M8
PowerPoint Presentation by
Douglas Cloud
Professor Emeritus of Accounting
Pepperdine University
© Copyright 2005 South-Western, a division of Thomson Learning.
All rights reserved.
Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.
1

Sierra Cano
Company produces canoes by forming the hull using plastic polymers, then adding various accessories. The most active sales period occurs from
April through
August.
2

Canoe Diagram
3
Exhibit 1

Once you have completed this chapter, you should be able to:
Explain how budgets provide information to help managers prepare a pro forma (predicted) income statement and balance sheet.
4

Transactions and Budget Systems Compared
5
A budget is a detailed plan describing the use of financial and operating resources over a specific period.

Exhibit 2
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statements based on actual
7

I see. And the budget system produces financial statements based on expected performance.
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The Pro Forma Income Statement
9
Exhibit 3
Exhibit 3—Panel A

Exhibit 3—Panel B
10

Once you have completed this chapter, you should be able to:
Prepare the budgets and schedules that make up the master budget.
11

Overview of the Master Budget
A master budget is a collection of related budgets that include sales, production, purchasing, labor, overhead, selling and administrative, and cash budgets.
12

Exhibit 4
13

Exhibit 5
14

Sales Budget
The sales budget projects revenues from sales of a company’s products or services.
15

Sales Budget
16
Exhibit 6

Production Budget
The production budget identifies the amount of a product that must be produced to meet a company’s needs for sales and inventory.
17

Production Budget
18
Exhibit 7

Materials Purchases Budget
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The canoe produced by Sierra Canoe Co. requires two types of raw materials:
 polymer (for use in molding the canoe), and
 an accessory package consisting of seats, gunwale, thwart, and decking.

Materials Purchases Budget
The materials purchases budget identifies the amount of materials that will be required to support a company’s total production needs.
20

Materials Purchases Budget
Materials
Purchases
Budget for
Polymer
[ units to be produced x standard amount of polymer
(12 gallons) per unit]
+
Desired ending raw materials inventory
–
Beginning raw materials inventory
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Materials Purchases Budget
Dec.
Jan.
Production units
Gallons of polymer per unit
86 x 12
Production requirements (gallons) 1,032
Add desired ending inventory 144
Total requirements (gallons) 1,176
Less: Beginning polymer inventory 206
Total gallons to be purchased 970
60 x 12
720
377
1,097
144
953
Total polymer purchases @ $9 $8,730 $8,577
22

Materials Purchases Budget for Polymer*
23
Exhibit 8

Materials Purchases Budget for Accessory Packages
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Exhibit 9

Labor Budget
The labor budget identifies the labor resources required to meet production needs.
25

Labor Budget
Each canoe requires 6 hours of direct labor at an average of $22 per hour.
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Labor Budget
Total production
Hours per unit
Total hours required
Labor rate per hour
Total labor cost
Dec.
86 x 6
516 x $22
$11,352
27

Labor Budget
28
Exhibit 10

Overhead Budget
The overhead budget provides a schedule of all costs of production other than direct materials and direct labor.
29

Overhead Budget
Sierra Canoe Co. associates overhead with products using a rate of $50 per direct labor hour.
30

Overhead Budget
Total production (units)
Hours per unit
Total hours required
Overhead cost per hour
Total overhead costs
Dec.
86 x 6
516 x $50
$25,800
31

Overhead Budget
32
Exhibit 11

Canoe Cost Calculation
Materials:
Polymer ($9 x 12 gallons)
Accessory kit
Labor
$108
50
(6 hours x $22 per hour) 132
Overhead (6 hours x $50 per hour) 300
Total unit cost $590
Exhibit 12
33

Selling and Administrative Budget
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The selling and administrative budget contains expenses related to selling a company’s product and administering the business.

Selling and Administrative Budget
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Management of Sierra Canoe Co. estimates variable expenses are 15 percent of sales, while fixed expenses are $6,000 per month.

Selling and Administrative Budget
Total sales
Variable expense per sales dollar
Total variable expenses
Fixed expenses per month
Total selling and administrative expenses per month
Dec.
$72,000 x .15
$10,800
6,000
$16,800
36

Selling and Administrative Budget
37
Exhibit 13

Once you have completed this chapter, you should be able to:
Prepare reports that describe the timing of cash receipts and payments during a fiscal period.
38

Cash Budget
The cash budget summarizes expected cash collections and payments during an accounting period. To illustrate a cash budget, assume that
Sierra Canoe Co.’s ending cash balance in
December is $50,000.
39

Cash Budget
Beginning cash balance
Plus: Cash collections
Less cash distributions
Cash in excess of deficit
Plus: Bank loans
Less: Bank repayments
Ending balance
January
$50,000
49,600
58,240
41,360
9,000
0
$50,360
40

Cash Budget
41
Exhibit 14

Schedule of Cash Collections
42
Based on Sierra Canoe’s collection experience, typical cash collections from sales on account follow a pattern:

70 percent in the month of sale

30 percent in the month following the sale

Schedule of Cash Collections
January
January collections for December sales
($72,000 x 30%)
January collections for January sales
($40,000 x 70%)
$21,600
28,000
$49,600
The other 70% for December sales were collected in December.
43

Schedule of Cash Collections
44
Exhibit 15

Schedule of Cash Payments
The schedule of cash payments identifies the timing and amount of cash outflows related to production and administrative activities.
45

Schedule of Cash Payments
Sierra Canoe’s cash payments typically occur in the following pattern:

50 percent in the month of purchase

50 percent in the month following a purchase
46

Schedule of Cash Payments
January disbursements for December purchases ($66,982 x 50%)
January disbursements for January purchases ($49,497 x 50%)
January
$33,491
24,749
$58,240
Purchases for December and January totaled $66,982 and $49,497, respectively.
47

Schedule of Cash Payments
48
Exhibit 16

Once you have completed this chapter, you should be able to:
Describe the elements of a successful budgeting culture.
49

Responsibility Accounting
Responsibility accounting assigns the responsibility for the performance of a company’s department to department managers.
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Participating Budgeting
Participating budgeting
(or bottom-up budgeting) is a process that allows individuals at various levels of a company to participate in determining the company’s goals and the plans for achieving those goals.
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Vice
President
Sales
Participating Budgeting
(Bottom-up Budgeting)
Chief
Executive
Office
Vice
President
Production
Vice
President
Finance
Departments
Department s
Department s
52

Slack in Budgets
Budgetary slack is the difference between a less demanding budget value and a value managers believe they realistically can achieve.
53

Budgets and
Undesirable Behavior
Budget goals sometimes can cause lower-level managers to make decisions that are not in the best interest of the company as a whole.
54

Once you have completed this chapter, you should be able to:
Explain the role of budgets in service organizations.
55

Budgeting in Service Companies
Service company budgets differ from manufacturing companies because service companies do not manufacture goods.
56

Budgeting in Service Companies
In service companies, workers may be involved in the delivery of several types of services during the same time period.
57

Budgeting in Service Companies
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In manufacturing companies, workers usually manufacture only one type of product at a time.

M8
THE
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