Budgeting

1. Budgeting Chapter 21

2. Learning Objectives • Describe budgeting, its objectives, and its impact 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.

3. Learning Objective 1 Describe budgeting, its objectives, and its impact on human behavior.

4. Nature and Objectives of Budgeting • 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.

5. Objectives of Budgeting Estimated Portion of Your Total Monthly Income That Should Be Budgeted for Various Living Expenses Source: Consumer Credit Counseling Service

6. Objectives of Budgeting • Budgeting involves: • Establishing specific goals. • Executing plans to achieve the goals. • Periodically comparing actual results with the goals.

7. Objectives of Budgeting • 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.

8. Objectives of Budgeting • A budgetary unit of a company is called a responsibility center. • Each responsibility center is led by a manager who has the authority and responsibility for achieving the center’s budgeted goals.

9. Objectives of Budgeting

10. Objectives of Budgeting • 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. • If necessary, responsibility centers can use such feedback to adjust their activities in the future.

11. Human Behavior and Budgeting • 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 onthe company achieving its goals.

12. Human Behavior and Budgeting • 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.

13. Human Behavior and Budgeting • 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.

14. Learning Objective 2 Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting.

15. Budgeting Systems • The budgetary period for operating activities normally includes the fiscal year of a company. • A variation of fiscal-year budgeting, called continuous budgeting, maintains a 12-month projection into the future.

16. Budgeting Systems

17. Budgeting Systems • Zero-based budgeting requires managers to estimate sales, production, and other operating data as though operations are being started for the first time.

18. Static Budget • 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. • A static budget is used by many service companies and for some administrative functions of manufacturing companies.

19. Static Budget

20. Static Budget • The disadvantage of static budgets is that they do not adjust for changes in revenues and expenses that occur as volumes change.

21. Flexible Budget • Flexible budgets show the expected results of a responsibility center for several activity levels. • A flexible budget is, in effect, a series of static budgets for different levels of activity.

22. Flexible Budget

23. The firm would be under budget by $200 ($71,000 – $70,800). Flexible Budget • 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?

24. Flexible Budget

25. Learning Objective 3 Describe the master budget for a manufacturing company.

26. Master Budget • The master budget is an integrated set of operating, investing, and financing budgets for a period of time.

27. Master Budget • 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 Financing Budget Cash budget Investing Budget Capital expenditures budget Budgeted Income Statement Budgeted Balance Sheet

28. Learning Objective 4 Prepare the basic income statement budgets for a manufacturing company.

29. Income Statement Budgets

30. Sales Budgets • 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.

31. Sales Budgets • 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

32. Sales Budgets • 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.

33. Sales Budgets

34. Production Budget • The production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels.

35. Production Budget • Elite Accessories Inc. expects the following inventories of wallets and handbags:

36. Production Budget

37. Production Budget Expected units to be sold + Desired units in ending inventory – Estimated units in beginning inventory Total units to be produced Production Budget Sales Budget

38. Direct Materials Purchases Budget • The direct materials purchases budget estimates the quantities of direct materials to be purchased to support the budgeted production and desired inventory levels.

39. Production Budget Direct Materials Purchases Budget Sales Budget Direct Materials Purchases Budget Materials needed for production + Desired ending materials inventory – Estimated beginning materials inventory Direct materials to be purchased

40. Direct Materials Purchases Budget Note A: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds.

41. Direct Materials Purchases Budget Note A: 520,000 units x 0.10 sq. yd. per unit = 52,000 sq. yds.

42. Direct Materials Purchases Budget Note B: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds.

43. Direct Materials Purchases Budget Note B: 292,000 units x 0.50 sq. yd. per unit = 146,000 sq. yds.

44. Direct Labor Cost Budget • The direct labor cost budget estimates the direct labor hours and related cost needed to support budgeted production.

45. Production Budget Direct Labor Cost Budget Sales Budget Direct Materials Purchases Budget Direct Labor Cost Budget

46. Direct Labor Cost Budget Note A: 520,000 units x 0.10 hr. per unit = 52,000 hrs.

47. Direct Labor Cost Budget Note A: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

48. Direct Labor Cost Budget Note B: 292,000 units x 0.15 hr. per unit = 43,800 hrs.

49. Direct Labor Cost Budget Note B: 292,000 units x 0.40 hr. per unit = 116,800 hrs.

50. Factory Overhead Cost Budget • The factory overhead cost budget estimates the cost for each item of factory overhead needed to support budgeted production.