1. 6
Budgeting

2. Budget
6-1
A budget charts a course for a business by outlining the plans of the business in financial terms.

3. Establishing specific goals
Objectives of Budgeting
6-1
Establishing specific goals
Executing plans to achieve the goals
Periodically comparing actual results to the goals

4. Planning
6-1
Budgeting supports the planning process by requiring all organizational units to establish their goals for the upcoming period. These goals motivate individuals and groups to perform at high levels. Planning also motivates employees to attain goals and improve overall decision making.

5. Directing
6-1
The budget can be used to direct and coordinate operations in order to achieve the stated goals.

6. Responsibility Centers
6-1
The budgetary units of an organization are called responsibility centers. Each responsibility center is led by a manager who has the authority over and responsibility for the unit’s performance.

7. Controlling
6-1
As time passes, the actual performance of an operation can be compared against the planned goals. This provides prompt feedback to employees about their performance. If necessary, employees can use such feedback to adjust their activities in the future.

8. Human behavior problems can arise if—
Human Behavior and Budgeting
6-1
Human behavior problems can arise if—
the budget goal is too tight and very hard for the employee to achieve. 13

9. Human behavior problems can arise if—
6-1
Human behavior problems can arise if—
the budget goal is too loose and very easy for the employee to achieve. 14

10. 6-1
It is undesirable to plan lower goals than may be possible. Such budget “padding” is termed budgetary slack.

11. Human behavior problems can arise if—
6-1
Human behavior problems can arise if—
the budget goals of a business conflict with the objectives of the employees. 16

12. 6-1
Goal conflict occurs when individual self-interest differs from business objectives.
A manager pushing for maximum production (to increase his/her bonus) may not have the same production goals as the company’s (trying to control the size of its inventory).

13. Budgeting Systems
6-2
A variation of fiscal-year budgeting, called continuous budgeting, maintains a twelve-month projection into the future.

14. Zero-Based Budgeting
6-2
Zero-based budgeting requires managers to estimate sales, production, and other operating data as though operations are being started for the first time.

15. Static Budget
6-2
A static budget shows the expected results of a responsibility center for only one activity level. The budget does not change as the activity increases or decreases.
A static budget is used by many service companies and for some administrative functions of manu-facturing companies.

16. 6-2
Strength: A static budget is simple—all expenses are budgeted as fixed costs.
Weakness: A static budget does not adjust for changes in revenues and expenses that occur as volumes change.

17. Flexible Budget
6-2
A flexible budget shows the expected results of a responsibility center for several activity levels.
A flexible budget is especially useful in estimating and controlling factory costs and operating expenses.

18. 6-2
Strength: Flexible budgeting provides information needed to analyze the impact of volume changes on actual operating results.
Weakness: Flexible budgeting requires greater research into costs. There must be a differentiation between fixed and variable costs.

19. Budgeted Income Statement Budgeted Balance Sheet
Budgets That Are Linked Together in a Master Budget
6-3
Budgeted Income Statement
Sales budget
Cost of goods sold budget:
Production budget
Direct materials purchases budget
Direct labor cost budget
Factory overhead cost budget
Selling and administrative expense budget
Budgeted Balance Sheet
Cash budget
Capital expenditures budget

20. The sales budget normally indicates for each product—
Sales Budget
6-4
The sales budget normally indicates for each product—
(1) the quantity of estimated sales and
(2) the expected unit selling price.

21. backlog of unfilled sales orders planned advertising and promotion
Factors Expected to Affect Future Sales include—
6-4
backlog of unfilled sales orders
planned advertising and promotion
expected industry and general economic conditions
productive capacity
projected pricing policy
findings of market research studies

22. Production Budget
6-4
The number of units to be manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget.

23. + Desired units in ending inventory
6-4
Sales
Budget
Production Budget
Expected units of sales
+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced 42

24. – Estimated beginning materials inventory
Direct Materials Purchases Budget
6-4
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Materials needed for production
+ Desired ending materials inventory
– Estimated beginning materials inventory
Direct materials to be purchased 45

25. Budget Sales Production Budget Direct Labor Cost Budget 6-4
Direct Labor Cost Budget
6-4
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Direct Labor
Cost Budget 50

