Budgeting and Financial
Planning
Chapter 15
Why budgets?
Planning
Controlling
Coordination
Allocation of resources
Evaluation
Master budget
Series of individual budgets and
schedules representing the plan
for the organization
Begins with sales forecast
Ends with pro forma financial
statements
Sales budget
Revenue and “unit” forecast
Based on various pieces of info
Past sales, trends, pricing policy,
competitors’ actions, etc.
Units
Selling price
Revenue
Q1
20,000
$
20
$ 400,000
Q2
30,000
$
20
$ 600,000
Q3
18,000
$
20
$ 360,000
Q4
14,000
$
20
$ 280,000
Total
82,000
$
20
$ 1,640,000
Operational budgets
For various operational areas
Tailored to the type of organization
Revenue-producing resource needs
Production or acquisition
Selling and administrative
Cash receipts and disbursements
Capital budget
Production budget
Based on sales forecast, desired
inventory levels
Sales + end. invty. – beg. Invty.
Sales
Ending inventoy
Needed
Beginning inventory
Production
Q1
20,000
1,500
21,500
1,000
20,500
Q2
30,000
900
30,900
1,500
29,400
Ending Inventory 5% of next month's sales
Assumed
Q3
18,000
700
18,700
900
17,800
Q4
14,000
1,100
15,100
700
14,400
Total
82,000
1,100
83,100
1,000
82,100
Materials budget
Based on production needs,
desired material inventory levels
Production
Pieces per finished unit
Production needs
Ending inventory
Needed
Beginning inventory
Purchases
Cost per piece
Cost of purchases
Q1
20,500
3
61,500
4,410
65,910
3,075
62,835
Q2
29,400
3
88,200
2,670
90,870
4,410
86,460
Q3
17,800
3
53,400
2,160
55,560
2,670
52,890
Q4
14,400
3
43,200
3,383
46,583
2,160
44,423
Total
82,100
3
246,300
3,383
249,683
3,075
246,608
$
4.00
$ 251,340
$
4.00
$ 345,840
$
4.00
$ 211,560
$
4.00
$ 177,690
$
4.00
$ 986,430
Inventory is 5% of next month's production needs
Assumed
Labor budget
Based on production needs
Production
Hours per unit
Hours required
Cost per hour
Labor cost
Q1
20,500
0.10
2,050
Q2
29,400
0.10
2,940
Q3
17,800
0.10
1,780
Q4
14,400
0.10
1,440
Total
82,100
0.10
8,210
$ 12.00
$ 24,600
$ 12.00
$ 35,280
$ 12.00
$ 21,360
$ 12.00
$ 17,280
$ 12.00
$ 98,520
Assumes labor is a unit-level cost
Overhead budget
Based on production needs
Not all costs will be proportional to
units produced
Batch-level
Product-level
Facility-level
Unit-level
Units
Indirect materials ($.50 per unit)
Utilities ($.12 per unit)
Total unit-level costs
Batch-level
Batches
Set-up ($200 per batch)
Material handling ($50 per batch)
Total batch-level costs
Product-level
Engineering change orders
Engineering ($1,200 per ECO)
Total product-level costs
Facility-level
Administrative salaries
Insurance
Depreciation
Total facility-level costs
Total overhead
Less depreciation
Cash overhead costs
$
$
$
$
$
$
$
$
Q1
Q2
Q3
Q4
20,500
10,250
2,460
12,710
29,400
14,700
3,528
18,228
17,800
8,900
2,136
11,036
14,400
7,200
1,728
8,928
21
4,200
1,050
5,250
7
8,400
8,400
$
$
$
$
40,000
5,000
15,000
60,000
$
86,360
15,000
71,360
$
$
$
30
6,000
1,500
7,500
4
4,800
4,800
$
$
$
$
40,000
15,000
55,000
$
85,528
15,000
70,528
$
$
$
18
3,600
900
4,500
2
2,400
2,400
$
$
$
$
40,000
5,000
15,000
60,000
$
77,936
15,000
