23-1
CHAPTER 23
BUDGETING FOR
PLANNING AND CONTROL
23-2
Budget

Webster’s definition ...

Text def. (p. 827): A plan showing the
company’s objectives and how
management intends to acquire and use
resources to attain those objectives.

A plan, while necessary, is
insufficient by itself; control
is also needed to insure that
plans are accomplished.
23-3
Why Budget?

Budgets enable
organizations to better
deal with the uncertainty
of the future.

Without planning,
organizations only react
to future events rather
than anticipating them.
23-4
Purposes of Budgets
Formalize in writing management’s
plans in quantitative terms
Express
management’s
plans for
coming periods
Purposes
Increase
motivation to
achieve
stated goals
Cause managers to think ahead,
anticipate results and act to
correct poor results
23-5
Benefits of Budgets
Produces more costconscious employees
Fosters coordination
of activities
Communicates
plans
Benefits
Facilitates review
and revision of plans
Develops a more
visionary management
Promotes management
by exception
Considerations in
Preparing a Budget

Management's assumptions re:
State of the economy for the
planning period
 Adding, deleting or
changing product lines
 Nature and degree of competition
 Effects of government regulation


Useful accounting data from past
periods can be adjusted for future
expectations.
23-6
General Principles of
Good Budgeting
Coordination of financial and
nonfinancial planning
 Top management support
 Employee participation in
goal setting
 Communicating results
 Flexibility
 Follow-up

23-7
Behavioral Implications of
Budgeting

Hazards of imposed budgets
Employee resistance to perceived unfair
or unrealistic goals
 Does not facilitate free flow of
management-employee communications


Participatory budgeting


All levels of management actively
participate in the process
Accountant’s role

Should compile the information and
coordinate the preparation of the budget
23-8
23-9
Participatory Budget System
Top Management
Middle
Management
Supervisor
Supervisor
Middle
Management
Supervisor
Flow of Budget Data
Supervisor
23-10
Master Budget

Sets specific targets for
Sales revenue
 Production costs
 Selling and administrative expenses
 Cash receipts and disbursements


Culminates in projected financial
statements

Projected Balance Sheet

Projected Income Statement
• A/K/A Financial Budget
• A/K/A Pro Forma Balance Sheet
• A/K/A Planned Operating Budget
• A/K/A Pro Forma Income Statement
23-11
Master Budget

Using an electronic spreadsheet
to prepare is ideal because of
Considering “what if” scenarios
 Interlocking relationships between
the various elements of the budget


Which is prepared first?
Projected Income Statement
 Projected Balance Sheet

23-12
Master Budget

Using an electronic spreadsheet
to prepare is ideal because of
Considering “what if” scenarios
 Interlocking relationships between
the various elements of the budget


Which is prepared first?
a. Projected Income Statement
b. Projected Balance Sheet

Trivia time! What was the first
electronic spreadsheet?
23-13
Master Budget
(Prepared first)
Production
costs
Detail
Budget
Detail
Budget
Detail
Budget
Detail
Budget
Detail
Budget
Projected
Income Statement
and
Balance Sheet
23-14
Sales Budget
Detailed schedule showing expected
sales for the coming periods
expressed in units and dollars.
23-15
Sales Budget
All items in the budgeting process are
dependent on a sales forecast.
Compilation of forecasts
from sales staff
Statistical
forecasts
Sales
Forecas
t
Economic
models
Management
intuition
23-16
Budgets
That’s enough talking
about budgets, now
show me some examples!
23-17
Sales Budget
Ellis Magnet Co. is preparing budgets for the quarter
ending June 30. The sales price is $10 per magnet.
Budgeted sales for the next four months are:
April
May
June
July
20,000 magnets
50,000 magnets
30,000 magnets
25,000 magnets
@ $10 =
@ $10 =
@ $10 =
@ $10 =
$200,000
$500,000
$300,000
$250,000
The Sales Budget
July is needed for June ending inventory computations.
23-18
Production Budget
Sales
Budget
Production
Budget
23-19
Production Budget
Two Approaches
Based on sales estimates and
level production each period
Ending inventory level is a residual
and fluctuates
 e.g., ILL. 23.2 (p. 833)
 A/K/A Sales and Production Budget

Based on sales estimates and
desired ending inventory level
Production quantity is a
residual and fluctuates
 e.g., Bottom p. 833

