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Presentation on theme: "Budgeting. Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You."— Presentation transcript:

1 Budgeting

2 Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3 Estimated portion of your total monthly income that should be budgeted Nature and Objectives of Budgeting

4 1.Describe budgeting, its objectives, and its impact on human behavior. 2.Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting. 3.Describe the master budget for a manufacturing business. 4.Prepare the basic income statement budgets for a manufacturing business. 5.Prepare balance sheet budgets for a manufacturing business. ObjectivesObjectives

5 Feedback Establishing specific goals Executing plans to achieve the goals Periodically comparing actual results to the goals Objectives of Budgeting Objectives of Budgeting PLANNING DIRECTINGCONTROLLING Nature and Objectives of Budgeting

6 Human Behavior and Budgeting Setting budget goals too tightly Setting budget goals too loosely Setting conflicting budget goals Nature and Objectives of Budgeting

7 Goal conflict occurs when individual self- interest differs from business objectives. A student’s question, “Will this be on the test?” is evidence of goal conflict.

8 Continuous Budgeting One-Year Budget Feb Mar Apr May 2006 June 2006 July 2998 Aug Sep Oct Nov Dec Jan Delete on February 28

9 Continuous Budgeting One-Year Budget Add February 2007 Mar Apr May 2006 June 2006 July 2998 Aug Sep Oct Nov Dec Jan Feb. 2007

10 Static Budgets Description: A budget that does not reflect potential changes in volume or activity level Strength:It is simple—all expenses are budgeted as fixed costs Weakness:It does not reflect changes in revenues and expenses that occur as volumes change Typical usage: Service organizations or administrative departments of retailers and manufacturers

11 Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006 Direct labor $40,000 Electric Power5,000 Supervisor salaries 15,000 Total department costs$60,000 Static Budgets

12 Flexible Budgets Description: A budget that shows revenues and expenses for a variety of volumes or activity levels Strength:Provides information needed to analyze the impact of volume changes on actual operating results Weakness:Requires greater research into costs— must differentiate fixed and variable costs Typical usage:Operational departments of retailers and manufacturers whose costs change with sales and production

13 Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006 Units of production8,0009,00010,000 Variable cost: Direct labor $40,000$45,000$50,000 Electric power4,0004,5005,000 Total variable cost$44,000$49,500$55,000 Cost per unit is $5.50 at all levels of activity

14 Variable cost: Direct labor $40,000$45,000$50,000 Electric power4,0004,5005,000 Total variable cost$44,000$49,500$55,000 Fixed cost: Electric power$ 1,000$ 1,000$ 1,000 Supervisor salaries15,00015,00015,000 Total fixed cost$16,000$16,000$16,000 Units of production8,0009,00010,000 Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006

15 Units of production8,0009,00010,000 Variable cost: Direct labor $40,000$45,000$50,000 Electric power4,0004,5005,000 Total variable cost$44,000$49,500$55,000 Fixed cost: Electric power$ 1,000$ 1,000$ 1,000 Supervisor salaries15,00015,00015,000 Total fixed cost$16,000$16,000$16,000 Total department costs$60,000$65,500$71,000 Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2006

16 Static and Flexible Budgets Static Budget Actual Results Overbudget $60,000 $72,000

17 8,000 units Actual Results $60,000 $72,000 9,000 units $65,500 10,000 units $71,000 Overbudget Flexible Budget Static and Flexible Budgets

18 Master Budget Budgeted Income Statement Sales budget Cost of goods sold budget: Production budget Direct materials purchases budget Direct labor cost budget Selling and administrative expense budget Budgeted Balance Sheet Cash budget Capital expenditure budget

19 Income Statement Budgets

20 Sales Budget Sales Budget Production Budget Expected units of sales +Desired units in ending inventory –Estimated units in beginning inventory Total units to be produced

21 Production Budget Direct Materials Purchases Budget Direct Materials Purchases Budget Materials needed for production +Desired ending materials inventory – Est. beginning materials inventory Direct materials to be purchased Sales Budget Sales Budget

