Financial & Managerial
Accounting 2002e
Belverd E. Needles, Jr.
Marian Powers
Susan Crosson
----------Multimedia Slides by:
Harry Hooper
Santa Fe Community College
Copyright © by Houghton Mifflin Company. All rights reserved.
1
Chapter 21
The Budgeting
Process
Copyright © by Houghton Mifflin Company. All rights reserved.
2
LEARNING OBJECTIVES
1. Define budgeting and explain its role
in the management cycle.
2. Describe the master budget process
for different types of organizations,
and list the guidelines for preparing
budgets.
Copyright © by Houghton Mifflin Company. All rights reserved.
3
LEARNING OBJECTIVES
3. Prepare a budgeted income statement
and supporting operating budgets
4. Prepare a cash budget.
5. Prepare a budgeted balance sheet.
Copyright © by Houghton Mifflin Company. All rights reserved.
4
The Budgeting Process
OBJECTIVE 1
Define budgeting and explain its
role in the management cycle.
Copyright © by Houghton Mifflin Company. All rights reserved.
5
The Budgeting Process
Budgeting
is the process of:
 Identifying
 Gathering
 Summarizing
 Communicating
financial and nonfinancial
information about an organization’s
future activities.
Copyright © by Houghton Mifflin Company. All rights reserved.
6
– a plan of action that forecasts future
transactions, activities and events in financial or
non-financial terms.
 Budgets are used in government, not-for-profit and
profit-oriented businesses.
 Cash Budgets establish target levels of cash
receipts and limits on cash spending for particular
purposes.
 Production Budgets show planned production in
units.
 JIT and TQM require continuously updated
budgets.
 Budget
Copyright © by Houghton Mifflin Company. All rights reserved.
7
The Budgeting Process
The
budgeting process provides
managers with the opportunity to
carefully match the goals of the
organization with the resources
necessary to accomplish those goals.
Copyright © by Houghton Mifflin Company. All rights reserved.
8
Budgeting and Goals
Long-Term
Goals: 5 to 10 year
projections, set by top management.
 Include
quality projections, growth rates
and desired market share
 Set specific targets and expected
timetables
 Name the people responsible for achieving
the goals
 Include future profit projections and
describe new products and services
Copyright © by Houghton Mifflin Company. All rights reserved.
9
Budgeting and Goals
 Short-Term
Goals: 1 year plan, more
detailed.
 Include
sales and profit targets by product or
service



Define human resource needs
State plans for introducing new products or
services
Set a timetable for all parts of the year’s operating
plan
 Name
people and their responsibilities, targets
and deadlines
Copyright © by Houghton Mifflin Company. All rights reserved.
10
The Importance of Participation
All appropriate people, from top
managers to first-line supervisors, who
participate in preparing the budget
must be identified.
Participative Budgeting involves all levels
of an organization taking part in
creating the budget. Participation
results in motivation. Dictated targets
de-motivate.
Copyright © by Houghton Mifflin Company. All rights reserved.
11
Examples of Budgets
State University Knights
Alumni Club
Revenues an Expenditures Budget
Homecoming Activities - 20x1
Budgeted Revenues
Football Concession Sales
Homecoming Dance Tickets
(1,200 at $20)
Parking Fees
Total Budgeted Revenues
Budgeted Expenditures
Dance Music Group
Hall Rental
Refreshments
Printing Costs
Concession Purchases
Clean-up Costs
Miscellaneous
Total Budgeted Expenditures
Excess of Revenues Over Expenditures
$32,500
24,000
1,425
$57,925
$7,500
2,000
2,600
1,450
12,200
4,720
800
Copyright © by Houghton Mifflin Company. All rights reserved.
31,270
$26,655
12
The Management Cycle
 Managers
use the budgeting process
throughout the management cycle to
help:
 Plan
 Execute
 Review
 Report
the organization’s financing, investing,
and operating activities.
Copyright © by Houghton Mifflin Company. All rights reserved.
13
Budgeting and the Management Cycle
Copyright © by Houghton Mifflin Company. All rights reserved.
14
The Planning Stage
Budgeting
pertains especially to the
planning stage.
 Budgets
are tied to long-range and shortrange plans to meet success factors
related to quality, cost, and time.
 Resources
and workloads are distributed
to specific products, departments, sales
territories and activities.
Copyright © by Houghton Mifflin Company. All rights reserved.
15
The Planning Stage
Budget
information is used to
communicate responsibilities to
individuals who are accountable for a
particular segment of the organization.
Performance
measures are carefully
selected to motivate individuals or
teams to achieve targeted goals.
