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Budget
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6-1
A budget charts a course for
a business by outlining the
plans of the business in
financial terms.
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Estimated Portion of Your Total Monthly
Income That Should Be Budgeted for
Various Living Expenses
Savings
8%
Entertainment
6%
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6-1
Housing
30%
Transportation
15%
Clothing
7%
Other
4% Medical
5%
Utilities
5%
Food
20%
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Objectives of Budgeting
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6-1
 Establishing specific goals
 Executing plans to achieve the
goals
 Periodically comparing actual
results to the goals
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6-2
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Example Exercise 6-1
At the beginning of the period, the Assembly
Department budgeted direct labor of $45,000
and supervisor salaries of $30,000 for 5,000
hours of production. The department actually
completed 6,000 hours of production.
Determine the budget for the department,
assuming that it uses flexible budgeting?
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6-2
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Follow My Example 6-1
Variable cost:
Direct labor (6,000 hours x $9.00*
per hour)
Fixed cost:
Supervisor
Total department cost
$54,000
30,000
$84,000
*45,000/5,000 hours
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For Practice: PE6-1A, PE6-1B
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Budgets That Are Linked Together in
a Master Budget
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Budgeted Income Statement
Sales budget
Cost of goods sold budget:
Production budget
Direct materials
purchases budget
Direct labor cost budget
Factory overhead cost
budget
Selling and administrative
expense budget
6-3
Budgeted Balance Sheet
Cash budget
Capital expenditures
budget
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Income Statement Budgets
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6-3
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Sales Budget
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6-4
The sales budget normally
indicates for each product—
(1) the quantity of estimated
sales and
(2) the expected unit selling
price.
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Production Budget
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6-4
The number of units to be
manufactured to meet budgeted
sales and inventory needs for
each product is set forth in the
production budget.
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Sales
Budget
6-4
Production Budget
Expected units of sales
+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced
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6-4
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Example Exercise 6-2
Landon Awards Co. projected sales of 45,000
brass plaques for 2008. The estimated January
1, 2008 inventory is 3,000 units, and the
desired December 31, 2008 inventory is 5,000
units. What is the budgeted production (in
units) for 2008?
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6-4
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Follow My Example 6-2
Expected units to be sold
Plus: desired ending inventory,
December 31, 2008
Total
Less estimated beginning inventory,
January 1, 2008
Total units to be produced
45,000
5,000
50,000
3,000
47,000
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For Practice: PE6-2A, PE6-2B
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Direct Materials Purchases Budget
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Sales
Budget
6-4
Production Budget
Direct Materials
Purchases Budget
Materials needed for production
+ Desired ending materials inventory
– Estimated beginning materials inventory
Direct materials to be purchased
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6-4
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Example Exercise 6-3
Landon Awards Co. budgeted production of
47,000 brass plaques in 2008. Brass sheet is
required to produce a brass plaque. Assume 96
square inches of brass sheet is required for each
brass plaque. The estimated January 1, 2008
brass sheet inventory is 240,000 square inches.
The desired December 31, 2008 brass sheet
inventory is 200,000 square inches. If brass
sheets costs $0.12 per square inch, determine the
materials budget for 2008.
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6-4
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Follow My Example 6-3
Square inches required for production:
Brass plaque (47,000 x 96 sq. in.)
Plus: desired ending inventory,
December 31, 2008
Total
Less estimated beginning inventory,
January 1, 2008
Total square inches to purchase
Unit price (per square inch)
Total direct materials to be purchased
4,512,000
200,000
4,712,000
240,000
4,472,000
x $0.12
$ 536,640
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For Practice: PE6-3A, PE6-3B
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Direct Labor Cost Budget
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Sales
Budget
6-4
Production Budget
Direct Materials
Purchases Budget
Direct Labor
Cost Budget
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6-4
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Example Exercise 6-4
Landon Awards Co. budgeted production of
47,000 brass plaques in 2008. Assume that 12
minutes are required to engrave each plaque. If
engraving labor costs $11.00 per hour,
determine the direct labor budget for 2008.
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6-4
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Follow My Example 6-4
Hours required for engraving:
Brass plaque (47,000 x 12 min.)
Convert minutes to hour
Engraving hours
Hourly rate
Total direct labor cost
564,000 min.
/
60 min.
9,400 hrs.
x $11.00
$103,400
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For Practice: PE6-4A, PE6-4B
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Factory Overhead Cost Budget
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Sales
Budget
6-4
Production Budget
Direct Materials
Purchases Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget
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6-4
Cost of Goods Sold
Budget
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Direct materials
purchase budget
Direct labor
cost budget
Factory overhead
cost budget
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Factory Overhead Cost Budget
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Sales
Budget
6-4
Production Budget
Direct Materials
Purchases Budget
Cost of Goods
Sold Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget
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Selling and Administrative
Expense Budget
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6-4
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Selling and Administrative Expense
Budget
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Sales
Budget
6-4
Production Budget
Direct Materials
Purchases Budget
Cost of Goods
Sold Budget
Selling &
Administrative
Expenses
Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget
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Budgeted Income Statement
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6-4
Sales budget
Cost of goods
sold budget
Selling and
administrative
expenses budget
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Cash Budget
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6-5
The cash budget is one of the
most important elements of the
budgeted balance sheet. The
cash budget presents the
expected receipts (inflows) and
payments (outflows) of cash
for a period of time.
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6-5
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Example Exercise 6-6
Landon Awards Co. collects 25% of its sales on
account in the month of the sale and 75% in the
month following the sale. If sales on account
are budgeted to be $100,000 for March and
$126,000 for April, what are the budgeted cash
receipts from sales on account for April?
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6-5
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Follow My Example 6-6
April
Collections from March sales (75% x
$100,000)
$ 75,000
Collections from April sales (25% x
$126,000)
31,500
Total receipts from sales on account $106,500
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For Practice: PE6-6A, PE6-6B
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Capital Expenditure Budget
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6-5
The capital expenditure budget summarizes
plans for acquiring fixed assets.
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