22 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 Cost of Goods Sold Budget Cost of Goods Sold Budget Selling & Administrative Expenses Budget Selling & Administrative Expenses Budget Sales Budget Sales Budget

23 Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2006 Wallet: East………………..287,000$12.00$ 3,444,000 West……………….241, ,892,000 Total…………….528,000$ 6,336,000 Handbag: East………………..156,400$25.00$ 3,910,000 West……………….123, ,090,000 Total…………….280,000$ 7,000,000 Total revenue from Sales………………..$13,336,000 Unit SalesUnit SellingTotal Product and RegionVolumePriceSales

24 Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Expected units to be sold528,000280,000 From sales budget Units WalletHandbag

25 Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Expected units to be sold………….528,000280,000 Plus desired ending inventory, December 31, 2006……………. 80,000 60,000 Total608,000340,000 Units WalletHandbag

26 Elite Accessories Inc. Production Budget For the Year Ending December 31, 2006 Expected units to be sold………….528,000280,000 Plus desired ending inventory, December 31, 2006……………. 80,000 60,000 Total……………………………….608,000340,000 Less estimated beginning inventory, January 1, 2006…………………. 88,000 48,000 Total units to be produced…………520,000292,000 Units WalletHandbag

27 Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006 Direct Materials Leather Lining Total Square yards required for production: Wallet (Note A)…………………..156,00052,000 Note A: Leather: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds. Lining: 520,000 units x 0.10 sq. yd. Per unit = 52,000 sq. yds.

28 Square yards required for production: Wallet (Note A)……..……..……..156,00052,000 Handbag (Note B)………………..365,000146,000 Note B: Leather: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds. Lining: 292,000 units x 0.50 sq. yd. Per unit = 146,000 sq. yds. Direct Materials Leather Lining Total Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006

29 Square yards required for production: Wallet (Note A)……....…………..156,00052,000 Handbag (Note B).……………….365,000146,000 Plus desired inventory, Dec. 31, ,000 12,000 Total………………………………541,000210,000 Direct Materials Leather Lining Total Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006

30 Square yards required for production: Wallet (Note A) ………………….156,00052,000 Handbag (Note B) ……………….365,000146,000 Plus desired inventory, Dec. 31, ,000 12,000 Total………………………………541,000210,000 Less estimated inventory, Jan. 1, ,000 15,000 Total square yards to be produced..523,000195,000 Direct Materials Leather Lining Total Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006

31 Square yards required for production: Wallet (Note A)…………………..156,00052,000 Handbag (Note B).……………….365,000146,000 Plus desired inventory, Dec. 31, ,000 12,000 Total………………………………541,000210,000 Less estimated inventory, Jan. 1, ,000 15,000 Total square yards to be produced..523,000195,000 Unit price (per square yard)………….x $4.50x $1.20 Total direct materials to be purchased.$2,353,500$234,000$2,587,500 Direct Materials Leather Lining Total Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2006

32 Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006 Cutting Sewing Total Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs. Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs. Hours required for production: Wallet (Note A)………….52,000130,000

33 Cutting Sewing Total Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs. Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs. Hours required for production: Wallet (Note A)………….52,000130,000 Handbag (Note B)……….. 43, ,800. Note B: Cutting Department: 292,000 units x 0.15 hr. per unit = 43,800 hrs. Sewing Department: 292,000 units x 0.40 hr. per unit = 116,800 hrs Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006

34 Cutting Sewing Total Hours required for production: Wallet (Note A)………….52,000130,000 Handbag (Note B)……….. 43, ,800 Total……………………... 95,800246,800 Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs. Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.. Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs. Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006

35 Cutting Sewing Total Hours required for production: Wallet (Note A)………….52,000130,000 Handbag (Note B)……….. 43, ,800 Total……………………... 95,800246,800 Hourly rate……………………x $12.00x $15.00 Total direct labor cost…………$1,149,600$3,702,000$4,851,600 Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs. Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs. Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs. Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2006

36 Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2006 Indirect factory wages……………………...$ 732,800 Supervisory salaries………………………...360,000 Power and light……………………………..306,000 Depreciation of plant and equipment……….288,000 Indirect materials……………………………182,800 Maintenance………………………………...140,280 Insurance and property taxes………………. 79,200 Total factory overhead cost………………...$2,089,080

