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Operational Budgeting

Chapter 22. Operational Budgeting. Control Steps taken by management to ensure that objectives are attained. Planning Developing objectives for acquisition and use of resources. Budgeting: The Basis for Planning and Control.

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Operational Budgeting

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  1. Chapter22 Operational Budgeting

  2. Control Steps taken by management to ensure that objectives are attained. Planning Developing objectives for acquisitionand use of resources. Budgeting: The Basis forPlanning and Control A budget is a comprehensive financialplan for achieving the financial andoperational goals of an organization.

  3. Enhanced managerialresponsibility Coordinationof activities Performanceevaluation Benefits Assignment of decisionmaking responsibilities Benefits Derived from Budgeting

  4. Budget Problems Perceived unfair or unrealistic goals. Poor management-employee communications. Solution Reasonable and achievable budgets. Employee participation in budgeting process. Establishing Budgeted Amounts: The “Behavioral” Approach

  5. Participation in Budget Process Flow of Budget Data

  6. 2001 2002 2003 2004 C a p i t a l B u d g e t s The Budget Period The annual operating budget may be divided into quarterly or monthly budgets. A continuous budget is usually a twelve-month budget that adds one month as the current month is completed.

  7. Cost of goodssold and endinginventorybudgets Salesforecast Productionschedule • Budgeted • financial budgets: • cash • income • balance sheet Capitalexpendituresbudget Operatingexpensebudgets The Master Budget

  8. Preparing the Master Budget:An Illustration That’s enough talkingabout budgets, nowshow me an example!

  9. EstimatedUnit Sales EstimatedUnit Price Analysis of economic and market conditions+Forecasts of customer needs from marketing personnel Preparing the Master Budget:An Illustration SalesBudget

  10. Ellis Magnet Co. is preparing budgets for the quarter ending June 30. The sales price is $10 per magnet. Budgeted sales for the next four months are: April 20,000 magnets @ $10 = $200,000 May 50,000 magnets @ $10 = $500,000 June 30,000 magnets @ $10 = $300,000 July 25,000 magnets @ $10 = $250,000 Preparing the Master Budget:An Illustration The Sales Budget July is needed for June ending inventory computations.

  11. Sales Budget Production Budget Completed The Production Budget

  12. Ellis wants ending inventoryto be 20 percent of the next month’s budgeted sales in units. 4,000 units were on hand March 31. Let’s prepare the production budget. The Production Budget

  13. Production must be adequate to meet budgeted sales and to provide sufficient ending inventory. • Budgeted product sales in units • + Desired product units in ending inventory • = Total product units needed • – Product units in beginning inventory • = Product units to produce The Production Budget

  14. The Production Budget

  15. The Production Budget

  16. The Production Budget

  17. Production Budget Units Production Budget MaterialPurchases Completed The Production Budget

  18. Units to produce • × Material needed per unit • = Material needed for units to produce • + Desired units of material in ending inventory • = Total units of material needed • – Units of material in beginning inventory • = Units of material to purchase The Production BudgetMaterial Purchases The material purchases budget is based on production quantity and desired material inventory levels.

  19. Five pounds of material are needed for each unit produced. Ellis wants to have materials on hand at the end of each month equal to 10 percent of the following month’s production needs. The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000 units. The Production BudgetMaterial Purchases

  20. The Production BudgetMaterial Purchases

  21. The Production BudgetMaterial Purchases

  22. The Production BudgetMaterial Purchases

  23. Materials used in production cost $.40per pound. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month. No discount terms are available. The accounts payable balance onMarch 31 is $12,000. Cash Payments forMaterial Purchases

  24. Cash Payments forMaterial Purchases

  25. Cash Payments forMaterial Purchases

  26. Cash Payments forMaterial Purchases

  27. Cash Payments forMaterial Purchases

  28. Production Budget UnitsMaterial Production Budget Labor Completed The Production Budget

  29. Each unit produced requires 3 minutes (.05 hours) of direct labor. Ellis employs 30 persons for 40 hours each week at a rate of $10 per hour. Any extra hours needed are obtained by hiring temporary workers also at $10 per hour. The Production BudgetDirect Labor

  30. Cash Payments forDirect Labor

  31. Cash Payments forDirect Labor

  32. Production Budget UnitsMaterialLabor Production Budget ManufacturingOverhead Completed The Production Budget

  33. Variable manufacturing overhead is $1 per unit produced and fixed manufacturing overhead is $50,000 per month. Fixed manufacturing overhead includes $20,000 indepreciation which does not require a cash outflow. The Production BudgetManufacturing Overhead

  34. Cash Payments forManufacturing Overhead

  35. Cash Payments forManufacturing Overhead

  36. Cash Payments forManufacturing Overhead

  37. Production Budget SellingandAdministrativeExpenseBudget Completed Selling and Administrative(S&A) Expense Budget

  38. Selling expense budgets contain both variable and fixed items. Variable items: shipping costs and sales commissions. Fixed items: advertising and sales salaries. Administrative expense budgets contain mostly fixed items. Executive salaries and depreciation on company offices. Selling and Administrative(S&A) Expense Budget

  39. Variable selling and administrative expenses are $.50 per unitsoldand fixed selling and administrative expenses are $70,000 per month. Fixed selling and administrative expenses include $10,000 in depreciation which does not require a cash outflow. Cash Payments for(S&A) Expenses

  40. Cash Payments for(S&A) Expenses

  41. Cash Payments for(S&A) Expenses

  42. I have seen a lot of cashpayments but no cashreceipts. Show me somecash receipts! Cash Receipts Budget

  43. All sales are on account. Ellis’s collection pattern is: 70 percent collected in month of sale 25 percent collected in month after sale 5 percent will be uncollectible Accounts receivable on March 31 is $30,000, all of which is collectible. Cash Receipts Budget

  44. Cash Receipts Budget

  45. Cash Receipts Budget

  46. Cash Receipts Budget

  47. Cash Receipts Budget

  48. With just a little more information we will be able to prepare a comprehensive cash budget. Comprehensive Cash Budget

  49. Comprehensive Cash BudgetAdditional Information • Ellis Magnet Company: • Has a $100,000 line of credit at its bank, with a zero balance on April 1. • Maintains a $30,000 minimum cash balance. • Borrows at the beginning of a month and repays at the end of a month. • Pays interest at 16 percent when a principal payment is made. • Pays a $51,000 cash dividend in April. • Purchases equipment costing $143,700 in May and $48,800 in June. • Has a $40,000 cash balance on April 1.

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