Copyright © by Houghton Mifflin Company. All rights reserved.
16
The Executing Stage
During
the executing stage,
managers use budget information
for:
 Communication
 Benchmarking
 Problem
recognition
Copyright © by Houghton Mifflin Company. All rights reserved.
17
The Reviewing Stage
In
the reviewing stage, managers:
 Calculate
 Evaluate
 Review
variances
performances
timeliness
 Create
solutions for continuous
improvement
Copyright © by Houghton Mifflin Company. All rights reserved.
18
The Reporting Stage
In
the reporting stage, budgets
serve as a reference point for many
reports, such as performance
reports that support bonuses and
promotions.
Copyright © by Houghton Mifflin Company. All rights reserved.
19
Discussion
Q.
What are some examples of ways that
budgeting can help managers during
the reviewing stage of the management
cycle?
A.
1.
2.
3.
4.
Calculate variances
Evaluate performance
Determine timeliness
Create solutions for continuous
improvement
Copyright © by Houghton Mifflin Company. All rights reserved.
20
The Master Budget
OBJECTIVE 2
Describe the master budget
process for different types of
organizations, and list the
guidelines for preparing budgets.
Copyright © by Houghton Mifflin Company. All rights reserved.
21
The Master Budget
 The
master budget is a set of budgets that
consolidates an organization’s financial
information into budgeted financial
statements for a future period of time. They
include:
 Operating
 Budgeted
 Cash
budgets.
balance sheet.
budget.
 Capital
expenditure budget.
Copyright © by Houghton Mifflin Company. All rights reserved.
22
Preparation of a Master Budget for a Manufacturing Organization
Copyright © by Houghton Mifflin Company. All rights reserved.
23
The Budgeting Process
Manufacturing,
retail, and service
organizations’ differ in their
preparation.
In all 3 cases, the operating budgets
support the budgeted income
statement.
Copyright © by Houghton Mifflin Company. All rights reserved.
24
Manufacturing Organizations
The
operating budgets for a
manufacturing organization include
budgets for:
 Sales.
 Production.
 Direct
materials purchases.
 Direct labor.Manufacturing overhead.
 Cost of goods manufactured.
 Selling and administrative expenses.
Copyright © by Houghton Mifflin Company. All rights reserved.
25
Retail Organizations
Managers
of retail organizations
must know:
 What
products to sell.
 Estimated quantities to be sold.
 The selling price for each.
Copyright © by Houghton Mifflin Company. All rights reserved.
26
Retail Organizations
The
operating budgets for retail
organizations include the:
 Sales
budget.
 Purchases budget.
 Cost of goods sold budget.
 Selling and administrative budget.
Copyright © by Houghton Mifflin Company. All rights reserved.
27
Preparation of a Master Budget for a Retail Organization
Copyright © by Houghton Mifflin Company. All rights reserved.
28
Service Organizations
Managers
of service organizations
must know the types and amounts
of:
 Services
to perform.
 Labor hours required.
 Level of expertise of employees.
 Labor rates.
Copyright © by Houghton Mifflin Company. All rights reserved.
29
Service Organizations
The
operating budgets for service
organizations include:
 Service
revenue.
 Labor.
 Services
overhead.
 Selling and administrative budget.
Copyright © by Houghton Mifflin Company. All rights reserved.
30
Preparation of a Master Budget for a Service Organization
Copyright © by Houghton Mifflin Company. All rights reserved.
31
Guidelines for Budget Preparation
To
improve the quality of the budgets,
managers need to know:
 Why
the budget is being prepared.
 Who will read and use it.
 How the information will be presented.
 Where the information can be found.
Several
revisions may be required
before the final version is ready.
Copyright © by Houghton Mifflin Company. All rights reserved.
32
Discussion
Q.
What three financial statements are included
in the preparation of a master budget?
A.
1. Budgeted income statement.
2. Budgeted balance sheet.
3. Cash budget.
Copyright © by Houghton Mifflin Company. All rights reserved.
33
The Operating Budgets
OBJECTIVE 3
Prepare a budgeted income
statement and supporting
operating budgets.
Copyright © by Houghton Mifflin Company. All rights reserved.
34
The Master Budget
A master
budget consists of:
 Detailed
operating budgets.
 Budgeted income statement.
 Capital expenditures budget.
 Cash budget.
 Budgeted balance sheet.
Copyright © by Houghton Mifflin Company. All rights reserved.
35
The Operating Budgets
Detailed operating budgets include the:
 Sales budget (in units and dollars).