62,936
$
$
$
15
3,000
750
3,750
1
1,200
1,200
Total
$
$
$
$
40,000
15,000
55,000
$
68,878
15,000
53,878
$
$
$
82,100
41,050
9,852
50,902
84
16,800
4,200
21,000
14
16,800
16,800
160,000
10,000
60,000
230,000
318,702
60,000
258,702
SG&A budget
May be unit-, batch-, product-,
customer- or facility-level
Selling expenses based on units
sold
Not units produced
Unit-level
Unit sales
Sales commissions ($.60 per unit)
Total unit-level expenses
Batch-level
Batches shipped
Freight-out ($45 per batch)
Insurance ($5 per batch)
Total batch-level expenses
Customer-level
Number of new customers
Account set-up ($250 per new customer)
Product support ($300 per new customer)
Total customer-level expenses
Facility-level
Sales salaries
Administrative salaries
Advertising
Bad debt expense
Depreciation
Insurance
Total facility-level expenses
Total SG&A expenses
Less depreciation
Less bad debt expense
Cash SG&A expenses
$
$
$
$
$
$
$
$
$
$
Q1
Q2
Q3
Q4
20,000
12,000
12,000
30,000
18,000
18,000
18,000
10,800
10,800
14,000
8,400
8,400
40
1,800
200
2,000
17
4,250
5,100
9,350
$
$
$
$
$
$
20,000
35,000
4,000
8,000
7,000
500
74,500
$
97,850
7,000
8,000
82,850
$
$
$
60
2,700
300
3,000
21
5,250
6,300
11,550
$
$
$
$
$
$
20,000
35,000
4,000
12,000
7,000
500
78,500
$
111,050
7,000
12,000
92,050
$
$
$
36
1,620
180
1,800
14
3,500
4,200
7,700
$
$
$
$
$
$
20,000
35,000
4,000
7,200
7,000
500
73,700
$
94,000
7,000
7,200
79,800
$
$
$
28
1,260
140
1,400
9
2,250
2,700
4,950
Total
$
$
$
$
82,000
49,200
49,200
164
7,380
820
8,200
$
61
15,250
18,300
33,550
20,000
35,000
4,000
5,600
7,000
500
72,100
$
$
$
$
$
$
$
80,000
140,000
16,000
32,800
28,000
2,000
298,800
86,850
7,000
5,600
74,250
$
389,750
28,000
32,800
328,950
$
$
Cash budget
All cash inflows and outflows
Possible timing differences
between revenues and expenses
and the resulting cash flows
Credit sales
Schedule of cash receipts
Credit purchases
Schedule of cash disbursements
Schedule of cash collections
Sales revenue
$
Q1
400,000
60% collected in
quarter of sale
$
240,000
$
Q2
600,000
$
360,000
$
Q3
360,000
$
216,000
$
Q4
280,000
Total
$ 1,640,000
$
168,000
$
984,000
38% collected in
quarter after sale
78,420
152,000
228,000
136,800
595,220
2% uncollectible
Total collected
318,420
512,000
444,000
304,800
$ 1,579,220
$
$
$
$
Assumed
Schedule of cash disbursements for materials
Material purchases
$
Q1
251,340
80% paid in month
of purchase
$
201,072
$
27,852
228,924
20% paid in month
following purchase
Total disbursed
Assumed
$
Q2
345,840
$
276,672
$
50,268
326,940
$
Q3
211,560
$
169,248
$
69,168
238,416
$
Q4
177,690
$
Total
986,430
$
142,152
$
789,144
$
42,312
184,464
$
$
189,600
978,744
Schedule of cash disbursements for operations
Materials
Production labor
Indirect materials
Utilities
Set-up
Material handling
Engineering
Factory admin salaries
Factory insurance
Sales commissions
Freight-out
Insurance on shipments
Account set-up
Product support
Sales salaries
General admin salaries
Advertising
Insurance
Total cash disbursements
for operations
$
$
Q1
228,924
24,600
10,250
2,460
4,200
1,050
8,400
40,000
5,000
12,000
1,800
200
4,250
