1. DEVELOPING A BUSINESS PLAN FOR A MANUFACTURING COMPANY: BUDGETING
CHAPTER 12
DEVELOPING A BUSINESS PLAN FOR A MANUFACTURING COMPANY: BUDGETING

2. Chapter Overview
What are the similarities and differences between a large company’s master budget and that of an entrepreneurial company?
What are the similarities and differences between a large company’s master budget and that of a retail company?
How is a manufacturing company’s operating cycle difference from that of a retail company?

3. Chapter Overview
Is there a strategy a manufacturing company can use to complete its budget?
If a company’s actual sales are different than its budgeted sales (or actual production is different from budgeted production) for the same time period, how can managers meaningfully evaluate how well the company met its cost goals?
How do budgets affect the business decisions that employees make?

4. Manufacturing Company Master Budget
Sales budget
Production budget
Direct materials budget
Direct labor budget
Factory overhead budget
Selling expenses budget
G&A expenses budget
Capital expenditures budget
Cash budget
Projected income statement
Projected balance sheet
A manufacturing company’s master budget might include these related components

5. Master Budget Relationships Exhibit 12-1

6. Unlimited Decadence’s Operating Cycle Exhibit 12-2

7. Sales Budget
Like the retail budget, the budgeting process for a manufacturing company begins with the sales budget.
The reason for this is that product sales affect all of the other operating activities of a company.
The sales budget shows the amount of inventory (in units) that the company expects to sell in each month of the budget period and the related revenues earned.

8. Unlimited Decadence Sales Budget Exhibit 12-3

9. Production Budget
Once the units sales are budgeted, the next step is the production budget.
The production budget is a schedule showing how many units the company should produce during each budget period to satisfy expected sales (from the sales budget) for that period.
In addition, the budget shows the desired ending finished goods inventory.

10. Production Budget
The production budget begins with budgeted unit sales from the sales budget, adding in desired ending inventory.
This approach helps to minimize risks of underestimating actual sales or overestimating the inventory that should be on hand.
Out of stock; high cost of ordering materials
Too low
Estimated ending inventory
Ties up cash resources; high storage costs
Too high
Inventory
on hand

11. Unlimited Decadence Production Budget Exhibit 12-4

12. Direct Materials Purchases Budget
The direct materials purchases budget is a schedule showing the number of direct material units the company should produce during each budget period to meet production for that period.
In addition, the budget shows the desired ending direct materials inventory.
It also shows the costs related to those purchases and when the company expects to pay for them.

13. Unlimited Decadence Direct Materials Purchases Budget Exhibit 12-5

14. Direct Labor Budget
The direct labor budget is a schedule showing the hours and the cost of the direct labor required to meet the budgeted production for that period.
It also shows the the cash payments the company expects to make for direct labor during each budget period.

15. Unlimited Decadence Direct Labor Budget

16. Factory Overhead Budget
The factory overhead budget is a schedule showing the estimates of all factory overhead costs and their related cash payments for each budget period.
Managers based these factory overhead cost estimates on the production budget and on studies of the behavior of the various overhead costs (fixed, variable) discussed in Chapter 11.
Like other budgets, it also includes expected cash payments during each budget period.

17. Unlimited Decadence Factory Overhead Budget

18. Selling Expenses Budget
The selling expenses budget of a manufacturing company is developed in the same way as that of a retail company, with a few exceptions.
Sales-determined expenses include such items as shipping expenses, which are directly related to the volume of budgeted sales.
Sales-determining expenses include items that affect the volume of budgeted sales, such as advertising expenses.
Like other budgets, it also includes expected cash payments during each budget period.

19. Unlimited Decadence Selling Expenses Budget

20. G&A Expenses Budget
The G&A (general and administrative) expenses budget of a manufacturing company is developed in the same way as that of a retail company.
This budget would include expenses related to the non-manufacturing activities of the company, such as accounting, research and development, legal or administrative functions.
Like other budgets, it also includes expected cash payments during each budget period.

21. Unlimited Decadence G&A Expenses Budget

22. Capital Expenditures Budget
The capital expenditures budget is a set of schedules that shows the effect that each new project to be undertaken is expected to have on other master budget schedules.
Managers use information gathered during project evaluation to show the expected timing of project-related cash receipts and payments and other items.
The capital expenditures budget is more complex that other budgets and will be discussed in Chapter 20.

23. Cash Budget
The cash budget shows the company’s expected cash inflows and outflows as well as its beginning and ending cash for the budget period.
The cash budget is key to projecting cash surpluses, financing needs, and cash requirements through the budget period.
Too high: idle resources not invested in operations
Cash
on hand
Too low: can’t fund operations; no buffer; unanticipated borrowings

24. Projected Cash Flow Statement
This statement summarizes the cash receipts and payments by operating, investing, and financing activities. It is the cash budget of the company’s planned activities.
Operating
activities
Cash receipts and payments from planned operations
Cash receipts and payments from planned financing activities
Cash receipts and payments from planned investing activities
Financing
activities
Investing
activities

25. Unlimited Decadence Cash Budget

26. Projected Income Statement
This statement summarizes the company’s expected profitability if it follows all of its plans and if all the anticipated conditions occur.
The data is derived from the sales budget, production budget, and the various expenses budget.
For a corporation, an estimate of income tax is included on the projected income statement. The cash payments for income taxes are included on the cash budget.

27. Unlimited Decadence Income Statement

28. Projected Balance Sheet
Before implementing their plan of action, managers develop a projected balance sheet.
This statement summarizes the company’s expected financial position on a particular date, based on the planned activities.
Like other projected financial statements, its purpose is to project a future result, completing the financial description set forth in the budget plan.

29. Unlimited Decadence Actual Balance Sheet

30. Unlimited Decadence Projected Balance Sheet

31. Technology and Budgeting
The budgeting process involves plenty of number crunching. It is not uncommon for managers to have to revised budgets several times over before they are finalized.
Luckily, technological developments have made this process easier and less time- consuming as well as minimizing errors.
Spreadsheet programs such as EXCEL or an enterprise resource planning system (ERPS) provide budgeting and planning technology tools to aid this process.

32. Responsibility Centers
Responsibility centers involves the concept of reporting revenues and costs (where relevant) on the basis of the manager who has the authority to make the day-to-day decisions about the items.
Under this concept, a manager’s performance is evaluated on matters directly under that manager’s control.
A responsibility center is an identifiable portion or segment of a company’s operations, the activities of which are the responsibility of a particular manager.

33. Responsibility Centers
Depending on the decision-making authority, a responsibility center may be evaluated as a:
COST
CENTER
REVENUE
CENTER
Decision-making over costs only
Decision-making over revenues only

34. Responsibility Centers
Depending on the decision-making authority, responsibility centers may also include:
PROFIT
CENTER
INVESTMENT
CENTER
Decision-making over revenues and costs
Decision-making over revenues, costs, and invested operating assets

35. Flexible Budgets
One of the benefits of budgeting is to provide a benchmark against which managers can measure results.
When budgeted costs are involved, a flexible budget projects expected costs that should be incurred at various levels of activity.
Flexible budgets help to identify true variances is costs that arise from other than activity level.

36. Unlimited Decadence Flexible Manufacturing Cost Budget