Budgeting

1
Budgeting

• Chapter M5

2
Budgets

• Charts a course for a business by outlining the
  plans of the business in financial terms

3
Objecitves

• Establish specific goals
• Executing plans to achieve goals
• Periodically comparing actual results with goals

4
Management meets objectives

• Planning
• Directing
• Controlling

5
Budgeting Systems

• Static budget
• Flexible budget
• Master budget
• Sales budget
• Production budget
• Direct materials purchase budget
• Direct labor cost budget
• Factory overhead cost budget
• Selling and administrative budget
• Cash budget

6
Sales Budget

• Indicates for each product the quantity of sales
  and expected selling price
• Example 1 Brite Lite sells two products in the
  US and Canada. Product A is estimated to sell
  5,000 units in the US and 10,000 units in Canada
  at 100 per unit. Product B sells 20,000 units
  in US and 6,000 units in Canada at 50 per unit.

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Sales Budget
Brite Lite Sales Budget For year 2005
8
Production budget

• Coordinates with sales budget
• Expected units to be sold
• Desired ending inventory
• -Estimated beginning inventory
• Production for period

9
Production budget

• Brite Lite plans to have beginning inventory of
  3,000 units of A and 5,000 units of B. Ending
  inventory should be 10 of sales.

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Production Budget
Brite Lite Production Budget For year 2004
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Example 2

• Geo produces three products X, Y, and Z. Sales
  are expected at 10,000 units to X, 15,000 units
  to Y, and 25,000 to Z. Beginning inventory is
  estimated at 3,000 to X, 5000 to Y, 2,500 to Z.
  Ending inventory is estimated at 1,500 to X,
  4,000 to Y, and 4,000 to Z. Complete production
  budget.

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Example 2
Geo Products Production Budget For year 2005
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Direct Materials Purchases Budget

• Estimates purchase levels for the next year and
  costs
• Materials required for production plus ending
  inventory minus beginning inventory

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Direct Materials

• Product A uses 2 lbs of Tox and 3lbs of Gox.
  Product B uses 1/2lb of Tox, 1lb of Gox, 2lbs of
  Plox. Gox sells for 5 per lb, Tox 10lbs and
  Plox 2 lb. Beg inventory is 7,300, 3,600, and
  5,200 lbs. Ending inventory is 4,000lbs,
  6,000lbs, and 8,000 lbs.

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Direct Materials Budget
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Example 4

• Dare uses two materials in the production of its
  products X and Y. The materials are A and B.
  Product X requires 3 units of A and 1.5lbs of B
  for completion. Product Y requires 4 units of A
  and 1lb. Of B. A is 6 per unit and B is 5 per
  unit. Estimated beginning inventory is 3,000 A
  and 4,000 of B. Desired ending inventory is
  2,000 of A and 1,000 of B. The company is
  expecting to product 10,000 units of X and 15,000
  units of Y.

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Example 4
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Direct Labor Budget

• Product A uses 6hrs of Dept 1 and 2hrs of Dept 2.
  Product B uses 4hrs of Dept 1 and 1.2hr in Dept
  2. Labor is 10 per hour in Dept 1 and 7 per
  hour in Dept 2.

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Example
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Factory Overhead Budget
Indirect labor 25,000, utilities 45,000,
maintenance 40,000 and insurance 60,000
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Cost of goods sold budget

• Is composed of the budgets for production, direct
  materials, direct labor and factory overhead

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Cash Budget

• Is one of the most important elements of budgets
• Presents the expected receipts and payments of
  cash for a period of time
• Divided into
• Cash receipts
• Cash payments
• Other items

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Cash Receipts Budget

• Magna has estimated sales of 1,080,000 in
  January, 1,240,000 in february, and March of
  970,000. Accounts receivable has a balance on
  January 1 of 370,000. The company expects 10
  of its sales to be in cash. Of the credit sales
  60 will be collected in the month of the sale
  and remainder the next month.

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Cash Sales

• January 1,080,000 X 10 108,000
• Feb 1,240,000 X 10 124,000
• March 970,000 X 10 97,000

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Credit Receipts

• January collections
• 60 of Jan collected in January
• Credit sales 1,080,000 X 90
• Collection 972,000 X 60 583,200
• Dec sales 370,000 value of Accts receivable
• Feb collections
• 40 of Jan credit sales
• 972,000 X 40 388,800
• 60 of Feb credit sales
• 1,240,000 X 90 X 60 669,600

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Credit Receipts

• March
• Feb 40 of credit sales
• 1,160,000 X 40 446,400
• March 60 of credit sales
• 970,000 X 90 X 60 523,800

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Cash Receipts Budget
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Cash Payments Budget

• Reduction in cash from manufacturing, selling and
  administrative, capital expenditure, and other
  expenses
• Assume manufacturing costs are 840,000,
  780,000, and 812,000 for Jan through March.
  Beg balance in accounts payable is 190,000.
  Depreciation expense is 24,000 per month
  included in mfg costs. Mfg costs are paid 75 in
  month incurred and remainder next month.

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Cash Payment Budget

• January
• Mfg cost 840,000
• Depreciation 24,000
• Net 816,000
• Current mo 816,000 X 75 612,000
• Next mo 816,000 X 25 204,000

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Cash Payment Budget

• February
• Mfg cost 780,000
• Depre 24,000
• Net 756,000
• Current 756,000 X 75 567,000
• Next 756,000 X 25 189,000

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Cash Payment Budget

• March
• Mfg 812,000
• Dep 24,000
• Net 788,000
• Current 788,000 X 75 591,000

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Cash Payment Budget
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Completing the Budget

• Cash balance on Jan 1 is 280,000
• Quarterly tax on 3/31 is 150,000
• Quarterly interest paid 1.10 is 22.500
• Selling expense 160,000, 165,000 and 145,000
• Interest revenue 3/21 is 24,500
• Capital expenditures 2/28 is 274,000
• Minimum cash balance is 340,000

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Cash Budget