1. Internal Planning and Measurement Tools
Chapter 10

2. Discuss some of the benefits of the operating budget.
Learning Objective 1
Discuss some of the benefits
of the operating budget.

3. Operating Budget It is the plan for a firm’s operating
activities for a specified period of time.
Forecasted or pro forma financial statements
estimate what may happen in the future.

4. Benefits of Budgeting Budgeting serves as a guide.
It assists in resource allocation.
It fosters communication and coordination.
Budgeting establishes performance standards.

5. Learning Objective 2 Compare and contrast various
approaches to the preparation
and use of the operating budget.

6. Different Approaches to Budgeting
Perpetual budgeting (rolling budgeting):
As one month ends, another month
is added to the end of the budget.
Incremental budgeting is the process
of using the prior year’s budget to
build the new operating budget.

7. Different Approaches to Budgeting
Zero-based budgeting is an
alternative to incremental budgeting.
Managers must start from scratch,
or zero, when preparing a new budget.
In top-down budgeting, the top
executives prepare the budget.
Imposed budget

8. Different Approaches to Budgeting
In bottom-up budgeting, lower-level
managers and employees
prepare the initial budget.
Bottom-up budgeting is always a
participative budgeting process.
To empower employees means to give
them the authority to make decisions
concerning their job responsibilities.

9. Learning Objectives 3 & 4 Construct the three budgeted
financial statements contained
in the operating budget and
the other budget schedules.
Demonstrate the role
of the sales forecast in
the budgeting process.

10. The Sales Forecast Sales budget Cost of goods sold budget Production
Other budgets
Sales forecast

11. Different Budgets Sales budget Production or purchases budget
Cost of goods sold or
cost of services budget
Selling and administrative
expense budget
Cash budget

12. Budgeted Financial Statements
Budgeted income
statement
Budgeted
balance sheet
Budgeted cash
flow statement

13. Interrelationship Among the Budgets
Sales forecast
Cash budget
Budgeted income
statement
Budgeted
balance sheet
of cash flows
Sales budget
Production (purchases)
budget
Selling and administrative
expense budget
Cost of goods sold
(Cost of services) budget

14. Prepare the budgets included in the operating budget.
Learning Objective 5
Prepare the budgets included
in the operating budget.

15. Elevation Sports, Inc. Sales Budget For the Year Ended May 31, 2006
Budgeted unit sales:
Wholesale S ,
Selling price $ $ $ $
Subtotal $ 4,750 $ 23,750 $ 95,000 $ 57,000 $ 180,500
Retail S , ,200
Selling price $ $ $ $
Subtotal $ 10,800 $ 42,000 $210,000 $168,000 $ 430,800
Wholesale M
Selling price $ $ $ $
Subtotal $ 60,000 $ 36,000 $ 24,000 $ 30,000
Retail M
Selling price $ $ $ $
Subtotal $ 99,000 $ 72,000 $ 40,500 $ 72,000 $ 283,500
Budgeted sales ($):
Retail goods $ 10,500 $ 18,300 $ 34,600 $ 13,700 $ ,100
Total $185,050 $192,050 $404,100 $340,700 $1,121,900
Quarter
First
Total
Fourth
Second
Third

16. Elevation Sports, Inc. Cost of Goods Sold Budget For the Year Ended May 31, 2006
Quarter
First
Second
Third
Fourth
Total
Budgeted unit sales:
Wholesale S ,
Retail S , ,200
Total S , ,800
Mfg. cost $ $ $ $
Subtotal $ 8,450 $ 35,750 $162,500 $117, $323,700
Wholesale M
Retail M
Total M ,
Mfg. cost $ $ $ $
Subtotal $ 94,500 $ 63,000 $ 38,250 $ 58, $254,250
Budgeted sales ($):
Retail goods $ 10,500 $ 18,300 $ 34,600 $ 13,700
Purchase cost % % % %
Subtotal $ 6,300 $ 10,980 $ 20,760 $ 8, $ 46,260
Total $109,250 $109,730 $221,510 $183, $624,210