37 Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006 Note A:Leather:18,000 sq. yds. x $4.50 per sq. yd$81,000 Lining:15,000 sq. yds. x $1.20 per sq. yd 18,000 Direct materials inventory, January 1, 2006$99,000 Note A:Leather:18,000 sq. yds. x $4.50 per sq. yd$81,000 Lining:15,000 sq. yds. x $1.20 per sq. yd 18,000 Direct materials inventory, January 1, 2006$99,000 Finished goods inventory, January 1,2006…..$ 1,095,600 Work in process inventory, January 1, 2006…$ 214,400 Direct materials: Direct materials inventory, January 1, 2006 (Note A)………………………………….$ 99,000

38 Finished goods inventory, January 1,2006…..$ 1,095,600 Work in process inventory, January 1, 2006…$ 214,400 Direct materials: Direct materials inventory, January 1, 2006 (Note A)………………………………….$ 99,000 Note B:Leather:20,000 sq. yds. x $4.50 per sq. yd$ 90,000 Lining:12,000 sq. yds. x $1.20 per sq. yd 14,400 Direct materials inventory, December 31, 2006$104,400 Note B:Leather:20,000 sq. yds. x $4.50 per sq. yd$ 90,000 Lining:12,000 sq. yds. x $1.20 per sq. yd 14,400 Direct materials inventory, December 31, 2006$104,400 Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006

39 Finished goods inventory, January 1,2006….$ 1,095,600 Work in process inventory, January 1, $ 214,400 Direct materials: Direct materials inventory, January 1, 2006 (Note A)………………………………….$ 99,000 Direct materials purchases (Slide 31)…….. 2,587,500 Cost of direct materials available for use….$2,686,500 Less direct materials inventory, December 31, 2006 (Note B)……………. 104,400 Cost of direct materials placed in production$2,582,100 Direct labor (Slide 35)……………………….4,851,600 Factory overhead (Slide 36)………………….. 2,089,080 Total manufacturing costs……………………. 9,522,780 Total work in process during period………….$9,737,180 Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006

40 Less work in process inventory, December 31, ,000 Cost of goods manufactured………………………... 9,517,180 Cost of finished goods available for sale…………...$10,612,780 Less finished goods inventory, December 31, ,565,000 Cost of goods sold…………………………………..$ 9,047,780 Finished goods inventory, January 1,2006………...$ 1,095,600 Work in process inventory, January 1, 2006………..$ 214,500 Total manufacturing costs………………………….. 9,522,780 Total work in process during period………………..$9,737,180 Elite Accessories Inc. Cost of Goods Sold Budget For the Year Ending December 31, 2006

41 Elite Accessories Inc. Selling and Administrative Expenses Budget For the Year Ending December 31, 2006 Selling expenses: Sales salaries expense………………………….$715,000 Advertising expense…………………………...360,000 Travel expense…………………………………. 115,000 Total selling expenses………………………...$1,190,000 Administrative expenses: Officers’ salaries expense……………………….$360,000 Office salaries expense………………………….258,000 Office rent expense……………………………...34,500 Office supplies expense………………………….17,500 Miscellaneous administrative expense………….. 25,000 Total administrative expenses………………… 695,000 Total selling and administrative expenses…………$1,885,000

42 Revenue from sales (slide 23)$13,336,000 Cost of goods sold (slide 40) 9,047,780 Gross profit$ 4,288,220 Selling & administrative expenses: Selling expenses (slide 41) $1,190,000 Administrative expenses (slide 41) 695,000 Total sell. & Admin. Expenses 1,885,000 Income from operations$ 2,403,220 Other income: Interest revenue $ 98,000 Other expense: Interest expense 90,000 8,000 Income before income tax$ 2,411,220 Income tax 600,000 Net income$ 1,811,220 Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2006

43

44 The cash budget is one of the most important elements of the budgeted balance sheet. We’ll begin with a schedule of collection from sales.

