1. Cost Management Chapter 10 Static and Flexible Budgets
Measuring, Monitoring, and Motivating Performance
Chapter 10
Static and Flexible Budgets
Prepared by
Gail Kaciuba
Midwestern State University
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

2. Chapter 10: Static and Flexible Budgets
Learning objectives
Q1: What are the relationships among budgets, long-term strategies, and short-term operating plans?
Q2: What is a master budget and how is it prepared?
This slide is entirely automated – no clicks required.
Q3: What are budget variances and how are they calculated?
Q4: What are the differences between static and flexible budgets?
Q5: How are budgets used to monitor and motivate performance?
Q6: What are other approaches to budgeting?
Q7: How is the cash budget developed?
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

3. Q1: Budgets, Strategies, & Operating Plans
A budget is
A formalized financial plan.
A translation of an organization’s strategies.
A method of communicating.
A way to define areas of responsibility and decision rights.
The first bullet and its secondary bullets are all automated.
The first click brings in the second bullet.
The budget cycle is the series of sequential steps followed to create and use budgets.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

4. Q2: Master Budgets
A master budget is
A comprehensive plan for the upcoming accounting period.
Usually prepared for a one-year period.
Is based on a series of budget assumptions.
The first bullet and its secondary bullets are all automated.
The first click brings in the second bullet.
The master budget consists of several subsidiary budgets, in two categories:
Operating budgets.
Financial budgets.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

5. Q2: Operating Budgets
The operating budget is created by preparing the following individual budgets, in this order:
Revenue budget
Production budget
Direct materials budget
Direct labor budget
Manufacturing overhead budget
Inventory and cost of goods sold budget
Support department budgets
Budgeted income statement
This slide is entirely automated – no clicks required.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

6. Long-term financing budget Cash budget Budgeted balance sheet
Q2: Financial Budgets
The financial budget is created by preparing the following individual budgets, in this order:
Capital budget
Long-term financing budget
Cash budget
Budgeted balance sheet
Budgeted statement of cash flows
This slide is entirely automated – no clicks required.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

7. Q2: Operating Budget Example
Stanley J, Inc., makes a tool used by auto mechanics that sells for $68/unit. It expects to sell 6,000 units in April and 7,000 units in May. Stanley J prefers to end each period with a finished goods inventory equal to 10% of the next period’s sales in units and a direct materials inventory equal to 20% of the direct materials required for the next period’s production. The company never has any beginning or ending work-in-process inventories. There were 400 units in finished goods inventory on April 1. Prepare the revenue and production budgets for April.
The given information and the solution templates are automated.
The first click brings in the solution for the revenue budget.
The second click brings in the solutions for the production budget.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

8. Q2: Operating Budget Example
Stanley J’s product uses 0.3 pounds of direct material per unit, at a cost of $4/lb. There were 220 lbs. of direct material on hand on April 1. Assume that budgeted production for May is 6,500 units. Prepare the direct materials budget for April.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

9. Q2: Operating Budget Example
Stanley J’s product uses 0.2 hours of direct labor at a cost of $12/hr. Prepare the direct labor budget for April.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

10. Q2: Operating Budget Example
Stanley J’s budgeted fixed manufacturing overhead for April is $167,000, and variable manufacturing overhead is budgeted at $6 per direct labor hour. Prepare the manufacturing overhead budget for April.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

11. Q2: Operating Budget Example
Assume that Stanley J’s April 1 direct materials inventory had a cost of $1,560. Prepare the April ending inventories budget for direct materials.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

12. Q2: Operating Budget Example
Prepare the April ending inventories budget for finished goods.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

13. Q2: Operating Budget Example
Assume that Stanley J’s April 1 finished goods inventory had a cost of $12,146. Prepare the cost of goods sold budget for April.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

14. Q2: Operating Budget Example
Stanley J’s budget for April includes $22,000 for administrative costs, $34,000 for fixed distribution costs, $18,000 for research and development, and $13,000 for fixed marketing costs. Additionally, the budgeted variable costs for distribution are $0.75/unit sold and the budgeted variable costs for marketing are 4% of sales revenue. Prepare the support department budget for April.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

15. Q2: Operating Budget Example
Suppose that Stanley J’s income tax rate is 28%. Prepare the budgeted income statement for April.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

16. Managers compare actual results to budgeted results in order to
Q3: Budget Variances
Managers compare actual results to budgeted results in order to
Monitor operations, and
Motivate appropriate performance.
The first bullet and sub-bullets are automated.
The first click brings in the second primary bullet.
The second click brings in its secondary bullet.
Differences between budgeted and actual results are called budget variances.
Variances are stated in absolute value terms, and labeled as Favorable or Unfavorable.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

