Chapter 20
Budgeting
Financial and Managerial Accounting
8th Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
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Nature and Objectives of Budgeting
Savings
8%
Entertainment
6%
Housing
30%
Transportation
15%
Estimated
portion of Clothing
7%
your total
monthly
Other
income that
4%
should be
Medical
budgeted
5%
Utilities
5%
Food
20%
Objectives
1. Describe budgeting, its objectives, and its
After studying
impact on human
behavior.this
chapter,
you should
2. Describe the
basic elements
of the budget
process, the twobe
major
abletypes
to: of budgeting,
and the use of computers in budgeting.
3. Describe the master budget for a
manufacturing business.
4. Prepare the basic income statement budgets
for a manufacturing business.
5. Prepare balance sheet budgets for a
manufacturing business.
Nature and Objectives of Budgeting
Objectives of Budgeting
• Establishing specific goals
• Executing plans to achieve the goals
• Periodically comparing actual results
to the goals
PLANNING
DIRECTING
CONTROLLING
Nature and Objectives of Budgeting
Human Behavior and Budgeting
Setting budget goals too tightly
Setting budget goals too loosely
Setting conflicting budget goals
Nature and Objectives of Budgeting
Goal conflict occurs
when individual selfinterest differs from
business objectives.
A student’s question, “Will this be on the
test?” is evidence of goal conflict.
Continuous Budgeting
One-Year Budget
Feb.
2006
Mar. Apr.
2006 2006
Delete on
February 28
May
2006
June
2006
July
2998
Aug.
2006
Sep.
2006
Oct.
2006
Nov.
2006
Dec.
2006
Jan.
2007
Continuous Budgeting
One-Year Budget
Mar. Apr.
2006 2006
May
2006
June
2006
July
2998
Aug.
2006
Sep.
2006
Oct.
2006
Nov.
2006
Dec.
2006
Jan.
2007
Feb.
2007
Add February 2007
Static Budgets
Description:
Strength:
Weakness:
Typical usage:
A budget that does not
reflect potential changes in
volume or activity level
It is simple—all expenses
are budgeted as fixed costs
It does not reflect changes in
revenues and expenses that
occur as volumes change
Service organizations or
administrative departments of
retailers and manufacturers
Static Budgets
Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Direct labor
Electric Power
Supervisor salaries
Total department costs
$40,000
5,000
15,000
$60,000
Flexible Budgets
Description:
A budget that shows revenues and
expenses for a variety of volumes or
activity levels
Strength:
Provides information needed to
analyze the impact of volume changes
on actual operating results
Weakness:
Requires greater research into costs—
must differentiate fixed and variable
costs
Typical usage: Operational departments of retailers
and manufacturers whose costs
change with sales and production
Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Units of production
Variable cost:
Direct labor
Electric power
Total variable cost
8,000
9,000
10,000
$40,000
4,000
$44,000
$45,000
4,500
$49,500
$50,000
5,000
$55,000
Cost per unit is $5.50 at all levels of activity
Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Units of production
Variable cost:
Direct labor
Electric power
Total variable cost
Fixed cost:
Electric power
Supervisor salaries
Total fixed cost
8,000
9,000
10,000
$40,000
4,000
$44,000
$45,000
4,500
$49,500
$50,000
5,000
$55,000
$ 1,000
15,000
$16,000
$ 1,000
15,000
$16,000
$ 1,000
15,000
$16,000
Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Units of production
Variable cost:
Direct labor
Electric power
Total variable cost
Fixed cost:
Electric power
Supervisor salaries
Total fixed cost
Total department costs
8,000
9,000
10,000
$40,000
4,000
$44,000
$45,000
4,500
$49,500
$50,000
5,000
$55,000
$ 1,000
15,000
$16,000
$60,000
$ 1,000
15,000
$16,000
$65,500
$ 1,000
15,000
$16,000
$71,000
Static and Flexible Budgets
Overbudget
Static
Budget
$60,000
$72,000
Static and Flexible Budgets
Overbudget
Flexible Budget
8,000
units
9,000
units
10,000
units
$60,000
$65,500
$71,000
$72,000
Master Budget
Budgeted Income
Statement
Sales budget
Cost of goods sold budget:
Production budget
Direct materials purchases
budget
Direct labor cost budget
Selling and administrative
expense budget
Budgeted Balance
Sheet
Cash budget
Capital expenditure
budget
Income
Statement
Budgets
Sales
Budget
Production Budget
Expected units of sales
+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Materials needed for production
+ Desired ending materials inventory
– Est. beginning materials inventory
Direct materials to be purchased
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Cost of Goods
Sold Budget
Selling &
Administrative
Expenses
Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget
Elite Accessories Inc.