26. Budget Sales Production Budget Factory Overhead Cost Budget 6-4
Factory Overhead Cost Budget
6-4
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget 54

27. Budget Sales Production Budget Cost of Goods Sold Budget
Factory Overhead Cost Budget
6-4
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Cost of Goods
Sold Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget 56

28. Selling & Administrative
Selling and Administrative Expense Budget
6-4
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Cost of Goods
Sold Budget
Direct Labor
Cost Budget
Selling & Administrative
Expenses
Budget
Factory Overhead
Cost Budget 61

29. Cash Budget
6-5
The cash budget is one of the most important elements of the budgeted balance sheet. The cash budget presents the expected receipts (inflows) and payments (outflows) of cash for a period of time.

30. Estimated Cash Receipts 6-5
Estimated Cash Receipts
6-5
January February March
Receipts from cash sales:
Cash sales (10% x current month’s sales—Note A)……. $108,000 $124,000 $ 97,000
Note A: $108,000 = $1,080,000 x 10%
$124,000 = $1,240,000 x 10%
$ 97,000 = $ 970,000 x 10% 65

31. 6-5 January February March Receipts from cash sales:
6-5
January February March
Receipts from cash sales:
Cash sales (10% x current month’s sales—Note A)……. $108,000 $124,000 $ 97,000
Receipts from sales on account:
Collections from prior month’s
sales (40% of previous month’s
credit sales—Note B)……….. $370,000 $388,800 $446,400
Note B: $370,000, given as Jan. 1, 2008 Accts. Rec. balance
$388,800 = $1,080,000 x 90% x 40%
$446,400 = $1,240,000 x 90% x 40% 66

32. 6-5 January February March Receipts from cash sales:
6-5
January February March
Receipts from cash sales:
Cash sales (10% x current month’s sales—Note A)……. $108,000 $124,000 $ 97,000
Receipts from sales on account:
Collections from prior month’s
sales (40% of previous month’s
credit sales—Note B)………... $370,000 $388,800 $446,400
Collections from current month’s sales (60%) (see Note
C)…………………………… 583, , ,800
Note C: $583,200 = $1,080,000 x 90% x 60%
$669,600 = $1,240,000 x 90% x 60%
$523,800 = $ 970,000 x 90% x 60% 67

33. Estimated Cash Payments 6-5
Estimated Cash Payments
6-5
January February March
Payments of prior months’ manu-
facturing costs {[25% x previous
month’s manufacturing costs
(less depreciation)]—Note A}….. $190,000 $204,000 $189,000
Note A: $190,000, given as January 1, 2006 Accounts
Payable balance
$204,000 = ($840,000 – $24,000) x 25%
$189,000 = ($780,000 – $24,000) x 75% 69

34. 6-5 January February March Payments of prior months’ manu-
6-5
January February March
Payments of prior months’ manu-
facturing costs {[25% x previous
month’s manufacturing costs
(less depreciation)]—Note A}….. $190,000 $204,000 $189,000
Payments of current month’s
manufacturing costs {[75% x
current month’s manufacturing
costs (less depreciation)]—
Note B}…………….…………… $612,000 $567,000 $591,000
Note B: $612,000 = ($840,000 – $24,000) x 75%
$567,000 = ($780,000 – $24,000) x 75%
$591,000 = ($812,000 – $24,000) x 75% 70

35. Completing the Cash Budget 6-5
Completing the Cash Budget
6-5
January February March
Estimated cash receipts from:
Cash sales (Slide 68) $ 108,000 $ 124,000 $ ,000
Collections of accounts
receivable (Slide 68). 953,200 1,058, ,200
Interest revenue — — ,500
Total cash receipts $1,061,200 $1,182,400 $1,091,700
Estimated cash payments for:
Manufacturing costs (Slide 71).. $ 802,000 $ 771,000 $ 780,000
Selling and administrative expenses 160, , ,000
Capital additions 274,000
Interest expense 22,500
Income taxes 150,000 74

36. Budgeted Balance Sheet
6-5
The budgeted balance sheet estimates the financial condition at the end of a budget period.