1. 5
C H A P T E R
Operational Budgets

2. What are the Purposes of Budgeting ?
OVERALL PURPOSE:
To quantify a general plan so that performance in relation to a goal can be carefully monitored.
TWOFOLD PURPOSE
FIRST:
To allow individuals or companies to develop a plan to meet a specified goal.
SECOND:
To allow ongoing comparison between actual results and the plan in order to control operations or activities.

3. Describe Two Types of Planning
Long-run planning includes strategic planning and capital budgeting
Short-run planning includes production process prioritizing and operational budgeting or profit planning

4. List Reasons for Budgeting
Planning and setting objectives
Communication and coordination
Authorization
Motivation
Conflict resolution
Evaluation

5. Budgeting Process Who or what is the budget committee?
A management group responsible for establishing budgeting policy and for coordinating the preparation of budgets.
What are two issues of the budgeting process?
Behavioral considerations
Involvement in preparing
the budget

6. List Behavioral Considerations
1. Top management support
2. Employee participation
3. Addressing budget deviations

7. Describe the Top-Down Approach to Budgeting
Top management prepares the entire budget and distributes it to division managers.
Top
Management
Manager
Manager
Manager

8. Describe the Bottom-Up Approach to Budgeting
Each manager prepares a budget request, from which management creates an overall budget.
Top
Management
Manager
Manager
Manager

9. Master Budget—Manufacturing
Planning Process
Capital Project
Plans
Strategic Goals
and Plans
Short-Term
Objectives
Operating Budget
Production
Budget
Sales Budget*
Direct
Materials
Budget*
Direct
Labor
Budget*
Manufacturing
Overhead
Budget*
Selling/Admin.
Expense
Budget*
* These budgets all flow into the cash budget below.
Budgeted
Product Sheet
Budgeted
Income Statement
Financial Budgeting * * * *
Capital Expenditures
Budget
Cash Budget
Budgeted
Balance Sheet
Budgeted
Cash Flows

10. Master Budget—Manufacturing Define each budget.
Sales Budget
A schedule of projected sales over the budget period.

11. Example: Sales Budget Selling price per bike . . . . . . $ 100
Expected sales (units) x 100
Expected revenues $10,000

12. Master Budget—Manufacturing Define each budget.
Sales Budget
Production
Budget
A schedule of production
requirements for the budget period.

13. Example: Production Budget
Expected sales
Add desired ending inventory
Total number of bikes needed
Less beginning inventory
Bikes to be produced
Note: Ending inventory is estimated at 80%
of the next period’s sales.

14. Master Budget—Manufacturing Define each budget.
Sales Budget
Production
Budget
A schedule of direct materials to be used and purchased during the budget period.
Direct Materials
Budget

15. Example: Direct Materials Budget
Direct materials usage:
Direct Amount Unit Total
Materials Required Cost Cost
Metal ,700 lbs $2.00/ft. $5,400
Plastic lbs $1.00/ft. $ 405

16. Example: Direct Materials Budget
Direct materials purchases:
Metal Plastic
Desired ending inventory ,
Needed for production ,
Total needed ,
Less beginning inventory ,
Materials to be purchased ,
Unit cost x $2 x $1
Total cost $4,000 $ 510

17. Master Budget—Manufacturing Define each budget.
Sales Budget
Production
Budget
A schedule of direct labor requirements for the budget period.
Direct Materials
Budget
Direct Labor
Budget

18. Example: Direct Labor Budget
Number of bikes to produce
Direct labor hours per bike x
Total hours required
Rate per hour x $5
Total direct labor cost $2,025

19. Master Budget—Manufacturing Define each budget.
A schedule of production costs other than those for direct labor and direct materials.
Sales Budget
Production
Budget
Direct Materials
Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget

20. Example: Manufacturing Overhead Budget
Variable costs:
Indirect materials costs $ 220
Indirect labor costs
Total variable costs $ 820
Fixed costs:
Insurance expense $ 200
Depreciation expense
Total fixed costs $ 800
Total manufacturing overhead $1,620

21. Master Budget—Manufacturing Define each budget.
Sales Budget
A schedule to accumulate all the budgeted production cost to produce each bike
Production
Budget
Selling and
Administrative
Expense Budget
Direct Materials
Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget
Budgeted
Product
Cost Sheet

22. Budgeted Product Cost Sheet
Input Required Cost
Cost Inputs per Bike
Metal $2.00/ft $40.00
Plastic $1.00/ft
Direct labor $5.00/hr
Fixed OH $1.98/hr
Variable OH $2.02/hr
Total variable cost per bike $70.00
Total fixed MOH $1,620
Divide by Production Volume bikes
Fixed MOH cost allocated per bike
Total $82.00

23. Master Budget—Manufacturing Define each budget.
Sales Budget
A schedule of all non-production spending expected to occur during the budget period.
Production
Budget
Selling and
Administrative
Expense Budget
Direct Materials
Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget

24. Example: Selling and Administrative Budget
Variable expenses:
Sales commissions $
Total variable expenses $
Fixed expenses:
Salaries expense $1,000
Depreciation
Advertising expense
Total fixed expenses $1,300
Total selling and
administrative expenses $1,700

25. Master Budget—Merchandising Define each budget.
Sales Budget
Purchases
Budget
Selling and
Administrative
Expense Budget
A schedule of projected purchases over the budget period.
Budgeted
Income
Statement

26. Master Budget—Service Define each budget.
A service entity’s budget that identifies how much revenue will be generated during a period.
Pro-Forma Income
Statement
Revenue Budget
Wages and
Salaries Budget
Production
Budget
Cash Budget
Pro-Forma
Balance Sheet
Selling/Admin.
Expense Budget
Overhead
Supplies
Pro-Forma Statement
of Cash Flows

27. Master Budget—Manufacturing Define each budget.
Sales Budget
A schedule of expected cash receipts and
disbursements during the budget period.
Production
Budget
Selling and
Administrative
Expense Budget
Direct Materials
Budget
Direct Labor
Budget
Manufacturing
Overhead
Budget
Cash Budget

28. Example: Cash Budget Cash balance, beginning . . . . . . . . . $ 4,900
Add collections from customers ,100
(1)Total cash available $15,000
Less disbursements for:
Direct materials $ 3,000
Direct labor ,000
Equipment purchase ,000
(2)Total disbursements $ 7,000
Minimum cash balance desired ,000
Total cash needed $13,000
Excess (or deficiency) of cash available before financing $ 2,000
(3) Financing needed Ending cash balance [(1) – (2) + (3)] $ 2,000

29. Define Static versus Flexible Budgeting
Static Budgeting:
A quantified plan that projects revenues and costs for only one level of activity.
Not useful for controlling costs and measuring performance because the actual level of activity may have differed significantly from the planned level.
Flexible Budgeting
A quantified plan that projects revenues and costs for varying levels of activity.
More useful for control and performance evaluation because it is not confined to one level of activity.