cost of goods sold
Gross profit
$ 9,047,780.00
$ 4,288,220.00
Selling and administrative expenses
Income from operations
Other income
Interest revenue
Other expenses
$ 1,885,000.00
$ 2,403,220.00
Interest expenses
Income before income tax
$
98,000.00
$
90,000.00
Income tax
Net income
$
8,000.00
$ 2,411,220.00
$
600,000.00
$ 1,811,220.00
Note: numbers in red are from prior budgets.
Balance Sheet Budgets
 Cash Budget:
 Is one of the most important elements of budgeted
balance sheet.
 Presents the expected receipts and payments of cash for a
period of time.
 Three parts of the cash budget are
o Cash receipts
o Cash payments
o Other items
 We prepare a schedule for each of the three parts and
then unite in the final cash budget presentation.
Created by: M. Mari
Fall 2007
Page 8 of 12
ACG 2071
Module 9: Budgeting
Cash Receipts Schedule:
Example: Magna Corporation has estimated sales of January $1,080,000,
February $1,240,000, and March $970,000. Accounts receivable has a
balance on January 1 of $370,000. The company expects that 10% of its
sales will be in cash and the remainder in credit. Of the credit sales, 60%
will be collected in the next month and the remainder the following month.
Required: Prepare a schedule of cash receipts.
Calculations:
January Sales
Sales
$ 1,080,000.00
Less cash portion ( 10% of sales)
$ 108,000.00
Credit sales
$ 972,000.00
Credit sales
Collections in February
Remainder collected in March
February Sales
Sales
$ 972,000.00
$ 583,200.00
$ 388,800.00
$ 1,240,000.00
Less cash portion ( 10% of sales)
$ 124,000.00
Credit sales
$ 1,116,000.00
Credit sales
Collections in February
Remainder collected in March
March Sales
Sales
60% of credit sales
$ 1,116,000.00
$ 669,600.00
$ 446,400.00
60% of credit sales
$ 970,000.00
Less cash portion ( 10% of sales)
$
97,000.00
Credit sales
$ 873,000.00
Credit sales
Collections in February
Remainder collected in March
$ 873,000.00
$ 523,800.00
$ 349,200.00
60% of credit sales
Schedule of Cash Receipts
Receipts of Cash Sales
Receipt from collections:
Collection from last month’s sales
Collection from current month’s
Total receipts
Created by: M. Mari
Fall 2007
Page 9 of 12
January
$108,000
February
$124,000
March
$97,000
$370,000
583,200
953,200
$388,800
669,600
1,058,400
$446,400
523,800
970,200
ACG 2071
Module 9: Budgeting
Schedule of Cash Payments
o Reduction in cash from manufacturing, selling and
administrative, capital expenditures, and other sources.
Example: Magna Company has manufacturing costs of $840,000 in
January, $780,000 in February, and $812,000 for March. The beginning
balance in accounts payable is $190,000. Depreciation expense is $24,000
per month which is included in manufacturing costs. Manufacturing costs
payments are allocated at 75% in month incurred and remainder the next
month.
Calculations:
January Manufacturing Costs
Total manufacturing costs for month
$ 840,000.00
Less depreciation expense
$
Total manufacturing costs owed
$ 816,000.00
Payment in January
Total manufacturing costs owed
'75% paid in month incurred
$ 816,000.00
75%
Payment in January
$ 612,000.00
Total manufacturing costs owed
Less payment in January
Payment in February
$ 816,000.00
$ 612,000.00
$ 204,000.00
February Manufacturing Costs
Total manufacturing costs for month
24,000.00
$ 780,000.00
Less depreciation expense
$
Total manufacturing costs owed
$ 756,000.00
Payment in February
Total manufacturing costs owed
'75% paid in month incurred
$ 756,000.00
75%
Payment in February
$ 567,000.00
Total manufacturing costs owed
Less payment in February
Payment in March
$ 756,000.00
$ 567,000.00
$ 189,000.00
Created by: M. Mari
Fall 2007
Page 10 of 12
does not require a payment of cash
24,000.00
does not require a payment of cash
ACG 2071
Module 9: Budgeting
March Manufacturing Costs
Total manufacturing costs for month
$ 812,000.00
Less depreciation expense
$
Total manufacturing costs owed
$ 788,000.00
Payment in March
Total manufacturing costs owed
'75% paid in month incurred
$ 788,000.00
75%
Payment in March
$ 591,000.00
Total manufacturing costs owed
Less payment in March
Payment in April
$ 788,000.00
$ 591,000.00
$ 197,000.00
Payments of prior month’s
manufacturing costs
Payments of current month’s
manufacturing costs
Total payments
24,000.00
does not require a payment of cash
January
$190,000
February
$204,000
March
$189,000
612,000
567,000
591,000
$802,000
$771,000
$780,000
Completing the Cash Budget
o After preparing the schedule of cash receipts and the schedule
of cash payments, we review additional items and prepare the
formal cash budget.
Example:
 Cash balance on January 1 - $280,000
 Quarterly tax due on March 31 - $150,000
 Quarterly interest paid to creditors on January 10 - $22,500
 Selling and administrative expenses:
o January $160,000
o February $165,000
o March $145,000
 Interest revenue to be received on March 21 - $24,500
 Capital expenditures on equipment payable on February 28 - $274,000
 Minimum cash balance of $340,000 is required by the corporation’s
Board of Directors
Created by: M. Mari
Fall 2007
Page 11 of 12
ACG 2071
Module 9: Budgeting
Magna Inc
Cash Budget
For January, February, and March 2008
January
Estimated cash receipts
Cash receipts
Collections of accounts receivables
Interest revenue
Total cash receipts
Estimated cash payments
Manufacturing costs
Selling and administrative
Capital expenditures
Interest expense
Tax payment
Total cash payments
Cash increase
Cash balance at beg of month
Cash balance at end of month
Minimum cash balance
Excess
Created by: M. Mari
Fall 2007
Page 12 of 12
$
$
108,000.00
953,200.00
February
$
$
124,000.00
1,058,400.00
$
$
97,000.00
970,200.00
$
$
24,500.00
1,091,700.00
$
$
780,000.00
145,000.00
$
$
$
$
$
$
$
150,000.00
1,075,000.00
16,700.00
207,900.00
224,600.00
340,000.00
(115,400.00)
$
1,061,200.00
$
1,061,200.00
$
$
802,000.00
160,000.00
$
$
$
771,000.00
165,000.00
274,000.00
$
22,500.00
$
$
$
$
$
$
984,500.00
76,700.00
280,000.00
356,700.00
340,000.00
16,700.00
$
$
$
$
$
$
March
1,210,000.00
(148,800.00)
356,700.00
207,900.00
340,000.00
(132,100.00)