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Learning Objectives
1. Describe budgeting, its objectives, and its impact
2.
3.
4.
5.
on human behavior.
Describe the basic elements of the budget
process, the two major types of budgeting, and
the use of computers in budgeting.
Describe the master budget for a manufacturing
company.
Prepare the basic income statement budgets for a
manufacturing company.
Prepare balance sheet budgets for a
manufacturing company.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Nature and Objectives of Budgeting
o Budgets play an important role for
organizations of all sizes and forms. For
example, budgets are used in managing the
operations of government agencies, churches,
hospitals, small businesses, and manufacturing
companies.
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OBJECTIVES OF
BUDGETING
Estimated Portion of Your Total Monthly
Income That Should Be Budgeted for
Various Living Expenses
Source: Consumer Credit Counseling Service
Objectives of Budgeting
o Budgeting involves:
 Establishing specific goals.
 Executing plans to achieve the goals.
 Periodically comparing actual results with the goals.
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Objectives of Budgeting
o Budgeting affects the following managerial
functions:
 Planning, which involves setting goals to guide
decisions and help motivate employees.
 Directing, which involves decisions and actions to
achieve budgeted goals.
 Controlling, which involves comparing actual
performance against the budgeted goals.
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Objectives of Budgeting
o A budgetary unit of a company is called a
responsibility center.
o Each responsibility center is led by a manager
who has the authority and responsibility for
achieving the center’s budgeted goals.
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OBJECTIVES OF
BUDGETING
Objectives of Budgeting
o As time passes, the actual performance of a
responsibility center can be compared against
the budgeted goals. This provides prompt
feedback to managers and employees about
their performance.
o If necessary, responsibility centers can use
such feedback to adjust their activities in the
future.
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Human Behavior and Budgeting
o Human behavior problems can arise in the
budgeting process in the following situations:
 The budgeted goals are set too tight, which are very
hard or impossible to achieve.
 This may have a negative effect on
the company achieving its goals.
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Human Behavior and Budgeting
o Human behavior problems can arise in the
budgeting process in the following situations:
 The budgeted goals are set too
loose, which are very easy to
achieve.
 Budget “padding” is called
budgetary slack.
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Human Behavior and Budgeting
o Human behavior problems can arise in the
budgeting process in the following situations:
 The budgeted goals conflict with
the objectives of the company
and employees.
 Goal conflict occurs when
employees’ or managers’
self-interest differs from the
company’s goals.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Budgeting Systems
o The budgetary period for operating activities
normally includes the fiscal year of a company.
o A variation of fiscal-year budgeting, called
continuous budgeting, maintains a 12-month
projection into the future.
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BUDGETING
SYSTEMS
Budgeting Systems
o Zero-based budgeting requires managers to
estimate sales, production, and other operating
data as though operations are being started for
the first time.
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Static Budget
o A static budget shows the expected results of a
responsibility center for only one activity level.
The budget does not change even if the
activity changes.
o A static budget is used by many service
companies and for some administrative
functions of manufacturing companies.
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STATIC BUDGET
Static Budget
o The disadvantage of static budgets is that they
do not adjust for changes in revenues and
expenses that occur as volumes change.
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Flexible Budget
o Flexible budgets show the expected results of
a responsibility center for several activity
levels.
o A flexible budget is, in effect, a series of static
budgets for different levels of activity.
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FLEXIBLE BUDGET
Flexible Budget
o If Colter Manufacturing Company’s Assembly
Department spent $70,800 to produce 10,000
units, how much over or under budget would
the department manager be when using a
flexible budget?
The firm would be
under budget by $200
($71,000 – $70,800).
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FLEXIBLE BUDGET
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Master Budget
o The master budget is an integrated set of
operating, investing, and financing budgets for
a period of time.
