1. ACG 2071 Chapter 21 Module 9 Fall 2007
Budgeting
ACG 2071
Chapter 21
Module 9
Fall 2007

2. Budgets
Charts a course for a business by outlining the plans of the business in financial terms

3. Budgets Objectives Establishing specific goals
Executing plans to achieve goals
Periodically comparing actual results with goals

4. Management meets objectives
Planning
Directing
Controlling

5. Budgeting Systems Continuous Budget Static budget Flexible budget
Zero Based Budgeting

6. Master Budget Manufacturing Company Parts Budgeted income statement
Sales budget
Cost of goods sold budget
Production budget
Direct materials purchases budget
Direct labor cost budget
Factory overhead cost budget
Selling and administrative expense budget
Budgeted balance sheet
Cash budget
Capital Expenditure Budget

7. Sales Budget
Indicates for each product the quantity of sales and expected selling price
Example 1: Brite Lite sells two products in United States and Canada. Product A is estimated to sell 5,000 units in the United States and 10,000 units in Canada at $100 per unit. Product B sells 20,000 units in United States and 6,000 units in Canada at $50 per unit

8. Sales Budget Brite Lite Sales Budget For year 2008 Product A Product B
Units sold:
United States
5,000
20,000
Canada
10,000
6,000
Total units sold
15,000
26,000
Sales price per unit
X $100
X $50
Total sales
$1,500,000
1,300,000
$2,800,000

9. Production Budget
Coordinates with sales budget to ensure that production and sales are kept in balance during the period
Number of units manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget.

10. Production Budget Formula
Expected units to be sold
+ Desired Ending Inventory
-Estimated Beginning Inventory
Total units to be produced

11. Production budget
Brite Lite expects to have beginning inventory of 3,000 units of Product A and 5,000 units of Product B. The company would like its ending inventory to be 10% of estimated sales

12. Production Budget Brite Lite Production Budget For year 2008 Product A
Product B
Expected sales (in units)
15,000
26,000
Plus desired ending inventory
+ 1,500
+ 2,600
Minus estimated beginning inventory
- 3,000
- 5,000
Total production
13,500
23,600

13. Example 2 Class problem Geo produces three products X, Y, and Z.
Sales:
10,000 units to X,
15,000 units to Y
25,000 to Z. B
Beginning inventory is estimated at
3,000 to X,
5000 to Y,
2,500 to Z.
Ending inventory is estimated at
1,500 to X,
4,000 to Y
4,000 to Z. Complete production budget.

14. Direct Materials Budget
The production budget is the starting point for determining the estimated quantities of direct materials to be purchased.
Estimates purchase levels for the next year and costs.
Formula:

15. Direct Materials Budget Formula
Materials required for production
+Desired Ending Materials Inventory
-Estimated Beginning Materials Inventory
Direct materials to be purchased
X Cost per unit
Total Direct Materials Cost

16. Direct Materials Purchases Budget
Estimates purchase levels for the next year and costs
Materials required for production plus ending inventory minus beginning inventory

17. Ending Inventory (lbs) Beginning inventory (lbs.)
Direct Materials
Product A uses 2 lbs. of plastic and 3 lbs. of aluminum. Product B uses ½ lb. of plastic, 1 lb. of aluminum, and 2 lbs. of paper. Aluminum sells for $5 per lb. Plastic sells for $10 per lbs, and paper sells for $2 per lbs.
Ending Inventory (lbs)
Beginning inventory (lbs.)
Plastic
4,000
7,300
Aluminum
6,000
3,600
Paper
8,000
5,200

18. AL
Plastic
Paper
Total
Product A (13,500 units)
13,500 x 3 lbs.
40,500
13,500 x 2 lbs.
27,000
13,500 x 0 lbs.
Product B (23,600 units)
23, 600 x 1lbs.
23.600
23,600 x ½ lbs.
11,800
23,600 x 2 lbs.
47,200
Total needed for production
64,100
38,800
+ Desired Ending inventory
4,000
6,000
8,000
Total units needed
68,100
44,800
55,200
- Beginning Inventory
-7,300
-3,600
-5,200
Total direct materials purchased
60,800
41,200
50,000
Unit cost for material
X $5
X $10
X $2
Total costs
$304,000
$412,000
$100,000
$816,000

19. Direct Labor Budget
Production budget also provides the starting point for preparing the direct labor cost budget.
Example: Department 1 has a labor cost of $10 per hour. Product A uses 6 hours in Department 1 and Product B uses 4 hours. Department 2 has a labor cost of $7 per hours. Production A uses 2 hours of Department 2’s labor and Product B uses ½ hour. Prepare a direct labor budget.

20. Example Department 1 Department 2 Total Product A (13,500 units)
6 hours per unit x 13,500
81,000
2 hours per unit x 13,500
27,000
Product B (23,600 units)
4 hours x 23,600 units
94,400
½ hour x 23,600 units
11,800
Total hours per department
175,400
38,800
Labor cost per hour
X $10
X $7
$1,754,000
$271,600
$2,025,600

21. Factory Overhead Budget
Indirect labor $25,000, utilities $45,000, maintenance
$40,000 and insurance $60,000

22. Cost of goods sold budget:
Is composed of the budgets for production, direct materials, direct labor and factory overhead

23. Selling and Administrative Budget:
Sales budget is often used as the starting point for estimating the selling and administrative expenses.

