1. Budgetary Planning and Control
Chapter Ten
Budgetary Planning and Control 1 1 1

2. Expense Budget
An expense budget states the acceptable limits for costs the manager may incur in accomplishing assigned tasks.
The two general ways to develop budget allowances for expenses are:
Static budget
Flexible budget 22 11

3. Flexible Budget
Fixed Amount Variable Amount per
Cost per Month Direct Labor Hour
Indirect labor $2,400 $0.40
Supplies
Maintenance 1,
Depreciation 1,
Miscellaneous
Total $6,100 $1.10
The Company is expecting to work 1,000 direct labor hours for the month, but does work 1,300. 22 11

4. Flexible Budget Performance Report
Budget for Budget for Variance
Budgeted Actual Actual Costs Favorable
Hours Hours Incurred (Unfavorable)
Direct labor hours 1,000 1,300
Indirect labor $2,800 $2,920 $2,870 $50
Supplies
Maintenance ,800 1,860 1,900 (40)
Depreciation ,200 1,200 1,200 0
Miscellaneous (10)
Total $7,200 $7,530 $7,515 $15 23 12

5. KEY CONCEPT
Budgets must be adjusted to reflect the costs that should have been incurred given the actual level of activity before performance evaluation can take place

6. Master Budget
A master budget is a set of financial statements and other schedules showing the expected, or pro forma, results for a future period. 10 4

7. Master Budget
A set of interrelated budgets that allows for planning and control throughout the organization
Driven by the sales forecast
Includes sales budget, production budget, labor and overhead budgets, purchases budget, collections budget, capital spending budget, cash budget, and pro forma balance sheet and income statements

8. Master Budget + + + + Sales Forecast Assumptions about cost behavior
Pro forma
income
statement +
Assumptions about
levels of inventory,
collections of
receivables, and
payments of expenses
and liabilities
Budgets for
purchases and
production +
Balance sheet
at beginning of
budget period
Budgets for cash
and requirements for
short-term financing +
Plans for long-term
financing and for
capital spending
Pro forma
balance sheet 15 6

9. Organization of Budgets
Continuous budgets are maintained by adding a budget for a month (or quarter) as one of these periods goes by. Thus, a 12-month budget exists at all times.
Project budgets reflect expectations for various stages of completing specific projects.
2005 16 7

10. Methods Used to Forecast Sales
Indicator methods
Historical analysis
Judgmental methods
Your sales will
be... 19 8

11. Interim Period Forecasts
Three types of sales forecasts
1. Annual forecasts
2. Longer-term forecasts (3 to 5 years)
3. Quarterly or monthly forecasts

12. Budget Example April 700 Sales budgets by month: January $400
February 500
March 800
April 700
May 600
Cost of goods sold will be 60 percent of sales dollars.
Inventory should be 40% of next month’s cost of sales
Total fixed costs will be $150, of which $15 per month is depreciation expense. 30 16

13. Lag Information Other data:
Home effects collects 70% of its sales in the month of sales, 30% in the following month.
Home effects pays for purchases 60% in the month of purchase, 40% in the following month.
Home effects pays all other expenses requiring cash disbursements as incurred.
Home effects tries to keep at least $50 cash as a buffer against unexpected cash needs.

14. Home Effects Balance Sheet December 31, 2003
Assets: Liabilities:
Cash $80 Accounts payable $195
Accounts receivable 120 Stockholder’s equity 1,131
Inventory 96
Fixed assets, net 1,030
Total $1,326 Total $1,326

15. Purchases Budget Cost of goods sold $240 $300 $480 $1,020
Three-months January February March Total
Cost of goods sold $240 $300 $480 $1,020
Budgeted ending inventory
Total requirements ,188
Beginning inventory
Purchases 264 $372 $456 $1,092 32 18

16. Cash Receipts Jan. Feb. Mar. Total
Sales for the month $400 $500 $800 $1,700
From prior month, 30% $120 $120 $150 $390
From current month, 70% ,190
Total receipts $400 $470 $710 $1,580

17. Cash Disbursements for Purchases
Jan. Feb. Mar. Total
From prior month, 40% $195 * $105.6 $148.8 $449.4
From current month, 60%
Total $ $328.8 $384 $1104.6
* from beginning of balance sheet

18. Cash Disbursements-Total Costs
Jan. Feb. Mar. Total
For merchandise $353.4 $328.8 $ $1,104.6
Fixed costs requiring cash
Total $488.4 $463.8 $557.4 $1,509.6

19. Minimum-Cash-Balance Policies
Financial managers devote considerable attention to determining the needed minimum level of cash. As with most decisions, a trade-off between two conflicting factors is involved. A small minimum balance would lead to a higher probability of running out of cash, while too large a minimum balance would lead to little or no return. 24 18 24

20. Cash Budget Jan. Feb. Mar. Total
Beginning balance $80 $50.6 $50.68 $80
Cash receipts ,770
Total available $480 $ $ $1,850
Cash disbursements
Indicated balance (8.4)
Excess (deficiency
Borrow
Interest(at 12%)
Repay
Ending balance $50.6 $ $98.69 $98.69

21. Budgeted Income Statement
Jan. Feb. March Total
Sales $400 $500 $800 $1,700
Cost of goods sold ,020
Gross profit and contribution margin $160 $200 $320 $680
Fixed costs
Income before interest $10 $50 $170 $230
Interest
Net Income

22. Ending Balance Sheet Assets: Liabilities:
Cash $ Accounts payable $182.4
Accounts receivable 240 Stockholder’s EQ1,359.29
Inventory 168
Fixed assets, net 985
Total $ Total $1,541.69