8. budgeting

Universidad CuauhtémocCampus Aguascalientes

BudgetingAnálisis de Costos

Maestría en Administración

Housing30%

Utilities5%

Food20%Medical

5%

Other4%

Clothing7%

Transportation15%

Entertainment6%

Savings8%

Estimated portion of your total monthly

income that should be budgeted

Nature and Objectives of BudgetingNature and Objectives of Budgeting

Feedback

Establishing specific goalsExecuting plans to achieve the goalsPeriodically comparing actual

results to the goals

Objectives of Budgeting

PLANNING DIRECTINGCONTROLLIN

G

Nature and Objectives of BudgetingNature and Objectives of Budgeting

Continuous BudgetingContinuous Budgeting

One-Year Budget

Feb. 2006

Mar. 2006

Apr. 2006

May 2006

June 2006

July 2006

Aug. 2006

Sep. 2006

Oct. 2006

Nov. 2006

Dec. 2006

Jan. 2007

Delete on February 2007

Continuous BudgetingContinuous Budgeting

One-Year Budget

Add February 2007

Mar. 2006

Apr. 2006

May 2006

June 2006

July 2006

Aug. 2006

Sep. 2006

Oct. 2006

Nov. 2006

Dec. 2006

Jan. 2007

Feb. 2007

Static BudgetsStatic BudgetsDescription: A budget that does not

reflect potential changes in volume or activity level

Strength: It is simple—all expenses are budgeted as fixed

costsWeakness: It does not reflect

changes in revenues and expenses that occur as volumes changeTypical usage: Service organizations or

administrative departments of retailers and manufacturers

Colter Manufacturing CompanyAssembly Department Budget

For the Month Ending July 31, 2006

Direct labor $40,000Electric Power 5,000Supervisor salaries 15,000 Total department costs $60,000

Static BudgetsStatic Budgets

Flexible BudgetsFlexible BudgetsDescription: A budget that shows revenues and

expenses for a variety of volumes or activity levels

Strength: Provides information needed to analyze the impact of volume changes on actual operating results

Weakness: Requires greater research into costs—must differentiate fixed and variable costs

Typical usage: Operational departments of retailers and manufacturers whose costs change with sales and production



Units of production 8,000 9,000 10,000

Variable cost:Direct labor $40,000$45,000$50,000Electric power 4,000 4,500 5,000 Total variable cost $44,000$49,500$55,000

Cost per unit is $5.50 at all levels of activityCost per unit is $5.50 at all levels of activity


Fixed cost:Electric power $ 1,000 $ 1,000 $ 1,000Supervisor salaries 15,000 15,000 15,000 Total fixed cost $16,000$16,000$16,000






Fixed cost:Electric power $ 1,000 $ 1,000 $ 1,000Supervisor salaries 15,000 15,000 15,000 Total fixed cost $16,000$16,000$16,000

Total department costs$60,000$65,500$71,000



Static BudgetsStatic Budgets

Budget

Actual

Results

Overbudget

$60,000 $72,000

8,000 units

Actual

Results

$60,000 $72,000

9,000 units

$65,500

10,000 units

$71,000

Overbudget

Flexible Budget

Flexible BudgetsFlexible Budgets

Master BudgetMaster Budget

Budgeted Income Statement

Sales budgetCost of goods sold budget:Production budgetDirect materials purchases

budgetDirect labor cost budget

Selling and administrative expense budget

Elite Accessories

Budgets

SalesBudget

SalesBudget Production Budget

Expected units of sales

+ Desired units in ending inventory

– Estimated units in beginning inventory

Total units to be produced

Production Budget

Direct MaterialsPurchases Budget


Materials needed for production + Desired ending materials inventory

– Est. beginning materials inventory

Direct materials to be purchased

SalesBudget

SalesBudget

Production Budget



Direct LaborCost Budget

Direct LaborCost Budget

Factory OverheadCost Budget

Factory OverheadCost Budget

Cost of GoodsSold Budget

Cost of GoodsSold Budget

Selling & Administrative

ExpensesBudget

Selling & Administrative

ExpensesBudget

SalesBudget

SalesBudget

Elite Accessories Inc.Sales Budget

For the Year Ending December 31, 2010

Wallet:East……………….. 287,000$12.00 $ 3,444,000West………………. 241,00012.00 2,892,000 Total……………. 528,000 $ 6,336,000

