1. The Budgeting Process What is budgeting? What is budgeting? It is the coordinating the combined intelligence of an entire organization into a plan of action. Budgets include operating budget and financing budget. It is the coordinating the combined intelligence of an entire organization into a plan of action. Budgets include operating budget and financing budget. Budgeting is a formal quantitative expression of management plan. Budgeting is a formal quantitative expression of management plan.

2. Operating budget is the budget that focuses on the acquisition and use of scarce resources. Operating budget is the budget that focuses on the acquisition and use of scarce resources. On the other hand financing budget is the budget that focuses on acquiring to obtain resources. On the other hand financing budget is the budget that focuses on acquiring to obtain resources.

3. Advantages of budgets Advantages of budgets Enhance the decision making process by helping mangers meet uncertainties. Enhance the decision making process by helping mangers meet uncertainties. Enhance communication between mangers because in the initial phase of budgeting mangers are forced to communicate with each other. Enhance communication between mangers because in the initial phase of budgeting mangers are forced to communicate with each other.

4. Budgets encourage coordination among segments. Mangers through budgeting are forced to exchange views and hence coordination is achieved. Budgets encourage coordination among segments. Mangers through budgeting are forced to exchange views and hence coordination is achieved. Budgeting is a formal commitment to take corrective action. Budgeting is a formal commitment to take corrective action.

5. Provides performance standards and grantees effective performance. Provides performance standards and grantees effective performance. Difference between actual and budgeted operations indicates the areas lacking control and enhances corrective actions. Difference between actual and budgeted operations indicates the areas lacking control and enhances corrective actions.

6. Principles of budgeting Principles of budgeting Top management support. Top management support. Budgeting must be considered important by all management levels Budgeting must be considered important by all management levels A budget must not be a scapegoat to management or company problems. A budget must not be a scapegoat to management or company problems.

7. Management must consider a budget an excellent means of planning so that it can gain numerous benefits. Management must consider a budget an excellent means of planning so that it can gain numerous benefits. If there are new external or internal conditions that require revision of budgets, top management must make budget revision. If there are new external or internal conditions that require revision of budgets, top management must make budget revision.

8. Types of budgets Types of budgets Budgets or planning horizon can vary from one year (less) to many years, depending on the objectives and the uncertainties involves. Budgets or planning horizon can vary from one year (less) to many years, depending on the objectives and the uncertainties involves. Short term: normally twelve or less months. Short term: normally twelve or less months. Long range: more than a year, normally 5-10 years. These are prepared for special purposes. Eg equipment purchase, addition of product lines. Long range: more than a year, normally 5-10 years. These are prepared for special purposes. Eg equipment purchase, addition of product lines.

9. Master budget consolidate an organization plan for shorter time span and are usually prepared on an annual basis. They are sub-divided month to month, monthly basis for the first quarter and then quarterly for the remaining of the year. Master budget consolidate an organization plan for shorter time span and are usually prepared on an annual basis. They are sub-divided month to month, monthly basis for the first quarter and then quarterly for the remaining of the year. Continuous budget these are master budgets that perpetually add a month as the month just ended is dropped. Continuous budget these are master budgets that perpetually add a month as the month just ended is dropped.

10. Budgets forecast two types of activities Budgets forecast two types of activities Operating activities are forecasted in the operating budget. This include: Operating activities are forecasted in the operating budget. This include: Sales budget Sales budget Production budget ( units) Production budget ( units) Material use Material use Direct labor Direct labor Indirect manufacturing. Indirect manufacturing.

11. Change in inventory level. Change in inventory level. Cost of goods sold budget Cost of goods sold budget Selling expense budget Selling expense budget Budgeted income statement Budgeted income statement Financial Budget Financial Budget Capital Budget Capital Budget Administrative expense budget Administrative expense budget

12. Cash budget Budgeted balance sheet

13. Sales budget Sales budget This is the starting point of the budgeting process, because inventory levels,purchases, and operating expenses are generally geared to the rate of the sales activity. The sales budget includes cash sales, credit sales and their total. This is the starting point of the budgeting process, because inventory levels,purchases, and operating expenses are generally geared to the rate of the sales activity. The sales budget includes cash sales, credit sales and their total.