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Master Budget
o For a manufacturing company, the master
budget consists of the following integrated
budgets:
Operating Budgets
Sales budget
Cost of goods sold budget:
Production budget
Direct materials purchases budget
Direct labor cost budget
Factory overhead cost budget
Selling and administrative expenses budget
Budgeted Income Statement
Financing Budget
Cash budget
Budgeted Balance Sheet
Investing Budget
Capital expenditures budget
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
INCOME
STATEMENT
BUDGETS
Sales Budgets
o The sales budget begins by estimating the
quantity of sales. Once sales quantities are
estimated, the expected sales revenue can be
determined by multiplying the volume by the
expected unit sales price.
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Sales Budgets
o The prior year’s sales quantities are revised for
such factors as the following:
 Backlog of unfilled sales orders
 Planned advertising and promotion
 Productive capacity
 Projected pricing changes
 Findings of market research studies
 Expected industry and general economic conditions
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
Sales Budgets
o Elite Accessories Inc. manufactures wallets and
handbags that are sold in two regions, the East
and West regions. Elite Accessories estimates
the following sales quantities and prices for
2014.
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SALES BUDGETS
Production Budget
o The production budget estimates the number
of units to be manufactured to meet budgeted
sales and desired inventory levels.
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Production Budget
o Elite Accessories Inc. expects the following
inventories of wallets and handbags:
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PRODUCTION
BUDGET
PRODUCTION
BUDGET
Sales
Budget
Production Budget
Expected units to be sold
+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced
Direct Materials Purchases Budget
o The direct materials purchases budget
estimates the quantities of direct materials to
be purchased to support the budgeted
production and desired inventory levels.
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DIRECT MATERIALS
PURCHASES BUDGET
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Materials needed for production
+ Desired ending materials inventory
– Estimated beginning materials inventory
Direct materials to be purchased
DIRECT MATERIALS
PURCHASES BUDGET
Note A: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds.
DIRECT MATERIALS
PURCHASES BUDGET
Note A: 520,000 units x 0.10 sq. yd. per unit = 52,000 sq. yds.
DIRECT MATERIALS
PURCHASES BUDGET
Note B: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds.
DIRECT MATERIALS
PURCHASES BUDGET
Note B: 292,000 units x 0.50 sq. yd. per unit = 146,000 sq. yds.
Direct Labor Cost Budget
o The direct labor cost budget estimates the
direct labor hours and related cost needed to
support budgeted production.
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DIRECT LABOR
COST BUDGET
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Direct Labor
Cost Budget
DIRECT LABOR
COST BUDGET
Note A: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
DIRECT LABOR
COST BUDGET
Note A: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
DIRECT LABOR
COST BUDGET
Note B: 292,000 units x 0.15 hr. per unit = 43,800 hrs.
DIRECT LABOR
COST BUDGET
Note B: 292,000 units x 0.40 hr. per unit = 116,800 hrs.
Factory Overhead Cost Budget
o The factory overhead cost budget estimates
the cost for each item of factory overhead
needed to support budgeted production.
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FACTORY
OVERHEAD COST
BUDGET
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget
FACTORY
OVERHEAD COST
BUDGET
Cost of Goods Sold Budget
o The cost of goods sold budget is prepared by
integrating the following budgets:
 Direct materials purchases budget
 Direct labor cost budget
 Factory overhead cost budget
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COST OF GOODS
SOLD BUDGET
Sales
Budget
Production Budget
Cost of Goods
Sold Budget
Direct Labor
Cost Budget
Direct Materials
Purchases Budget
Factory Overhead
Cost Budget
COST OF GOODS
SOLD BUDGET
Selling and Administrative Expenses Budget
o The selling and administrative expenses
budget is normally supported by departmental
schedules. The sales budget is often used as
the starting point for this budget.