23-20
Production Budget
Ellis wants ending inventory
to be 20 percent of the next month’s
budgeted sales in units.
4,000 units were on hand March 31.
Let’s prepare the
production budget using the
second approach.
23-21
Production Budget
Production must be adequate to meet
budgeted sales and to provide sufficient
ending inventory.
Budgeted product sales in units
+ Desired product units in ending inventory
= Total product units needed
– Product units in beginning inventory
= Product units to produce
23-22
Production Budget
Budgeted unit sales
Desired ending inventory
Total units needed
Less beginning inventory
Units to produce
April
20,000
May
50,000
June
30,000
23-23
Production Budget
Budgeted unit sales
Desired ending inventory
Total units needed
Less beginning inventory
Units to produce
April
20,000
10,000
30,000
May
50,000
6,000
56,000
June
30,000
5,000
35,000
Ending inventory = 20% of next month's production needs
June ending inventory = .20 × 25,000 July units = 5,000 units
23-24
Production Budget
Budgeted unit sales
Desired ending inventory
Total units needed
Less beginning inventory
Units to produce
April
20,000
10,000
30,000
4,000
26,000
May
50,000
6,000
56,000
10,000
46,000
June
30,000
5,000
35,000
6,000
29,000
Ending inventory = 20% of next month's production needs
June ending inventory = .20 × 25,000 July units = 5,000 units
Beginning inventory is last month's ending inventory.
23-25
Production Budget
Production
Budget
Units
Production
Budget
Material
Purchases
23-26
Production Budget
Material Purchases
The material purchases budget is based on
production quantity and desired material
inventory levels.
×
=
+
=
–
=
Units to produce
Material needed per unit
Material needed for units to produce
Desired units of material in ending inventory
Total units of material needed
Units of material in beginning inventory
Units of material to purchase
23-27
Production Budget
Material Purchases
Five pounds of material are needed for
each unit produced.
Ellis wants to have materials on hand at
the end of each month equal to 10
percent of the following month’s
production needs.
The materials inventory on March 31 is
13,000 pounds. July production is
budgeted for 23,000 units.
23-28
Production Budget
Material Purchases
Units to produce
Pounds per unit
Material needs (lbs.)
Desired ending inventory
Total material needs (lbs.)
Less beginning inventory
Material purchases (lbs.)
April
26,000
5
130,000
May
46,000
5
230,000
June
29,000
5
145,000
23-29
Production Budget
Material Purchases
Units to produce
Pounds per unit
Material needs (lbs.)
Desired ending inventory
Total material needs (lbs.)
Less beginning inventory
Material purchases (lbs.)
April
26,000
5
130,000
23,000
153,000
May
46,000
5
230,000
14,500
244,500
June
29,000
5
145,000
11,500
156,500
Ending inventory = 10% of next month's material needs
June Ending inventory = .10 × (23,000 units × 5 lbs. per unit)
June Ending inventory = 11,500 lbs.
23-30
Production Budget
Material Purchases
Units to produce
Pounds per unit
Material needs (lbs.)
Desired ending inventory
Total material needs (lbs.)
Less beginning inventory
Material purchases (lbs.)
April
26,000
5
130,000
23,000
153,000
13,000
140,000
May
46,000
5
230,000
14,500
244,500
23,000
221,500
June
29,000
5
145,000
11,500
156,500
14,500
142,000
Ending inventory = 10% of next month's material needs
June Ending inventory = .10 × (23,000 units × 5 lbs. per unit)
June Ending inventory = 11,500 lbs.
Beginning inventory is last month's ending inventory.
23-31
Production Budget
Production
Budget
Material
Purchases
Production
Budget
Labor
(Not shown)
23-32
Cash Receipts Budget
O.K., let’s do a
cash receipts
budget!
23-33
Cash Receipts Budget
All sales are on account.
Ellis’ collection pattern is:
70 percent collected in month of sale
25 percent collected in month after sale
5 percent will be uncollectible
Accounts receivable on March 31 is
$30,000, all of which is collectible.
23-34
Cash Receipts Budget
Budgeted unit sales
Price per unit
Budgeted sales revenue
Receipts from March sales
Receipts from April sales
Receipts from May sales
Receipts from June sales
Total cash receipts
April
20,000
$
10
$ 200,000
$ 30,000
$ 170,000
May
50,000
$
10
$ 500,000
June
30,000
$
10
$ 300,000
23-35
Cash Receipts Budget
Budgeted unit sales
Price per unit
Budgeted sales revenue
Receipts from March sales
Receipts from April sales
Receipts from May sales
Receipts from June sales
Total cash receipts
April
20,000
$
10
$ 200,000
May
50,000
$
10
$ 500,000
$ 30,000
140,000
50,000
June
30,000
$
10
$ 300,000
$ 170,000
April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000
23-36
Cash Receipts Budget
Budgeted unit sales
Price per unit
Budgeted sales revenue
Receipts from March sales
Receipts from April sales
Receipts from May sales
Receipts from June sales
Total cash receipts
April
20,000
$
10
$ 200,000
$ 30,000
140,000
$ 170,000
May
50,000
$
10
$ 500,000
June
30,000
$
10
$ 300,000
50,000
350,000
125,000
$ 400,000
April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000
May: .70 × $500,000 = $350,000 and .25 × $500,000 = $125,000
23-37
Cash Receipts Budget
Budgeted unit sales
Price per unit
Budgeted sales revenue
Receipts from March sales
Receipts from April sales
Receipts from May sales
Receipts from June sales
Total cash receipts
April
20,000
$
10
$ 200,000
$ 30,000
140,000
$ 170,000
May
50,000
$
10
$ 500,000
50,000
350,000
$ 400,000
June
30,000
$
10
$ 300,000
125,000
210,000
$ 335,000
April: .70 × $200,000 = $140,000 and .25 × $200,000 = $50,000
May: .70 × $500,000 = $350,000 and .25 × $500,000 = $125,000
June: .70 × $300,000 = $210,000
23-38
Comprehensive Cash Budget
.
We can now
prepare a
comprehensive
cash budget
which will also
include cash
disbursements.
23-39
Projected Income Statement
Cash
Budget
Projected
Income
Statement
23-40
Projected Income Statement
Ellis Magnet Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10)
$ 1,000,000
23-41
Projected Income Statement
Ellis Magnet Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10)
Cost of goods sold (100,000 @ $4.99)
Gross margin
$ 1,000,000
499,000
501,000
Computation of unit cost is
assumed to shorten the
illustration.
23-42
Projected Income Statement
Ellis Magnet Company
Budgeted Income Statement
For the Three Months Ended June 30
Sales (100,000 units @ $10)
$ 1,000,000
Cost of goods sold (100,000 @ $4.99)
499,000
Gross margin
501,000
Selling and administrative expenses
260,000
Operating income
241,000
Assumed
Interest expense
2,000
Net income
$ 239,000
23-43
Projected Balance Sheet
Projected
Income
Statement
Projected
Balance
Sheet
23-44
Ellis Magnet Company
Projected Balance Sheet
June 30, 1999
Current assets
Cash
$ 43,000
Accounts receivable
75,000
Raw materials inventory
4,600
Finished goods inventory
24,950
25%
of
June
11,500 lbs.
Total current assets
147,550
sales
of
at $.40 per
lb. and equipment
Property
5,000
units balance $ 148,150
$300,000
Beginning
Land
50,000
at $4.99
each
Add:
net
income
239,000
Building
174,500
50% of
June
192,500
Deduct:Equipment
dividends
(51,000)
purchases
Total property
and equipment
417,000
Ending balance
$ 336,150
of $56,800
Total assets
$ 564,550
Liabilities and Equities
Accounts payable
Common stock
Retained earnings
Total liabilities and equities
$ 28,400
200,000
336,150
$ 564,550
23-45
Text Illustrations
Now, let’s look more
closely at some of the
illustrations in the chapter
23-46
Leed Company

