1. 22
Budgeting

2. Describe the nature of the adjusting process.
Learning Objective 1
Learning Objective 1
Budgeting
3-1
3-1
After studying this chapter, you should be able to: 1
Describe budgeting, its objective, and its impact on human behavior.
Insert Chapter Objectives
Describe the nature of the adjusting process.
Describe the nature of the adjusting process. 2
Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting. 3
Describe the master budget for a manufacturing company.
22-2

3. Budgeting (continued)4
Prepare the basic income statement budgets for a manufacturing company. 5
Prepare balance sheet budgets for a manufacturing company.
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4. Describe budgeting, its objectives, and its impact on human behavior.1
Describe budgeting, its objectives, and its impact on human behavior.
22-4

5. 1
Budgets
Budgets play an important role for organizations of all sizes and forms. Budgets are used in managing the operations of government agencies, churches, hospitals, and other nonprofit organizations.

6. 1
Estimated Portion of Your Total Monthly Income That Should Be Budgeted for Various Living Expenses

7. Objectives of Budgeting1
Objectives of Budgeting
Planning involves setting goals as a guide for making decisions.
Directing involves decisions and actions to achieve budgeted goals.
Controlling involves comparing actual performance against the budgeted goals.

8. 1
Exhibit 1
Planning, Directing, and Controlling

9. Responsibility Centers1
Responsibility Centers
A budgetary unit of a company is called responsibility center. Each responsibility center is led by a manager who has the authority and responsibility for achieving the center’s budgeted goals.

10. Controlling Through Feedback1
Controlling Through Feedback
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.

11. Human behavior problems can arise if—1
Exhibit 2
Human Behavior Problems in Budgeting
Human behavior problems can arise if—
the budget goal is too tight and very hard for the employee to achieve.
(continued)

12. Human behavior problems can arise if—1
Exhibit 2
Human Behavior Problems in Budgeting (continued)
Human behavior problems can arise if—
the budget goal is too loose and very easy for the employee to achieve.
(continued on Slide 14)

13. 1
Budgetary Slack
Although it is desirable to establish attainable goals, it is undesirable to plan lower goals than may be possible. Such budget “padding” is termed budgetary slack.

14. Human behavior problems can arise if—1
Exhibit 2
Human Behavior Problems in Budgeting (concluded)
Human behavior problems can arise if—
the budget goals of a business conflict with the objectives of the employees.

15. 1
Goal Conflict
Goal conflict occurs when individual self-interest differs from business objectives or when different departments are given conflicting objectives.

16. 2
Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting.
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17. 2
Continuous Budgeting
A variation of fiscal-year budgeting, called continuous budgeting, maintains a twelve-month projection into the future.

18. 2
Exhibit 3
Continuous Budgeting

19. 2
Zero-Based Budgeting
Zero-based budgeting requires managers to estimate sales, production, and other operating data as though operations are being started for the first time.

20. 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.

21. 2
A static budget is used by many service companies and for some administrative functions of manufacturing companies.

22. 2
Exhibit 4
Static Budget

23. Weakness of the Static Budget2
Weakness of the Static Budget
A static budget does not adjust for changes in revenues and expenses that occur as volumes change.

24. 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.

25. 2
Exhibit 5
Flexible Budget

26. Static and Flexible Budgets2
Static and Flexible Budgets
If Coulter Manufacturing Company’s Assembly Department spent $72,000 to produce 10,000 units, how much over or under budget would the department manager be when using a static budget?
$12,000 (refer to Slide 22)

27. 2
Exhibit 6
Static and Flexible Budgets

28. 2
Example Exercise 22-1
Flexible Budgeting
At the beginning of the period, the Assembly Department budgeted direct labor of $45,000 and supervisor salaries of $30,000 for 5,000 hours of production. The department actually completed 6,000 hours of production. Determine the budget for the department, assuming that it uses flexible budgeting.
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29. 2 Follow My Example 22-1 Variable cost:
Example Exercise 22-1 (continued) 2
Follow My Example 22-1
Variable cost:
Direct labor (6,000 hours × $9.00* per hour)……………………………… $54,000
Fixed cost:
Supervisor salaries…………………. 30,000
Total department costs………………… $84,000
*45,000/5,000 hours
For Practice: PE 22-1A, PE 22-1B
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30. Computerized Budgeting Systems2
Computerized Budgeting Systems
Integrated computerized budget and planning systems speed up and reduce the cost of preparing the budget.

