CHAPTER
5
Operational Budgets
What are the Purposes of
Budgeting ?
OVERALL PURPOSE:
To quantify a general plan so that performance
in relation to a goal can be carefully monitored.
TWOFOLD PURPOSE
FIRST:
To allow individuals or
companies to develop
a plan to meet a
specified goal.
SECOND:
To allow ongoing
comparison between actual
results and the plan in
order to control operations
or activities.
Describe Two Types of Planning
Long-run planning includes strategic
planning and capital budgeting
Short-run planning includes production
process prioritizing and operational
budgeting or profit planning
List Reasons for Budgeting
1. Planning and setting objectives
2. Communication and coordination
3. Authorization
4. Motivation
5. Conflict resolution
6. Evaluation
Budgeting Process
Who or what is the budget committee?
A management group responsible for
establishing budgeting policy and for
coordinating the preparation of budgets.
What are two issues of the budgeting
process?
Behavioral considerations
Involvement in preparing
the budget
List Behavioral Considerations
1. Top management support
2. Employee participation
3. Addressing budget
deviations
Describe the Top-Down Approach
to Budgeting
Top
Management
Manager
Top management
prepares the entire
budget and distributes
it to division
managers.
Manager
Manager
Describe the Bottom-Up Approach
to Budgeting
Top
Management
Manager
Each manager prepares
a budget request, from
which management
creates an overall
budget.
Manager
Manager
Master Budget—Manufacturing
Planning Process
Capital Project
Plans
Strategic Goals
and Plans
Short-Term
Objectives
Operating Budget
Production
Budget
Direct
Materials
Budget*
Direct
Labor
Budget*
Budgeted
Product Sheet
Financial Budgeting
* * * *
Capital Expenditures
Budget
Cash Budget
Sales Budget*
Manufacturing
Overhead
Budget*
Selling/Admin.
Expense
Budget*
* These budgets all flow into
the cash budget below.
Budgeted
Income Statement
Budgeted
Balance Sheet
Budgeted
Cash Flows
Master Budget—Manufacturing
Define each budget.
Sales Budget
A schedule of
projected
sales over the
budget
period.
Example: Sales Budget
Selling price per bike . . . . . . $
Expected sales (units). . . . .
100
x 100
Expected revenues . . . . . . . $10,000
Master Budget—Manufacturing
Define each budget.
Sales Budget
Production
Budget
A schedule of production
requirements for the
budget period.
Example: Production Budget
Expected sales. . . . . . . . . . . . . . .
100
Add desired ending inventory. . . . 105
Total number of bikes needed . .
205
Less beginning inventory . . . . . . .
70
Bikes to be produced . . . . . . . . . .
135
Note: Ending inventory is estimated at 80%
of the next period’s sales.
Master Budget—Manufacturing
Define each budget.
Sales Budget
Production
Budget
Direct Materials
Budget
A schedule of direct
materials to be used
and purchased
during the budget
period.
Example: Direct Materials Budget
Direct materials usage:
Direct
Materials
Metal
Plastic
AmountUnit
Total
Required
Cost
Cost
2,700 lbs.
$2.00/ft. $5,400
405 lbs.
$1.00/ft.
$ 405
Example: Direct Materials Budget
Direct materials purchases:
Desired ending inventory. . . . .
Needed for production. . . . . . .
Total needed . . . . . . . . . . . . . .
Less beginning inventory. . . . .
Materials to be purchased . . . .
Unit cost. . . . . . . . . . . . . . . . . .
Total cost . . . . . . . . . . . . . . . .
Metal Plastic
2,100
315
2,700
405
4,800
720
2,800
210
2,000
510
x $2
x $1
$4,000
$ 510
Master Budget—Manufacturing
Define each budget.
Sales Budget
Production
Budget
Direct Materials
Budget
Direct Labor
Budget
A schedule of
direct labor
requirements for
the budget
period.
Example: Direct Labor Budget
Number of bikes to produce. . . .
Direct labor hours per bike. . . . .x
Total hours required. . . . . . . . .
Rate per hour. . . . . . . . . . . . . . . .x
135
3
405
$5
Total direct labor cost. . . . . . . . $2,025
Master Budget—Manufacturing
Define each budget.