ILL. 23.3 (P. 833) - This is the basis for
many subsequent illustrations.

ILL. 23.4 (P. 834) - You should have
determined the source of each
number here when you “worked your
way through the chapter”.

Questions?
Flexible Budget and
Budget Variances


Flexible Budget - one that provides
budgeted revenues and expenses at various
levels of output (i.e., production or sales)
“When management uses a flexible budget
to appraise a department’s performance, it
bases the evaluation on the amounts
budgeted for the level of activity actually
experienced. The difference between the
actual costs incurred and the flexible
budget amount for that
p. 835
same level of operations is
called a budget variance.”
23-47
Flexible Budget and
Budget Variances

Referring to ILL. 23.6 (p. 836), the
Flexible Budget for Manufacturing
Overhead, what is the relevant range?
17,500 to 25,000 units

Now, if actual power cost = $9,600,
what is the budget variance?
$9,600 Actual
- 7,000 Budgeted
2,600 UNfavorable budget variance
23-48
Illustration 23.7 vs.
Illustration 23.8
23.7 - Comparison of Planned Operating
Budget and Actual Results
Used for what?
Assessment of overall performance
vs. objectives
What were objectives?
Sales of $400,000 and profit of $6,000
Why were earnings better than budget
when sales were worse than budget?
23-49
Illustration 23.7 vs.
Illustration 23.8
23.8 - Comparison of Flexible Operating
Budget and Actual Results
Please add to title: “At the Level of
Production and Sales Attained”
Used for what?
Expense control purposes
p. 837
23-50
23-51
Additional Budgeting Topic
Zero-Base Budgeting
Managers start each year
with zero budget levels and
must justify each dollar
appearing in the budget
instead of just taking the
prior year’s budget or
actual results as the
starting point, as is so often
done with traditional
budgeting.
23-52
THE END
I would be happy to assist
you with your cash budget!