14. Sample of sales budget Company Name Company Name Sales Budget Sales Budget AprilMay June AprilMay June Credit sales(40%) 160200240 Credit sales(40%) 160200240 Cash sales(60%) 240300360 Cash sales(60%) 240300360 Total 400500600 Total 400500600

15. After the sales budget is prepared, the purchase budget can be prepared. The total merchandise needed is the sum of desired ending inventory plus the amount needed to fulfill the budgeted sales demand. The total needed is partially met by the beginning inventory; the reminder must come from planned purchases. After the sales budget is prepared, the purchase budget can be prepared. The total merchandise needed is the sum of desired ending inventory plus the amount needed to fulfill the budgeted sales demand. The total needed is partially met by the beginning inventory; the reminder must come from planned purchases.

16. Therefore these purchases are computed as follows: Therefore these purchases are computed as follows: Purchases= desired ending inventory + Production needs- beginning inventory. Purchases= desired ending inventory + Production needs- beginning inventory.

17. Sample of Purchase Budget Purchase Budget Purchase Budget AprilMay June AprilMay June Ending inventory 648536480 Ending inventory 648536480 PN350560420 PN350560420 Total needed9981096900 Total needed9981096900 Beg- inventory 480648536 Beg- inventory 480648536 Purchases518448364 Purchases518448364 Purchases in $ = cost x Units Purchases in $ = cost x Units

18. Operating expense budget Operating expense budget This is dependent on various factors. many operating expenses are directly influenced by month-to-month fluctuations in sales volume (sales commission). Others are not directly influenced by the volume of sales( rent, insurance) This is dependent on various factors. many operating expenses are directly influenced by month-to-month fluctuations in sales volume (sales commission). Others are not directly influenced by the volume of sales( rent, insurance)

19. Sample of operating expense budget Expense budget Expense budget AprilMay June AprilMay June Wages 250250250 Wages 250250250 Commission 7501200900 Commission 7501200900 Total 10001450 1150 Total 10001450 1150 Rent250250250 Rent250250250 Depreciation 200200200 Depreciation 200200200 Other costs------------ Other costs------------ Total O. Expenses-------- ---- Total O. Expenses-------- ----

20. Sample of budgeted P&L Budgeted Income Statement Budgeted Income Statement Sales Sales -CGS -CGS -Operating expenses -Operating expenses Income from operations Income from operations -Interest -Interest Net income Net income

21. At this stage we have completed the operating budget. At this stage we have completed the operating budget. Therefore the steps are as follows: Therefore the steps are as follows: 1. Prepare the sales budget 1. Prepare the sales budget 2. Prepare the purchase budget 2. Prepare the purchase budget 3. Prepare the operating expenses budget 3. Prepare the operating expenses budget 4. Prepare the income statement budget. 4. Prepare the income statement budget.

22. Examples Examples 1. A retail store has the following data 1. A retail store has the following data Monthly forecasted sales for the month form June to September are 2500, 2200 ’ 2800, 3100 respectively. Sales consist of 40% cash and 60% credit. Uncollectible amounts may be ignored. Monthly forecasted sales for the month form June to September are 2500, 2200 ’ 2800, 3100 respectively. Sales consist of 40% cash and 60% credit. Uncollectible amounts may be ignored.

23. Prepare the sales budget Prepare the sales budget Sales Budget Sales Budget JuneJuly August September JuneJuly August September Cash sales(40%) 100088011201240 Cash sales(40%) 100088011201240 Credit sales(60%) 150013201680 1860 Credit sales(60%) 150013201680 1860 Total 2500 220028003100 Total 2500 220028003100

24. Example A retail store has the following data A retail store has the following data Monthly forecasted inventory levels for the month from May to August are 170000, 150000, 190000 and 160000 respectively. Sales are expected to be 350000for June, 250000 for July and 330000 for August. Cost of sales is 60% of sales. Purchases in April has been 190000, May 160000. Prepare the budget for June, July and August. Monthly forecasted inventory levels for the month from May to August are 170000, 150000, 190000 and 160000 respectively. Sales are expected to be 350000for June, 250000 for July and 330000 for August. Cost of sales is 60% of sales. Purchases in April has been 190000, May 160000. Prepare the budget for June, July and August.

25. Purchase Budget Purchase Budget JuneJuly August JuneJuly August End.Inv.150000190000160000 End.Inv.150000190000160000 +CGS210000150000198000 +CGS210000150000198000 Total360000340000358000 Total360000340000358000 - Beg. Inv170000150000190000 190000190000 168000

26. A retail store has the following data A retail store has the following data Monthly forecasted sales for the month form May to August are 300000, 250000 220000, 280000 respectively. Salaries amount to 12000 monthly. Commission is 10% of current sales. Other expenses are rent 3000 per month, miscellaneous expenses 6% of sales, depreciation 1900 per month. Prepare the operating budget for the month June, July and August. Monthly forecasted sales for the month form May to August are 300000, 250000 220000, 280000 respectively. Salaries amount to 12000 monthly. Commission is 10% of current sales. Other expenses are rent 3000 per month, miscellaneous expenses 6% of sales, depreciation 1900 per month. Prepare the operating budget for the month June, July and August.

