1. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Operational Budgeting Lecture 23

2. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Control Steps taken by management to ensure that objectives are attained. Planning Developing objectives for acquisition and use of resources. A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization. Budgeting: The Basis for Planning and Control

3. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Benefits Coordination of activities Performance evaluation Enhanced managerial responsibility Assignment of decision making responsibilities Benefits Derived from Budgeting

4. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Budget Problems Perceived unfair or unrealistic goals. Poor management- employee communications. Solution Reasonable and achievable budgets. Employee participation in budgeting process. Establishing Budgeted Amounts: The “Behavioral” Approach

5. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Flow of Budget Data Participation in Budget Process

6. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin 2001200220032004 C a p i t a l B u d g e t s A continuous budget is usually a twelve-month budget that adds one month as the current month is completed. The annual operating budget may be divided into quarterly or monthly budgets. The Budget Period

7. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Sales forecast Production schedule Budgeted financial budgets: cash income balance sheet Capital expenditures budget Operating expense budgets Cost of goods sold and ending inventory budgets The Master Budget

8. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin That’s enough talking about budgets, now show me an example! Preparing the Master Budget: An Illustration

9. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel Preparing the Master Budget: An Illustration

10. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Ellis Magnet Co. is preparing budgets for the quarter ending June 30. The sales price is $10 per magnet. Budgeted sales for the next four months are: April20,000 magnets @ $10 =$200,000 May50,000 magnets @ $10 =$500,000 June30,000 magnets @ $10 =$300,000 July25,000 magnets @ $10 =$250,000 The Sales Budget July is needed for June ending inventory computations. Preparing the Master Budget: An Illustration

11. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Sales Budget Completed Production Budget The Production Budget

12. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Ellis wants ending inventory to be 20 percent of the next month’s budgeted sales in units. 4,000 units were on hand March 31.  Let’s prepare the production budget. The Production Budget

13. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Production must be adequate to meet budgeted sales and to provide sufficient ending inventory. Budgeted product sales in units +Desired product units in ending inventory =Total product units needed – Product units in beginning inventory =Product units to produce The Production Budget

14. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Production Budget

15. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Production Budget

16. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Production Budget

17. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Production Budget Material Purchases Production Budget Units Completed The Production Budget

18. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The material purchases budget is based on production quantity and desired material inventory levels. Units to produce × Material needed per unit =Material needed for units to produce +Desired units of material in ending inventory =Total units of material needed – Units of material in beginning inventory =Units of material to purchase The Production Budget Material Purchases

19. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Five pounds of material are needed for each unit produced. Ellis wants to have materials on hand at the end of each month equal to 10 percent of the following month’s production needs. The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000 units. Five pounds of material are needed for each unit produced. Ellis wants to have materials on hand at the end of each month equal to 10 percent of the following month’s production needs. The materials inventory on March 31 is 13,000 pounds. July production is budgeted for 23,000 units. The Production Budget Material Purchases

20. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Production Budget Material Purchases

21. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Production Budget Material Purchases

22. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin The Production Budget Material Purchases

23. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Materials used in production cost $.40 per pound. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month. No discount terms are available. The accounts payable balance on March 31 is $12,000. Materials used in production cost $.40 per pound. One-half of a month’s purchases are paid for in the month of purchase; the other half is paid for in the following month. No discount terms are available. The accounts payable balance on March 31 is $12,000. Cash Payments for Material Purchases

24. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Cash Payments for Material Purchases

25. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Cash Payments for Material Purchases

26. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Cash Payments for Material Purchases

27. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Cash Payments for Material Purchases

28. © The McGraw-Hill Companies, Inc., 2002 McGraw-Hill/Irwin Source: Adopted from McGraw-Hill/Irvin