Budgeting
ACG 2071
Chapter 21
Module 9
Fall 2007
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
East
West
North
1st
Qtr
3rd
Qtr
Budgets

Objectives
• Establishing specific goals
• Executing plans to achieve goals
• Periodically comparing actual results with
goals
Management meets objectives



Planning
Directing
Controlling
Budgeting Systems




Continuous Budget
Static budget
Flexible budget
Zero Based Budgeting
Master Budget


Manufacturing Company
Parts
•
•
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
Budgeted balance sheet
•
•
Cash budget
Capital Expenditure Budget
Sales Budget


Indicates for each product the quantity of sales
and expected selling price
Example 1: 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
Sales Budget
Brite Lite
Sales Budget
For year 2008
Product A
Product B
Units sold:
United States
5,000
20,000
10,000
6,000
Total units sold
15,000
26,000
Sales price per
unit
X $100
X $50
$1,500,000
1,300,000
Canada
Total sales
$2,800,000
Production Budget


Coordinates with sales budget to ensure
that production and sales are kept in
balance during the period
Number of units manufactured to meet
budgeted sales and inventory needs for
each product is set forth in the
production budget.
Production Budget Formula
Expected units to be sold
+ Desired Ending Inventory
-Estimated Beginning Inventory
Total units to be produced
Production budget

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
Production Budget
Brite Lite
Production Budget
For year 2008
Product A
Expected sales (in units)
Product B
15,000
26,000
Plus desired ending inventory
+ 1,500
+ 2,600
Minus estimated beginning
inventory
- 3,000
- 5,000
13,500
23,600
Total production
Example 2 Class problem




Geo produces three products X, Y, and Z.
Sales:
• 10,000 units to X,
• 15,000 units to Y
• 25,000 to Z. B
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
• 4,000 to Z. Complete production budget.
Direct Materials 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:
Direct Materials Budget Formula
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
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
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.
Ending
Invent
ory
(lbs)
Beginnin
g
invent
ory
(lbs.)
Plastic
4,000
7,300
Aluminum
6,000
3,600
Paper
8,000
5,200
AL
Plastic
Paper
Total
Product A (13,500 units)
13,500 x 3 lbs.
40,500
13,500 x 2 lbs.
27,000
13,500 x 0 lbs.
0
Product B (23,600 units)
23, 600 x 1lbs.
23.600
23,600 x ½ lbs.
11,800
23,600 x 2 lbs.
Total needed for production
47,200
64,100
38,800
47,200
+ Desired Ending
inventory
4,000
6,000
8,000
Total units needed
68,100
44,800
55,200
- Beginning Inventory
-7,300
-3,600
-5,200
Total direct materials
purchased
60,800
41,200
50,000
Unit cost for material
X $5
X $10
X $2
$304,000
$412,000
$100,000
Total costs
$816,000
Direct Labor Budget


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.
Example
Department 1
Department 2
Total
Product A (13,500 units)
6 hours per unit x 13,500
81,000
2 hours per unit x 13,500
27,000
Product B (23,600 units)
4 hours x 23,600 units
94,400
½ hour x 23,600 units
Total hours per
department
Labor cost per hour
Total
11,800
175,400
38,800
X $10
X $7
$1,754,000
$271,600 $2,025,600
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
Selling and Administrative
Budget:

Sales budget is often used as the
starting point for estimating the selling
and administrative expenses.
Budgeted Income Statement:
Budgeted Income Statement
Revenue from sales
$ 13,336,000.00
Cost of goods sold
$ 9,047,780.00
Gross profit
$ 4,288,220.00
Selling and administrative expenses
$ 1,885,000.00
Income from operations
$ 2,403,220.00
Other income
Interest revenue
$
98,000.00
$
90,000.00
Other expenses
Interest expenses
$
8,000.00
Income before income tax
$ 2,411,220.00
Income tax
$
Net income
$ 1,811,220.00
600,000.00
Balance Sheet Budgets


Cash Budget
Capital Expenditure Budget
Capital Expenditures Budget

Lists dollar amounts to be both received
from plant asset disposals and spent to
purchase additional plant assets to carry
out the budgeted business activities
Cash Budget




Is one of the most important
elements of budgets
Presents the expected receipts
and payments of cash for a period
of time
Three parts of the budget”
•
•
•
Cash receipts
Cash payments
Other items
We prepare a schedule for cash
receipts and cash payments
Schedule of Cash Receipts


