2. WHAT IS THE FUTURE FOR C&C?
Cash flow has been a problem. Is $7,000 in cash enough to operate on?
C&C has borrowed money to finance operations
An increase in award jacket sales may be the answer to more cash
C&C’s president, George Douglas, wants to decrease inventory levels, but he is concerned that customer satisfaction will be affected

4. WHAT IS A BUDGET? An operating plan expressed in dollars
Shows how resources will be committed during the coming period
Helps plan for the future
Communicates corporate direction and coordinates corporate efforts

5. THE ROLES OF BUDGETING
Exhibit 5-1

6. BUDGETING INFORMATION FLOWS
Exhibit 5-2

7. TOP-DOWN BUDGETS: ADVANTAGES
Increase probability that the organization’s strategic plans will be incorporated in planned activities
Enhance coordination among divisional plans and objectives
Use top management’s knowledge of overall resource availability
Reduce the time frame for the budgeting process

8. TOP-DOWN BUDGETS: DISADVANTAGES
May result in dissatisfaction, defensiveness, and low morale among individuals who must work under the budget
Reduces the feeling of teamwork
May limit the acceptance of the stated goals and objectives
May create a view of the budget as a punitive device

9. BOTTOM-UP BUDGETS: ADVANTAGES
Gathers information from persons most familiar with the needs and constraints of organizational units
Allow organizational units to coordinate with one another
Lead to better morale and higher motivation
Develop a high degree of acceptance of and commitment to organizational goals and objectives by operating management

10. BOTTOM-UP BUDGETS: DISADVANTAGES
Require significantly more time
Effects of managerial participation may be negated by top-management changes
Managers may be ambivalent or unqualified to participate, creating an unachievable budget
May cause managers to introduce slack into the budget

12. WHAT IS A STANDARD?
Benchmark for measuring performance – an expectation
What are some examples of standards you are familiar with?
In accounting, you can think of it as a budget of a single unit of output

13. THE STANDARD CONTINUUM
PRACTICAL
IDEAL
Where do you want to be?
Tight, but attainable
Perfection, “Factory Heaven”

14. IDEAL STANDARDS ADVANTAGES Disadvantages Motivational tool
Constant reminder to workers of need for increased efficiency
Disadvantages
De-motivating because you know you can never achieve the standard
Employees may take shortcuts and reduce effectiveness
Poor planning tool

15. PRACTICAL STANDARDS ADVANTAGES DISADVANTAGES
Motivate employees to perform
Good planning tool
DISADVANTAGES
???

16. SETTING STANDARDS
Standards are set for both quantity and price of each input (materials, labor and overhead)
Estimated cost to manufacture a single unit of product or perform a single service
A budget for a single unit of output

17. HOW DO YOU SET MATERIALS STANDARDS?
What are the inputs?
What is the required quality of each input?
How much of each input is required?
How much does each unit of input cost?

18. C&C DIRECT MATERIALS STANDARDS

19. HOW DO YOU SET LABOR STANDARDS?
What are the operations required to produce the product?
How long does it take to perform each operation?
Who performs each operation and how much are they paid?

20. C&C DIRECT LABOR STANDARDS
Item
Rate
Base hourly rate
$8.00
Payroll taxes
0.60
Fringe benefits
1.00
Standard direct labor rate
$9.60
Activity
Direct Labor Hours
Cutting
.02
Sewing
.18
Machine down-time
.01
Rest period
.03
Standard direct labor hours
.25
$9.60 per direct labor hour x .25 direct labor hours = $2.40

21. HOW DO YOU SET OVERHEAD STANDARDS?
The predetermined overhead rate

23. COMPONENTS OF THE MASTER BUDGET

24. SALES BUDGET
Shows budgeted sales revenue for the period, which flows to the budgeted income statement for the period
Begins with the sales forecast, which typically will be prepared by the sales and marketing departments
Requires a forecasted sales price in addition to the sales volume forecast
Is prepared for each product

25. C&C’S SALES BUDGET
Notice that the individual sales budget amount flows to the overall sales budget.

26. SELLING & ADMINISTRATIVE EXPENSE BUDGET
Shows expenses to be incurred to support the budgeted level of sales
Includes variable and fixed expenses
Pay special attention to non-cash expenses such as bad debt expense and depreciation expense. These expenses do not flow to the cash budget.

