6 - 1 benefits of budgeting essentials of effective budgeting master budgetster budget budgeted...
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6 - 1
Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Budgetary Planning
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Management Functions
• Planning• Directing and Motivating
• Controlling
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Budget
A formal written statement of management’s plans
• for a specific future time period
• expressed in financial terms.
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Budgets
• Are both short-term and long-term.
• Set forth the objectives of the organization and proposed ways of accomplishing them.
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Benefits of Budgeting• Requires all levels of management to
plan ahead.• Provides definite objectives for
evaluating performance at each level of responsibility.
• Creates an early warning system for potential problems.
• Facilities coordination of activities within the organization.
• Results in greater management awareness of entity’s overall operation.
• Motivates personnel throughout the organization to meet planned objectives.
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Budget Committee• Is responsible for coordinating
the preparation of the budget.• Serves as review board where
managers can defend their budget goals and request.
• Differences are reviewed, modified if necessary and reconciled.
Flow of Information to Top of Organization Illustration 6-1
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Long-Range Planning and Budgeting
Differ:• In the time period involved• In emphasis-
– Budgeting is on short-term goals– Long-range Planning
• Identifies long-term goals• Selects strategies to achieve
them• Develops policies and plans to
implement them
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Master Budget
A set of interrelated budgets that constitutes a plan of action for a specific time period.
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Operating Budgets
Individual budgets that result in a budgeted income statement.
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Financial Budgets
Individual budgets that indicate the cash resources needed for expected operations and planned capital expenditures.
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Components of Master Budget
Illustration 6-2
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Sales Forecast
The projection of potential sales for the industry and the company’s expected share of such sales.
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Sales BudgetIllustration 6-3
An estimate of expected sales for the budget period.
Hayes CompanySales Budget
For the Year Ending December 31, 2002
Expected unit salesUnit selling price
Total sales
1 3,000
x $60
$180,000
2 3,500
x $60
$210,000
3 4,000
x $60
$240,000
4 4,500
x $60
$270,000
Year 15,000
x $60
$900,000
Quarter
Production BudgetA projection of the units that must be produced to meet
anticipated sales…including a realistic estimate of ending inventory.
Illustration 6-5
Hayes CompanyProduction Budget
For the Year Ending December 31, 2002
Expected unit sales (sales budget)Add: Desired ending FG unitsa
Total required unitsLess: Beginning FG units
Required production units
1 3,000
700 3,700
600c
3,100
Quarter
2 3,500
8004,300
700
3,600
3 4,000
9004,900
800
4,100
4 4,500
1,000b
5,500 900
4,600
Year
15,400
a20% of next quarter’s salesbExpected 2003 first-quarter sales, 5000 units x 20%c20% of estimated first-quarter 2002 sales units
Direct Materials BudgetAn estimate of the quantity and cost of direct materials to be
purchased, including a realistic estimate of ending inventory.
Units to be produced (Illustration 6-5)
Direct materials per unitTotal pounds needed for productionAdd: Desired ending Direct MaterialsTotal materials requiredLess:Beginning Direct Materials Direct materials purchasesCost per pound
Total cost of DM purchases
1
3,100 x 2
6,200 720
6,920 620
6,300 x $4
$25,200
Quarter
2
3,600 x 2
7,200 820
8,020 720
7,300 x $4
$29,200
3
4,100 x 2
8,200 920
9,120 820
8,300 x $4
$33,200
4
4,600 x 2
9,200 1,020
10,220 920
9,300 x $4
$37,200
Year
$124,800
Hayes CompanyDirect Materials Budget
For the Year Ending December 31, 2002
Illustration 6-7Illustration 6-7
Direct Labor Budget
A projection of the quantity and cost of direct labor to be incurred to meet production requirements.