Sales Budget
Production
Budget
Direct Materials
Budget
Direct Labor
Budget
A schedule of
production
costs other
than those for
direct labor
and direct
materials.
Manufacturing
Overhead
Budget
Example: Manufacturing
Overhead Budget
Variable costs:
Indirect materials costs. . . . . . . . .
Indirect labor costs . . . . . . . . . . . .
Total variable costs. . . . . . . . . . .
$ 220
600
$ 820
Fixed costs:
Insurance expense. . . . . . . . . . . .
Depreciation expense. . . . . . . . . .
Total fixed costs . . . . . . . . . . . . .
Total manufacturing overhead . . .
$
200
600
$ 800
$1,620
Master Budget—Manufacturing
Define each budget.
A schedule to
accumulate all
the budgeted
production cost
to produce each
bike
Sales Budget
Production
Budget
Selling and
Administrative
Expense Budget
Direct Materials
Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget
Budgeted
Product
Cost Sheet
Budgeted Product Cost Sheet
Input
Required
Cost
Inputs
Metal
$2.00/ft.
20
Plastic
$1.00/ft.
3
Direct labor
$5.00/hr.
3
Fixed OH
$1.98/hr.
3
Variable OH
$2.02/hr.
3
Total variable cost per bike . . . . .
Total fixed MOH
$1,620
Divide by Production Volume
135 bikes
Fixed MOH cost allocated per bike
Total
Cost
per Bike
$40.00
3.00
15.00
5.94
6.06
$70.00
12.00
$82.00
Master Budget—Manufacturing
Define each budget.
A schedule of all
non-production
spending
expected to occur
during the budget
period.
Sales Budget
Production
Budget
Selling and
Administrative
Expense Budget
Direct Materials
Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget
Example: Selling and
Administrative Budget
Variable expenses:
Sales commissions . . . . . . . . . . . . . . $
Total variable expenses. . . . . . . . . . $
400
400
Fixed expenses:
Salaries expense . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . .
Advertising expense. . . . . . . . . . . . .
Total fixed expenses. . . . . . . . . . . .
Total selling and
administrative expenses. . . . . . . . .
$1,000
100
200
$1,300
$1,700
Master Budget—Merchandising
Define each budget.
Sales Budget
Purchases
Budget
Selling and
Administrative
Expense Budget
Budgeted
Income
Statement
A schedule of projected purchases
over the budget period.
Master Budget—Service
Define each budget.
A service entity’s budget
that identifies how much
revenue will be
generated during a
period.
Supplies
Budget
Revenue Budget
Production
Budget
Wages and
Salaries Budget
Selling/Admin.
Expense Budget
Overhead
Budget
Cash Budget
Pro-Forma Income
Statement
Pro-Forma
Balance Sheet
Pro-Forma Statement
of Cash Flows
Master Budget—Manufacturing
Define each budget.
A schedule of
expected cash
receipts and
disbursements
during the
budget period.
Direct Materials
Budget
Sales Budget
Production
Budget
Selling and
Administrative
Expense Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget
Cash Budget
Example: Cash Budget
Cash balance, beginning . . . . . . . . .
Add collections from customers . . . .
(1)Total cash available. . . . . . . . . .
Less disbursements for:
Direct materials . . . . . . . . . . . . .
$ 3,000
Direct labor. . . . . . . . . . . . . . . . .
2,000
Equipment purchase . . . . . . . . .
2,000
(2)Total disbursements. . . . . . . . . .
Minimum cash balance desired. . . . .
Total cash needed. . . . . . . . . . . . . . .
Excess (or deficiency) of cash available before financing. . . . .
(3) Financing needed . . . . . . . . . . .
Ending cash balance [(1) – (2) + (3)]
$ 4,900
10,100
$15,000
$ 7,000
6,000
$13,000
$ 2,000
0
$ 2,000
Define Static versus
Flexible Budgeting
•Static Budgeting:
• A quantified plan that projects revenues and costs for
only one level of activity.
• Not useful for controlling costs and measuring
performance because the actual level of activity may
have differed significantly from the planned level.
•Flexible Budgeting
• A quantified plan that projects revenues and costs for
varying levels of activity.
• More useful for control and performance evaluation
because it is not confined to one level of activity.