budgeting. some of the action has been automated, so click the mouse when you see this lightning...
TRANSCRIPT
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BudgetingBudgeting
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Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand
corner of the screen. You can point and click anywhere on the screen.
Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand
corner of the screen. You can point and click anywhere on the screen.
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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 BudgetingNature and Objectives of BudgetingNature and Objectives of Budgeting
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1. Describe budgeting, its objectives, and its impact on human behavior.
2. Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting.
3. Describe the master budget for a manufacturing business.
4. Prepare the basic income statement budgets for a manufacturing business.
5. Prepare balance sheet budgets for a manufacturing business.
ObjectivesObjectivesObjectivesObjectives
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Feedback
• Establishing specific goals• Executing plans to achieve the goals• Periodically comparing actual results to the goals
Objectives of BudgetingObjectives of Budgeting
PLANNINGPLANNING DIRECTINGDIRECTING CONTROLLINCONTROLLINGG
Nature and Objectives of BudgetingNature and Objectives of BudgetingNature and Objectives of BudgetingNature and Objectives of Budgeting
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Human Behavior and BudgetingHuman Behavior and Budgeting
Setting budget goals too tightly
Setting budget goals too loosely
Setting conflicting budget goals
Nature and Objectives of BudgetingNature and Objectives of BudgetingNature and Objectives of BudgetingNature and Objectives of Budgeting
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Nature and Objectives of BudgetingNature and Objectives of BudgetingNature and Objectives of BudgetingNature and Objectives of Budgeting
Goal conflict occurs when individual self-interest differs from business objectives.
A student’s question, “Will this be on the test?” is evidence of goal conflict.
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Continuous BudgetingContinuous BudgetingContinuous BudgetingContinuous Budgeting
One-Year Budget
Feb. 2006
Mar. 2006
Apr. 2006
May 2006
June 2006
July 2998
Aug. 2006
Sep. 2006
Oct. 2006
Nov. 2006
Dec. 2006
Jan. 2007
Delete on February 28
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Continuous BudgetingContinuous BudgetingContinuous BudgetingContinuous Budgeting
One-Year Budget
Add February 2007
Mar. 2006
Apr. 2006
May 2006
June 2006
July 2998
Aug. 2006
Sep. 2006
Oct. 2006
Nov. 2006
Dec. 2006
Jan. 2007
Feb. 2007
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Static BudgetsStatic BudgetsStatic BudgetsStatic BudgetsDescription: A budget that
does not reflect potential changes in volume or activity levelStrength: It is simple—all expenses are budgeted as fixed costs
Weakness: It does not reflect changes in revenues and expenses that occur as volumes changeTypical usage: Service
organizations or administrative departments of retailers and manufacturers
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Colter Manufacturing CompanyAssembly Department Budget
For the Month Ending July 31, 2006Direct labor $40,000Electric Power 5,000Supervisor salaries 15,000 Total department costs $60,000
Static BudgetsStatic BudgetsStatic BudgetsStatic Budgets
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Flexible BudgetsFlexible BudgetsFlexible 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
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Colter Manufacturing CompanyAssembly Department Budget
For the Month Ending July 31, 2006
Units of productionUnits of production 8,0008,000 9,0009,000 10,00010,000
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
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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
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
Units of productionUnits of production 8,0008,000 9,0009,000 10,00010,000
Colter Manufacturing CompanyAssembly Department Budget
For the Month Ending July 31, 2006
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Units of productionUnits of production 8,0008,000 9,0009,000 10,00010,000
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
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
Colter Manufacturing CompanyAssembly Department Budget
For the Month Ending July 31, 2006
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Static and Flexible BudgetsStatic and Flexible BudgetsStatic and Flexible BudgetsStatic and Flexible Budgets
Static Static BudgetBudget
Actual
Results
Overbudget
$60,000 $72,000
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8,000 8,000 unitsunits
Actual
Results
$60,000 $72,000
9,000 9,000 unitsunits
$65,500
10,000 10,000 unitsunits
$71,000
Overbudget
Flexible Budget
Static and Flexible BudgetsStatic and Flexible BudgetsStatic and Flexible BudgetsStatic and Flexible Budgets