17. Elevation Sports, Inc. Selling and Admin
Elevation Sports, Inc. Selling and Admin. Expense Budget For the Year Ended May 31, 2006
Quarter
First
Second
Third
Fourth
Total
Selling expenses:
Advertising $ 8,300 $17,000 $18,000 $12, $ 55,300
Discounts , , , , ,400
Rent ,600
Sales salaries , , , , ,800
Internet expenses ,600
Utilities , , , , ,000
Depreciation ,200
Other expenses , ,664
Total $22,300 $34,920 $42,600 $31, $131,564
Administrative exp.:
Officers’ salaries $48,000 $48,000 $48,000 $48, $192,000
Employee benefits 6, , , , ,000
Insurance , , , , ,200
Utilities ,400
Depr. and amort ,824
Other expenses 6, , , , ,400
Total $63,706 $63,706 $63,706 $63, $254,824

18. Elevation Sports, Inc. Budgeted Income Statement For the Year Ended May 31, 2006
Quarter
First
Second
Third
Fourth
Total
Sales $185,050 $192,050 $404,100 $340,700 $1,121,900
Cost of goods sold 109, , , , ,210
Gross profit $ 75,800 $ 82,320 $182,590 $156,980 $ 497,690
Selling expense , , , , ,564
Admin. expense , , , , ,824
Taxable income $(10,206) $(16,306) $ 76,284 $ 61,530 $ 111,302
Income taxes (4,082) (6,523) , , ,521
Net income $ (6,124) $ (9,783) $ 45,770 $ 36,918 $ ,781

19. Elevation Sports, Inc. Production Budget For the Year Ended May 31, 2006
Quarter
First
Second
Third
Fourth
Total
Snowboards:
Forecasted sales , , ,980
Desired ending inv ,
Total units needed , , , ,040
Beg. inventory (80) (220) (1,000) (480) (80)
To be produced , , , ,960
Cost per unit $ $ $ $ $
Cost of production $ 17,550 $ 86,450 $128,700 $ 89,700 $322,400
Mountain boards:
Forecasted sales , ,825
Desired ending inv
Total units needed , , ,265
Beg. inventory (150) (280) (170) (260) (150)
To be produced , ,115
Cost per unit $ $ $ $ $
Cost of production $106,200 $ 53,100 $ 46,350 $ 74,700 $280,350
Total prod. cost $123,750 $139,550 $175,050 $164,400 $605,750

20. Elevation Sports, Inc. Purchases Budget For the Year Ended May 31, 2006
Quarter
First
Second
Third
Fourth
Total
Forecasted sales $10,500 $18,300 $34,600 $13,700 $77,100
Cost of sales $ 6,300 $10,980 $20,760 $ 8,220 $46,260
Desired ending inv , , , , ,600
Inventory needed $10,692 $19,284 $24,048 $10,820 $48,860
Beg. inventory , , , , ,600
Inventory to
be purchased $ 5,092 $14,892 $15,744 $ 7,532 $43,260

21. Elevation Sports, Inc. Partial Cash Receipts Schedule For the Year Ended May 31, 2006
Quarter
Prior
First
Second
Total forecasted sales $185,050 $192,050
Credit sales (30%) $80, , ,615
Forecasted cash sales (70%) $129,535 $134,435
Credit sales collected:
From accounts receivable
at 5/31/05: (20% of $80,000)
From new credit sales: $ 16,000
First quarter credit sales:
Collected – first quarter (80%) ,412
Collected – second quarter (20%) $ 11,103
Second quarter credit sales:
Collected – second quarter (80%) ,092
Budgeted receipts from credit sales , ,195
Total budgeted cash receipts $189,947 $191,630