: 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
$ 972,000.00
Collections in February
$ 583,200.00 *
Remainder collected in March
$ 388,800.00
* 60% of Credit sales = $972,000 x 60%
Calculations
February Sales
Sales
Less cash portion ( 10% of sales)
$ 1,240,000.00
$ 124,000.00
Credit sales
$ 1,116,000.00
Credit sales
$ 1,116,000.00
Collections in February
Remainder collected in March
$ 669,600.00
$ 446,400.00
Calculations
March Sales
Sales
$ 970,000.00
Less cash portion ( 10% of sales)
$
Credit sales
$ 873,000.00
Credit sales
$ 873,000.00
Collections in February
$ 523,800.00
Remainder collected in March
$ 349,200.00
97,000.00
Schedule of Cash Receipts
January
Receipts of Cash Sales
February
March
$108,000
$124,000
$97,000
$370,000
$388,800
$446,400
Collection from current
month’s
583,200
669,600
523,800
Total receipts
953,200 1,058,400
970,200
Receipt from collections:
Collection from last month’s
sales
Schedule of Cash Payments

Reduction in cash from manufacturing, selling and
administrative, capital expenditure, and other
expenses

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.
January Manufacturing Costs
Total manufacturing costs for month
$ 840,000.00
Less depreciation expense
$
Total manufacturing costs owed
$ 816,000.00
24,000.00
Payment in January
Total manufacturing costs owed
$ 816,000.00
'75% paid in month incurred
X 75%
Payment in January
$ 612,000.00
Total manufacturing costs owed
$ 816,000.00
Less payment in January
$ 612,000.00
Payment in February
$ 204,000.00
February Manufacturing Costs
Total manufacturing costs for month
$ 780,000.00
Less depreciation expense
$
Total manufacturing costs owed
$ 756,000.00
24,000.00
Payment in February
Total manufacturing costs owed
$ 756,000.00
'75% paid in month incurred
75%
Payment in February
$ 567,000.00
Total manufacturing costs owed
$ 756,000.00
Less payment in February
$ 567,000.00
Payment in March
$ 189,000.00
March Manufacturing Costs
Total manufacturing costs for month
$ 812,000.00
Less depreciation expense
$
Total manufacturing costs owed
$ 788,000.00
24,000.00
Payment in March
Total manufacturing costs owed
$ 788,000.00
'75% paid in month incurred
75%
Payment in March
$ 591,000.00
Total manufacturing costs owed
$ 788,000.00
Less payment in March
$ 591,000.00
Payment in April
$ 197,000.00
Schedule of Cash Payments
January
Payments of prior month’s
manufacturing costs
Payments of current month’s
manufacturing costs
Total payments
February
March
$190,000
$204,000
$189,000
612,000
567,000
591,000
$802,000
$771,000
$780,000
Completing the Cash Budget

After preparing the schedule of cash
receipts and the schedule of cash
payments, we review additional items
and prepare the formal cash budget.
Completing the Budget







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:
•
•
•
January $160,000
February $165,000
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
January
February
March
Estimated cash receipts
Cash receipts
$
Cash Budget
Collections of accounts
receivables
$
108,000.00
$
124,000.00
$
97,000.00
953,200.00
$
1,058,400.00
$
970,200.00
$
24,500.00
Interest revenue
Total cash receipts
$
1,061,200.00
$
1,061,200.00
$
1,091,700.00
Manufacturing costs
$
802,000.00
$
771,000.00
$
780,000.00
Selling and administrative
$
160,000.00
$
165,000.00
$
145,000.00
$
274,000.00
$
150,000.00
Estimated cash payments
Capital expenditures
Interest expense
$
22,500.00
Tax payment
Total cash payments
$
984,500.00
$
1,210,000.00
$
1,075,000.00
Cash increase
$
76,700.00
$
(148,800.00)
$
16,700.00
Cash balance at beg of month
$
280,000.00
$
356,700.00
$
207,900.00
Cash balance at end of month
$
356,700.00
$
207,900.00
$
224,600.00
Minimum cash balance
$
340,000.00
$
340,000.00
$
340,000.00
Excess
$
16,700.00
$
(132,100.00)
$
(115,400.00)