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Budgeting

0. 21. Budgeting. 0. 21-1. Objective 1. Describe budgeting, its objectives, and its impact on human behavior. 0. 21-1. Budget. A budget charts a course for a business by outlining the plans of the business in financial terms. 0.

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Budgeting

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  1. 0 21 Budgeting

  2. 0 21-1 Objective 1 Describe budgeting, its objectives, and its impact on human behavior.

  3. 0 21-1 Budget A budget charts a course for a business by outlining the plans of the business in financial terms.

  4. 0 Estimated Portion of Your Total Monthly Income That Should Be Budgeted for Various Living Expenses 21-1 Savings 8% Entertainment Housing 6% 30% Transportation 15% Clothing Utilities 7% 5% Other 4% Food Medical 4 5% 20%

  5. Establishing specific goals 0 21-1 Objectives of Budgeting • Executing plans to achieve the goals • Periodically comparing actual results to the goals

  6. 0 21-1 Responsibility Centers The budgetary units of an organization are called responsibility centers. Each responsibility center is led by a manager who has the authority over and responsibility for the unit’s performance.

  7. 0 21-1 Human Behavior and Budgeting Human behavior problems can arise if— • the budget goal is too tight and very hard for the employee to achieve. 7

  8. 0 21-1 Human behavior problems can arise if— • the budget goal is too loose and very easy for the employee to achieve. 8

  9. 0 21-1 Human behavior problems can arise if— • the budget goals of a business conflict with the objectives of the employees. 9

  10. 0 21-1 Goal conflict occurs when individual self-interest differs from business objectives. A manager pushing for maximum production (to increase his/her bonus) may not have the same production goals as the company’s (trying to control the size of its inventory).

  11. 0 21-2 Objective 2 Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting.

  12. 0 21-2 Budgeting Systems A variation of fiscal-year budgeting, called continuousbudgeting, maintains a twelve-month projection into the future.

  13. One-Year Budget Feb. 2008 Feb. 2008 Mar. 2008 Apr. 2008 May 2008 June 2008 July 2008 Aug. 2008 Sep. 2008 Oct. 2008 Nov. 2008 Dec. 2008 Jan. 2009 Feb. 2009 Add February 2009 Delete on February 28 13 0 21-2 Continuous Budgeting

  14. 0 21-2 Zero-Based Budgeting Zero-based budgeting requires managers to estimate sales, production, and other operating data as though operations are being started for the first time.

  15. 0 21-2 Static Budget • A static budget shows the expected results of a responsibility center for only one activity level. The budget does not change as the activity increases or decreases. • A static budget is used by many service companies and for some administrative functions of manu-facturing companies.

  16. 0 21-2 Strength:A static budget is simple Weakness:A static budget does not adjust for changes in revenues and expenses that occur as volumes change.

  17. 4 0 21-2 Static Budget Colter Manufacturing Company Assembly Department Budget For the Year Ending July 31, 2008 Direct labor $40,000 Electric power 5,000 Supervisor salaries 15,000 Total department costs $60,000 17

  18. 0 21-2 Flexible Budget • A flexible budget shows the expected results of a responsibility center for several activity levels. • A flexible budget is especially useful in estimating and controlling factory costs and operating expenses.

  19. Strength:Flexible budgeting provides information needed to analyze the impact of volume changes on actual operating results. 0 21-2 Weakness:Flexible budgeting requires greater research into costs. There must be a differentiation between fixed and variable costs.

  20. 0 21-2 Flexible Budget 20

  21. 0 21-3 Objective 3 Describe the master budget for a manufacturing business.

  22. Budgeted Income Statement Budgeted Balance Sheet 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 Cash budget Capital expenditures budget 0 21-3 Budgets That Are Linked Together in a Master Budget

  23. 0 21-3 Income Statement Budgets 23

  24. 0 21-4 Objective 4 Prepare the basic income statement budgets for a manufacturing business.

  25. 0 21-4 Sales Budget The sales budget normally indicates for each product— (1) the quantity of estimated sales and (2) the expected unit selling price.

  26. 0 21-4 Factors Expected to Affect Future Sales include— • backlog of unfilled sales orders • planned advertising and promotion • expected industry and general economic conditions • productive capacity • projected pricing policy • findings of market research studies

  27. 0 21-4 Sales Budget 27

  28. 0 21-4 Production Budget The number of units to be manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget.

