1. AC239 Managerial Accounting Seminar 6 Jim Eads, CPA, MST, MSF Budgeting 1

2. Budget A budget charts a course for a business by outlining the plans of the business in financial terms. Budgeting objectives:  Planning: Establishing specific goals  Directing: Executing plans to achieve the goals  Controlling: Periodically comparing actual results to the goals 2

3. Planning Budgeting supports the planning process by requiring all organizational units to establish their goals for the upcoming period. These goals motivate individuals and groups to perform at high levels. Planning also motivates employees to attain goals and improve overall decision making. 3

4. Directing The budget can be used to direct and coordinate operations in order to achieve the stated goals. 4

5. Directing Responsibility centers are the budgetary units of an organization. Each responsibility center is led by a manager who has the authority over and responsibility for the unit’s performance. 5

6. Controlling As time passes, the actual performance of an operation can be compared against the planned goals. This provides prompt feedback to employees about their performance. If necessary, employees can use such feedback to adjust their activities in the future. 6

7. Human Behavior Human behavior problems can arise if: –the budget goal is too tight and very hard for the employee to achieve. –the budget goal is too loose and very easy for the employee to achieve. Called budgetary slack Called budgetary slack –the budget goals of a business conflict with the objectives of the employees. 7

8. Types of Budgeting Fiscal-year budgeting is budgeting for an accounting year. Continuous budgeting always budgets a rolling 12 months future. Zero-based budgeting starts with a clean slate each year as if the business was just starting. 8

9. Types of Budgeting Traditional budgeting uses prior period results and modifies for expected changes. –Static budget –Flexible budget 9

10. Static Budget A static budget shows the expected results of a responsibility center for only one activity level. The budget does not change even if the activity changes. A static budget is used by many service companies and for some administrative functions of manufacturing companies. 10

11. Static Budget Strength:A static budget is simple—all expenses are budgeted as fixed costs. Weakness:A static budget does not adjust for changes in revenues and expenses that occur as volumes change. 11

12. Flexible Budget Flexible budgets show the expected results of a responsibility center for several activity levels A flexible budget is especially useful in estimating and controlling factory costs and operating expenses. 12

13. Flexible Budget Strength:Flexible budgeting provides information needed to analyze the impact of volume changes on actual operating results. Weakness:Flexible budgeting requires greater research into costs. There must be a differentiation between fixed and variable costs. 13

14. Types of Budgets Income statement budgets Income statement budgets –Cost of goods sold budget: Production budget Production budget Direct materials purchases budget Direct materials purchases budget Direct labor cost budget Direct labor cost budget Factory overhead cost budget Factory overhead cost budget –Selling and administrative expense budget Balance sheet budgets Balance sheet budgets –Cash budget –Capital expenditures budget 14

15. Types of Budgets 15

16. Sales Budget The sales budget normally indicates for each product: The sales budget normally indicates for each product: –the quantity of estimated sales and –the expected unit selling price. 16

17. Sales Budget 17

18. Production Budget The production budget sets forth the number of units to be manufactured to meet budgeted sales and inventory needs for each. Estimated unit sales +Desired unit ending inventory - Unit beginning inventory Units to be produced 18

19. Direct Materials Purchases Budget The direct materials production budget sets forth the quantity of materials needed to manufacture the units specified by the production budget. Materials needed for production +Desired ending materials inventory - Beginning materials inventory Materials to be purchased 19

20. Direct Labor Cost Budget The direct labor cost budget sets forth the cost of labor needed to manufacture the units specified by the production budget. Units to be produced X hours per unit labor required X labor cost per hour Labor cost to be used 20

21. Factory Overhead Cost Budget The factory overhead cost budget details the expected overhead cost to produce the quantity of materials needed to manufacture the units specified by the production budget. 21

22. Factory Overhead Cost Budget 22

23. Cost of Goods Sold Budget Beginning Inventory Materials, WIP & finished goods +Materials to be purchased +Labor needed for production + Factory overhead budget -Ending inventory (material, WIP & FG) Cost of Goods Sold 23

24. Selling and Administrative Expense Budget 24

25. Budgeted Income Statement 25

26. Cash Budget The cash budget is one of the most important elements of the budgeted balance sheet. The cash budget presents the expected receipts (inflows) and payments (outflows) of cash for a period of time. 26

27. Estimated Cash Receipts Estimate: 10% of sales are cash sales 60% are collected within the month 30% are collected in the next month 27 Collected in: MonthSalesJanuaryFebruaryMarchApril January1,080,000756,000324,000 February1,240,000868,000372,000 March970,000679,000291,000 Total1,192,0001,051,000

28. Estimating Cash Payments Estimate: 50% are made in the current month 50% are paid within the month Note: Exclude depreciation 28 Paid in: MonthCostsJanuaryFebruaryMarchApril January900,000450,000 February1,250,000625,000 March1,400,000700,000 Total1,075,0001,325,000

29. Cash Budget 29 FebruaryMarch Cash in1,192,0001,051,000 Cash out1,075,0001,325,000 Cash increase (decrease)117,000(274,000) Cash at beginning of month400,000517,000 Cash at end of month517,000303,000 Minimum cash balance320,000 Excess (deficiency)197,000(17,000)

30. Example Exercise 22-6 (page 1016) Landon Awards Co. collects 25% of its sales on account in the month of the sale and 75% in the month following the sale. If sales on account are budgeted to be $100,000 for March and $126,000 for April, what are the budgeted cash receipts from sales on account for April? 30

31. Example Exercise 22-6 (page 986) Collections from March sales (75% x $100,000)$ 75,000 Collections from April sales (25% x $126,000) 31,500 Total$106,500 31

32. Capital Expenditures Budget The capital expenditures budget summarizes plans for acquiring fixed assets. 32

33. Budgeted Balance Sheet The budgeted balance sheet estimates the financial condition at the end of a budget period. 33

34. Questions? 34

35. One last thought…. Make sure you read through Chapter 23 before next week’s seminar. 35