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Master BudgetMaster BudgetMaster BudgetMaster Budget
Budgeted Income Statement
Sales budget
Cost of goods sold budget:
Production budget
Direct materials purchases budget
Direct labor cost budget
Selling and administrative expense budget
Budgeted Balance Sheet
Cash budget
Capital expenditure budget
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Income Income Statement Statement BudgetsBudgets
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SalesBudget
SalesBudget Production BudgetProduction Budget
Expected units of sales
+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced
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Production BudgetProduction Budget
Direct MaterialsPurchases Budget
Direct MaterialsPurchases Budget
Materials needed for production + Desired ending materials inventory
– Est. beginning materials inventory
Direct materials to be purchased
SalesBudget
SalesBudget
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Production BudgetProduction Budget
Direct MaterialsPurchases Budget
Direct MaterialsPurchases 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
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Elite Accessories Inc.Sales Budget
For the Year Ending December 31, 2006
Wallet:East……………….. 287,000 $12.00 $ 3,444,000West………………. 241,000 12.00 2,892,000 Total……………. 528,000 $ 6,336,000
Handbag:East……………….. 156,400 $25.00 $ 3,910,000West………………. 123,600 25.00 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
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Elite Accessories Inc.Production Budget
For the Year Ending December 31, 2006
Expected units to be sold 528,000 280,000
From sales budgetFrom sales budget
UnitsWallet Handbag
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Elite Accessories Inc.Production Budget
For the Year Ending December 31, 2006
Expected units to be sold…………. 528,000 280,000Plus desired ending inventory,
December 31, 2006……………. 80,000 60,000Total 608,000 340,000
UnitsWallet Handbag
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Elite Accessories Inc.Production Budget
For the Year Ending December 31, 2006
Expected units to be sold…………. 528,000 280,000Plus desired ending inventory,
December 31, 2006……………. 80,000 60,000Total………………………………. 608,000 340,000Less estimated beginning inventory,
January 1, 2006…………………. 88,000 48,000Total units to be produced………… 520,000 292,000
UnitsWallet Handbag
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Elite Accessories Inc.Direct Materials Purchases Budget
For the Year Ending December 31, 2006 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.
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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
Elite Accessories Inc.Direct Materials Purchases Budget
For the Year Ending December 31, 2006
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Square yards required for production:Wallet (Note A)……....………….. 156,000 52,000Handbag (Note B).………………. 365,000 146,000
Plus desired inventory, Dec. 31, 2006 20,000 12,000Total……………………………… 541,000 210,000
Direct Materials Leather Lining Total
Elite Accessories Inc.Direct Materials Purchases Budget
For the Year Ending December 31, 2006
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Square yards required for production:Wallet (Note A) …………………. 156,000 52,000Handbag (Note B) ………………. 365,000 146,000
Plus desired inventory, Dec. 31, 2006 20,000 12,000Total……………………………… 541,000 210,000
Less estimated inventory, Jan. 1, 2006 18,000 15,000Total square yards to be produced.. 523,000 195,000
Direct Materials Leather Lining Total
Elite Accessories Inc.Direct Materials Purchases Budget
For the Year Ending December 31, 2006
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Square yards required for production:Wallet (Note A)………………….. 156,000 52,000Handbag (Note B).………………. 365,000 146,000
Plus desired inventory, Dec. 31, 2006 20,000 12,000Total……………………………… 541,000 210,000
Less estimated inventory, Jan. 1, 2006 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
Direct Materials Leather Lining Total
Elite Accessories Inc.Direct Materials Purchases Budget
For the Year Ending December 31, 2006
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Elite Accessories Inc.Direct Labor Cost Budget
For the Year Ending December 31, 2006
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
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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)…………. 52,000 130,000Handbag (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
Elite Accessories Inc.Direct Labor Cost Budget
For the Year Ending December 31, 2006
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Cutting Sewing Total
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
Elite Accessories Inc.Direct Labor Cost Budget
For the Year Ending December 31, 2006
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Cutting Sewing Total
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.Direct Labor Cost Budget
For the Year Ending December 31, 2006
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Elite Accessories Inc.Factory Overhead Cost Budget