Handbag:East……………….. 156,400$25.00 $ 3,910,000West………………. 123,60025.00 3,090,000 Total……………. 280,000 $ 7,000,000

Total revenue from Sales……………….. $13,336,000

Unit Sales Unit Selling Total Product and Region Volume Price Sales

Elite Accessories Inc.Production Budget


Expected units to be sold528,000 280,000

From sales budgetFrom sales budget

UnitsWallet Handbag



Expected units to be sold…………. 528,000 280,000Plus desired ending inventory,

December 31, 2010……………. 80,000 60,000Total 608,000 340,000

UnitsWallet Handbag



Expected units to be sold…………. 528,000 280,000Plus desired ending inventory,

December 31, 2010……………. 80,000 60,000Total………………………………. 608,000 340,000Less estimated beginning inventory,

January 1, 2010…………………. 88,000 48,000Total units to be produced………… 520,000 292,000

UnitsWallet Handbag

Elite Accessories Inc.Direct Materials Purchases Budget

For the Year Ending December 31, 2010 Direct Materials

Leather Lining Total

Square yards required for production:Wallet (Note A)………………….. 156,000 52,000

Note A: Leather: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds.Lining: 520,000 units x 0.10 sq. yd. Per unit = 52,000 sq. yds.

Square yards required for production:Wallet (Note A)……..……..…….. 156,000 52,000Handbag (Note B)……………….. 365,000 146,000

Note B: Leather: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds.Lining: 292,000 units x 0.50 sq. yd. Per unit = 146,000 sq. yds.

Direct Materials Leather Lining Total



Square yards required for production:Wallet (Note A)……....………….. 156,000 52,000Handbag (Note B).………………. 365,000 146,000

Plus desired inventory, Dec. 31, 2010 20,000 12,000Total……………………………… 541,000 210,000




Square yards required for production:Wallet (Note A) …………………. 156,000 52,000Handbag (Note B) ………………. 365,000 146,000


Less estimated inventory, Jan. 1, 2010 18,000 15,000Total square yards to be produced.. 523,000 195,000




Square yards required for production:Wallet (Note A)………………….. 156,000 52,000Handbag (Note B).………………. 365,000 146,000


Less estimated inventory, Jan. 1, 2010 18,000 15,000Total square yards to be produced.. 523,000 195,000

Unit price (per square yard)…………. x $4.50 x $1.20Total direct materials to be purchased. $2,353,500 $234,000 $2,587,500




Elite Accessories Inc.Direct Labor Cost Budget


Cutting Sewing Total

Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

Hours required for production:Wallet (Note A)…………. 52,000 130,000


Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

Hours required for production:Wallet (Note A)…………. 52,000 130,000Handbag (Note B)……….. 43,800 116,800

. Note B: Cutting Department: 292,000 units x 0.15 hr. per unit = 43,800 hrs.

Sewing Department: 292,000 units x 0.40 hr. per unit = 116,800 hrs




Hours required for production:Wallet (Note A)…………. 52,000 130,000Handbag (Note B)……….. 43,800 116,800Total……………………... 95,800 246,800

Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs..

Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.

Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs




Hours required for production:Wallet (Note A)…………. 52,000 130,000Handbag (Note B)……….. 43,800 116,800Total……………………... 95,800 246,800

Hourly rate…………………… x $12.00 x $15.00Total direct labor cost………… $1,149,600 $3,702,000

$4,851,600Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs



Elite Accessories Inc.Factory Overhead Cost Budget


Indirect factory wages……………………... $ 732,800Supervisory salaries………………………... 360,000Power and light…………………………….. 306,000Depreciation of plant and equipment………. 288,000Indirect materials…………………………… 182,800Maintenance………………………………... 140,280Insurance and property taxes………………. 79,200Total factory overhead cost………………... $2,089,080