Sales Budget
For the Year Ending December 31, 2006
Product and Region
Unit Sales
Volume
Wallet:
East……………….. 287,000
West………………. 241,000
Total……………. 528,000
Handbag:
East……………….. 156,400
West………………. 123,600
Total……………. 280,000
Total revenue from
Sales………………..
Unit Selling
Price
Total
Sales
$12.00
12.00
$ 3,444,000
2,892,000
$ 6,336,000
$25.00
25.00
$ 3,910,000
3,090,000
$ 7,000,000
$13,336,000
Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet
Handbag
Expected units to be sold
528,000
280,000
From sales budget
Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet
Handbag
Expected units to be sold…………. 528,000
Plus desired ending inventory,
December 31, 2006……………. 80,000
Total
608,000
280,000
60,000
340,000
Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet
Handbag
Expected units to be sold………….
Plus desired ending inventory,
December 31, 2006…………….
Total……………………………….
Less estimated beginning inventory,
January 1, 2006………………….
Total units to be produced…………
528,000
280,000
80,000
608,000
60,000
340,000
88,000
520,000
48,000
292,000
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather
Lining
Square yards required for production:
Wallet (Note A)…………………..
156,000
Total
52,000
Note A: Leather: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds.
Lining: 520,000 units x 0.10 sq. yd. Per unit = 52,000 sq. yds.
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather
Lining
Square yards required for production:
Wallet (Note A)……..……..……..
Handbag (Note B)………………..
156,000
365,000
Total
52,000
146,000
Note B: Leather: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds.
Lining: 292,000 units x 0.50 sq. yd. Per unit = 146,000 sq. yds.
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather
Lining
Square yards required for production:
Wallet (Note A)……....…………..
Handbag (Note B).……………….
Plus desired inventory, Dec. 31, 2006
Total………………………………
156,000
365,000
20,000
541,000
52,000
146,000
12,000
210,000
Total
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather
Lining
Square yards required for production:
Wallet (Note A) ………………….
Handbag (Note B) ……………….
Plus desired inventory, Dec. 31, 2006
Total………………………………
Less estimated inventory, Jan. 1, 2006
Total square yards to be produced..
156,000
365,000
20,000
541,000
18,000
523,000
52,000
146,000
12,000
210,000
15,000
195,000
Total
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather
Lining
Square yards required for production:
Wallet (Note A)…………………..
Handbag (Note B).……………….
Plus desired inventory, Dec. 31, 2006
Total………………………………
Less estimated inventory, Jan. 1, 2006
Total square yards to be produced..
Unit price (per square yard)………….
Total direct materials to be purchased.
Total
156,000
52,000
365,000 146,000
20,000
12,000
541,000 210,000
18,000
15,000
523,000 195,000
x
$4.50 x $1.20
$2,353,500 $234,000 $2,587,500
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Hours required for production:
Wallet (Note A)………….
Cutting
Sewing
52,000
130,000
Total
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Hours required for production:
Wallet (Note A)………….
Handbag (Note B)………..
Cutting
Sewing
52,000
43,800
130,000
116,800
Total
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
Note B: Cutting Department: 292,000 units x 0.15 hr. per unit = 43,800 hrs.
Sewing Department: 292,000 units x 0.40 hr. per unit = 116,800 hrs
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Hours required for production:
Wallet (Note A)………….
Handbag (Note B)………..
Total……………………...
Cutting
Sewing
52,000
43,800
95,800
130,000
116,800
246,800
Total
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.
Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Cutting
Hours required for production:
Wallet (Note A)………….
52,000
Handbag (Note B)………..
43,800
Total……………………...
95,800
Hourly rate…………………… x $12.00
Total direct labor cost………… $1,149,600
Note A: Cutting Department:
Sewing Department:
Note B: Cutting Department:
Sewing Department:
Sewing
Total
130,000
116,800
246,800
x $15.00
$3,702,000 $4,851,600
520,000 units x 0.10 hr. per unit = 52,000 hrs.
520,000 units x 0.25 hr. per unit = 130,000 hrs.
520,000 units x 0.15 hr. per unit = 43,800 hrs.
520,000 units x 0.40 hr. per unit = 116,800 hrs
Elite Accessories Inc.