22. Elevation Sports, Inc. Partial Cash Payments Schedule For the Year Ended May 31, 2006
Quarter
Prior
First
Second
Purchases $ 6,500 $ 5,092 $ 14,892
Production costs , , ,550
Total $156,500 $128,842 $154,442
Amount paid: (35% of prior) ,775
First quarter:
Paid in first quarter (65%) ,747
Paid in second quarter (35%) ,095
Second quarter:
Paid in second quarter (65%) ,387
Less: Depreciation (3,700) (3,700)
Total paid for production costs and purchases $134,822 $141,782
Total paid for selling and
administrative expense , ,620
Total paid for other expenses ,
Budgeted cash payments $234,822 $239,402

23. Elevation Sports, Inc. Cash Budget For the Year Ended May 31, 2006
Quarter
First
Second
Third
Fourth
Total
Beg. cash balance $124,000 $ 79,125 $ 40,000 $123,150 $ 124,000
Add: Cash receipts 189, , , , ,117,458
Cash available $313,947 $270,755 $431,377 $467,654 $1,241,458
Less: Cash pmts , , , , ,197,694
Balance before
borrowing $ 79,125 $ 31,353 $131,797 $ 43,764 $ ,764
Borrowing/
(repayment) , (8,647)
Ending cash
balance $ 79,125 $ 40,000 $123,150 $ 43,764 $ ,764

24. Elevation Sports, Inc. Budgeted Balance Sheet
Assets
Aug. 31,
2005
Nov. 30,
2005
Feb. 28,
2006
May 31,
2006
Current assets:
Cash $ 79,125 $ 40,000 $123,150 $ 43,764
Accounts receivable , , , ,442
Mdse. inventory , , , ,600
Mfg. inventories , , , ,500
Tax refund due , ,
Prepaid expenses , , , ,000
Total current assets $203,202 $215,732 $270,284 $175,306
Equipment:
Equip. and furniture $103,100 $103,100 $103,100 $223,100
Less: Acc. depreciation , , , ,000
Total equipment $ 27,450 $ 23,000 $ 18,550 $134,100
Intangible assets $ 8,756 $ 8,500 $ 8,244 $ 7,988
Total assets $239,408 $247,232 $297,078 $317,394

25. Elevation Sports, Inc. Budgeted Balance Sheet
Liabilities and
Stockholders’ Equity
Aug. 31,
2005
Nov. 30,
2005
Feb. 28,
2006
May 31,
2006
Current liabilities:
Accounts payable $ 45,095 $ 54,055 $ 66,778 $ 60,176
Note payable ,
Total current liabilities $ 45,095 $ 62,702 $ 66,778 $ 60,176
Stockholders’ equity:
Paid-in capital:
Common stock $ 60,000 $ 60,000 $ 60,000 $ 60,000
Paid-in capital , , , ,000
Total paid-in capital $100,000 $100,000 $100,000 $100,000
Retained earnings , , , ,218
Total stockholders equity $194,313 $184,530 $230,300 $257,218
Total liabilities and
stockholders’ equity $239,408 $247,232 $297,078 $317,394

26. Elevation Sports, Inc. Budgeted Statement of Cash Flows For the Year Ended May 31, 2006
Quarter
First
Second
Third
Fourth
Cash flows from
operating activities:
Net income $ (6,124) $ (9,783) $45,770 $36,918
Add: Depreciation , , , ,450
Amortization
Changes in working capital:
Accounts receivable , (420) (12,723) 3,804
Mdse. inventory , (3,912) 5,
Mfg. inventories (20,800) (40,800) 25, ,100
Tax refunds due (4,082) (6,523) 10,
Accounts payable (9,680) , ,723 (6,602)
Net cash flow from
operating activities $(29,875) $(47,772) $91,797 $50,614

27. Elevation Sports, Inc. Budgeted Statement of Cash Flows For the Year Ended May 31, 2006
Quarter
First
Second
Third
Fourth
Cash flows from
investing activities:
Cash paid for equipment $(120,000)
Net cash used by
investing activities $(120,000)
financing activities:
Borrowing $ 8,647
Loan payments $(15,000) $ (8,647)
Dividends paid $(10,000)
Net cash flow from
financing activities $(15,000) $ 8,647 $ (8,647) $(10,000)
Increase/(decrease) in cash $(44,875) $(39,125) $ 83,150 $(79,386)
Budgeted beg. cash balance 124, , , ,500
Budgeted ending cash balance $ 79,125 $ 40,000 $123,500 $ 43,764

28. Integrate the operating budget into the overall
Learning Objective 6
Integrate the operating
budget into the overall
management process.