Elite Accessories Inc.Cost of Goods Sold Budget


Note A: Leather: 18,000 sq. yds. x $4.50 per sq. yd $81,000Lining: 15,000 sq. yds. x $1.20 per sq. yd 18,000 Direct materials inventory,

January 1, 2010 $99,000

Note A: Leather: 18,000 sq. yds. x $4.50 per sq. yd $81,000Lining: 15,000 sq. yds. x $1.20 per sq. yd 18,000 Direct materials inventory,

January 1, 2010 $99,000

Finished goods inventory, January 1 ,2010….. $ 1,095,600Work in process inventory, January 1, 2010… $ 214,400Direct materials:

Direct materials inventory, January 1, 2010 (Note A)…………………………………. $ 99,000

Finished goods inventory, January 1 ,2010…. $ 1,095,600Work in process inventory, January 1, 2010... $ 214,400Direct materials:

Direct materials inventory, January 1, 2010 (Note A)…………………………………. $ 99,000Direct materials purchases (Slide 27)…….. 2,587,500Cost of direct materials available for use…. $2,686,500Less direct materials inventory, December 31, 2010 (Note B)……………. 104,400



Note B: Leather: 20,000 sq. yds. x $4.50 per sq. yd $ 90,000Lining: 12,000 sq. yds. x $1.20 per sq. yd 14,400

Direct materials inventory, December 31, 2010 $104,400

Note B: Leather: 20,000 sq. yds. x $4.50 per sq. yd $ 90,000Lining: 12,000 sq. yds. x $1.20 per sq. yd 14,400

Direct materials inventory, December 31, 2010 $104,400

Finished goods inventory, January 1 ,2010…. $ 1,095,600Work in process inventory, January 1, 2010... $ 214,400Direct materials:

Direct materials inventory, January 1, 2010 (Note A)…………………………………. $ 99,000Direct materials purchases (Slide 27)…….. 2,587,500Cost of direct materials available for use…. $2,686,500Less direct materials inventory, December 31, 2010 (Note B)……………. 104,400Cost of direct materials placed in production $2,582,100

Direct labor (Slide 31)………………………. 4,851,600Factory overhead (Slide 32)………………….. 2,089,080Total manufacturing costs……………………. 9,522,780Total work in process during period…………. $9,737,180



Less work in process inventory, December 31, 2010 220,000Cost of goods manufactured………………………... 9,517,180Cost of finished goods available for sale…………... $10,612,780Less finished goods inventory, December 31, 2010.. 1,565,000Cost of goods sold………………………………….. $ 9,047,780

Finished goods inventory, January 1 ,2010………... $ 1,095,600

Work in process inventory, January 1, 2010……….. $ 214,500Total manufacturing costs………………………….. 9,522,780Total work in process during period……………….. $9,737,180



Elite Accessories Inc.Selling and Administrative Expenses Budget


Selling expenses:Sales salaries expense…………………………. $715,000Advertising expense…………………………... 360,000Travel expense…………………………………. 115,000

Total selling expenses………………………...$1,190,000

Administrative expenses:Officers’ salaries expense………………………. $360,000Office salaries expense…………………………. 258,000Office rent expense……………………………...34,500Office supplies expense…………………………. 17,500Miscellaneous administrative expense………….. 25,000

Total administrative expenses………………… 695,000

Total selling and administrative expenses…………$1,885,000

Revenue from sales (slide 19) $13,336,000Cost of goods sold (slide 36) 9,047,780Gross profit $ 4,288,220Selling & administrative expenses:

Selling expenses (slide 37) $1,190,000Administrative expenses (slide 37) 695,000 Total sell. & Admin. Expenses

1,885,000Income from operations $ 2,403,220Other income:

Interest revenue $ 98,000Other expense:

Interest expense 90,000 8,000Income before income tax $ 2,411,220Income tax 600,000Net income $ 1,811,220

Elite Accessories Inc.Budgeted Income Statement


Universidad CuauhtémocCampus Aguascalientes

Análisis de CostosMaestría en Administración

8. budgeting

Business

sales budget production

year budget

units of production

units of sales

inventory total units

total variable cost

administrative expense

total fixed cost