31. Describe the master budget for a manufacturing company.3
Describe the master budget for a manufacturing company.
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32. 3
Master Budget
The master budget is an integrated set of operating, investing, and financing budgets for a period of time.

33. Budgets That Are Linked Together in a Master Budget3
Budgets That Are Linked Together in a Master Budget
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
Financing Budget
Cash budget
Investing Budget
Capital expenditures budget
Budgeted Income Statement
Budgeted Balance Sheet

34. 3
Exhibit 7
Income Statement Budgets

35. 4
Prepare the basic income statement budgets for a manufacturing company.
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36. 4
Sales Budget
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.

37. 4
Factors expected to affect future sales include—
Backlog of unfilled sales orders
Planned advertising and promotion
Productive capacity
Projected pricing changes
Findings of market research studies
Expected industry and general economic conditions

38. 4
Exhibit 8
Sales Budget

39. 4
Production Budget
The production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels.

40. Exhibit 9
Production Budget

41. + Desired units in ending inventory 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. + Desired units in ending inventory 4
Wallets
Sales
Budget
Production Budget
From Exhibit 8 (Slide 38) 528,000
+ Desired units in ending inventory
– Estimated units in beginning inventory
Total units to be produced

43. + Desired ending inventory 80,000 4
Wallets
Sales
Budget
Production Budget
From Exhibit 8 528,000
+ Desired ending inventory 80,000
– Estimated units in beginning inventory
Total units to be produced

44. + Desired ending inventory 80,000 – Est. beginning inventory (88,000) 4
Wallets
Sales
Budget
Production Budget
From Exhibit 8 528,000
+ Desired ending inventory 80,000
– Est. beginning inventory (88,000)
Total units to be produced

45. + Desired ending inventory 80,000 – Est. beginning inventory (88,000) 4
Wallets
Sales
Budget
Production Budget
From Exhibit ,000
+ Desired ending inventory 80,000
– Est. beginning inventory (88,000)
Total units to be produced 520,000

46. + Desired ending inventory 60,000 – Est. beginning inventory (48,000)
Handbags
Sales
Budget
Production Budget
From Exhibit 8 280,000
+ Desired ending inventory 60,000
– Est. beginning inventory (48,000)
Total units to be produced 292,000

47. 4
Example Exercise 22-2
Production Budget
Landon Awards Co. projected sales of 45,000 brass plaques for The estimated January 1, 2010 inventory is 3,000 units, and the desired December 31, 2010 inventory is 5,000 units. What is the budgeted production (in units) for 2010?
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48. 4 Follow My Example 22-2 Expected units to be sold………………… 45,000
Example Exercise 22-2 (continued) 4
Follow My Example 22-2
Expected units to be sold………………… 45,000
Plus desired ending inventory, December 31, 2010………………...…… 5,000
Total…………………………………………... 50,000
Less estimated beginning inventory, January 1, 2010…………………………. 3,000
Total units to be produced……………….. 47,000
For Practice: PE 22-2A, PE 22-2B
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49. Direct Materials Purchases Budget4
Direct Materials Purchases Budget
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

50. 4 Exhibit 10 Direct Materials Purchase Budget
Note A: 520,000 units × 0.30 sq. yd. per unit = 156,000 sq. yds.
(continued)

51. 4 Exhibit 10 Direct Materials Purchase Budget (continued)
Note A: 520,000 units × 0.10 sq. yd. per unit = 52,000 sq. yds.
(continued)

52. 4 Exhibit 10 Direct Materials Purchase Budget (continued)
Note B: 292,000 units × 1.25 sq. yd. per unit = 365,000 sq. yds.
(continued)

53. 4 Exhibit 10 Direct Materials Purchase Budget (concluded)
Note B: 292,000 units × .50 sq. yd. per unit = 146,000 sq. yds.

54. 4 Example Exercise 22-3 Direct Materials Purchases Budget
Landon Awards Co. budgeted production of 47,000 brass plaques in Brass sheet is required to produce a brass plaque. Assume 96 square inches of brass sheet is required for each brass plaque. The estimated January 1, 2010 brass sheet inventory is 240,000 square inches. The desired December 31, 2010 brass sheet inventory is 200,000 square inches. If brass sheets costs $0.12 per square inch, determine the materials purchases budget for 2010.
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55. Example Exercise 22-3 (continued)4
Follow My Example 22-3
Square inches required for production: Brass sheet (47,000 × 96 sq. in.)…...…… 4,512,000
Plus: desired ending inventory, December 31, 2010……………………… ,000
Total………………………………………… 4,712,000
Less estimated beginning inventory, January 1, 2010…………………………… ,000
Total square inches to purchase……... 4,472,000
Unit price (per square inch)……………… × $0.12
Total direct materials to be purchased….. $ 536,640
For Practice: PE 22-3A, PE 22-3B
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56. Direct Labor Cost Budget4
Direct Labor Cost Budget
The direct labor cost budget estimates the direct labor hours and related cost needed to support budgeted production.

