Chapter 13A Budgeting

 A budget is a financial plan for a business.  Objectives of budgeting: Establishing specific goals (Planning) Executing plans to achieve the goals (Directing) Periodically comparing actual results with the goals (Controlling)

Human Behavior and Budgeting  Importance of setting a reasonable budget: Budgets set too tightly discourage employees when expectations are too high. Budgets set too loosely lead to budgetary slack – called “padding” the budget. Goal conflict occurs when the employees’ or managers’ self-interest differs from the company’s goals or objectives.

Choosing the Budget Period Operating Budget The annual operating budget may be divided into quarterly or monthly budgets. The annual operating budget may be divided into quarterly or monthly budgets. A continuous budget is a 12- month budget that rolls forward one month as the current month is completed. is completed. A continuous budget is a 12- month budget that rolls forward one month as the current month is completed. is completed.

Developing Budget Estimates  Zero-based budgeting requires managers to estimate sales, production, and other data as though operations are being started for the first time.  More common methods involve revising last year’s budget.

Master Budget  A master budget is a series of budgets that are linked together.  Major parts of a master budget include:

Relationship of the Various Income Statement Budgets

Sales Budget

Production Budget Total units to be sold Desired ending inventory += Total units needed Total units needed - Expected beginning inventory = Units to be produced

Production Budget

Calculation of the Purchases Budget Raw material needed for production Desired ending raw material inventory += Total raw material needs Total raw material needs - Expected raw material beginning inventory = Raw material to be purchased Units to be Produced (Production Budget) * DM needed for each unit Price of Raw Materials *Units of Raw Materials

Raw Material Requirements Wallet: Leather: 0.30 square yard per unit Lining: 0.10 square yard per unit Handbag: Leather: 1.25 square yards per unit Lining: 0.50 square yard per unit

Direct Materials Purchases Budget

Direct Labor Requirements Wallet: Cutting Dept: 0.10 hour per unit Sewing Dept: 0.25 hour per unit Handbag: Cutting Dept: 0.15 hour per unit Sewing Dept: 0.40 hour per unit

Direct Labor Cost Budget

Factory Overhead Cost Budget

Estimated Inventories January 1, 2009: Finished Goods: $1,095,600 Work in Process: $214,400 December 31, 2009: Finished Goods: $1,565,000 Work in Process: $220,000

Selling and Administrative Expenses Budget