  29. Production Budget Expected units of sales + Desired units in ending inventory – Estimated units in beginning inventory Total units to be produced 0 21-4 Sales Budget 29

  30. Production Budget Materials needed for production + Desired ending materials inventory – Estimated beginning materials inventory Direct materials to be purchased 0 21-4 Direct Materials Purchases Budget Sales Budget Direct Materials Purchases Budget 30

  31. 0 21-4 Direct Materials Purchases Budget 31

  32. 0 21-4 Direct Labor Cost Budget 32

  33. Production Budget 0 21-4 Direct Labor Cost Budget Sales Budget Direct Materials Purchases Budget Direct Labor Cost Budget 33

  34. 0 21-4 Factory Overhead Cost Budget 34

  35. Production Budget 0 21-4 Factory Overhead Cost Budget Sales Budget Direct Materials Purchases Budget Direct Labor Cost Budget Factory Overhead Cost Budget 35

  36. 0 21-4 Cost of Goods Sold Budget Direct materials purchase budget Direct labor cost budget Factory overhead cost budget 36

  37. Production Budget Cost of Goods Sold Budget 0 21-4 Factory Overhead Cost Budget Sales Budget Direct Materials Purchases Budget Direct Labor Cost Budget Factory Overhead Cost Budget 37

  38. 0 21-4 Selling and Administrative Expense Budget 38

  39. Production Budget Cost of Goods Sold Budget 0 21-4 Selling and Administrative Expense Budget Sales Budget Direct Materials Purchases Budget Direct Labor Cost Budget Selling & Administrative Expenses Budget Factory Overhead Cost Budget 39

  40. 0 21-4 Budgeted Income Statement Sales budget Cost of goods sold budget Selling and administrative expenses budget 40

  41. 0 21-5 Objective 5 Prepare balance sheet budgets for a manufacturing business.

  42. 0 21-5 Cash Budget 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.

  43. 0 21-5 Estimated Cash Receipts January February March Receipts from cash sales: Cash sales (10% x current month’s sales—Note A)……. $108,000 $124,000 $ 97,000 Note A: $108,000 = $1,080,000 x 10% $124,000 = $1,240,000 x 10% $ 97,000 = $ 970,000 x 10% 43

  44. 0 21-5 January February March Receipts from cash sales: Cash sales (10% x current month’s sales—Note A)……. $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 Note B: $370,000, given as Jan. 1, 2008 Accts. Rec. balance $388,800 = $1,080,000 x 90% x 40% $446,400 = $1,240,000 x 90% x 40% 44

  45. 0 21-5 January February March Receipts from cash sales: Cash sales (10% x current month’s sales—Note A)……. $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%) (see Note C)…………………………… 583,200 669,600 523,800 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% 45

  46. 0 21-5 Schedule of Collections from Sales 46

  47. 0 21-5 Estimated Cash Payments January February March Payments of prior months’ manu- facturing costs {[25% x previous month’s manufacturing costs (less depreciation)]—Note A}….. $190,000 $204,000 $189,000 Note A: $190,000, given as January 1, 2006 Accounts Payable balance $204,000 = ($840,000 – $24,000) x 25% $189,000 = ($780,000 – $24,000) x 75% 47

  48. 0 21-5 January February March Payments of prior months’ manu- facturing 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}…………….…………… $612,000 $567,000 $591,000 Note B: $612,000 = ($840,000 – $24,000) x 75% $567,000 = ($780,000 – $24,000) x 75% $591,000 = ($812,000 – $24,000) x 75% 48

  49. 0 21-5 Schedule of Payments for Manufacturing Costs 49

  50. 0 21-5 Completing the Cash Budget January February March Estimated cash receipts from: Cash sales (Slide 46) $ 108,000 $ 124,000 $ 97,000 Collections of accounts receivable (Slide 46) 953,200 1,058,400 970,200 Interest revenue —— 24,500 Total cash receipts $1,061,200$1,182,400$1,091,700 Estimated cash payments for: Manufacturing costs (Slide 49) $ 802,000 $ 771,000 $ 780,000 Selling and administrative expenses 160,000 165,000 145,000 Capital additions 274,000 Interest expense 22,500 Income taxes 150,000 50

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