Download - PP for Chapter 9 - Budgeting - Final
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Accounting: A Malaysian Perspective,
4
th
ed
(Adapted from Accounting 22
nd
ed
)
Warren, Reeve and
Duchac
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Budgeting andControlling
Tools
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1. Describe budgeting, its objectives,and its impact on human behavior.
2. Describe the basic elements ofthe budget process, the twomajor types of budgeting, and the
use of computers in budgeting.
After studying this chapter, youshould be able to:
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3. Describe the master budget for amerchandising business.
4. Prepare the basic incomestatement budgets for amerchandising business.
5. Prepare balance sheet budgetsfor a merchandising business.
After studying this chapter, youshould be able to:
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Describe budgeting, itsobjectives, and its impact onhuman behavior.
Objective 1
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A budgetcharts a course for a business byoutlining the plans of the business in financialterms.
Establishing specific goals
Executing plans to achieve the goals
Periodically comparing actual results to the goals
Objectives of Budgeting
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Housing30%
Utilities5%
Food20%
Medical5%
Other4%
Clothing7%
Transportation15%
Entertainment6%
Savings8%
Estimated Portion of Your Total Monthly
Income That Should Be Budgeted for
Various Living Expenses
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Budgeting processes 9-1
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Planning
Budgeting supports the planning process byrequiring all organizational units to establishtheir goals for the upcoming period. These
goals motivate individuals and groups toperform at high levels. Planning alsomotivates employees to attain goals andimprove overall decision making.
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Directing
The budget can be used to directandcoordinateoperations in order toachieve the stated goals.
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The budgetary units of an organization arecalled responsibility centers. Eachresponsibility center is led by a manager who
has the authority over and responsibility for theunits performance.
Responsibility Centers9-1
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Controlling Through Feedback
As time passes, the actual performance ofan operation can be compared against the
planned goals. This provides promptfeedback to employees about theirperformance. If necessary, employees canuse such feedback to adjust their activities
in the future.
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Human behavior problems canarise if
1. the budget goal is too
tight and very hard forthe employee to achieve.
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Human behavior problems canarise if
2. the budget goal is too loose
and very easy for theemployee to achieve.
It is undesirable to set lowergoals than is attainable. Suchbudget padding is termedbudgetary slack.
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Human behavior problems canarise if
3. the budget goals of a
business conflict with theobjectives of the employees.
Goal conflictoccurs when individual self-
interest differs from business objectives orwhen different departments are givenconflicting objectives.
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Describe the basic elements of
the budget process, the twomajor types of budgeting, andthe use of computers in
budgeting.
Objective 2
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A variation of fiscal-year budgeting,called continuousbudgeting,maintains a twelve-month projection
into the future.
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One-Year Budget
Feb.2008
Mar.2008
Apr.2008
May2008
June2008
July2008
Aug.2008
Sep.2008
Oct.2008
Nov.2008
Dec.2008
Jan.2009
Delete on February 28
20Add February 2009
Feb.2008
Feb.2009
Continuous Budgeting9-2
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Zero-based budgetingrequiresmanagers to estimate sales,
production, and other operatingdata as though operations arebeing started for the first time.
Zero-Based Budgeting
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Static Budget
A static budgetshows the expectedresults of a responsibility center for onlyone activity level. The budget does not
change even if the activity changes.
A static budget is used by many servicecompanies and for some administrativefunctions of merchandising companies.
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Colter Manufacturing CompanyAssembly Department BudgetFor the Year Ending July 31, 2008
Direct labor $40,000Electric power 5,000Supervisor salaries 15,000Total department costs $60,000
Static Budget
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Strength:A static budget is simpleall expenses arebudgeted as fixed costs.
Weakness:
A static budget does not adjust for changes in
revenues and expenses that occur as volumeschange.
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Flexible Budget
Flexible budgetsshow theexpected results of a responsibility
center for several activity levels.
A flexible budget is especially usefulin estimating and controlling factory
costs and operating expenses.
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Flexible Budget9-2
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Strength:
Flexible budgeting provides information needed
to analyze the impact of volume changes on
actual operating results.
Weakness:
Flexible budgeting requires greater research into
costs. There must be a differentiation betweenfixed and variable costs.
