WHAT IS THE FUTURE FOR C&C?

Cash flow has been a problem. Is $7,000 in cash enough to operate on?

C&C has borrowed money to finance operations

An increase in award jacket sales may be the answer to more cash

C&C’s president, George Douglas, wants to decrease inventory levels, but he is concerned that customer satisfaction will be affected

WHAT IS A BUDGET?

An operating plan expressed in dollars

Shows how resources will be committed during the coming period

Helps plan for the future

Communicates corporate direction and coordinates corporate efforts

THE ROLES OF BUDGETING

BUDGETING INFORMATION FLOWS

TOP-DOWN BUDGETS: ADVANTAGES

Increase probability that the organization’s strategic plans will be incorporated in planned activities

Enhance coordination among divisional plans and objectives

Use top management’s knowledge of overall resource availability

Reduce the time frame for the budgeting process

TOP-DOWN BUDGETS: DISADVANTAGES

May result in dissatisfaction, defensiveness, and low morale among individuals who must work under the budget

Reduces the feeling of teamwork

May limit the acceptance of the stated goals and objectives

May create a view of the budget as a punitive device

BOTTOM-UP BUDGETS: ADVANTAGES

Gathers information from persons most familiar with the needs and constraints of organizational units

Allow organizational units to coordinate with one another

Lead to better morale and higher motivation

Develop a high degree of acceptance of and commitment to organizational goals and objectives by operating management

BOTTOM-UP BUDGETS: DISADVANTAGES

Require significantly more time

Effects of managerial participation may be negated by top-management changes

Managers may be ambivalent or unqualified to participate, creating an unachievable budget

May cause managers to introduce slack into the budget

WHAT IS A STANDARD?

Benchmark for measuring performance – an expectation

What are some examples of standards you are familiar with?

In accounting, you can think of it as a budget of a single unit of output

THE STANDARD CONTINUUM

PRACTICAL IDEAL

Tight, but attainable

Perfection, “Factory Heaven”

Where do you want to be?

IDEAL STANDARDS

ADVANTAGESMotivational tool

Constant reminder to workers of need for increased efficiency

DISADVANTAGESDe-motivating because you know you can never achieve the standard

Employees may take shortcuts and reduce effectiveness

Poor planning tool

PRACTICAL STANDARDS

ADVANTAGESMotivate employees to perform

Good planning tool

DISADVANTAGES???

SETTING STANDARDS

Standards are set for both quantity and price of each input (materials, labor and overhead)

Estimated cost to manufacture a single unit of product or perform a single service

A budget for a single unit of output

HOW DO YOU SET MATERIALS STANDARDS?

What are the inputs?

What is the required quality of each input?

How much of each input is required?

How much does each unit of input cost?

C&C DIRECT MATERIALS STANDARDS

HOW DO YOU SET LABOR STANDARDS?

What are the operations required to produce the product?

How long does it take to perform each operation?

Who performs each operation and how much are they paid?

C&C DIRECT LABOR STANDARDS

Item Rate

Base hourly rate $8.00

Payroll taxes 0.60

Fringe benefits 1.00

Standard direct labor rate $9.60

Activity Direct Labor Hours

Cutting .02

Sewing .18

Machine down-time .01

Rest period .03

Standard direct labor hours .25

$9.60 per direct labor hour x .25 direct labor hours = $2.40

HOW DO YOU SET OVERHEAD STANDARDS?

The predetermined overhead rate

COMPONENTS OF THE MASTER BUDGET

SALES BUDGET

Shows budgeted sales revenue for the period, which flows to the budgeted income statement for the period

Begins with the sales forecast, which typically will be prepared by the sales and marketing departments

Requires a forecasted sales price in addition to the sales volume forecast

Is prepared for each product

C&C’S SALES BUDGET

Notice that the individual sales budget amount flows to the overall sales budget.

SELLING & ADMINISTRATIVE EXPENSE BUDGET

Shows expenses to be incurred to support the budgeted level of sales

Includes variable and fixed expenses

Pay special attention to non-cash expenses such as bad debt expense and depreciation expense. These expenses do not flow to the cash budget.

C&C’S S&A EXPENSE BUDGET

Don’t forget to subtract the non-cash expenses to determine the amount of cash expenditures that

will carry through to the cash budget.

Don’t forget to subtract the non-cash expenses to determine the amount of cash expenditures that

will carry through to the cash budget.