27. Operating budget Operating budget JuneJuly August JuneJuly August Sales250000220000280000 Sales250000220000280000 - OP - OP Salaries120001200012000 Rent250002200028000 Salaries120001200012000 Rent250002200028000 Micell150001320016800 Micell150001320016800 Elect300030003000 Elect300030003000

28. Dep190019001900 Net I193100167900218300

29. Material purchase budget Material purchase budget Units needed in production Units needed in production Add desired direct production Add desired direct production Less beginning inventory Less beginning inventory Units to be purchased Units to be purchased Units purchase price Units purchase price Total purchase cost Total purchase cost

30. Problem 1. Problem 1. Alex Company manufactures products X, Y and Z. each product required different quantities of input. Planned unit production of each product in 1991 is 10000 units for X, 40000 for Y and 30000 for Z. the direct material for each product are Alex Company manufactures products X, Y and Z. each product required different quantities of input. Planned unit production of each product in 1991 is 10000 units for X, 40000 for Y and 30000 for Z. the direct material for each product are

31. Unit material requirement Unit material requirement Product ABCD Product ABCD X3_2 _ X3_2 _ Y11_4 Y11_4 Z2213 Z2213

32. Beginning and desired ending inventory as well as unit costs for each direct material is as follows: Beginning and desired ending inventory as well as unit costs for each direct material is as follows: Inventory /unit AB CD Inventory /unit AB CD Jan 1. 20000 50003000 10000 Jan 1. 20000 50003000 10000 Dec 31. 8000 10006000 30000 Dec 31. 8000 10006000 30000 unit cost $ 4782 unit cost $ 4782 Required: prepare a direct material purchases budget for 1991 Required: prepare a direct material purchases budget for 1991

33. Solution Solution Direct material Aunits Direct material Aunits Product X 10000 units @ 330000 Product X 10000 units @ 330000 Product Y 40000 units @ 140000 Product Y 40000 units @ 140000 Product Z 30000 units @260000 Product Z 30000 units @260000 Production needs 130000 Production needs 130000 Scheduled inventory decrease(12000) Scheduled inventory decrease(12000) Required to be purchased118000 Required to be purchased118000

34. Direct material B Direct material B Product Y 40000 unit@ 140000 Product Y 40000 unit@ 140000 Product Z 30000 unit@ 260000 Product Z 30000 unit@ 260000 Production needs 100000 Production needs 100000 Schedule inventory decrease(4000) Schedule inventory decrease(4000) Required to purchase96000 Required to purchase96000

35. Direct material C Direct material C Product X 10000 units @ 220000 Product X 10000 units @ 220000 Product Z 30000 units @ 130000 Product Z 30000 units @ 130000 Production needs 50000 Production needs 50000 Schedule inventory increase 3000 Schedule inventory increase 3000 Required to purchase53000 Required to purchase53000

36. Direct material D Direct material D Product Y 40000 unit @ 4160000 Product Y 40000 unit @ 4160000 Product Z 30000 unit @ 390000 Product Z 30000 unit @ 390000 Production needs250000 Production needs250000 Schedule inventory increase20000 Schedule inventory increase20000 Required to purchase270000 Required to purchase270000

37. material Q Price Totat purchase price material Q Price Totat purchase price A118000 4 $472000 A118000 4 $472000 B96000 7 672000 B96000 7 672000 C53000 8 424000 C53000 8 424000 D 270000 2 540000 D 270000 2 540000 Total $2108000 Total $2108000

38. Direct labor budget Direct labor budget It reflects the number of units to be produced according to the production budget. Labor budget includes only direct labor as indirect labor is included in the overhead budget. In this budget the direct labor hours have to be specified so that management has to translate this into dollars by applying the appropriate labor rate. It reflects the number of units to be produced according to the production budget. Labor budget includes only direct labor as indirect labor is included in the overhead budget. In this budget the direct labor hours have to be specified so that management has to translate this into dollars by applying the appropriate labor rate.

