Budgeting

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• Budgeting

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Purposes of Budgeting Systems

• Budget
• a detailed plan, expressed in quantitative terms,
  that specifies how resources will be acquired and
  used during a specified period of time.

• Planning
• Controlling Profit and Operations
• Evaluating Performance and Providing Incentives

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Types of Budgets
Detail Budget
Detail Budget
Detail Budget
Materials
Master Budget Covering all phases of a
companys operations.
Production
Sales
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Sales of Services or Goods
Exh. 9-1
Ending Inventory BudgetWork in Process and
Finished Goods
Production Budget
Inventory budget
Selling and Administrative Budget
Direct LaborBudget
Overhead Budget
Cash Budget
Budgeted Financial Statements
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Sales Budget

• Breakers, Inc. is preparing budgets for the
  quarter ending June 30.
• Budgeted sales for the next five months are
• April 20,000 units
• May 50,000 units
• June 30,000 units
• July 25,000 units
• August 15,000 units.
• The selling price is 10 per unit.

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Sales Budget
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Production Budget
Completed
Production must be adequate to meet
budgeted sales and provide for sufficient ending
inventory.
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Production Budget

• The management of Breakers, Inc. wants ending
  inventory to be equal to 20 of the following
  months budgeted sales in units.
• On March 31, 4,000 units were on hand.
• Lets prepare the production budget.

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Production Budget
From sales budget
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Production Budget
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Production Budget
March 31 ending inventory
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Production Budget
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Production Budget
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Direct-Material Budget

• At Breakers, five pounds of material are required
  per unit of product.
• Management wants materials on hand at the end of
  each month equal to 10 of the following months
  production.
• On March 31, 13,000 pounds of material are on
  hand. Material cost .40 per pound.
• Lets prepare the direct materials budget.

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Direct-Material Budget
From ourproduction budget
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Direct-Material Budget
10 of the following months production
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Direct-Material Budget
March 31 inventory
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Direct-Material Budget
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Direct-Material Budget
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Direct-Labor Budget

• At Breakers, each unit of product requires 0.1
  hours of direct labor.
• The Company has a no layoff policy so all
  employees will be paid for 40 hours of work each
  week.
• In exchange for the no layoff policy, workers
  agreed to a wage rate of 8 per hour regardless
  of the hours worked (No overtime pay).
• For the next three months, the direct labor
  workforce will be paid for a minimum of 3,000
  hours per month.
• Lets prepare the direct labor budget.

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Direct-Labor Budget
From our production budget
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Direct-Labor Budget
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Direct-Labor Budget
This is the greater of labor hours required
or labor hours guaranteed.
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Direct-Labor Budget
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Overhead Budget

• Here is Breakers Overhead Budget for the quarter.

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Selling and Administrative Expense Budget

• At Breakers, variable selling and administrative
  expenses are 0.50 per unit sold.
• Fixed selling and administrative expenses are
  70,000 per month.
• The 70,000 fixed expenses include 10,000 in
  depreciation expense that does not require a cash
  outflows for the month.

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Selling and Administrative Expense Budget
From our Sales budget
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Selling and Administrative Expense Budget
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Selling and Administrative Expense Budget
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Cash Receipts Budget

• At Breakers, all sales are on account.
• The companys collection pattern is
• 70 collected in the month of sale,
• 25 collected in the month following sale,
• 5 is uncollected.
• The March 31 accounts receivable balance of
  30,000 will be collected in full.

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Cash Receipts Budget
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Cash Receipts Budget
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Cash Disbursement Budget

• Breakers pays 0.40 per pound for its materials.
• One-half of a months purchases are paid for in
  the month of purchase the other half is paid in
  the following month.
• No discounts are available.
• The March 31 accounts payable balance is 12,000.

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Cash Disbursement Budget
140,000 lbs. .40/lb. 56,000
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Cash Disbursement Budget
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Cash Disbursement BudgetContinued

• Breakers
• Maintains a 12 open line of credit for 75,000.
• Maintains a minimum cash balance of 30,000.
• Borrows and repays loans on the last day of the
  month.
• Pays a cash dividend of 25,000 in April.
• Purchases 143,700 of equipment in May and
  48,300 in June paid in cash.
• Has an April 1 cash balance of 40,000.