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Static and Flexible Budgets
If Coulter Manufacturing Companys AssemblyDepartment spent $72,000 to produce 10,000units, how much over or under budget would
the department manager be using a staticbudget? A flexible budget?
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Over Budget
StaticBudget
$60,000 $72,000
ActualResults
Static and Flexible Budgets
(Continued)
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8,000
units
$60,000
9,000
units
$65,500
10,000
units
$71,000
OverBudget
Flexible Budget
$72,000
ActualResults
(Concluded)
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Describe the master
budget for amerchandising business.
Objective 3
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Budgeted Balance Sheet
Cash budget
Capital expenditures
budget
Budgets That Are Linked Together in a Master Budget
Budgeted Income Statement
Sales budget
Purchase budget
Inventory budget
Cost of goods sold budget
Selling and administrativeexpense budget
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Income Statement
Budgets Sales Budget
Purchases Budget
Inventory Budget
Cost of Goods Sold
Budget
Budgeted Income
Statement
Selling and Administrative
Expenses Budget
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Prepare the basic incomestatement budgets for amerchandising business.
Objective 4
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Sales Budget
The sales budgetnormally indicates foreach product
(1) the quantity of estimated sales and
(2) the expected unit selling price.
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Factors Expected to Affect Future
Sales include
backlog of unfilled sales orders
planned advertising and promotion
expected industry and general economicconditions
productive capacity
projected pricing policy findings of market research studies
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Sales Budget (Exhibit 1)
Elite Sports Enterprise
Sales Budget
For the Months of January, February and March
Month Forecasted Sales
Volume
Unit Selling
Price
Total Sales
January 2,700 RM400 RM1,080,000
February 3,100 RM400 RM1,240,000
March 2,425 RM400 RM 970,000
Total revenue from sales RM3,290,000
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Purchase Budget
Purchase budget is used to estimate the quantity ofmerchandises needed to be purchased in order tofulfill the targeted sales demand. Use the following
formulation to determine total purchase needed.Budgeted Cost of goods sold
(+) Desired Ending inventory
Total inventory needed
(-) Estimated Beginning inventory
Total Purchase needed
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Purchases Budget (Exhibit 2)
Elite Sports Enterprise
Purchases Budget
For the Months of January, February and March
January February March Total
Cost of goods sold
(50% of current sales) 540,000 620,000 485,000 1,645,000Plus Desired ending inventory
(70% of next month cost of goods sold) 434,000 339,500 *420,000 420,000
Total inventory needed 974,000 959,500 905,000 2,065,000
Less Beginning inventory # 378,000 434,000 339,500 378,000
Total Purchases (RM) 596,000 525,500 565,500 1,687,000
Note* : RM420,000 = (3,000 x 400) x 50% x 70%# : RM378,000 = given as December 31, 2009, Accounts Receivable balance, or
= 70% x January cost of goods sold of RM540,000
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Selling and administrative expense
The sales budget is often used as thestarting point for estimating the selling andadministrative expenses.
For example, a budgeted increase in salesmay require more advertising. Otherexamples of expenses driven by sales
volume are sales commissions, packagingand delivery expenses.
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Selling and Administrative Expense Budget
(Exhibit 3) Elite Sports EnterpriseSelling and Administrative Expenses BudgetFor the Months of January, February and March
January February March Total
Administrative expenses:Salaries (fixed)
RentDepreciationMiscellaneous expenses
20,000
2,0006,00010,800
20,000
2,0006,00012,400
20,000
2,0006,0009,700
60,000
6,00018,00032,900
Total administrative expenses 38,800 40,400 37,700 116,900Selling expenses:
CommissionsAdvertising
Others
162,00021,600
10,000
186,00024,800
10,000
145,50019,400
10,000
493,50065,800
30,000Total selling expenses 193,600 220,800 174,900 589,300Total selling andadministrative expenses
232,400 261,200 212,600 706,200
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Prepare balance sheetbudgets for a
merchandising business.
Objective 5
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Cash Budget
The cash budgetis one of the mostimportant elements of the budgetedbalance sheet. The cash budget
presents the expected receipts(inflows) and payments (outflows) ofcash for a period of time.