Year
$308,000
Units to be produced (from production budget Ill 6-5)Direct labor time (hours) per unitTotal required direct labor hoursDirect labor cost per hour
Total direct labor cost
1
3,100 x 2
6,200 x $10
$62,000
Quarter
2
3,600 x 2
7,200 x $10
$72,000
3
4,100 x 2
8,200 x $10
$82,000
4
4,600 x 2
9,200 x $10
$92,000
Hayes CompanyDirect Labor Budget
For the Year Ending December 31, 2002
Illustration 6-8
6 - 18
Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Manufacturing Overhead Budget•Shows the expected manufacturing overhead costs for the budget period. •Distinguishes between fixed and variable overhead costs.•The fixed cost amounts are assumed, and Hayes expects the following variable costs per direct labor hour:
•indirect materials: $1.00•indirect labor: $1.40•utilities: $0.40•maintenance: $0.20
Hayes CompanyManufacturing Budget
For the Year Ending December 31, 2002
Manufacturing Overhead Budget
Variable Costs Indirect materials ($1.00 per DLH) Indirect labor ($1.40 per DLH) Utilities ($ .40 per DLH) Maintenance ($.20 per DLH) Total variableFixed costs Supervisory salaries Depreciation Property tax and insurance Maintenance
Total fixed
Total manufacturing overhead
1 $ 6,200
8,6802,480
1,240 18,600
20,0003,8009,000
5,700 38,500
$57,100
Quarter
2 $ 7,20010,080
2,880 1,440 21,600
20,0003,8009,000
5,700 38,500
$60,100
3 $ 8,20011,480
3,280 1,640 24,600
20,0003,8009,000
5,700 38,500
$63,100
4 $ 9,20012,880
3,680 1,840 27,600
20,0003,8009,000
5,700 38,500
$66,100
9,2008,2007,2006,200 30,800Direct Labor hours
$ 8.00Manufacturing overhead rate per direct labor hour ($246,400 30,800)
Illustration 6-9
Year $ 30,800
43,12012,320
6,160 92,400
80,00015,20036,000
22,800 154,000
$246,400
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Selling and Administrative Expense Budget
• Is a projection of anticipated operating expenses.
• Distinguishes between fixed and variable costs.• Fixed cost amounts are assumed, and Hayes
expects the following variable costs per unit sold (from sales budget):– sales commissions: $3.00– freight-out: $1.00
Selling and Administrative Expense Budget
Hayes CompanySelling & Administrative Budget
For the Year Ending December 31, 2002
Variable Costs Sales commissions ($3 per unit) Freight-out ($1 per unit) Total variableFixed costs Advertising Sales salaries Office Salaries Depreciation Property taxes and insurance
Total selling and administrative expenses
1 $ 9,000
3,000 12,000
5,00015,000
7,5001,000
1,500 30,000
$42,000
Quarter
Illustration 6-10
2 $ 10,500 3,500 14,000
5,00015,000
7,5001,000
1,500 30,000
$44,000
3 $ 12,000 4,000 16,000
5,00015,000
7,5001,000
1,500 30,000
$46,000
4 $ 13,500 4,500 18,000
5,00015,000
7,5001,000
1,500 30,000
$48,000
Year $ 45,000 15,000 60,000
20,00060,00030,000
4,000 6,000 120,000
$180,000
Total fixed
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Budgeted Income StatementAn estimate of the expected
profitability of operations for the budget period.
Hayes CompanyBudgeted Income Statement
For the Year Ending December 31, 2002
Illustration 6-12
Sales (Illustration 6-3)Cost of goods sold (15,000 x $44)Gross profitSelling & administrative expensesIncome from operationsInterest expenseIncome before income taxesIncome tax expense
Net income
$900,000 660,000240,000
180,00060,000
10059,900
12,000
$ 47,900
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Financial Budgets Consist of:
• Capital Expenditure Budget
• Cash Budget
• Budget Balance Sheet
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Cash Budget
A projection of anticipated cash flows.
Any CompanyCash Budget
Beginning cash balanceAdd: Cash receipts (itemized)Total cash availableLess: Cash disbursements (itemized)Excess (deficiency) of available cash over cash disbursementsFinancing
Ending cash balance
$x,xxx x,xxxx,xxx
x,xxxx,xxx
x,xxx
$x,xxx
Illustration 6-13
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Budgeted Balance SheetA projection of financial position at the end
of the budget period.
Hayes CompanyBudgeted Balance Sheet
December 31, 2002
Illustration 6-17
Cash Accounts receivable Finished goods inventory Raw materials inventory Buildings & Equipment Less: Accumulated Depreciation
Total assets
$ 192,000 48,000
$ 37,900108,000
44,0004,080
144,000
$337,980
Accounts payable Common stock Retained earnings
Total liabilities and stockholders’ equity
94,380$337,980
ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 18,600225,000
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Merchandise Purchases Budget
The estimated cost of goods to be purchased by a merchandiser to meet expected sales.
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Nonmanufacturing Companies such as service enterprises and not-for-profit organizations also need budgeting!
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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Not-for-profit entities budget on the basis of cash flows rather than on a revenue and expense basis.
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Benefits of Budgeting
Essentials of Effective Budgeting
Master Budget
Budgeted Income Statement
Cash Budget
Budgeting in a nonmanufac-turing Company
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