1. McGraw-Hill/Irwin Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 17 Budgeting

2. 17-2 Introduction Budget – a business’s financial plan for a specific period –It provides the most efficient means for planning and controlling future activities.

3. 17-3 Budgetary Control A system for comparing actual results with budgeted goals –It covers all phases of business activity –Responsibility of budgetary control: Budget committee  Budget director  Controller –Master budget – the entire financial plan of the company It is also called the operating budget It makes planning and controlling easier

4. 17-4 Sales Budget Written plan that estimates products or groups of products expected to be sold during a period –Key to the overall company budget –The anticipated sales volume determines the: Amount of goods produced Labor, equipment, and capital required Nature and amount of various selling, administrative, and financial expenses

5. 17-5 Sales Budget (cont’d) Analysis of past performance –Evaluate sales force’s efforts –Set new plans and goals Forecast of business conditions –General economic conditions Economic indexes as major indicators and measures of sales prospects –Specific factors relating to a firm and its industry

6. 17-6 Production Budget Written plan with information regarding quantities of each product to be produced during a period –Actual number of units to be completed is determined by the: Units to be sold Desired size of the ending inventory Units in the beginning inventory

7. 17-7 Manufacturing Costs Budget Also known as the cost of goods manufactured budget – prepared for the level of production planned for the period –Fixed budget – for a single level of activity –Flexible budget – costs expected to be incurred at various levels of output Cost standard – costs that should be used for each unit of product under efficient operating conditions

8. 17-8 Materials Budget It is a schedule that shows –Number of units of material to be used (Materials usage) –Number of units to be purchased (Materials purchases) Factors affecting the schedule –Storage problems –Quantity discounts –Time required to receive materials –Costs of carrying inventory

9. 17-9 Direct Labor Budget Estimate of total direct labor hours and direct labor cost –It is a variable cost –May take a semivariable form as process becomes more automated Estimate is based on –Data from past experience –Established labor standards

10. 17-10 Manufacturing Overhead Budget Manufacturing overhead costs are less consistent –Variable cost – indirect labor –Fixed cost – depreciation, manager’s salaries –Semivariable – utilities, payroll taxes Controllable costs Noncontrollable costs

11. 17-11 Operating Expenses Budget Detailed budgets prepared for selling and administrative expenses, based on –Estimated sales –Production operations

12. 17-12 Budgeted Income Statement Data from supporting budgets are combined to prepare a budgeted income statement

13. 17-13 Other Budget Schedules All schedules are combined to form the master budget Other schedules include –Schedule of budgeted cash receipts and payments –Budget of asset acquisition and retirement –Budgeted balance sheet

14. 17-14 Using Flexible Budget as a Management Tool Budgets are used as a control device –Actual results compared with budgeted amount –Important variations are investigated –Estimates what the overhead cost should be for any volume attained Management by exception –Focusing on things that are not according to plan

15. 17-15 Periodic Performance Report Compares the actual and budgeted amounts –Explanatory comments are included –Reports may be presented to specific departments

16. 17-16 Other Budgetary Considerations Service costs have not been discussed –The service department usually maintains a separate budget for control purposes –If the cost is directly tied to activities of a producing department, this department may be charged