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Cash Disbursement BudgetContinued
From our Cash Receipts Budget
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Cash Disbursement BudgetContinued
From our Cash Disbursements Budget
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Cash Disbursement BudgetContinued
From our Direct Labor Budget
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Cash Disbursement BudgetContinued
From our Overhead Budget
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Cash Disbursement BudgetContinued
From our Selling and Administrative Expense Budget
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Cash Disbursement BudgetContinued
To maintain a cash balance of 30,000, Breakers
must borrow 35,000 on its line of credit.
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Cash Disbursement BudgetFinancing and Repayment
Ending cash balance for April is the beginning
May balance.
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Cash Disbursement BudgetContinued
Breakers must borrow an addition 13,800 to
maintain a cash balance of 30,000.
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Cash Disbursement BudgetFinancing and Repayment
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Cash Disbursement BudgetContinued
At the end of June, Breakers has enough cash to
repay the 48,800 loan plus interest at 12.
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Cash Disbursement BudgetFinancing and Repayment
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Cash Disbursement BudgetContinued
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Cash Disbursement BudgetFinancing and Repayment
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Budgeted Income Statement
Completed
After we complete the cash budget, we can
prepare the budgeted income statement for
Breakers.
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Budgeted Ending Inventory
Manufacturing overhead is applied on the basis of
direct labor hours.
rounded
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Budgeted Income Statement
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Budgeted Balance Sheet

• Breakers reports the following account balances
  on June 30 prior to preparing its budgeted
  financial statements
• Land - 50,000
• Building (net) - 148,000
• Common stock - 200,000
• Retained earnings - 46,400

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25of June sales of 300,000
11,500 lbs. at .40 per lb.
5,000 units at 4.60 per unit.
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50 of June purchases of 56,800
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Flexible Budgets
Hmm! Comparingstatic budgetswith actual
costsis like comparingapples and oranges.

• Static budgets are prepared for a single,
  planned level of activity.
• Performance evaluation is difficult when
  actual activity differs from the planned level of
  activity.

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Flexible Budgets
Hmm! Comparingstatic budgetswith actual
costsis like comparingapples and oranges.

• Considerthe following example from the Cheese
  Company . . .

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Static Budgets andPerformance Reports
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Static Budgets andPerformance Reports
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Static Budgets andPerformance Reports
F Favorable variance since actual costs are
less than budgeted costs.
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Static Budgets andPerformance Reports
Since cost variances are favorable, havewe done
a good job controlling costs?
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Static Budgets andPerformance Reports
I dont think I can answer this question using
a static budget.
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Static Budgets andPerformance Reports

• The relevant question is . . .
• How much of the favorable cost variance is due
  to lower activity, and how much is due to good
  cost control?
• To answer the question,we mustthe budget to
  theactual level of activity.

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Flexible Budgets

• Central Concept
• If you can tell me what your activity wasfor
  the period, I will tell you what your costs and
  revenue should have been.

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Preparing a Flexible Budget

• To a budget for different activity
  levels, we must know how costs behave with
  changes in activity levels.
• Total variable costs changein direct proportion
  to changes in activity.
• Total fixed costs remainunchanged within
  therelevant range.

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Advantages of Flexible Budgets
Show revenues and expensesthat should have
occurred at theactual level of activity.
May be prepared for any activity level in the
relevant range.
Reveal variances due to good cost control or lack
of cost control.
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Preparing a Flexible Budget
Lets prepare budgets for the Cheese Company.
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Preparing a Flexible Budget
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Preparing a Flexible Budget
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Preparing a Flexible Budget
Variable costs are expressed as a constant amount
per hour. In the original static budget, indirect
labor was 40,000 for 10,000 hours resulting in a
rate of 4.00 per hour.
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Preparing a Flexible Budget
Fixed costs are expressed as a total amount that
does not change within the relevant range of
activity.
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Preparing a Flexible Budget
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Preparing a Flexible Budget
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Preparing a Flexible Budget
Note There is no flexin the fixed costs.
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Preparing a Flexible Budget
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Flexible BudgetPerformance Report
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Flexible BudgetPerformance Report
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Flexible BudgetPerformance Report
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Flexible BudgetPerformance Report
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Flexible BudgetPerformance Report
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Flexible BudgetPerformance Report
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Flexible BudgetPerformance Report
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End of Chapter
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