 Production budget (in units).
 Direct materials purchases budget (in units and
dollars).
 Direct labor budget (in hours and dollars).
 Manufacturing overhead budget.
 Selling and administrative expense budget.
 Cost of Goods Manufactured budget.
Copyright © by Houghton Mifflin Company. All rights reserved.
36
Sales Budget
Based on the Sales forecast, influenced by:
External
The state of the local and national economies.
 The state of the industry’s economy.
 The nature of the competition.

Internal
Number of units sold in prior periods.
 Credit policies and collection policies.
 Pricing policies.
 New product plans.
 Manufacturing capacity.

Copyright © by Houghton Mifflin Company. All rights reserved.
37
Sales Budget
Hi-Flyer Company
Sales Budget
For the Year Ended December 31, 20x1
Quarter
Sales in Units
1
2
3
4
Year
10,000
30,000
10,000
40,000
90,000
x Selling Price
per Unit
$
Total Sales
$ 50,000 $150,000
5
$
5
$
5
$
5
$
5
$ 50,000 $200,000 $450,000
Copyright © by Houghton Mifflin Company. All rights reserved.
38
Production Budget
 Based
on sales and inventory needs.
 Used to plan for technical and human resources
needed.
Total Production Units =
Budgeted Sales in Units
+ Desired Units of Ending Finished Goods Inventory
- Desired Units of Beginning Finished Goods Inventory
Copyright © by Houghton Mifflin Company. All rights reserved.
39
Production Budget
Hi-Flyer Company
Production Budget
For the Year Ended December 31, 20x1
Quarter
1
Sales in Units
Add Desired Units of Ending
Finished Goods Inventory
2
3
4
Year
10,000 30,000 10,000 40,000 90,000
3,000
1,000
4,000
1,500
1,500
Desired Total Units
13,000 31,000 14,000 41,500 91,500
Less Desired Units of
Beginning Finished Goods
Inventory
Total Production Units
1,000 3,000 1,000 4,000 1,000
12,000 28,000 13,000 37,500 90,500
Copyright © by Houghton Mifflin Company. All rights reserved.
40
Direct Materials Purchases
Budget
 Based
on production and inventory needs.
 Used to plan direct material purchases and to
estimate cash payments to suppliers.
Total Units of Direct Materials Purchased =
Total Production Needs in Units of Direct Materials
+ Desired Units of Ending Direct Materials Inventory
– Desired Units of Beginning Direct Materials Inventory
Copyright © by Houghton Mifflin Company. All rights reserved.
41
Direct Labor Budget
Based on production needs, labor pay rates,
staffing levels, and productivity projections.
 Used to schedule (and hire) employees and to
estimate cash payments to workers.

Total Budgeted Direct Labor Cost =
Estimated Total Direct Labor Hours
x Estimated Direct Labor Cost per Hour
Copyright © by Houghton Mifflin Company. All rights reserved.
42
Direct Labor Budget
Hi-Flyer Company
Direct Labor Budget
For the Year Ended December 31, 20x1
Quarter
1
2
3
4
Year
Total Production Units
12,000
28,000
13,000
37,500
90,500
x Direct Labor Hours
per Unit
.1
.1
.1
.1
.1
1,200
2,800
1,300
3,750
9,050
$
$
$
$
$
Total Direct Labor Hours
x Direct Labor Cost
per Hour
Total Production Units
6
6
6
6
6
$ 7,200 $16,800 $ 7,800 $22,500 $54,300
Copyright © by Houghton Mifflin Company. All rights reserved.
43
The Manufacturing Overhead Budget
Details
manufacturing costs, other than
direct materials and labor.
Used to integrate overhead cost budgets
and to calculate manufacturing
overhead rates.
Categorized by variable and fixed
overhead costs.
Frequently broken down by each cost
pool.
Copyright © by Houghton Mifflin Company. All rights reserved.
44
The Selling and Administrative Budget
Details
operating expenses, other than
production costs, needed to support
sales and overall operations
Used to estimate cash payments for
non-production-related products and
services
Frequently broken into variable and
fixed cost groups
Copyright © by Houghton Mifflin Company. All rights reserved.
45
The Cost of Goods Manufactured
Budget
Summarizes
production costs, using
Direct Materials, Direct Labor and
Manufacturing Overhead Budgets
Copyright © by Houghton Mifflin Company. All rights reserved.
