1 PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2005 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. The Budgeting Process— Planning Business Activities Chapter M8

2 Sierra Cano Company produces canoes by forming the hull using plastic polymers, then adding various accessories. The most active sales period occurs from April through August.

3 Exhibit 1 Canoe Diagram

4 Objective 1 Explain how budgets provide information to help managers prepare a pro forma (predicted) income statement and balance sheet. Once you have completed this chapter, you should be able to:

5 A budget is a detailed plan describing the use of financial and operating resources over a specific period. Transactions and Budget Systems Compared

6 Exhibit 2

7 The transaction system produces financial statements based on actual performance. Transactions and Budget Systems Compared The transaction system produces financial statements based on actual performance. Transactions and Budget Systems Compared

8 I see. And the budget system produces financial statements based on expected performance. Transactions and Budget Systems Compared

9 The Pro Forma Income Statement Exhibit 3 Exhibit 3—Panel A

10 Exhibit 3—Panel B

11 Objective 2 Prepare the budgets and schedules that make up the master budget. Once you have completed this chapter, you should be able to:

12 A master budget is a collection of related budgets that include sales, production, purchasing, labor, overhead, selling and administrative, and cash budgets. Overview of the Master Budget

13 Exhibit 4

14 Exhibit 5

15 Sales Budget The sales budget projects revenues from sales of a company’s products or services.

16 Sales Budget Exhibit 6

17 Production Budget The production budget identifies the amount of a product that must be produced to meet a company’s needs for sales and inventory.

18 Exhibit 7 Production Budget

19 Materials Purchases Budget The canoe produced by Sierra Canoe Co. requires two types of raw materials:  polymer (for use in molding the canoe), and  an accessory package consisting of seats, gunwale, thwart, and decking.

20 Materials Purchases Budget The materials purchases budget identifies the amount of materials that will be required to support a company’s total production needs.

21 [ units to be produced x standard amount of polymer (12 gallons) per unit] Materials Purchases Budget for Polymer Materials Purchases Budget + Desired ending raw materials inventory – Beginning raw materials inventory

22 Production units 86 Gallons of polymer per unitx 12 Production requirements (gallons)1,032 Add desired ending inventory 144 Total requirements (gallons)1,176 Less: Beginning polymer inventory 206 Total gallons to be purchased970 Dec.Jan. 60 x ,097 Total polymer $9 $8,730$8,577 Materials Purchases Budget

23 Materials Purchases Budget for Polymer* Exhibit 8

24 Exhibit 9 Materials Purchases Budget for Accessory Packages

25 Labor Budget The labor budget identifies the labor resources required to meet production needs.

26 Labor Budget Each canoe requires 6 hours of direct labor at an average of $22 per hour.

27 Dec. Total production 86 Hours per unit x 6 Total hours required516 Labor rate per hour x $22 Total labor cost$11,352 Labor Budget

28 Labor Budget Exhibit 10

29 Overhead Budget The overhead budget provides a schedule of all costs of production other than direct materials and direct labor.

30 Overhead Budget Sierra Canoe Co. associates overhead with products using a rate of $50 per direct labor hour.

31 Dec. Total production (units) 86 Hours per unit x 6 Total hours required516 Overhead cost per hourx $50 Total overhead costs$25,800 Overhead Budget

32 Overhead Budget Exhibit 11

33 Canoe Cost Calculation Materials: Polymer($9 x 12 gallons)$108 Accessory kit50 Labor(6 hours x $22 per hour)132 Overhead(6 hours x $50 per hour) 300 Total unit cost$590 Exhibit 12

34 Selling and Administrative Budget The selling and administrative budget contains expenses related to selling a company’s product and administering the business.

35 Selling and Administrative Budget Management of Sierra Canoe Co. estimates variable expenses are 15 percent of sales, while fixed expenses are $6,000 per month.

36 Dec. Total sales $72,000 Variable expense per sales dollarx.15 Total variable expenses$10,800 Fixed expenses per month 6,000 Total selling and administrative expenses per month$16,800 Selling and Administrative Budget

37 Selling and Administrative Budget Exhibit 13

38 Objective 3 Prepare reports that describe the timing of cash receipts and payments during a fiscal period. Once you have completed this chapter, you should be able to:

39 Cash Budget The cash budget summarizes expected cash collections and payments during an accounting period. To illustrate a cash budget, assume that Sierra Canoe Co.’s ending cash balance in December is $50,000.

40 January Beginning cash balance$50,000 Plus: Cash collections49,600 Less cash distributions 58,240 Cash in excess of deficit41,360 Plus: Bank loans9,000 Less: Bank repayments 0 Ending balance$50,360 Cash Budget

41 Exhibit 14 Cash Budget

42 Schedule of Cash Collections Based on Sierra Canoe’s collection experience, typical cash collections from sales on account follow a pattern:  70 percent in the month of sale  30 percent in the month following the sale

43 Schedule of Cash Collections January January collections for December sales ($72,000 x 30%)$21,600 January collections for January sales ($40,000 x 70%) 28,000 $49,600 The other 70% for December sales were collected in December.

44 Schedule of Cash Collections Exhibit 15

45 Schedule of Cash Payments The schedule of cash payments identifies the timing and amount of cash outflows related to production and administrative activities.

46 Schedule of Cash Payments Sierra Canoe’s cash payments typically occur in the following pattern:  50 percent in the month of purchase  50 percent in the month following a purchase

47 January January disbursements for December purchases ($66,982 x 50%)$33,491 January disbursements for January purchases ($49,497 x 50%) 24,749 $58,240 Schedule of Cash Payments Purchases for December and January totaled $66,982 and $49,497, respectively.

48 Schedule of Cash Payments Exhibit 16

49 Objective 4 Describe the elements of a successful budgeting culture. Once you have completed this chapter, you should be able to:

50 Responsibility Accounting Responsibility accounting assigns the responsibility for the performance of a company’s department to department managers.

51 Participating Budgeting Participating budgeting (or bottom-up budgeting) is a process that allows individuals at various levels of a company to participate in determining the company’s goals and the plans for achieving those goals.

52 Departments Participating Budgeting (Bottom-up Budgeting) Vice President Sales Vice President Production Vice President Finance Chief Executive Office

53 Slack in Budgets Budgetary slack is the difference between a less demanding budget value and a value managers believe they realistically can achieve.

54 Budgets and Undesirable Behavior Budget goals sometimes can cause lower-level managers to make decisions that are not in the best interest of the company as a whole.

55 Objective 5 Explain the role of budgets in service organizations. Once you have completed this chapter, you should be able to:

56 Budgeting in Service Companies Service company budgets differ from manufacturing companies because service companies do not manufacture goods.

57 Budgeting in Service Companies In service companies, workers may be involved in the delivery of several types of services during the same time period.

58 Budgeting in Service Companies In manufacturing companies, workers usually manufacture only one type of product at a time.

59 THE END Chapter M8

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