39. Sample Sample ABC Co. ABC Co. Direct labor budget Direct labor budget Date Date UnitsHoursTotal hour ’ sTotal budget@ rate UnitsHoursTotal hour ’ sTotal budget@ rate Product A 16503495059400 Product A 16503495059400 Product B 16130580650 967800 Product B 16130580650 967800 Product C 94001094000 1128000 Product C 94001094000 1128000 179600 2155200 179600 2155200

40. Practice 1. Practice 1. Emilio and Sons Company manufactures products 1,2 and 3. each product required different quantities of input. Planned unit production of each product in 2001 is 20000 units for 1, 30000 for 2 and 40000 for 3. The direct material for each product are Emilio and Sons Company manufactures products 1,2 and 3. each product required different quantities of input. Planned unit production of each product in 2001 is 20000 units for 1, 30000 for 2 and 40000 for 3. The direct material for each product are

41. Unit material requirement Unit material requirement Product ABCD Product ABCD 1-32 1 1-32 1 21132 21132 352-4 352-4

42. Beginning and desired ending inventory as well as unit costs for each direct material is as follows: Beginning and desired ending inventory as well as unit costs for each direct material is as follows: Inventory /unit AB CD Inventory /unit AB CD Jan 1. 2000 40004000 1000 Jan 1. 2000 40004000 1000 Dec 31. 6000 20006000 3000 Dec 31. 6000 20006000 3000 unit cost $ 3564 unit cost $ 3564 Required: prepare a direct material purchases budget for 2001 Required: prepare a direct material purchases budget for 2001

43. Practice 2. Practice 2. Mohd and Sons Company manufactures products 1,2 and 3. Each product required different quantities of input. Planned unit production of each product in 2003 is 10000 units for 1, 15000 for 2 and 20000 for 3. The direct material for each product are Mohd and Sons Company manufactures products 1,2 and 3. Each product required different quantities of input. Planned unit production of each product in 2003 is 10000 units for 1, 15000 for 2 and 20000 for 3. The direct material for each product are

44. Unit material requirement Unit material requirement Product ABCD Product ABCD 1123 1 1123 1 21133 21133 33114 33114

45. Beginning and desired ending inventory as well as unit costs for each direct material is as follows: Beginning and desired ending inventory as well as unit costs for each direct material is as follows: Inventory /unit AB CD Inventory /unit AB CD Jan 1. 2000 40004000 1000 Jan 1. 2000 40004000 1000 Dec 31. 5000 20003000 3000 Dec 31. 5000 20003000 3000 unit cost $ 3564 unit cost $ 3564 Required: prepare a direct material purchases budget for 2003 Required: prepare a direct material purchases budget for 2003

46. Q. 2 A retail store has the following data Q. 2 A retail store has the following data Monthly forecasted inventory levels for the month from May to August are 160000, 140000, 180000 and 170000 respectively. Sales are expected to be 350000 for June, 260000 for July and 330000 for August. Cost of sales is 70% of sales. Purchases in April has been 190000, May 160000. Prepare the budget for June, July and August. Monthly forecasted inventory levels for the month from May to August are 160000, 140000, 180000 and 170000 respectively. Sales are expected to be 350000 for June, 260000 for July and 330000 for August. Cost of sales is 70% of sales. Purchases in April has been 190000, May 160000. Prepare the budget for June, July and August.

47. CGS Budget Company Name Cost of Goods Sold Budget Date Direct materials Inventory1.1 Add: net material purchase Direct material available for use Less direct material inventory 31.12 Direct material used

48. Direct labor Factory overhead Total manufacturing costs for the period Add work in process 1.1 Less work in process 31.12 Cost of goods manufactured

49. Finished goods inventory 1.1 Finished goods inventory 1.1 Cost of goods available for sale Cost of goods available for sale Less finished goods inventory 31.12 Less finished goods inventory 31.12 Cost of goods sold Cost of goods sold

50. Marketing & Administrative Expense Budget Company Name Company Name Marketing and Administrative expenses Marketing and Administrative expenses Date Date Variable marketing expenses Variable marketing expenses Wages Wages Sales commission Sales commission Advertising Advertising Traveling Traveling Total variable expenses Total variable expenses

51. Fixed marketing expenses Fixed marketing expenses Warehousing Warehousing Advertising Advertising Marketing manger salary Marketing manger salary Total fixed marketing expenses Total fixed marketing expenses Variable Administrative expenses Variable Administrative expenses Clerical wages Clerical wages Supplies Supplies Total variable administrative expenses Total variable administrative expenses

