1. EMBA Presentation October 20, 2013

2. Overview  Budgets Within the Architecture of the Organization  Types of Budgets  Budget Preparation Theories  Example of Preparing Sales, Production and Raw Materials Budget  Example of Cash Flow Forecast

3. Budgeting and Organizational Architecture  Assigns Decision Rights – Gives manager the right to spend or use organizational resources  Measures Performance – Actual results to forecast  Rewards Performance – Basis to incentive compensation and recognition for accomplishing goals

4. Types of Budgets  Strategic Plan  Long Term Budget  Operating Budget

5. Theory of Budget Preparation  Participation  Bottom-up, Top-down has been found to be a very successful approach  In a survey of 219 publicly traded firms, 79% indicated lower-level managers were significantly involved in the budget process  75% stated budgeting was a managerial, not accounting, function

6. Budget Preparation Theories  Budget Ratcheting  Uses past historical data for next year's budget  Usually raises targets from prior year  May cause for lower output this year to avoid higher targets next year  Line Item Budgets  Reduce agency problems  May restrict good management actions

7. Steps In Preparing the Operating Budget  Develop Sales Forecasts  Convert Sales Forecast to Production Budget  Prepare Raw Material Budget in Units  Prepare Raw Material Budget in Dollars  Prepare Selling, General and Administrative Budgets  Prepare Income Statement  Convert to Cash Forecast  Prepare Pro-forma Balance Sheets

8. The First Step to Proper Planning of Production

9. Getting to the Sales Numbers  Input from field sales personnel  Get the numbers right!!!!  Using the budget as a sales management tool

10. Example of Salesperson’s Input Customer Projected Sales Probability Adjusted Sales A $1,000,000.50 $500,000 B $250,000 1.00$250,000 C $500,000.75 $375,000 Misc. $1,000,000.80 $800,000

11. Sales Projections for Production Budget  January5,000 Units  February 6,000 Units  March 8,000 Units  April7,000 Units  May 6,000 Units

12. Production Assumptions  Require 30% of next month’s sales on hand at beginning of month  Project to have 1,000 units on hand at beginning of January

13. Calculation of Production Required

14. Additional Assumptions  10% of next month’s raw materials must be on hand at beginning of month  Project 5,000 units on hand at begining  Production process uses 5 units of raw product for each unit of finished product  Raw product costs $10.00 per unit  Direct labor cost is $15.00/hour and it takes one hour to make each finished product  Overhead is applied at $4.00 per DLH

15. Calculation of Raw Materials Budget

16. Cost of Goods Manufactured Schedule

17. Must Be Done Prior to Preparation of Pro-forma Balance Sheets

19. Assumptions for Cash Flow Calculation  Company purchased $72,600 of inventory in May, $89,100 in June, and $93,720 in June  Cash balance was $10,000 on June 1  Salaries are paid on 7th and 22nd of each month  Salaries for May totaled $30,000

20. Additional Assumptions  Rent is paid on first day of the month  Utilities are paid on the 10th day of month following; May utilities totaled $3,000  All inventory is paid on the 10th day following month of purchase  Company has line of credit at Old Boise National Bank in amount of $100,000  Company always wants $10,000 in cash balance at end of each month

21. Cash Inflow Assumptions  April sales on account were $80,000  May sales on account were $90,000  Accounts Receivable are collected as follows:  10% in month of sale  75% in first month following  10% in second month following

23. Logical Flow of Master Budget Procurement Budget Sales Budget Production Budget Ending Inventory Budget Direct Materials Budget Direct Labor Budget Factory Overhead Budget SG&A Budget Cost of Goods Manufactured Budget Capital Investment Budget Budgeted Income Statement Budgeted Balance Sheet Budgeted Cash Flows Master Budget

24. Copyright by Frank Ilett, 2012