17. Reasons for budget variances are investigated.
Q3: Budget Variances
Reasons for budget variances are investigated.
The investigation may find:
Inefficiencies in actual operations that can be corrected.
Efficiencies in actual operations that can be replicated in other areas of the organization.
Uncontrollable outside factors that require changes to the budgeting process.
The first primary bullet is automated.
One click is required for each remaining bullet and sub-bullet.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

18. Static budgets are prepared at the beginning of the year.
Q4: Static Budgets
A budget prepared for a single level of sales volume is called a static budget.
Static budgets are prepared at the beginning of the year.
Differences between actual results and the static budget are called static budget variances.
One click is required for each bullet, including the first one.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

19. Q4: Flexible Budgets
A budget prepared for a multiple levels of sales volume is called a flexible budget.
Flexible budgets are prepared at the beginning of the year for planning purposes and at the end of the year for performance evaluation.
Differences between actual results and the flexible budget are called flexible budget variances.
One click is required for each bullet, including the first one.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

20. Q3,4: Flexible Budget Example
Tina’s Trinkets is preparing a budget for The budgeted selling price per unit is $10, and total fixed costs for 2006 are estimated to be $5,000. Variable costs are budgeted at $3/unit. Prepare a flexible budget for the volume levels 1,000, 1,100, and 1,200 units.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

21. Q5: Static Budget Variances Example
Suppose that Tina’s 2006 static budget was for 1,100 units of sales. The actual results are given below. Compute the static budget variances for each row and discuss.
The given information and the solution template are automated.
The first click brings in the solution.
No solutions are provided for the “discuss” part of the question, but the instructor should talk about who is responsible for each variance and whether it depends on volume levels or not.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

22. Q5: Flexible Budget Variances Example
Compute the flexible budget variances for Tina and discuss the results. Compare the flexible budget variances to the static budget variances on the prior page.
The given information and the solution template are automated.
The first click brings in the solution.
No solutions are provided for the “compare” part of the question, but the instructor should talk about how the volume differences are gone from the FBVs.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

23. Q5: Performance Evaluation
A static budget variance includes effects from output volume.
A flexible budget variance removes these output volume effects.
Other adjustments to the year-end flexible budget may be made for a fair performance evaluation, such as
Input price changes outside the control of the manager under evaluation
Fixed cost increases outside the control of the manager under evaluation
One click is required for each bullet and sub-bullet, including the first primary bullet.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

24. Q6: Other Budgeting Approaches
Rolling budgets are prepared frequently for overlapping time periods and actual results may be used to update the budget for the next period.
Activity based budgets use more cost pools and cost drivers.
Kaizen budgets plan cost reductions over time.
Extreme programming can be used to budget long-term projects that contain a large amount of uncertainty.
Often used for information technology projects
Projects begin with little up-front planning
One click is required for each bullet and sub-bullet, including the first primary bullet.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

25. Cash budgets are prepared after the operating budgets.
Q7: Cash Budgets
Cash budgets are prepared after the operating budgets.
The cash budgets include the following individual budgets:
Cash receipts budget
Cash disbursements budget
Short-term borrowings and investments budget
The first bullet is automated.
One click is required for each remaining bullet and sub-bullet.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

26. Q7: Cash Budget Example
Bryce Manufacturing is preparing a cash budget for a new division that will begin operations on January 1, Bryce expects sales to be 40% cash and 60% on account, with 45% of credit sales are collected in the month of the sale. In the month after the sale, 50% of credit sales should be collected, with the remainder collected two months after the sale. Budgeted sales for the first three months are $100,000, $150,000 and $200,000. Prepare a cash receipts budget for the first three months of 2006.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

27. Q7: Cash Budget Example
Bryce Manufacturing budgets direct labor costs to be 30% of sales revenue and expects to pay this in the month the costs are incurred. Direct materials purchases will be on account, and paid as follows: 40% in the month of the purchase, 50% the following month, and 10% in the second month following the purchase. Budgeted direct material purchases for the first 3 months of 2006 are $20,000, $35,000 and $45,000. Compute the budgeted cash disbursements for direct materials and labor for the first 3 months of 2006.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

28. Q7: Cash Budget Example
Bryce Manufacturing budgets other variable costs at 4% of sales revenue and will be paid in the month after the costs are incurred. Other budgeted fixed costs are $6,000 per month and will be paid in the month incurred. Prepare a cash disbursements budget for all costs, including direct materials and labor.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e

29. Q7: Cash Budget Example
Using the information from the prior slides, prepare a schedule of budgeted cash flows for Bryce Manufacturing’s new division for the first three months of 2006.
The given information and the solution template are automated.
The first click brings in the solution.
© John Wiley & Sons, 2005
Chapter 10: Static and Flexible Budgets
Eldenburg & Wolcott’s Cost Management, 1e