27. C&C’S S&A EXPENSE BUDGET
Don’t forget to subtract the non-cash expenses to determine the amount of cash expenditures that will carry through to the cash budget.

28. PRODUCTION BUDGET
Shows when and how many units to produce in order to meet budgeted sales volume
Includes budgeted ending inventory of finished goods to provide a cushion for unexpected sales
A retail establishment will have a purchases budget rather than a production budget
Budgeted Sales
Budgeted End. Inv.
Budgeted Beg. Inv.
Budgeted Production + _ =

29. C&C’S PRODUCTION BUDGET
Notice that budgeted ending inventory is based on the next period’s budgeted sales volume
Notice that budgeted beginning inventory is the previous period’s budgeted ending inventory

30. DIRECT MATERIALS PURCHASES BUDGET
Shows when and how much of each direct material to purchase in order to meet the production budget
Includes budgeted ending inventory of direct materials to provide a cushion for production errors or supply shortfalls
Is prepared for each direct material input used in the production process

31. C&C’S DIRECT MATERIALS BUDGET
Notice that you must convert from units of finished goods to units of the direct material – here from pants to yards of fabric.
Budgeted inventory levels are calculated using the same principle as in the production budget.

32. DIRECT LABOR BUDGET
Shows when and how much of each direct labor category to employ in order to meet the production budget
May use average standard wage rates for each class of direct laborer rather than actual wage rates for each employee

33. C&C’S DIRECT LABOR BUDGET
If the standard production time is stated in minutes, you must convert to the hour decimal equivalent since the standard wage rate is stated on an hourly basis.

34. MANUFACTURING OVERHEAD BUDGET
Is based on budgeted production levels of the overhead application base
Uses the predetermined overhead rate for variable overhead
Assumes budgeted fixed overhead cost is incurred evenly throughout the budget period
Pay special attention to non-cash expenses such as depreciation expense that do not flow to the cash budget.

35. Application base × variable overhead POR
C&C’S OVERHEAD BUDGET
Application base × variable overhead POR
Don’t forget to subtract the non-cash expenses to determine the amount of cash expenditures that will carry through to the cash budget.

36. ENDING INVENTORY AND COGS BUDGET
Shows desired levels of ending inventory
Assists in the preparation of budgeted balance sheet and income statement

37. C&C’S ENDING RAW MATERIALS BUDGET
DM usage is based on budgeted production and standard DM cost per unit

38. C&C’S ENDING FINISHED GOODS BUDGET

39. C&C’S COST OF GOODS SOLD BUDGET

41. THE CASH BUDGET Cash available to spend - Cash disbursements =
Cash excess or cash needed +
Short-term financing
Ending cash balance

42. CASH AVAILABLE TO SPEND

43. CASH RECEIPTS BUDGET Based on sales budget
Requires knowledge of historical accounts receivable collection patterns
Distinguishes between cash sales and credit sales
Provides ending accounts receivable balance for the budgeted balance sheet

44. C&C’S CASH RECEIPTS BUDGET

45. CASH DISBURSEMENTS

46. CASH PAYMENTS FOR MATERIALS BUDGET
Shows when payments for materials purchases will be made
Requires knowledge of past accounts payable payment patterns
Calculates ending accounts payable balance for the budgeted balance sheet

47. C&C’S CASH PAYMENTS FOR MATERIALS BUDGET

48. CASH EXCESS (NEEDED) Cash available minus cash disbursements
Many banks require a minimum cash balance, and that must be figured into the amount of cash excess (needed)

49. C&C’S CASH EXCESS (NEEDED)

50. SHORT-TERM FINANCING
This section is only prepared if there is a need to borrow money or repay previously borrowed money
Shows principal and interest amounts
Provides the ending cash balance for the budgeted balance sheet and interest expense for the budgeted income statement

51. C&CS’ SHORT-TERM FINANCING

52. C&c’s cash budget

54. PRO-FORMA FINANCIAL STATEMENTS
Reports “as-if” results rather than actual results
Shows the financial position of the company assuming the budget is achieved

55. C&C’S PRO-FORMA INCOME STATEMENT