1. Budgeting Chapter M5

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

3. Objecitves Establish specific goals Executing plans to achieve goals Periodically comparing actual results with goals

4. Management meets objectives Planning Directing Controlling

5. Budgeting Systems Static budget Flexible budget Master budget Sales budget Production budget Direct materials purchase budget Direct labor cost budget Factory overhead cost budget Selling and administrative budget Cash budget

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

7. Sales Budget Brite Lite Sales Budget For year 2005

8. Production budget Coordinates with sales budget Expected units to be sold +Desired ending inventory -Estimated beginning inventory Production for period

9. Production budget Brite Lite plans to have beginning inventory of 3,000 units of A and 5,000 units of B. Ending inventory should be 10% of sales.

10. Production Budget Brite Lite Production Budget For year 2004

11. Example 2 Geo produces three products X, Y, and Z. Sales are expected at 10,000 units to X, 15,000 units to Y, and 25,000 to Z. 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, and 4,000 to Z. Complete production budget.

12. Example 2 Geo Products Production Budget For year 2005

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

14. Direct Materials Product A uses 2 lbs of Tox and 3lbs of Gox. Product B uses 1/2lb of Tox, 1lb of Gox, 2lbs of Plox. Gox sells for $5 per lb, Tox $10lbs and Plox $2 lb. Beg inventory is 7,300, 3,600, and 5,200 lbs. Ending inventory is 4,000lbs, 6,000lbs, and 8,000 lbs.

15. Direct Materials Budget

16. Example 4: Dare uses two materials in the production of its products X and Y. The materials are A and B. Product X requires 3 units of A and 1.5lbs of B for completion. Product Y requires 4 units of A and 1lb. Of B. A is $6 per unit and B is $5 per unit. Estimated beginning inventory is 3,000 A and 4,000 of B. Desired ending inventory is 2,000 of A and 1,000 of B. The company is expecting to product 10,000 units of X and 15,000 units of Y.

17. Example 4

18. Direct Labor Budget Product A uses 6hrs of Dept 1 and 2hrs of Dept 2. Product B uses 4hrs of Dept 1 and 1.2hr in Dept 2. Labor is $10 per hour in Dept 1 and $7 per hour in Dept 2.

19. Example

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

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

22. Cash Budget Is one of the most important elements of budgets Presents the expected receipts and payments of cash for a period of time Divided into Cash receipts Cash payments Other items

23. Cash Receipts Budget Magna has estimated sales of $1,080,000 in January, $1,240,000 in february, and March of $970,000. Accounts receivable has a balance on January 1 of $370,000. The company expects 10% of its sales to be in cash. Of the credit sales 60% will be collected in the month of the sale and remainder the next month.

24. Cash Sales January: $1,080,000 X 10% = $108,000 Feb: $1,240,000 X 10% = $124,000 March: $970,000 X 10% = $97,000

25. Credit Receipts January collections: 60% of Jan collected in January Credit sales: $1,080,000 X 90% Collection: $972,000 X 60% = $583,200 Dec sales: $370,000 value of Accts receivable Feb collections: 40% of Jan credit sales $972,000 X 40% = $388,800 60% of Feb credit sales $1,240,000 X 90% X 60% = $669,600

26. Credit Receipts March: Feb: 40% of credit sales $1,160,000 X 40% = $446,400 March: 60% of credit sales $970,000 X 90% X 60% = $523,800

27. Cash Receipts Budget

28. Cash Payments Budget Reduction in cash from manufacturing, selling and administrative, capital expenditure, and other expenses Assume manufacturing costs are $840,000, $780,000, and $812,000 for Jan through March. Beg balance in accounts payable is $190,000. Depreciation expense is $24,000 per month included in mfg costs. Mfg costs are paid 75% in month incurred and remainder next month.

29. Cash Payment Budget January Mfg cost $840,000 Depreciation 24,000 Net 816,000 Current mo: $816,000 X 75% =$612,000 Next mo: $816,000 X 25% = $204,000

30. Cash Payment Budget February: Mfg cost $780,000 Depre 24,000 Net $756,000 Current: $756,000 X 75% = $567,000 Next: $756,000 X 25% = $189,000

31. Cash Payment Budget March: Mfg $812,000 Dep 24,000 Net 788,000 Current: $788,000 X 75% = $591,000

32. Cash Payment Budget

33. Completing the Budget Cash balance on Jan 1 is $280,000 Quarterly tax on 3/31 is $150,000 Quarterly interest paid 1.10 is $22.500 Selling expense $160,000, $165,000 and $145,000 Interest revenue 3/21 is $24,500 Capital expenditures 2/28 is $274,000 Minimum cash balance is $340,000

34. Cash Budget