For the Year Ending December 31, 2006
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
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Elite Accessories Inc.Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Note A: Leather: 18,000 sq. yds. x $4.50 per sq. yd$81,000
Lining: 15,000 sq. yds. x $1.20 per sq. yd 18,000
Direct materials inventory,
January 1, 2006$99,000
Note A: Leather: 18,000 sq. yds. x $4.50 per sq. yd$81,000
Lining: 15,000 sq. yds. x $1.20 per sq. yd 18,000
Direct materials inventory,
January 1, 2006$99,000
Finished goods inventory, January 1 ,2006….. $ 1,095,600Work in process inventory, January 1, 2006… $ 214,400Direct materials:
Direct materials inventory, January 1, 2006 (Note A)…………………………………. $ 99,000
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Finished goods inventory, January 1 ,2006….. $ 1,095,600Work in process inventory, January 1, 2006… $ 214,400Direct materials:
Direct materials inventory, January 1, 2006 (Note A)…………………………………. $ 99,000
Note B: Leather: 20,000 sq. yds. x $4.50 per sq. yd$ 90,000
Lining: 12,000 sq. yds. x $1.20 per sq. yd 14,400Direct materials inventory, December 31, 2006$104,400
Note B: Leather: 20,000 sq. yds. x $4.50 per sq. yd$ 90,000
Lining: 12,000 sq. yds. x $1.20 per sq. yd 14,400Direct materials inventory, December 31, 2006$104,400
Elite Accessories Inc.Cost of Goods Sold Budget
For the Year Ending December 31, 2006
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Finished goods inventory, January 1 ,2006…. $ 1,095,600Work in process inventory, January 1, 2006... $ 214,400Direct materials:
Direct materials inventory, January 1, 2006 (Note A)…………………………………. $ 99,000Direct materials purchases (Slide 31)…….. 2,587,500Cost of direct materials available for use…. $2,686,500Less direct materials inventory, December 31, 2006 (Note B)……………. 104,400Cost of direct materials placed in production $2,582,100
Direct labor (Slide 35)………………………. 4,851,600Factory overhead (Slide 36)………………….. 2,089,080Total manufacturing costs……………………. 9,522,780Total work in process during period…………. $9,737,180
Elite Accessories Inc.Cost of Goods Sold Budget
For the Year Ending December 31, 2006
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Less work in process inventory, December 31, 2006 220,000Cost of goods manufactured………………………... 9,517,180Cost of finished goods available for sale…………... $10,612,780Less finished goods inventory, December 31, 2006.. 1,565,000Cost of goods sold………………………………….. $ 9,047,780
Finished goods inventory, January 1 ,2006………... $ 1,095,600
Work in process inventory, January 1, 2006……….. $ 214,500Total manufacturing costs………………………….. 9,522,780Total work in process during period……………….. $9,737,180
Elite Accessories Inc.Cost of Goods Sold Budget
For the Year Ending December 31, 2006
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Elite Accessories Inc.Selling and Administrative Expenses Budget
For the Year Ending December 31, 2006
Selling expenses:Sales salaries expense…………………………. $715,000Advertising expense…………………………... 360,000Travel expense…………………………………. 115,000
Total selling expenses………………………... $1,190,000Administrative 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………………… 695,000Total selling and administrative expenses………… $1,885,000
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Revenue from sales (slide 23) $13,336,000Cost of goods sold (slide 40) 9,047,780Gross profit $ 4,288,220Selling & administrative expenses:
Selling expenses (slide 41) $1,190,000Administrative expenses (slide 41) 695,000 Total sell. & Admin. Expenses 1,885,000
Income 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
For the Year Ending December 31, 2006
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The cash budget is one of the most important elements of the budgeted balance sheet. We’ll
begin with a schedule of collection from sales.
The cash budget is one of the most important elements of the budgeted balance sheet. We’ll
begin with a schedule of collection from sales.
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Receipts from cash sales:Cash sales (10%)(see Note A)……………………... $108,000 $ 124,000 $ 97,000
January February March
Note A: $108,000 = $1,080,000 x 10%$124,000 = $1,240,000 x 10%$ 97,000 = $ 970,000 x 10%
Note A: $108,000 = $1,080,000 x 10%$124,000 = $1,240,000 x 10%$ 97,000 = $ 970,000 x 10%
Elite Accessories Inc.Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
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Receipts from cash sales:Cash sales (10%)(see Note A)……………………... $108,000 $ 124,000 $ 97,000
Receipts from sales on account:Collections from prior month’ssales (40%)(see Note B)……. $370,000 $ 388,800 $446,400
January February March
Note B: $370,000, given as January 1, 2006 Accounts Receivable balance$388,800 = $1,080,000 x 90% x 40%$446,400 = $1,240,000 x 90% x 40%
Note B: $370,000, given as January 1, 2006 Accounts Receivable balance$388,800 = $1,080,000 x 90% x 40%$446,400 = $1,240,000 x 90% x 40%
Elite Accessories Inc.Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
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Receipts from cash sales:Cash sales (10%)(see Note A)……………………... $108,000 $ 124,000 $ 97,000