Factory Overhead Cost Budget
For the Year Ending December 31, 2006
Indirect factory wages……………………... $ 732,800
Supervisory salaries………………………...
360,000
Power and light……………………………..
306,000
Depreciation of plant and equipment……….
288,000
Indirect materials……………………………
182,800
Maintenance………………………………...
140,280
Insurance and property taxes……………….
79,200
Total factory overhead cost………………... $2,089,080
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006…..
Work in process inventory, January 1, 2006…
Direct materials:
Direct materials inventory, January 1, 2006
(Note A)…………………………………. $
$ 1,095,600
$ 214,400
99,000
Note A: Leather:
18,000 sq. yds. x $4.50 per sq. yd
Lining:
15,000 sq. yds. x $1.20 per sq. yd
Direct materials
inventory,
January 1, 2006
$81,000
18,000
$99,000
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006…..
Work in process inventory, January 1, 2006…
Direct materials:
Direct materials inventory, January 1, 2006
(Note A)…………………………………. $
$ 1,095,600
$ 214,400
99,000
Note B: Leather:
20,000 sq. yds. x $4.50 per sq. yd
Lining:
12,000 sq. yds. x $1.20 per sq. yd
Direct materials inventory, December 31, 2006
$ 90,000
14,400
$104,400
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006….
Work in process inventory, January 1, 2006...
Direct materials:
Direct materials inventory, January 1, 2006
(Note A)………………………………….
Direct materials purchases (Slide 31)……..
Cost of direct materials available for use….
Less direct materials inventory,
December 31, 2006 (Note B)…………….
Cost of direct materials placed in production
Direct labor (Slide 35)……………………….
Factory overhead (Slide 36)…………………..
Total manufacturing costs…………………….
Total work in process during period………….
$ 1,095,600
$ 214,400
$ 99,000
2,587,500
$2,686,500
104,400
$2,582,100
4,851,600
2,089,080
9,522,780
$9,737,180
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006………...
Work in process inventory, January 1, 2006………..
Total manufacturing costs…………………………..
Total work in process during period………………..
Less work in process inventory, December 31, 2006
Cost of goods manufactured………………………...
Cost of finished goods available for sale…………...
Less finished goods inventory, December 31, 2006..
Cost of goods sold…………………………………..
$ 1,095,600
$ 214,500
9,522,780
$9,737,180
220,000
9,517,180
$10,612,780
1,565,000
$ 9,047,780
Elite Accessories Inc.
Selling and Administrative Expenses Budget
For the Year Ending December 31, 2006
Selling expenses:
Sales salaries expense…………………………. $715,000
Advertising expense…………………………...
360,000
Travel expense…………………………………. 115,000
Total selling expenses………………………...
$1,190,000
Administrative expenses:
Officers’ salaries expense………………………. $360,000
Office salaries expense…………………………. 258,000
Office rent expense……………………………... 34,500
Office supplies expense…………………………. 17,500
Miscellaneous administrative expense………….. 25,000
Total administrative expenses…………………
695,000
Total selling and administrative expenses…………
$1,885,000
Elite Accessories Inc.
Budgeted Income Statement
For the Year Ending December 31, 2006
Revenue from sales (slide 23)
$13,336,000
Cost of goods sold (slide 40)
9,047,780
Gross profit
$ 4,288,220
Selling & administrative expenses:
Selling expenses (slide 41)
$1,190,000
Administrative expenses (slide 41)
695,000
Total sell. & Admin. Expenses
1,885,000
Income from operations
$ 2,403,220
Other income:
Interest revenue
$ 98,000
Other expense:
Interest expense
90,000
8,000
Income before income tax
$ 2,411,220
Income tax
600,000
Net income
$ 1,811,220
The cash budget is one of the
most important elements of the
budgeted balance sheet. We’ll
begin with a schedule of
collection from sales.
Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January
February
March
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………... $108,000
$ 124,000
$ 97,000
Note A: $108,000 = $1,080,000 x 10%
$124,000 = $1,240,000 x 10%
$ 97,000 = $ 970,000 x 10%
Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………... $108,000
Receipts from sales on account:
Collections from prior month’s
sales (40%)(see Note B)……. $370,000
Note B:
February
March
$ 124,000
$ 97,000
$ 388,800
$446,400
$370,000, given as January 1, 2006 Accounts
Receivable balance
$388,800 = $1,080,000 x 90% x 40%
$446,400 = $1,240,000 x 90% x 40%
Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………... $108,000
Receipts from sales on account:
Collections from prior month’s
sales (40%)(see Note B)……. $370,000
Collections from current
month’s sales (60%)(see Note
C)…………………………… 583,200
February
March
$ 124,000
$ 97,000
$ 388,800
$446,400
669,600
523,800
Note C: $583,200 = $1,080,000 x 90% x 60%
$669,600 = $1,240,000 x 90% x 60%
$523,800 = $ 970,000 x 90% x 60%
Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………...