29. Connecting the Budget to the Strategic Plan
One of the most important budgeting
functions is for top management to
ensure that each budget aligns with the
goals and objectives of the strategic plan.
The strategic plan and the master budget
control the allocation of resources.
They must be in conformity with one another.

30. Analyze budget variances.
Learning Objective 7
Analyze budget variances.

31. The Budget Performance Report
The difference between the
actual and budgeted amounts
for a budget category is known
as a budget variance.

32. The Budget Performance Report
Elevation Sports, Inc.
Budget Performance Report for Sales
For the Year Ended May 31, 2005
Description
Budget
Actual
Variance
Snowboard sales – retail $350,000 $372,600 $22,600
Snowboard sales – wholesale , , (9,900)
Mountain board sales – retail , ,000 (15,000)
Mountain board sales – wholesale 150, ,000 (30,000)
Other merchandise , , ,400

33. The Budget Performance Report
Possible causes of variances:
The number of units of product
remained the same but the
price increased or decreased.
The price remained the same,
but due to uncontrollable
forces, the number of units sold
varied from the budgeted amounts.

34. Appendix: Snowboards Standard Cost
Direct materials:
Wood sq. ft. × $2/sq. ft. = $ 6.00
Binding set × $4 each =
Direct labor × $ = Variable overhead 2.5 × $ =
Fixed overhead 2.5 × $ = Total $70.00
Budgeted monthly direct labor hours = 1,000

35. Appendix: Snowboards Actual Results
Quantity
Actual
cost
Standard
cost
Units produced 250
Materials used:
Wood sq. ft. $ 1,200 $ 1,500
Bindings ,000
Direct labor: hrs , ,250 Variable overhead , ,875
Fixed overhead , ,875 Total $20,856 $17,500

36. Direct Material Quantity Variance: Wood
Standard
quantity
per unit:
3 sq. ft.
Number
of units
produced:
250
Standard quantity
of direct material
allowed:
750 sq. ft. × =
Standard
quantity
allowed:
750 sq. ft.
Actual
used:
600 sq. ft.
Quantity
variance in
square feet:
150 favorable = –

37. Direct Material Quantity Variance: Wood
How much is the variance in dollars?
Standard
price per
square foot:
$2.00
Quantity
variance in
square feet:
150 F
variance
in dollars:
$300 F × =

38. Material Price Variance: Bindings
252 AQ × $4 SP = $1,008 AQ at SP
$1,008 – $756 = $252 favorable

39. Direct Labor Efficiency Variance
2.5 SH × 250 units = 625 SH
625 SH – 750 AH = 125 hours unfavorable
125 × $10 SR = $1,250 unfavorable

40. Variable Overhead Variances
125 × $6.20 SR = $775
unfavorable efficiency variance
750 AH × $6.20 SR = $4,650 SV for AH
$4,650 SV for AH – $3,600 = $1,050
favorable spending variance

41. Fixed Overhead Volume Variance
400 plant production capacity
– 250 actual units = 150 units under
150 × $2.5 hours/unit = 375 hours
375 × $7.80 = $2,925 unfavorable

42. Elevation Sports, Inc. Performance Report For October 2005
Direct material quantity variance:
Wood $ 300
Bindings
Direct material price variance:
Wood
Bindings F
Direct labor efficiency variance ,250 U
Direct labor rate variance
Variable overhead efficiency variance U
Variable overhead spending variance 1,050 F
Fixed overhead budget variance
Fixed overhead volume variance ,925 U
Total $3,356 U

43. End of Chapter 10