57. 4 Budget Sales Production Budget Direct Materials Purchases Budget
Direct Labor
Cost Budget

58. Note A: 520,000 units × 0.10 hr. per unit = 52,000 hrs.4
Exhibit 11
Direct Labor Cost Budget
Note A: 520,000 units × 0.10 hr. per unit = 52,000 hrs.
(continued)

59. Note A: 520,000 units × 0.25 hr. per unit = 130,000 hrs.4
Exhibit 11
Direct Labor Cost Budget (continued)
Note A: 520,000 units × 0.25 hr. per unit = 130,000 hrs.
(continued)

60. 4 Exhibit 11 Direct Labor Cost Budget (continued)
Note B: 292,000 units × 0.15 hr. per unit = 43,800 hrs.
(continued)

61. Note B: 292,000 units × 0.40 hr. per unit = 116,800 hrs.
Exhibit 11
Direct Labor Cost Budget (concluded)
Note B: 292,000 units × 0.40 hr. per unit = 116,800 hrs.

62. 4 Example Exercise 22-4 Example Exercise 10-2 Follow My Example 22-4
Direct Labor Cost Budget
Landon Awards Co. budgeted production of 47,000 brass plaques in Each plaque requires engraving. Assume that 12 minutes are required to engrave each plaque. If engraving labor costs $11.00 per hour, determine the direct labor cost budget for 2010.
Follow My Example 6-1
Follow My Example 22-4
Hours required for engraving:
Brass plaque (47,000 × 12 min.)…………….. 564,000 min.
Convert minutes to hour……………………... ÷ min.
Engraving hours……………………………….. 9,400 hrs.
Hourly rate……………………………………………. × $11.00
Total direct labor cost………………………………. $103,400
For Practice: PE 22-4A, PE22-4B
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63. Factory Overhead Cost Budget4
Factory Overhead Cost Budget
The factory overhead cost budget estimates the cost for each item of factory overhead needed to support budgeted production.

64. 4 Budget Sales Production Budget Direct Materials Purchases Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget

65. 4
Exhibit 12
Factory Overhead Cost Budget

66. Cost of Goods Sold Budget4
Cost of Goods Sold Budget
The cost of goods sold budget is prepared by integrating the following budgets:
Direct materials purchases budget (Exhibit 10)
Direct labor cost budget (Exhibit 11)
Factory overhead cost budget (Exhibit 12)
Press the blue key to examine the exhibits, then type “66” and “Enter” to return to this slide.

67. 4 Budget Sales Cost of Goods Sold Budget Production Budget
Direct Materials
Purchases Budget
Cost of Goods
Sold Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget

68. Direct labor cost budget4
Exhibit 13
Cost of Goods Sold Budget
Direct materials purchases budget
Direct labor cost budget
Factory overhead cost budget

69. Type “69” and press “Enter” to return to this slide.4
Example Exercise 22-5
Cost of Goods Sold Budget
Prepare a cost of goods sold budget for Landon Awards Co. using the information in Example Exercise 22-3 (Slide 54) and 22-4 (Slide 62). Assume the estimated inventories on January 1, 2010 for finished goods and work in process were $54,000 and $47,000, respectively. Also assume the desired inventories on December 31, 2010 for finished goods and work in process were $50,000 and $49,000, respectively. Factory overhead was budgeted for $126,000.
Go to Slide 54
Go to Slide 62
Type “69” and press “Enter” to return to this slide.
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70. 4 Follow My Example 22-5 22-70 For Practice: PE 22-5A, PE 22-5B
Example Exercise 22-5 (continued) 4
Follow My Example 22-5
Finished goods inventory, Jan. 1, $ 54,000
Work in process inventory, Jan. 1, $ 47,000
Direct materials:
Direct materials inventory, Jan. 1, (240,000 × $0.12) $ 28,800
Direct materials purchases (EE 22-3) 536,640
Cost of direct materials available for use $565,440
Less direct materials inventory, Dec. 31, (200,000 x $0.12) ,000
Cost of direct materials placed in production $541,440
Direct labor (EE 22-4) 103,400
Factory overhead 126,000
Total manufacturing costs ,840
Total work in process during period $817,840
Less work in process inventory, December 31, ,000
Cost of goods manufactured ,840
Cost of finished goods available for sale $822,840
Less finished goods inventory, December 31, ,000
Cost of goods sold $772,840
For Practice: PE 22-5A, PE 22-5B
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71. Selling and Administrative Expenses Budget4
Selling and Administrative Expenses Budget
The sales budget is often used as the starting point for the selling and administrative expenses budget. This budget is normally supported by departmental schedules.

