C5 - 1 Learning Objectives Power Notes 1.Nature and Objectives of Budgeting 2.Budgeting Systems 3.Master Budget 4.Income Statement Budgets 5.Balance Sheet Budgets Chapter M5 C5 Budgeting Budgeting

C5 - 2 Budgeting Methods and Approaches Flexible Budgeting Income Statement Budgets Cash Budgets Slide # Power Note Topics Note: To select a topic, type the slide # and press Enter. Power Notes Chapter M5 Budgeting Budgeting

C5 - 3 Nature and Objectives of Budgeting Establishing specific future goals Executing plans to achieve the goals Comparing actual results to the goals Setting budget goals too tightly Setting budget goals too loosely Setting conflicting budget goals Objectives of Budgeting Objectives of Budgeting Human Behavior and Budgeting Human Behavior and Budgeting

C5 - 4 Static Budgets A budget that does not reflect potential changes in volume or activity level Simple—all expenses are budgeted as fixed costs Does not reflect changes in revenues and expenses that occur as volumes change Service organizations or administrative departments of retailers and manufacturers Description: Strength: Weakness: Typical Usage:

C5 - 5 Flexible Budgets A budget that shows revenues and expenses for a variety of volumes or activity levels Provides information needed to analyze the impact of volume changes on actual operating results Requires greater research into costs—must differentiate fixed and variable costs Operational departments of retailers and manufacturers whose costs change with sales and production Description: Strength: Weakness: Typical Usage:

C5 - 6 Incremental Budgets A budget that is prepared by increasing last year’s budget by a fixed amount or a percentage Simple to prepare; management focuses on new programs and business changes Little emphasis on analyzing last year’s budget—inefficiencies are passed on to the current year Government, not-for-profit organizations Description: Strength: Weakness: Typical Usage:

C5 - 7 Zero-Based Budgets A budget that requires management to start at zero and estimate all expenses as a new operation Forces a comprehensive analysis of business priorities and needs for resources Difficult and time-consuming to prepare Organizations focusing on cost reduction and evaluating efficiency Description: Strength: Weakness: Typical Usage:

C5 - 8 Flexible Budgeting Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2003 Units of production8,0009,00010,000 Variable cost: Direct labor ($5 per unit)$40,000$45,000$50,000 Electricity ($0.5 per unit)4,0004,5005,000 Total variable cost$44,000$49,500$55,000 Cost per unit is $5.50 at all levels of activity

C5 - 9 Flexible Budgeting Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2003 Units of production8,0009,00010,000 Variable cost: Direct labor ($5 per unit)$40,000$45,000$50,000 Electricity ($0.5 per unit)4,0004,5005,000 Total variable cost$44,000$49,500$55,000 Fixed cost: Electric power$ 1,000$ 1,000$ 1,000 Supervisor salaries15,00015,00015,000 Total fixed cost$16,000$16,000$16,000

C Flexible Budgeting Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2003 Units of production8,0009,00010,000 Variable cost: Direct labor ($5 per unit)$40,000$45,000$50,000 Electricity ($0.5 per unit)4,0004,5005,000 Total variable cost$44,000$49,500$55,000 Fixed cost: Electric power$ 1,000$ 1,000$ 1,000 Supervisor salaries15,00015,00015,000 Total fixed cost$16,000$16,000$16,000 Total department costs$60,000$65,500$71,000

C Sales Budget Sales Budget Income Statement Budgets

C Sales Budget Sales Budget Production Budget Income Statement Budgets Expected units of sales +Desired units in ending inventory - Estimated units in beginning inventory Total units to be produced

C Sales Budget Sales Budget Production Budget Income Statement Budgets Direct Materials Purchases Budget Direct Materials Purchases Budget Materials needed for production +Desired ending materials inventory - Estimated beginning materials inventory Direct materials to be purchased

C Sales Budget Sales Budget Production Budget Direct Labor Cost Budget Direct Labor Cost Budget Income Statement Budgets Direct Materials Purchases Budget Direct Materials Purchases Budget

