Budgeting
Advantages of Budgeting
Define goals
and objectives
Communicate
plans
Think about and
plan for the future
Advantages
Coordinate
activities
Allocate
resources
Uncover potential
bottlenecks
Budget Planning and Control
• Planning -• Control -- involves
involves developing
the steps taken by
objectives and
management that
preparing various
attempt to ensure
budgets to achieve
the objectives are
these objectives.
attained.
Choosing the Budget Period
Operating Budget
2011
2012
The annual operating budget
may be divided into quarterly
or monthly budgets.
2013
2014
The Basic Framework of
Budgeting
Detail
Budget
Detail
Budget
Master
Budget
Summary of
a company’s
plans.
Purchases
Detail
Budget
The Master Budget-Manufacturer
Sales
Budget
Selling and
Administrative
Budget
The Master Budget-Manufacturer
Sales
Budget
Ending
Inventory
Budget
Production
Budget
Selling and
Administrative
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget
The Master Budget-Manufacturer
Sales
Budget
Ending
Inventory
Budget
Production
Budget
Selling and
Administrative
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget
Cash
Budget
Budgeted Financial Statements
The Master Budget-Merchandiser
Sales
Budget
Selling and
Administrative
Budget
The Master Budget-Merchandiser
Sales
Budget
Ending
Inventory
Budget
Direct
Materials
Budget
Purchases
Budget
Selling and
Administrative
Budget
Manufacturing
Overhead
Budget
The Master Budget-Merchandiser
Sales
Budget
Ending
Inventory
Budget
Purchases
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Cash
Budget
Budgeted Financial Statements
Selling and
Administrative
Budget
The Budgeted Income Statement
Cash
Budget
Budgeted
Income
Statement
After we complete the cash budget,
we can prepare the budgeted income
statement.
And the Budgeted Balance Sheet
and Cash Flow Statement
Cash Receipts
and Payments
Schedules
Operating
Budgets
Start
Pro forma
Financial
Statements
Cash
receipts
Sales
budget
Income
statement
Cash
payments
for inventory
Inventory
purchases
budget
Balance
sheet
Cash
payments
for S & A
S&A
expense
budget
Statement of
cash flows
Cash
budget
The Sales Budget
Detailed schedule showing expected
sales for the coming periods expressed
in units and dollars.
Budgeting Example
Royal Company is preparing budgets for the
quarter ending June 30.
Budgeted sales for the next five months are:
April
May
June
July
August
20,000 units
50,000 units
30,000 units
25,000 units
15,000 units.
The selling price is $10 per unit.
The Sales Budget
Budgeted
sales (units)
Selling price
per unit
Total sales
April
May
June
20,000
50,000
30,000
Quarter
100,000
The Sales Budget
Budgeted
sales (units)
Selling price
per unit
Total sales
April
May
June
Quarter
20,000
50,000
30,000
100,000
$
10
$200,000
$
10
$500,000
$
10
$300,000
$
10
$1,000,000
Expected Cash Collections
• All sales are on account.
• Royal’s collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% is uncollectible.
• The March 31 accounts receivable balance of
$30,000 will be collected in full.
Expected Cash Collections
Accounts rec. - 3/31
Total cash collections
April
$ 30,000
May
June
Quarter
$ 30,000
Expected Cash Collections
Accounts rec. - 3/31
April sales
70% x $200,000
25% x $200,000
April
$ 30,000
May
140,000
Total cash collections $ 170,000
$ 50,000
$ 50,000
From the Sales Budget for April.
June
Quarter
$ 30,000
140,000
50,000
Expected Cash Collections
Accounts rec. - 3/31
April sales
70% x $200,000
25% x $200,000
May sales
70% x $500,000
25% x $500,000
April
$ 30,000
May
June
140,000
Total cash collections $ 170,000
140,000
50,000
$ 50,000
350,000
$ 125,000
$ 400,000
From the Sales Budget for May.
Quarter
$ 30,000
350,000
125,000
Expected Cash Collections
Accounts rec. - 3/31
April sales
70% x $200,000
25% x $200,000
May sales
70% x $500,000
25% x $500,000
June sales
70% x $300,000
Total cash collections
April
$ 30,000
May
June
140,000
140,000
50,000
$ 50,000
350,000
$ 170,000
$ 400,000
Quarter
$ 30,000
$ 125,000
350,000
125,000
210,000
$ 335,000
210,000
$ 905,000
The Production Budget
Sales
Budget
and
Expected
Cash
Collections
Production
Budget
Production must be adequate to meet budgeted
sales and provide for sufficient ending inventory.
The Direct Materials Budget
The Direct Labor Budget
The Overhead Budget
Inventory Purchases Budget
The total amount of inventory needed for each
month is equal to the amount of the cost of
budgeted sales plus the desired ending
inventory.
Cost of budgeted sales
Plus: Desired ending inventory
Total inventory needed
Less: Beginning inventory
Amount to purchase
XXX
XXX
XXX
(XXX)
XXX
7-26
Inventory Purchases Budget
HH’s policy is that ending inventory should be equal
to 25% of next month’s projected cost of goods sold.
At HH, cost of goods sold normally equal 70% of
sales.
Suppliers require HH to pay 60% of inventory
purchases in the month goods are purchased and the
remaining 40% in the month after the purchase.
Let’s prepare the inventory purchases budget and the
schedule of cash payments for inventory purchases.
January’s cost of goods sold is budgeted at $140,000.
7-27
Sales Budget
Exhibit 7.2
Sales Budget
7-28
$145,600 × 60% = $87,360
$145,600 × 40% = $58,240
Selling and Administrative Expense
Budget
The details of the Selling and Administrative (S&A)
Budget are shown on the next screen. It is
important to note that sales commission (based on
2% of sales) is paid in the month following the sale,
while supplies expense (based on 1% of sales) is
paid in the month of the sale. The utility expense is
paid in the month following the usage of the
electricity, gas, and water.
The Cash Budget
The cash budget is divided into four sections:
1.
Cash receipts listing all cash inflows excluding borrowing
2.
Cash disbursements listing all payments excluding repayments of principal
and interest
3.
Cash excess or deficiency
4.
The financing section listing all borrowings, repayments and interest
Cash Budget
HH plans to purchase, for cash, store fixtures with a
cost of $130,000 in October. HH borrows or repays
principal and interest on the last day of each month.
Any money borrowed from the bank bears interest at
an annual rate of 12% (1% per month). The
management at HH wants to maintain a cash balance
of at least $10,000 at the end of every month.
Borrowings must be in $1000 increments.
Pro Forma Income Statement
End of Chapter 7