72. Selling & Administrative4
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Cost of Goods
Sold Budget
Direct Labor
Cost Budget
Factory Overhead
Cost Budget
Selling & Administrative
Expenses
Budget

73. 4
Exhibit 14
Selling and Administrative Expenses Budget

74. 4 Exhibit 15 Budgeted Income Statement Sales budget
Cost of goods sold budget
Selling and administrative expenses budget

75. Prepare balance sheet budgets for a manufacturing company.5
Prepare balance sheet budgets for a manufacturing company.
22-75

76. 5
Cash Budget
The cash budget is one of the most important elements of the budgeted balance sheet. The cash budget estimates the expected receipts (inflows) and payments (outflows) of cash for a period of time.

77. Estimated Cash Receipts5
Estimated Cash Receipts
January February March
Receipts from cash sales:
Cash sales (10% × current month’s sales—Note A)……. $108,000 $124,000 $ 97,000
Note A: $108,000 = $1,080,000 × 10%
$124,000 = $1,240,000 × 10%
$ 97,000 = $ 970,000 × 10%
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78. Estimated Cash Receipts5
Estimated Cash Receipts
January February March
Receipts from cash sales:
Cash sales (10% × 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, 2010 Accts. Rec. balance
$388,800 = $1,080,000 × 90% × 40%
$446,400 = $1,240,000 × 90% × 40%
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79. Estimated Cash Receipts5
Estimated Cash Receipts
January February March
Receipts from cash sales:
Cash sales (10% × 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%) (Note
C)…………………………… 583, , ,800
Note C: $583,200 = $1,080,000 × 90% × 60%
$669,600 = $1,240,000 × 90% × 60%
$523,800 = $ 970,000 × 90% × 60%
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80. 5
Exhibit 16
Schedule of Collections from Sales

81. Estimated Cash Payments5
Estimated Cash Payments
January February March
Payments of prior months’ manu-
facturing costs {[25% × previous
month’s manufacturing costs
(less depreciation)]—Note A}….. $190,000 $204,000 $189,000
Note A: $190,000, given as January 1, 2010 Accounts
Payable balance
$204,000 = ($840,000 – $24,000) × 25%
$189,000 = ($780,000 – $24,000) × 25%

82. Estimated Cash Payments5
Estimated Cash Payments
January February March
Payments of prior months’ manu-
facturing costs {[25% × previous
month’s manufacturing costs
(less depreciation)]—Note A}….. $190,000 $204,000 $189,000
Payments of current month’s
manufacturing costs {[75% ×
current month’s manufacturing
costs (less depreciation)]—
Note B}…………….…………… $612,000 $567,000 $591,000
Note B: $612,000 = ($840,000 – $24,000) × 75%
$567,000 = ($780,000 – $24,000) × 75%
$591,000 = ($812,000 – $24,000) × 75%
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83. 5
Exhibit 17
Schedule of Payments for Manufacturing Costs

84. 5 Exhibit 18 Cash Budget Schedule of collections from sales
Schedule of cash payments for manufacturing costs

85. 5 Example Exercise 22-6 Example Exercise 10-2 Follow My Example 22-6
Cash Budget
Landon Awards Co. collects 25% of its sales on account in the month of the sale and 75% in the month following the sale. If sales on account are budgeted to be $100,000 for March and $126,000 for April, what are the budgeted cash receipts from sales on account for April?
Follow My Example 22-6
April
Collections from March sales (75% × $100,000)……... $ 75,000
Collections from April sales (25% × $126,000)……… ,500
Total receipts from sales on account………………….. $106,500
For Practice: PE 22-6A, PE22-6B
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86. Capital Expenditure Budget5
Capital Expenditure Budget
The capital expenditure budget summarizes plans for acquiring fixed assets. Such expenditures are necessary as machinery and other fixed assets wear out or become obsolete.

87. 5
Exhibit 19
Capital Expenditures Budget

88. Budgeted Balance Sheet5
Budgeted Balance Sheet
The budgeted balance sheet is prepared and 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.