C Sales Budget Sales Budget Production Budget Direct Labor Cost Budget Direct Labor Cost Budget Factory Overhead Cost Budget Factory Overhead Cost Budget Income Statement Budgets Direct Materials Purchases Budget Direct Materials Purchases Budget

C Sales Budget Sales Budget Production Budget Direct Labor Cost Budget Direct Labor Cost Budget Factory Overhead Cost Budget Factory Overhead Cost Budget Income Statement Budgets Direct Materials Purchases Budget Direct Materials Purchases Budget Cost of Goods Sold Budget Cost of Goods Sold Budget

C Sales Budget Sales Budget Production Budget Direct Labor Cost Budget Direct Labor Cost Budget Factory Overhead Cost Budget Factory Overhead Cost Budget Income Statement Budgets Direct Materials Purchases Budget Direct Materials Purchases Budget Cost of Goods Sold Budget Cost of Goods Sold Budget Selling & Administrative Expenses Budget Selling & Administrative Expenses Budget

C Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2003 Wallet: East287,000$12.00$3,444,000 West241, ,892,000 Total528,000$6,336,000 Unit SalesUnit SellingTotal Product and RegionVolumePriceSales How are these numbers determined?

C Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2003 Unit SalesUnit SellingTotal Product and RegionVolumePriceSales Wallet: East287,000$12.00$3,444,000 West241, ,892,000 Total528,000$6,336,000 Handbag: East156,400$25.00$3,910,000 West123, ,090,000 Total280,000$7,000,000

C Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2003 Unit SalesUnit SellingTotal Product and RegionVolumePriceSales Wallet: East287,000$12.00$3,444,000 West241, ,892,000 Total528,000$6,336,000 Handbag: East156,400$25.00$3,910,000 West123, ,090,000 Total280,000$7,000,000 Total sales revenue$13,336,000

C Elite Accessories Inc. Production Budget For the Year Ending December 31, 2003 Sales528,000280,000 Units WalletHandbag From sales budget

C Elite Accessories Inc. Production Budget For the Year Ending December 31, 2003 Units WalletHandbag Sales528,000280,000 Plus desired ending inventory, Dec. 31, ,00060,000 Total608,000340,000

C Elite Accessories Inc. Production Budget For the Year Ending December 31, 2003 Units WalletHandbag Sales528,000280,000 Plus desired ending inventory, Dec. 31, ,00060,000 Total608,000340,000 Less estimated beginning inventory, Jan. 1, ,00048,000 Total production520,000292,000

C Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2003 Units required for production: Wallet (Note A) 156,000 sq. yds. Handbag (Note B) 365,000 Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds. Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds. Leather

C Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2003 Leather Units required for production: Wallet (Note A) 156,000 sq. yds. Handbag (Note B)365,000 Plus desired inventory, Dec. 31, ,000 Total 541,000 sq. yds. Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds. Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds.

C Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2003 Leather Units required for production: Wallet (Note A) 156,000 sq. yds. Handbag (Note B)365,000 Plus desired inventory, Dec. 31, ,000 Total 541,000 sq. yds. Less estimated inventory, Jan. 1, ,000 Total square yards to be purchased 523,000 sq yds. Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds. Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds.

C Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2003 Leather Units required for production: Wallet (Note A) 156,000 sq. yds. Handbag (Note B)365,000 Plus desired inventory, Dec. 31, ,000 Total 541,000 sq. yds. Less estimated inventory, Jan. 1, ,000 Total square yards to be purchased 523,000 sq yds. Unit price x $ 4.50 Total direct materials purchased $2,353,500 Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds. Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds.

C Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2003 Hours required for production: Wallet (Note A)52,000130,000 Handbag (Note B)43,800116,800 Note A:Cutting Dept.: 520,000 units x 0.10 hrs. per unit = 52,000 hrs. Sewing Dept.: 520,000 units x 0.25 hrs. per unit = 130,000 hrs. Note B:Cutting Dept.: 292,000 units x 0.15 hrs. per unit = 43,800 hrs. Sewing Dept.: 292,000 units x 0.40 hrs. per unit = 116,800 hrs. CuttingSewingTotal

C Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2003 CuttingSewingTotal Hours required for production: Wallet (Note A)52,000130,000 Handbag (Note B)43,800116,800 Total95,800246,800 Hourly ratex $12x $15 Note A:Cutting Dept.: 520,000 units x 0.10 hrs. per unit = 52,000 hrs. Sewing Dept.: 520,000 units x 0.25 hrs. per unit = 130,000 hrs. Note B:Cutting Dept.: 292,000 units x 0.15 hrs. per unit = 43,800 hrs. Sewing Dept.: 292,000 units x 0.40 hrs. per unit = 116,800 hrs.

C Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2003 CuttingSewingTotal Hours required for production: Wallet (Note A)52,000130,000 Handbag (Note B)43,800116,800 Total95,800246,800 Hourly ratex $12x $15 Total direct labor cost$1,149,600$3,702,000$4,851,600 Note A:Cutting Dept.: 520,000 units x 0.10 hrs. per unit = 52,000 hrs. Sewing Dept.: 520,000 units x 0.25 hrs. per unit = 130,000 hrs. Note B:Cutting Dept.: 292,000 units x 0.15 hrs. per unit = 43,800 hrs. Sewing Dept.: 292,000 units x 0.40 hrs. per unit = 116,800 hrs.

C Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2003 Indirect factory wages$ 732,800 Supervisor salaries360,000 Power and light306,000 Depreciation of plant and equipment288,000 Indirect materials182,800 Maintenance140,280 Insurance and property taxes79,200

C Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2003 Indirect factory wages$ 732,800 Supervisory salaries360,000 Power and light306,000 Depreciation of plant and equipment288,000 Indirect materials182,800 Maintenance140,280 Insurance and property taxes79,200 Total factory overhead cost$2,089,080

C Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2003 Revenue from sales $13,336,000 Cost of goods sold9,047,780 Gross profit$4,288,220 Selling & admin. expenses: Selling expenses$1,190,000 Administrative expenses695,000 Total sell. & admin. exp.1,885,000 Income from operations$2,403,220 Other income: Interest revenue$ 98,000 Other expense: Interest expense90,0008,000 Income before income tax$2,411,220 Income tax600,000 Net income$1,811,220

C Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2003 Revenue from sales $13,336,000 Cost of goods sold9,047,780 Gross profit$4,288,220 Selling & admin. expenses: Selling expenses$1,190,000 Administrative expenses695,000 Total sell. & admin. exp.1,885,000 Income from operations$2,403,220 Other income: Interest revenue$ 98,000 Other expense: Interest expense90,0008,000 Income before income tax$2,411,220 Income tax600,000 Net income$1,811,220

C Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2003 Revenue from sales $13,336,000 Cost of goods sold9,047,780 Gross profit$4,288,220 Selling & admin. expenses: Selling expenses$1,190,000 Administrative expenses695,000 Total sell. & admin. exp.1,885,000 Income from operations$2,403,220 Other income: Interest revenue$ 98,000 Other expense: Interest expense90,0008,000 Income before income tax$2,411,220 Income tax600,000 Net income$1,811,220

C Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2003 Revenue from sales $13,336,000 Cost of goods sold9,047,780 Gross profit$4,288,220 Selling & admin. expenses: Selling expenses$1,190,000 Administrative expenses695,000 Total sell. & admin. exp.1,885,000 Income from operations$2,403,220 Other income: Interest revenue$ 98,000 Other expense: Interest expense90,0008,000 Income before income tax$2,411,220 Income tax600,000 Net income$1,811,220

C Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2003 Budgeted sales$1,080,000$1,240,000$970,000 Cash sales (10%)108,000124,00097,000 Credit sales (90%)$972,000$1,116,000$873,000 JanuaryFebruaryMarch

C Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2003 Budgeted sales$1,080,000$1,240,000$970,000 Cash sales (10%)108,000124,00097,000 Credit sales (90%)$972,000$1,116,000$873,000 Collections on account: Current month (60%)$583,200$669,600$523,800 JanuaryFebruaryMarch

C Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2003 Budgeted sales$1,080,000$1,240,000$970,000 Cash sales (10%)108,000124,00097,000 Credit sales (90%)$972,000$1,116,000$873,000 Collections on account: Current month (60%)$583,200$669,600$523,800 Prior month (40%)370,000388,800446,400 Total on account$953,200$1,058,400$970,200 JanuaryFebruaryMarch

C Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2003 JanuaryFebruaryMarch Budgeted sales$1,080,000$1,240,000$970,000 Cash sales (10%)108,000124,00097,000 Credit sales (90%)$972,000$1,116,000$873,000 Collections on account: Current month (60%)$583,200$669,600$523,800 Prior month (40%)370,000388,800446,400 Total on account$953,200$1,058,400$970,200 Plus cash sales 108,000124,00097,000 Total collections$1,061,200$1,182,400$1,067,200

C Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 Estimated cash receipts: Cash sales$108,000$124,000$97,000 Accounts receivable953,2001,058,400970,200 Interest Revenue— —24,500 Total cash receipts$1,061,200$1,182,400$1,091,700 JanuaryFebruaryMarch

C Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 Estimated cash receipts: Cash sales$108,000$124,000$97,000 Accounts receivable953,2001,058,400970,200 Interest Revenue— —24,500 Total cash receipts$1,061,200$1,182,400$1,091,700 Estimated cash payments: Manufacturing costs$802,000$771,000$780,000 Selling & administrative exp.160,000165,000145,000 Capital additions—274,000— Interest expense22,500 — — Income taxes — —150,000 Total cash payments$984,500$1,210,000$1,075,000 JanuaryFebruaryMarch

C Estimated cash receipts: Cash sales$108,000$124,000$97,000 Accounts receivable953,2001,058,400970,200 Interest Revenue— —24,500 Total cash receipts$1,061,200$1,182,400$1,091,700 Estimated cash payments: Manufacturing costs$802,000$771,000$780,000 Selling & administrative exp.160,000165,000145,000 Capital additions—274,000— Interest expense22,500 — — Income taxes — —150,000 Total cash payments$984,500$1,210,000$1,075,000 Cash increase (decrease)$76,700$(27,600)$16,700 Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 JanuaryFebruaryMarch

C Estimated cash receipts: Cash sales$108,000$124,000$97,000 Accounts receivable953,2001,058,400970,200 Interest Revenue— —24,500 Total cash receipts$1,061,200$1,182,400$1,091,700 Estimated cash payments: Manufacturing costs$802,000$771,000$780,000 Selling & administrative exp.160,000165,000145,000 Capital additions—274,000— Interest expense22,500 — — Income taxes — —150,000 Total cash payments$984,500$1,210,000$1,075,000 Cash increase (decrease)$76,700$(27,600)$16,700 Beginning cash balance280,000356,700329,100 Ending cash balance$356, ,100$345,800 Elite Accessories Inc. Cash Budget JanuaryFebruaryMarch

C Estimated cash receipts: Cash sales$108,000$124,000$97,000 Accounts receivable953,2001,058,400970,200 Interest Revenue— —24,500 Total cash receipts$1,061,200$1,182,400$1,091,700 Estimated cash payments: Manufacturing costs$802,000$771,000$780,000 Selling & administrative exp.160,000165,000145,000 Capital additions—274,000— Interest expense22,500 — — Income taxes — —150,000 Total cash payments$984,500$1,210,000$1,075,000 Cash increase (decrease)$76,700$(27,600)$16,700 Beginning cash balance280,000356,700329,100 Ending cash balance$356, ,100$345,800 Minimum cash balance340,000340,000340,000 Excess (deficiency)$16,700$ (10,900)$ 5,800 Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 JanuaryFebruaryMarch

C Note: To see the topic slide, type 2 and press Enter. This is the last slide in Chapter M5. Power Notes Chapter M5 Budgeting Budgeting