Receipts from sales on account:
Collections from prior month’s
sales (40%)(see Note B)…….
Collections from current
month’s sales (60%)(see Note
C)……………………………
Total receipts from sales on
account……………………...
January
February
March
$108,000
$ 124,000
$ 97,000
$370,000
$ 388,800
$446,400
583,200
669,600
523,800
$953,200 $1,058,400
$970,200
Elite Accessories Inc.
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2006
January
February
March
Payment of prior month’s
manufacturing costs (25%)
(see Note A)………………… $190,000
$204,000
$189,000
Note A: $190,000, given as January 1, 2006 Accounts
Payable balance
$204,000 = ($840,000 –$24,000) x 25%
$189,000 = ($780,000 – $24,000) x 75%
Elite Accessories Inc.
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2006
January
Payment of prior month’s
manufacturing costs (25%)
(see Note A)………………… $190,000
Payment of current month’s
manufacturing costs (75%)
(see Note B)…………………. 612,000
February
March
$204,000
$189,000
567,000
591,000
Note B: $612,000 = ($840,000 – $24,000) x 75%
$567,000 = ($780,000 – $24,000) x 75%
$591,000 = ($812,000 – $24,000) x 75%
Elite Accessories Inc.
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2006
January
Payment of prior month’s
manufacturing costs (25%)
(see Note A)………………… $190,000
Payment of current month’s
manufacturing costs (75%)
(see Note B)…………………. 612,000
Total payments………………. $802,000
February
March
$204,000
$189,000
567,000
$771,000
591,000
$780,000
Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
January
Estimated cash receipts:
Cash sales (Slide 45)………….. $ 108,000
Collections of accounts
receivable (Slide 48)………... 953,200
Interest revenue………………...
—
Total cash receipts……………. $1,061,200
February
March
$ 124,000
$
97,000
1,058,400
—
$1,182,400
970,200
24,500
$1,091,700
Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
January
Estimated cash receipts:
Cash sales (Slide 45)………….. $ 108,000
Collections of accounts
receivable (Slide 48)………... 953,200
Interest revenue………………...
—
Total cash receipts……………. $1,061,200
Estimated cash payments for:
Manufacturing costs (Slide 51).. $ 802,000
Selling and administrative
expenses……………………… 160,000
Capital additions
Interest expense
22,500
Income taxes
February
March
$ 124,000
$
97,000
1,058,400
—
$1,182,400
970,200
24,500
$1,091,700
$ 771,000
$ 780,000
165,000
274,000
145,000
150,000
Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
January
Estimated cash receipts:
Cash sales (Slide 45)………….. $ 108,000
Collections of accounts
receivable (Slide 48)………... 953,200
Interest revenue………………...
—
Total cash receipts……………. $1,061,200
Estimated cash payments for:
Manufacturing costs (Slide 51).. $ 802,000
Selling and administrative
expenses……………………… 160,000
Capital additions
Interest expense
22,500
Income taxes
Total cash payments…………. $ 984,500
February
March
$ 124,000
$
1,058,400
—
$1,182,400
970,200
24,500
$1,091,700
$ 771,000
$ 780,000
165,000
274,000
145,000
$1,210,000
97,000
150,000
$1,075,000
Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
Estimated cash receipts:
Cash sales (Slide 45)………….. $
Collections of accounts
receivable (Slide 48)………...
Capital additions
Interest expense………………..
Income taxes…………………...
Total cash payments…………. $
January
February
108,000
$ 124,000
953,200
1,058,400
274,000
March
$
97,000
970,200
22,500
984,500
Cash increase (decrease)…………. $ 76,700
Cash balance at beginning of month 280,000
Cash balance at end of month……. $ 356,700
Minimum cash balance…………… 340,000
Excess (deficiency)………………. $ 16,700
$1,210,000
150,000
$1,075,000
$ (27,600) $ 16,700
356,700
329,100
$ 329,100 $ 345,800
340,000
340,000
$ (10,900) $
5,800
Chapter 20
The End