PRODUCTION BUDGET

Shows when and how many units to produce in order to meet budgeted sales volume

Includes budgeted ending inventory of finished goods to provide a cushion for unexpected sales

A retail establishment will have a purchases budget rather than a production budget

Budgeted Sales

Budgeted End. Inv.

Budgeted Beg. Inv.

Budgeted Production

+ _ =

C&C’S PRODUCTION BUDGET

Notice that budgeted ending inventory is based on the next period’s budgeted

sales volume

Notice that budgeted ending inventory is based on the next period’s budgeted

sales volume Notice that budgeted beginning inventory is the previous period’s

budgeted ending inventory

Notice that budgeted beginning inventory is the previous period’s

budgeted ending inventory

DIRECT MATERIALS PURCHASES BUDGET

Shows when and how much of each direct material to purchase in order to meet the production budget

Includes budgeted ending inventory of direct materials to provide a cushion for production errors or supply shortfalls

Is prepared for each direct material input used in the production process

C&C’S DIRECT MATERIALS BUDGET

Notice that you must convert from units of finished goods to units of the direct material

– here from pants to yards of fabric.

Notice that you must convert from units of finished goods to units of the direct material

– here from pants to yards of fabric.

Budgeted inventory levels are calculated using the same principle as

in the production budget.

Budgeted inventory levels are calculated using the same principle as

in the production budget.

DIRECT LABOR BUDGET

Shows when and how much of each direct labor category to employ in order to meet the production budget

May use average standard wage rates for each class of direct laborer rather than actual wage rates for each employee

C&C’S DIRECT LABOR BUDGET

If the standard production time is stated in minutes, you must convert to the hour

decimal equivalent since the standard wage rate is stated on an hourly basis.

If the standard production time is stated in minutes, you must convert to the hour

decimal equivalent since the standard wage rate is stated on an hourly basis.

MANUFACTURING OVERHEAD BUDGET

Is based on budgeted production levels of the overhead application base

Uses the predetermined overhead rate for variable overhead

Assumes budgeted fixed overhead cost is incurred evenly throughout the budget period

Pay special attention to non-cash expenses such as depreciation expense that do not flow to the cash budget.

C&C’S OVERHEAD BUDGET

Don’t forget to subtract the non-cash expenses to determine the amount of cash expenditures that

will carry through to the cash budget.

Don’t forget to subtract the non-cash expenses to determine the amount of cash expenditures that

will carry through to the cash budget.

Application base × variable overhead POR

Application base × variable overhead POR

ENDING INVENTORY AND COGS BUDGET

Shows desired levels of ending inventory

Assists in the preparation of budgeted balance sheet and income statement

C&C’S ENDING RAW MATERIALS BUDGET

DM usage is based on budgeted production and standard DM cost per unit

DM usage is based on budgeted production and standard DM cost per unit

C&C’S ENDING FINISHED GOODS BUDGET

C&C’S COST OF GOODS SOLD BUDGET

THE CASH BUDGET

Cash available to spend- Cash disbursements= Cash excess or cash needed+ Short-term financing= Ending cash balance

CASH AVAILABLE TO SPEND

CASH RECEIPTS BUDGET

Based on sales budget

Requires knowledge of historical accounts receivable collection patterns

Distinguishes between cash sales and credit sales

Provides ending accounts receivable balance for the budgeted balance sheet

C&C’S CASH RECEIPTS BUDGET

CASH DISBURSEMENTS

CASH PAYMENTS FOR MATERIALS BUDGET

Shows when payments for materials purchases will be made

Requires knowledge of past accounts payable payment patterns

Calculates ending accounts payable balance for the budgeted balance sheet

C&C’S CASH PAYMENTS FOR MATERIALS BUDGET

CASH EXCESS (NEEDED)

Cash available minus cash disbursements

Many banks require a minimum cash balance, and that must be figured into the amount of cash excess (needed)

C&C’S CASH EXCESS (NEEDED)

SHORT-TERM FINANCING

This section is only prepared if there is a need to borrow money or repay previously borrowed money

Shows principal and interest amounts

Provides the ending cash balance for the budgeted balance sheet and interest expense for the budgeted income statement

C&CS’ SHORT-TERM FINANCING

C&c’s cash budget

PRO-FORMA FINANCIAL STATEMENTS

Reports “as-if” results rather than actual results

Shows the financial position of the company assuming the budget is achieved

C&C’S PRO-FORMA INCOME STATEMENT