46
The Cost of Goods Manufactured Budget
Cost of Goods Manufactured =
Total Manufacturing Costs for the Period
+ Cost of Beginning Work in Process Inventory
- Cost of Ending Work in Process Inventory
Total Manufacturing Costs for the Period =
Manufacturing Overhead Costs
+ Direct Labor Costs
+ Cost of Direct Materials Used
Cost of Direct Materials Used =
Cost of Total Units of Direct Materials Purchased
+ Cost of Beginning Direct Materials Inventory
- Cost of Ending Direct Materials Inventory
Copyright © by Houghton Mifflin Company. All rights reserved.
47
The Budgeted Income Statement
Prepared
after all of the operating
budgets
Projects net income based on
estimated revenues and expenses
Copyright © by Houghton Mifflin Company. All rights reserved.
48
The Capital Expenditures Budget
Outlines
amount and timing of
anticipated capital expenditures.
Examples:
 Buying
equipment
 Building a new store
 Purchasing and installing a materials
handling system
Copyright © by Houghton Mifflin Company. All rights reserved.
49
Discussion
Q. What are the four major sections of the
master budget?
A.
1.
2.
3.
4.
Detailed operating budgets.
Budgeted income statement.
Capital expenditures budget.
Budgeted balance sheet.
Copyright © by Houghton Mifflin Company. All rights reserved.
50
Cash Budgeting
OBJECTIVE 4
Prepare a cash budget.
Copyright © by Houghton Mifflin Company. All rights reserved.
51
The Cash Budget
A cash
budget is a projection over
a period of time of:
 Beginning
cash.
 Cash receipts.
 Cash payments.
 Ending cash.
Copyright © by Houghton Mifflin Company. All rights reserved.
52
Elements of a Cash Budget
Activities
Cash Receipts From
Operating Cash sales
Investing
Cash Payments For
Purchases of direct materials
Cash collections on
credit sales.
Interest
income from
investments
Cash dividends from
investments
Direct labor
Manufacturing overhead
expenses
Selling expenses
Interest Expense
Administrative expenses
Sale of investments
Purchase of investments
Sale of long-term assets
Purchase of long-term assets
Financing Loan proceeds
Proceeds from sale of stock
Proceeds from sale of bonds
Purchases of operating supplies
Loan repayment
Cash dividends to stockholders
Copyright © by Houghton Mifflin Company. All rights reserved.
53
The Cash Budget
Excludes
planned non-cash transactions
and expenses.
Examples:
 Depreciation
expense
 Amortization expense
 Issuance and receipt of stock dividends
 Uncollectable accounts expenses
 Gains and losses on sales of assets
Copyright © by Houghton Mifflin Company. All rights reserved.
54
Preparing a Cash Budget
 Estimated
Ending Cash Balance =
Total Estimated Cash Receipts
- Total Estimated Cash Payments
+ Estimated Beginning Cash Balance
 Supporting
schedules may include:
Schedule of Estimated Cash Collections
 Schedule of Estimated Cash Disbursements for
Materials, Labor and Overhead

Copyright © by Houghton Mifflin Company. All rights reserved.
55
Discussion
Q.
What are the three major activity
classifications of a cash budget?
A.
1.
Operating activities
2.
Investing activities
3.
Financing activities
Copyright © by Houghton Mifflin Company. All rights reserved.
56
Budgeted Balance Sheet
OBJECTIVE 5
Prepare a budgeted balance sheet.
Copyright © by Houghton Mifflin Company. All rights reserved.
57
Budgeted Balance Sheet
Information
from all other elements
of a master budget is used to
prepare a budgeted balance sheet.
A budgeted balance sheet projects
the financial position of an
organization at the end of a future
period.
Copyright © by Houghton Mifflin Company. All rights reserved.
58
The Cash Budget
Two
success factors for implementing
a budget are:
 Communications:
Communication of
expectations and targets to all key
people in the organization.
 Support: Top management must appear
willing to reward people for meeting the
organization’s goals that are
represented in the budget.
Copyright © by Houghton Mifflin Company. All rights reserved.
59
Discussion
Q.
What two factors are needed for the successful
implementation of a budget?
A.
1.
Communication
2.
Support
Copyright © by Houghton Mifflin Company. All rights reserved.
60
OK, LET’S REVIEW…
1. Define budgeting and explain its role
in the management cycle.
2. Describe the master budget process
for different types of organizations,
and list the guidelines for preparing
budgets.
3. Prepare a budgeted income statement
and supporting operating budgets.
Copyright © by Houghton Mifflin Company. All rights reserved.
61
AND FINALLY…
4. Prepare a cash budget.
5. Prepare a budgeted balance sheet.
Copyright © by Houghton Mifflin Company. All rights reserved.
62