5,100
20,000
35,000
4,000
500
407,734
$
$
Q2
326,940
35,280
14,700
3,528
6,000
1,500
4,800
40,000
18,000
2,700
300
5,250
6,300
20,000
35,000
4,000
500
524,798
$
$
Q3
238,416
21,360
8,900
2,136
3,600
900
2,400
40,000
5,000
10,800
1,620
180
3,500
4,200
20,000
35,000
4,000
500
402,512
$
$
Q4
184,464
17,280
7,200
1,728
3,000
750
1,200
40,000
8,400
1,260
140
2,250
2,700
20,000
35,000
4,000
500
329,872
$
Total
978,744
98,520
41,050
9,852
16,800
4,200
16,800
160,000
10,000
49,200
7,380
820
15,250
18,300
20,000
35,000
4,000
500
$ 1,486,416
Cash collections
Cash disbursements
Change in cash from
operations
Proceeds from sale of
equipment
Proceeds from bank loan
Proceeds from stock
Purchase of equipment
Payment of dividends
Repayment of bank loan
Payment of interest on
bank loan
Change in cash during
the period
Beginning cash balance
Ending cash balance
$
Q1
318,420
407,734
$
(89,314) $
$
Q2
512,000
524,798
$
Q3
444,000
402,512
$
Q4
304,800
329,872
(12,798) $
41,488
$
(25,072) $
$
7,500
$
$
(2,500)
(2,500)
(1,875)
(1,875)
(1,875)
31,311
20,000
51,311
$
$
(49,673) $
51,311
1,638 $
37,113
1,638
38,751
$
$
(85,696)
200,000
(52,000)
(2,500)
(125,000)
7,500
125,000
200,000
(92,000)
(10,000)
(125,000)
(1,875)
(7,500)
(6,447) $
38,751
32,304 $
12,304
20,000
32,304
125,000
(40,000)
(2,500)
Total
1,579,220
1,664,916
Budgeted cost of goods
manufactured
Determines the absorption cost
per unit manufactured Unit cost
Total cost
Direct material 3 pieces @
$4.00 per piece)
Direct labor (0.10 hours @
$12.00 per hour)
Unit-level overhead
Batch-level overhead
Product-level overhead
Facility level overhead
Total cost per unit
$
(82,100 units)
$
12.00
$
1.20
0.62
0.26
0.20
2.80
17.08
50,902
21,000
16,800
230,000
Pro forma financial statements
Income statement
Revenue from sales budget
Cost of goods sold from unit cost calculation
SG&A expenses from SG&A budget
Other expenses from cash budget
Interest expense
Income tax expense
Pro forma income statement
Sales revenue
Cost of goods sold
(82,000 units @ $17.08)
Gross profit
SG&A expenses
Income from operations
Interest expense
Income before taxes
Income tax expense
Net income (loss)
$
$
$
$
$
1,640,000
1,400,560
239,440
389,750
(150,310)
7,500
(157,810)
(157,810)
Pro forma financial statements
Balance sheet
Some items direct from budgets
Cash
Accounts receivable
Materials inventory
Finished goods inventory
Accounts payable
Some are “rolled forward” from previous year
balances
Pro forma financial statements
Statement of retained earnings
Previous year balance
Add pro forma income
Subtract dividends (cash budget)
Cash flow statement
Direct from cash budget
Budget considerations
Different budgets for different uses
Planning
Master budget
Static budget
Controlling
Flexible budget
Includes different levels of activity as
benchmarks
Evaluating
Flexible budget
Budget at actual level achieved
Budget considerations
Behavioral and ethical issues
Based on estimates
May be intentionally misstated to make actual
results look better than planned
Misallocation of resources
Breakdown of coordination
Participative or imposed?
Who knows best?