Chapter 21 Budgeting Student Version These slides should be viewed using the presentation mode (left click your mouse on the icon).

Describe budgeting, its objectives, and its impact on human behavior. Learning Objective 1 Describe budgeting, its objectives, and its impact on human behavior.

Nature and Objectives of Budgeting LO 1 Nature and Objectives of Budgeting Budgets play an important role for organizations of all sizes and forms. For example, budgets are used in managing the operations of government agencies, churches, hospitals, small businesses, and manufacturing companies.

Objectives of Budgeting LO 1 Objectives of Budgeting Budgeting affects the following managerial functions: Planning, which involves setting goals to guide decisions and help motivate employees. Directing, which involves decisions and actions to achieve budgeted goals. Controlling, which involves comparing actual performance against the budgeted goals.

Objectives of Budgeting LO 1 Objectives of Budgeting A budgetary unit of a company is called a responsibility center. Each responsibility center is led by a manager who has the authority and responsibility for achieving the center’s budgeted goals.

Objectives of Budgeting LO 1 Objectives of Budgeting As time passes, the actual performance of a responsibility center can be compared against the budgeted goals. This provides prompt feedback to managers and employees about their performance. If necessary, responsibility centers can use such feedback to adjust their activities in the future.

Human Behavior and Budgeting LO 1 Human Behavior and Budgeting Human behavior problems can arise in the budgeting process in the following situations: The budgeted goals are set too tight and are very hard or impossible to to achieve. This may have a negative effect on the company achieving its goals.

Human Behavior and Budgeting LO 1 Human Behavior and Budgeting Human behavior problems can arise in the budgeting process in the following situations: The budgeted goals are set too loose and are very easy to achieve. Budget “padding” is called budgetary slack.

Human Behavior and Budgeting LO 1 Human Behavior and Budgeting Human behavior problems can arise in the budgeting process in the following situations: The budgeted goals conflict with the objectives of the company and employees. Goal conflict occurs when employees’ or managers’ self-interest differs from the company’s goals.

Learning Objective 2 Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting.

LO 2 Budgeting Systems The budgetary period for operating activities normally includes the fiscal year of a company. A variation of fiscal-year budgeting, called continuous budgeting, maintains a 12-month projection into the future. Zero-based budgeting requires managers to estimate sales, production, and other operating data as though operations are being started for the first time.

LO 2 Static Budget A static budget shows the expected results of a responsibility center for only one activity level. The budget does not change even if the activity changes. A static budget is used by many service companies and for some administrative functions of manufacturing companies. The disadvantage of static budgets is that they do not adjust for changes in revenues and expenses that occur as volumes change.

LO 2 Flexible Budget Flexible budgets show the expected results of a responsibility center for several activity levels. A flexible budget is, in effect, a series of static budgets for different levels of activity.

Describe the master budget for a manufacturing company. Learning Objective 3 Describe the master budget for a manufacturing company.

LO 3 Master Budget For a manufacturing company, the master budget consists of the following integrated budgets: Operating Budgets Sales budget Cost of goods sold budget: Production budget Direct materials purchases budget Direct labor cost budget Factory overhead cost budget Selling and administrative expenses budget Budgeted Income Statement Financing Budget Cash budget Investing Budget Capital expenditures budget Budgeted Balance Sheet

Learning Objective 4 Prepare the basic income statement budgets for a manufacturing company.

LO 4 Sales Budgets The sales budget begins by estimating the quantity of sales. Once sales quantities are estimated, the expected sales revenue can be determined by multiplying the volume by the expected unit sales price.

LO 4 Sales Budgets ELITE ACCESSORIES Elite Accessories Inc. manufactures wallets and handbags that are sold in two regions, the East and West regions. Elite Accessories estimates the following sales quantities and prices for 2012.

LO 4 Sales Budgets ELITE ACCESSORIES

LO 4 Production Budget The production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels.

LO 4 Production Budget ELITE ACCESSORIES Elite Accessories Inc. expects the following inventories of wallets and handbags:

LO 4 Production Budget ELITE ACCESSORIES

Direct Materials Purchases Budget LO 4 Direct Materials Purchases Budget The direct materials purchases budget estimates the quantities of direct materials to be purchased to support the budgeted production and desired inventory levels.

Direct Materials Purchases Budget LO 4 Direct Materials Purchases Budget

Direct Labor Cost Budget LO 4 Direct Labor Cost Budget The direct labor cost budget estimates the direct labor hours and related cost needed to support budgeted production.

Direct Labor Cost Budget LO 4 Direct Labor Cost Budget ELITE ACCESSORIES

Factory Overhead Cost Budget LO 4 Factory Overhead Cost Budget The factory overhead cost budget estimates the cost for each item of factory overhead needed to support budgeted production.

Factory Overhead Cost Budget LO 4 Factory Overhead Cost Budget ELITE ACCESSORIES

Cost of Goods Sold Budget LO 4 Cost of Goods Sold Budget The cost of goods sold budget is prepared by integrating the following budgets: Direct materials purchases budget Direct labor cost budget Factory overhead cost budget

Cost of Goods Sold Budget LO 4 Cost of Goods Sold Budget ELITE ACCESSORIES

Selling and Administrative Expenses Budget LO 4 Selling and Administrative Expenses Budget The selling and administrative expenses budget is normally supported by departmental schedules. The sales budget is often used as the starting point for this budget.

Selling and Administrative Expenses Budget LO 4 Selling and Administrative Expenses Budget ELITE ACCESSORIES

Budgeted Income Statement LO 4 Budgeted Income Statement The budgeted income statement is prepared by integrating the following budgets: Sales budget Cost of goods sold budget Selling and administrative expenses budget

Budget Income Statement LO 4 Budget Income Statement ELITE ACCESSORIES Sales budget Cost of goods sold budget Selling and administrative expenses budget

Prepare balance sheet budgets for a manufacturing company. Learning Objective 5 Prepare balance sheet budgets for a manufacturing company.

LO 5 Cash Budget The cash budget estimates the expected receipts (inflows) and payments (outflows) of cash for a period of time.

Estimated Cash Receipts LO 5 Estimated Cash Receipts ELITE ACCESSORIES

Estimated Cash Payments LO 5 Estimated Cash Payments To estimate cash payments for manufacturing costs, a schedule of payments for manufacturing costs is prepared.

Estimated Cash Payments LO 5 Estimated Cash Payments ELITE ACCESSORIES

LO 5 Cash Budget ELITE ACCESSORIES

Capital Expenditures Budget LO 5 Capital Expenditures Budget The capital expenditures budget summarizes plans for acquiring fixed assets. Such expenditures are necessary as machinery and other fixed assets wear out or become obsolete. In addition, purchasing additional fixed assets may be necessary to meet increasing demand for the company’s product.

Capital Expenditures Budget LO 5 Capital Expenditures Budget ELITE ACCESSORIES

Budgeted Balance Sheet LO 5 Budgeted Balance Sheet The budgeted balance sheet is prepared based on the operating, financing, and investing budgets of the master budget. It is similar to a normal balance sheet except that estimated amounts are used.

Budgeting The End