52. Fixed administrative expenses Fixed administrative expenses Depreciation Depreciation Salaries Salaries Total fixed expenses Total fixed expenses Total administrative expenses Total administrative expenses Total marketing and administrative Total marketing and administrative

53. Budget for a new product Budget for a new product PhasePlanning Production Promotion PhasePlanning Production Promotion Expenses xxxxxx Expenses xxxxxx Direct Materialxxxxxx Direct Materialxxxxxx Labor cost Labor cost Consulting fees Consulting fees Indirect Labor Indirect Labor

54. Supplies Supplies Equipment Equipment Overhead Overhead Total xxxxxx Total xxxxxx Estimated machine hours Estimated machine hours Completion date Completion date

55. ABC is a manufacturing company. Actual sales for the first quarter of 2001 and projects sales from April and may are as follows: ABC is a manufacturing company. Actual sales for the first quarter of 2001 and projects sales from April and may are as follows: Jan (actual sales) ……… 300000 Jan (actual sales) ……… 300000 Feb (actual) ……………. 308000 Feb (actual) ……………. 308000 March (actual) ………… 312000 March (actual) ………… 312000 April projected ………... 316000 April projected ………... 316000 May projected …………..322000 May projected …………..322000

56. The company collects 60% of its sales during the month in which the sale is made, 25% during the following month and 15% in the second month. ABC pays for purchases the same amounts it pays for sales but their payment policy is as follows: 40% are paid during the month of purchase and 60% during the following month. Merchandise is purchased in the month proceeding the sale. The company plans to maintain the current level of inventory. The company collects 60% of its sales during the month in which the sale is made, 25% during the following month and 15% in the second month. ABC pays for purchases the same amounts it pays for sales but their payment policy is as follows: 40% are paid during the month of purchase and 60% during the following month. Merchandise is purchased in the month proceeding the sale. The company plans to maintain the current level of inventory.

57. To meet loan obligations there must be a cash balance of $25000 on hand at the end of April. Other cash payments anticipated during April are salaries 58000, other expenses 12000 and equipment purchase 15000. the cash balance at 1. April id 1800. To meet loan obligations there must be a cash balance of $25000 on hand at the end of April. Other cash payments anticipated during April are salaries 58000, other expenses 12000 and equipment purchase 15000. the cash balance at 1. April id 1800. Required : prepare a cash budget for April. Will the company need additional financing for to maintain the required ending cash balance? Required : prepare a cash budget for April. Will the company need additional financing for to maintain the required ending cash balance?

58. Solution Solution Beginning Balance1800 Beginning Balance1800 Cash receipts Cash receipts Feb( 15%of 308000)46200 Feb( 15%of 308000)46200 March (25%of 312000) 78000 March (25%of 312000) 78000 April (60%of 316000) 189600313800 April (60%of 316000) 189600313800 Total cash 315600 Total cash 315600

59. Cash Disbursements Cash Disbursements Purchases Purchases April (40% of 322000)128800 April (40% of 322000)128800 March(60%of 316000)189600 March(60%of 316000)189600 Salaries58000 Salaries58000 Other expenses12000 Other expenses12000 Equipment purchase15000 Equipment purchase15000 Total disbursement403400 Total disbursement403400

60. Ending cash balance(87800) Ending cash balance(87800) The amount needed by the company The amount needed by the company 87800+25000= 112800 87800+25000= 112800

61. Budgeted income statement Budgeted income statement Sales Sales CGS CGS Gross income Gross income Marketing and administrative expenses Marketing and administrative expenses Income before tax Income before tax Income tax (assumed) Income tax (assumed) Net income Net income

62. Budgeted statement of financial Position Budgeted statement of financial Position Cash Cash Accounts receivable Accounts receivable Direct material inventory Direct material inventory Work in process inventory Work in process inventory Finished goods inventory Finished goods inventory Total current Assets Total current Assets Plant assets Plant assets

63. Land Land Building Building Less accumulated depreciation Less accumulated depreciation Equipments Equipments Less Accumulated depreciation Less Accumulated depreciation Total plant assets Total plant assets

64. Current liabilities Current liabilities Accounts payable Accounts payable Income tax payable Income tax payable Total current liabilities Total current liabilities Owners Equity Owners Equity Common stock Common stock Retained earnings( income – dividends) Retained earnings( income – dividends) Total owners equity Total owners equity Total liabilities and owners equity Total liabilities and owners equity