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Receipts from cash sales:
Cash sales (10% x current
months salesNote 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%
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Receipts from cash sales:
Cash sales (10% x current
months salesNote A). $108,000 $124,000 $ 97,000
January February March
Note B: $370,000, given as Jan. 1, 2008 Accts. Rec. balance
$388,800 = $1,080,000 x 90% x 40%
$446,400 = $1,240,000 x 90% x 40%
Receipts from sales on account:
Collections from prior monthssales (40% of previous months
credit salesNote B).. $370,000 $388,800 $446,400
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Receipts from cash sales:
Cash sales (10% x current
months salesNote A) $108,000 $124,000 $ 97,000
January February March
Receipts from sales on account:
Collections from prior monthssales (40% of previous months
credit salesNoteB)... $370,000 $388,800 $446,400
Collections from current
months sales (60%) (see Note
C) 583,200 669,600 523,800
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%
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Scheduleof
Collections
from Sales
(exhibit 5)
Elite Sports EnterpriseSchedule of Collections from Sales
For the three months ending March 31, 2010
2009
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Schedule of Payments for purchase
Estimated cash paymentsare planned reductions in cashfrom cost of goods purchased, selling and administrativeexpenses, capital expenditures, and other sources, such asbuying securities or paying interest or dividends. Asupporting schedule can be used in estimating the cashpayments for purchases.
Consider the following assumption to determine
estimated cash payment for purchase: Firm expects topay 75% of the purchases in the month in which theyare incurred and the balance in the following month.
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Schedule of Payments for purchase (exhibit 5)
Elite Sports EnterpriseSchedule of Payments for Purchases
For the Three Months Ending March 31, 2010
January February March
Payments of current monthspurchases(75% x current monthspurchases) Note A 447,000 394,125 424,125
Payments of prior monthspurchases(25% x previous monthspurchases) Note B 133,050 149,000 131,375
Total payments 580,050 543,125 555,500
Note A: 75% x 596,000 = 447,000
75% x 525,500 = 394,125
75% x 565,500 = 424,125
Note B: 133,050 given as December 31, 2009 Accounts payable balance, or
25% x Dec. purchases =[(2,570 x 400) x 50%] + [70% x 540,000]
[70% x 514,000)] = 532,200 x 25% = 133,050
25% x 596,000 = 149,000
25% x 525,500 = 131,375
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Schedule of Payments for selling and
administrative expenses (exhibit 6)
Elite Sports EnterpriseSchedule of Payments for Selling and Administrative Expenses
For the Three Months Ending March 31, 2010January February March
Selling and Administrative Expenses:Salaries (fixed)Miscellaneous expenses
20,00010,800
20,00012,400
20,0009,700
Commissions (previous months)AdvertisingOthers
154,20021,60010,000
162,00024,80010,000
186,00019,40010,000
Total Payments 216,600 229,200 245,100
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Completing the Cash Budget
Consider additional information as given below in
preparing cash budget:
1. pay a new year bonus of RM280,000 on January
10
2. Pay a quarterly interest expense of RM22,500 onMarch 31.
3. The company plans to buy a new warehouse
costing RM145,000 in early January (assume that
the depreciation of the warehouse is alreadyincluded in the depreciation of the fixed assets).
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Completing the Cash Budget
Consider additional information as given below inpreparing cash budget:
4. The company requires a minimum of RM200,000
as a cash balance at the end of each month.
5. Loan-related information:
Assume that firm can borrow or repay
loans in multiples of RM1,000.
Loan interest rate of 10% per year,
Borrowing occurs at the beginning and repaymentat the end of the months.
Firm will borrow only when necessary and will
repay as promptly as possible.
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Elite Sports EnterpriseCash Budget
For the Three Months Ending March 31, 2010January
RMFebruary
RMMarch
RMBeginning cash balance 190,000 200,630 205,380Estimated cash receipts from sales
(from Exhibit 3) 953,280 1,058,400 970,200Total available cash (a) 1,143,280 1,259,030 1,175,580Estimated cash payments for:
Merchandise purchases (from Exhibit 5)Selling and administrative expenses(from Exhibit 6)
Interest expenseNew year bonusAcquisition of a new warehouse
580,050
216,600
280,000145,000
543,125
229,200
555,500
245,100
22,500
Total payments 1,221,650 772,325 823,100
Completing the Cash Budget (exhibit 7)9-5
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Budgeted Balance Sheet
The budgeted balancesheetestimates the financial condition at
the end of a budget period.
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