Receipts from sales on account:Collections from prior month’ssales (40%)(see Note B)……. $370,000 $ 388,800 $446,400Collections from currentmonth’s sales (60%)(see NoteC)…………………………… 583,200 669,600 523,800
January February March
Note C: $583,200 = $1,080,000 x 90% x 60%$669,600 = $1,240,000 x 90% x 60%$523,800 = $ 970,000 x 90% x 60%
Note C: $583,200 = $1,080,000 x 90% x 60%$669,600 = $1,240,000 x 90% x 60%$523,800 = $ 970,000 x 90% x 60%
Elite Accessories Inc.Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
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Receipts from cash sales:Cash sales (10%)(see Note A)……………………... $108,000 $ 124,000$ 97,000
Receipts from sales on account:Collections from prior month’ssales (40%)(see Note B)……. $370,000 $ 388,800$446,400Collections from current month’s sales (60%)
(see NoteC)…………………………… 583,200 669,600 523,800
Total receipts from sales on account……………………... $953,200 $1,058,400$970,200
January February March
Elite Accessories Inc.Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
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Payment of prior month’s
manufacturing costs (25%)
(see Note A)………………… $190,000 $204,000 $189,000
January February March
Elite Accessories Inc.Schedule of Payments for Manufacturing CostsFor the Three Months Ending March 31, 2006
Note A: $190,000, given as January 1, 2006 Accounts Payable balance$204,000 = ($840,000 –$24,000) x 25%$189,000 = ($780,000 – $24,000) x 75%
Note A: $190,000, given as January 1, 2006 Accounts Payable balance$204,000 = ($840,000 –$24,000) x 25%$189,000 = ($780,000 – $24,000) x 75%
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Payment of prior month’s
manufacturing costs (25%)
(see Note A)………………… $190,000 $204,000 $189,000
Payment of current month’s
manufacturing costs (75%)
(see Note B)…………………. 612,000 567,000 591,000
January February March
Note B: $612,000 = ($840,000 – $24,000) x 75%$567,000 = ($780,000 – $24,000) x 75%$591,000 = ($812,000 – $24,000) x 75%
Note B: $612,000 = ($840,000 – $24,000) x 75%$567,000 = ($780,000 – $24,000) x 75%$591,000 = ($812,000 – $24,000) x 75%
Elite Accessories Inc.Schedule of Payments for Manufacturing CostsFor the Three Months Ending March 31, 2006
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Payment of prior month’s
manufacturing costs (25%)
(see Note A)………………… $190,000 $204,000 $189,000
Payment of current month’s
manufacturing costs (75%)
(see Note B)…………………. 612,000 567,000 591,000
Total payments………………. $802,000 $771,000 $780,000
January February March
Elite Accessories Inc.Schedule of Payments for Manufacturing CostsFor the Three Months Ending March 31, 2006
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Estimated cash receipts:Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000Collections of accounts
receivable (Slide 48)………... 953,200 1,058,400 970,200Interest revenue………………... — — 24,500
Total cash receipts…………….$1,061,200 $1,182,400 $1,091,700
Elite Accessories Inc.Cash Budget
For the Three Months Ending March 31, 2006
January February March
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Estimated cash receipts:Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000Collections of accounts
receivable (Slide 48)………... 953,200 1,058,400 970,200Interest revenue………………... — — 24,500
Total cash receipts…………….$1,061,200 $1,182,400 $1,091,700
Elite Accessories Inc.Cash Budget
For the Three Months Ending March 31, 2006
January February March
Estimated cash payments for:Manufacturing costs (Slide 51).. $ 802,000 $ 771,000 $ 780,000Selling and administrative expenses……………………… 160,000 165,000 145,000Capital additions 274,000Interest expense 22,500Income taxes 150,000
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Estimated cash receipts:Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000Collections of accounts
receivable (Slide 48)………... 953,200 1,058,400 970,200Interest revenue………………... — — 24,500
Total cash receipts…………….$1,061,200 $1,182,400 $1,091,700
Elite Accessories Inc.Cash Budget
For the Three Months Ending March 31, 2006
January February March
Estimated cash payments for:Manufacturing costs (Slide 51).. $ 802,000 $ 771,000 $ 780,000Selling and administrative expenses……………………… 160,000 165,000 145,000Capital additions 274,000Interest expense 22,500Income taxes 150,000
Total cash payments…………. $ 984,500 $1,210,000 $1,075,000
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Estimated cash receipts:Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000Collections of accounts
receivable (Slide 48)………... 953,200 1,058,400 970,200
January February March
Capital additions 274,000Interest expense……………….. 22,500Income taxes…………………... 150,000
Total cash payments………….$ 984,500 $1,210,000 $1,075,000
Cash increase (decrease)…………. $ 76,700 $ (27,600) $ 16,700Cash balance at beginning of month 280,000 356,700 329,100Cash balance at end of month……. $ 356,700 $ 329,100 $ 345,800Minimum cash balance…………… 340,000 340,000 340,000Excess (deficiency)………………. $ 16,700 $ (10,900) $ 5,800
Elite Accessories Inc.Cash Budget
For the Three Months Ending March 31, 2006
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