24. Budgeted Income Statement:
Revenue from sales
$ 13,336,000.00
Cost of goods sold
$ 9,047,780.00
Gross profit
$ 4,288,220.00
Selling and administrative expenses
$ 1,885,000.00
Income from operations
$ 2,403,220.00
Other income
Interest revenue
$ ,000.00
Other expenses
Interest expenses
$ ,000.00
$ ,000.00
Income before income tax
$ 2,411,220.00
Income tax
$ ,000.00
Net income
$ 1,811,220.00

25. Balance Sheet Budgets
Cash Budget
Capital Expenditure Budget

26. Capital Expenditures Budget
Lists dollar amounts to be both received from plant asset disposals and spent to purchase additional plant assets to carry out the budgeted business activities

27. Cash Budget Is one of the most important elements of budgets
Presents the expected receipts and payments of cash for a period of time
Three parts of the budget”
Cash receipts
Cash payments
Other items
We prepare a schedule for cash receipts and cash payments

28. Schedule of Cash Receipts
: Magna Corporation has estimated sales of January $1,080,000, February $1,240,000, and March $970,000. Accounts receivable has a balance on January 1 of $370,000. The company expects that 10% of its sales will be in cash and the remainder in credit. Of the credit sales, 60% will be collected in the next month and the remainder the following month.
Required: Prepare a schedule of cash receipts..

29. Calculations January Sales Sales $ 1,080,000.00
Less cash portion ( 10% of sales)
$ 108,000.00
Credit sales
$ 972,000.00
Collections in February
$ 583, *
Remainder collected in March
$ 388,800.00
* 60% of Credit sales = $972,000 x 60%

30. Calculations February Sales Sales $ 1,240,000.00
Less cash portion ( 10% of sales)
$ 124,000.00
Credit sales
$ 1,116,000.00
Collections in February
$ 669,600.00
Remainder collected in March
$ 446,400.00

31. Calculations March Sales Sales $ 970,000.00
$ 970,000.00
Less cash portion ( 10% of sales)
$ ,000.00
Credit sales
$ 873,000.00
Collections in February
$ 523,800.00
Remainder collected in March
$ 349,200.00

32. Schedule of Cash Receipts
January
February
March
Receipts of Cash Sales
$108,000
$124,000
$97,000
Receipt from collections:
Collection from last month’s sales
$370,000
$388,800
$446,400
Collection from current month’s
583,200
669,600
523,800
Total receipts
953,200
1,058,400
970,200

33. Schedule of Cash Payments
Reduction in cash from manufacturing, selling and administrative, capital expenditure, and other expenses
Example: Magna Company has manufacturing costs of $840,000 in January, $780,000 in February, and $812,000 for March. The beginning balance in accounts payable is $190,000. Depreciation expense is $24,000 per month which is included in manufacturing costs. Manufacturing costs payments are allocated at 75% in month incurred and remainder the next month.

34. January Manufacturing Costs
Total manufacturing costs for month
$ 840,000.00
Less depreciation expense
$ ,000.00
Total manufacturing costs owed
$ 816,000.00
Payment in January
'75% paid in month incurred
X 75%
$ 612,000.00
Less payment in January
Payment in February
$ 204,000.00

35. February Manufacturing Costs
Total manufacturing costs for month
$ 780,000.00
Less depreciation expense
$ ,000.00
Total manufacturing costs owed
$ 756,000.00
Payment in February
'75% paid in month incurred
75%
$ 567,000.00
Less payment in February
Payment in March
$ 189,000.00

36. March Manufacturing Costs
Total manufacturing costs for month
$ 812,000.00
Less depreciation expense
$ ,000.00
Total manufacturing costs owed
$ 788,000.00
Payment in March
'75% paid in month incurred
75%
$ 591,000.00
Less payment in March
Payment in April
$ 197,000.00

37. Schedule of Cash Payments
January
February
March
Payments of prior month’s manufacturing costs
$190,000
$204,000
$189,000
Payments of current month’s manufacturing costs
612,000
567,000
591,000
Total payments
$802,000
$771,000
$780,000

38. Completing the Cash Budget
After preparing the schedule of cash receipts and the schedule of cash payments, we review additional items and prepare the formal cash budget.

39. Completing the Budget Cash balance on January 1 - $280,000
Quarterly tax due on March 31 - $150,000
Quarterly interest paid to creditors on January 10 - $22,500
Selling and administrative expenses:
January $160,000
February $165,000
March $145,000
Interest revenue to be received on March 21 - $24,500
Capital expenditures on equipment payable on February 28 - $274,000
Minimum cash balance of $340,000 is required by the corporation’s Board of Directors

40. Cash Budget January February March Estimated cash receipts
January
February
March
Estimated cash receipts
Cash receipts
$ ,000.00
$ ,000.00
$ ,000.00
Collections of accounts receivables
$ ,200.00
$ ,058,400.00
$ ,200.00
Interest revenue
$ ,500.00
Total cash receipts
$ ,061,200.00
$ ,091,700.00
Estimated cash payments
Manufacturing costs
$ ,000.00
$ ,000.00
$ ,000.00
Selling and administrative
$ ,000.00
$ ,000.00
$ ,000.00
Capital expenditures
$ ,000.00
Interest expense
$ ,500.00
Tax payment
$ ,000.00
Total cash payments
$ ,500.00
$ ,210,000.00
$ ,075,000.00
Cash increase
$ ,700.00
$ (148,800.00)
$ ,700.00
Cash balance at beg of month
$ ,000.00
$ ,700.00
$ ,900.00
Cash balance at end of month
$ ,600.00
Minimum cash balance
$ ,000.00
Excess
$ (132,100.00)
$ (115,400.00)
Cash Budget