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SELLING AND
ADMINISTRATIVE
EXPENSES BUDGET
Sales
Budget
Cost of Goods
Sold Budget
Selling &
Administrative
Expenses
Budget
Production Budget
Direct Materials
Purchases Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget
SELLING AND
ADMINISTRATIVE
EXPENSES BUDGET
Budgeted Income Statement
o The budgeted income statement is prepared
by integrating the following budgets:
 Sales budget
 Cost of goods sold budget
 Selling and administrative expenses budget
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
BUDGET INCOME
STATEMENT
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Cash Budget
o The cash budget estimates the expected
receipts (inflows) and payments (outflows) of
cash for a period of time.
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ESTIMATED CASH
RECEIPTS
Receipts from cash sales:
Cash sales (10% x current
month’s sales—Note A)…….
January
February
March
$108,000
$124,000
$ 97,000
Part of
Exhibit 16
Note A:
$108,000 = $1,080,000 x 10%
$124,000 = $1,240,000 x 10%
$ 97,000 = $ 970,000 x 10%
ESTIMATED CASH
RECEIPTS
January
February
March
$108,000
$124,000
$ 97,000
Receipts from sales on account:
Collections from prior month’s
sales (40% of previous month’s
credit sales—Note B)……….. $370,000
$388,800
$446,400
Receipts from cash sales:
Cash sales (10% x current
month’s sales—Note A)…….
Note B:
$370,000, given as Jan. 1, 2014, Accts. Rec. balance
$388,800 = $1,080,000 x 90% x 40%
$446,400 = $1,240,000 x 90% x 40%
ESTIMATED CASH
RECEIPTS
January
February
March
$108,000
$124,000
$ 97,000
Receipts from sales on account:
Collections from prior month’s
sales (40% of previous month’s
credit sales—Note B)……….. $370,000
$388,800
$446,400
Collections from current month’s
sales (60% of current month’s
credit sales—Note C)………… 583,200
669,600
523,800
Receipts from cash sales:
Cash sales (10% x current
month’s sales—Note A)…….
Note C:
$583,200 = $1,080,000 x 90% x 60%
$669,600 = $1,240,000 x 90% x 60%
$523,800 = $ 970,000 x 90% x 60%
ESTIMATED CASH
RECEIPTS
Estimated Cash Payments
o To estimate cash payments for manufacturing
costs, a schedule of payments for manufacturing
costs is prepared.
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ESTIMATED CASH
PAYMENTS
January
Payments of prior month’s manufacturing costs {[25% x previous
month’s manufacturing costs
(less depreciation)]—Note A}…..$190,000
February
$204,000
From Exhibit 17
Note A:
$190,000, given as January 1, 2014, Accounts
Payable balance
$204,000 = ($840,000 – $24,000) x 25%
$189,000 = ($780,000 – $24,000) x 25%
March
$189,000
ESTIMATED CASH
PAYMENTS
January
February
March
Payments of prior month’s manufacturing costs {[25% x previous
month’s manufacturing costs
(less depreciation)]—Note A}…..$190,000
$204,000
$189,000
Payments of current month’s
manufacturing costs {[75% x
current month’s manufacturing
costs (less depreciation)]—
Note B}…………….……………
$567,000
$591,000
Note B:
$612,000
$612,000 = ($840,000 – $24,000) x 75%
$567,000 = ($780,000 – $24,000) x 75%
$591,000 = ($812,000 – $24,000) x 75%
ESTIMATED CASH
PAYMENTS
CASH BUDGET
Capital Expenditures Budget
o The capital expenditures budget summarizes
plans for acquiring fixed assets. Such
expenditures are necessary as machinery and
other fixed assets wear out or become
obsolete.
o In addition, purchasing additional fixed assets
may be necessary to meet increasing demand
for the company’s product.
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CAPITAL
EXPENDITURES
BUDGET
Budgeted Balance Sheet
o The budgeted balance sheet is prepared
based on the operating, financing, and
investing budgets of the master budget. It is
similar to a normal balance sheet except that
estimated amounts are used.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.
c. 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, or posted to a publicly accessible website, in whole or in part.