45 Receipts from cash sales: Cash sales (10%)(see Note A)……………………...$108,000$ 124,000$ 97,000 JanuaryFebruaryMarch Note A: $108,000 = $1,080,000 x 10% $124,000 = $1,240,000 x 10% $ 97,000 = $ 970,000 x 10% Note A: $108,000 = $1,080,000 x 10% $124,000 = $1,240,000 x 10% $ 97,000 = $ 970,000 x 10% Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006

46 Receipts from cash sales: Cash sales (10%)(see Note A)……………………...$108,000$ 124,000$ 97,000 Receipts from sales on account: Collections from prior month’s sales (40%)(see Note B)…….$370,000$ 388,800$446,400 JanuaryFebruaryMarch Note B: $370,000, given as January 1, 2006 Accounts Receivable balance $388,800 = $1,080,000 x 90% x 40% $446,400 = $1,240,000 x 90% x 40% Note B: $370,000, given as January 1, 2006 Accounts Receivable balance $388,800 = $1,080,000 x 90% x 40% $446,400 = $1,240,000 x 90% x 40% Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006

47 Receipts from cash sales: Cash sales (10%)(see Note A)……………………...$108,000$ 124,000$ 97,000 Receipts from sales on account: Collections from prior month’s sales (40%)(see Note B)…….$370,000$ 388,800$446,400 Collections from current month’s sales (60%)(see Note C)…………………………… 583, , ,800 JanuaryFebruaryMarch Note C: $583,200 = $1,080,000 x 90% x 60% $669,600 = $1,240,000 x 90% x 60% $523,800 = $ 970,000 x 90% x 60% Note C: $583,200 = $1,080,000 x 90% x 60% $669,600 = $1,240,000 x 90% x 60% $523,800 = $ 970,000 x 90% x 60% Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006

48 Receipts from cash sales: Cash sales (10%)(see Note A)……………………...$108,000$ 124,000$ 97,000 Receipts from sales on account: Collections from prior month’s sales (40%)(see Note B)…….$370,000$ 388,800$446,400 Collections from current month’s sales (60%)(see Note C)…………………………… 583, , ,800 Total receipts from sales on account……………………...$953,200$1,058,400$970,200 JanuaryFebruaryMarch Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2006

49 Payment of prior month’s manufacturing costs (25%) (see Note A)…………………$190,000$204,000$189,000 JanuaryFebruaryMarch Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006 Note A: $190,000, given as January 1, 2006 Accounts Payable balance $204,000 = ($840,000 –$24,000) x 25% $189,000 = ($780,000 – $24,000) x 75% Note A: $190,000, given as January 1, 2006 Accounts Payable balance $204,000 = ($840,000 –$24,000) x 25% $189,000 = ($780,000 – $24,000) x 75%

50 Payment of prior month’s manufacturing costs (25%) (see Note A)…………………$190,000$204,000$189,000 Payment of current month’s manufacturing costs (75%) (see Note B)…………………. 612, , ,000 JanuaryFebruaryMarch Note B: $612,000 = ($840,000 – $24,000) x 75% $567,000 = ($780,000 – $24,000) x 75% $591,000 = ($812,000 – $24,000) x 75% Note B: $612,000 = ($840,000 – $24,000) x 75% $567,000 = ($780,000 – $24,000) x 75% $591,000 = ($812,000 – $24,000) x 75% Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006

51 Payment of prior month’s manufacturing costs (25%) (see Note A)…………………$190,000$204,000$189,000 Payment of current month’s manufacturing costs (75%) (see Note B)…………………. 612, , ,000 Total payments……………….$802,000$771,000$780,000 JanuaryFebruaryMarch Elite Accessories Inc. Schedule of Payments for Manufacturing Costs For the Three Months Ending March 31, 2006

52 Estimated cash receipts: Cash sales (Slide 45)…………..$ 108,000$ 124,000$ 97,000 Collections of accounts receivable (Slide 48)………...953,2001,058,400970,200 Interest revenue………………... — — 24,500 Total cash receipts…………….$1,061,200$1,182,400$1,091,700 Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006 January February March

53 Estimated cash receipts: Cash sales (Slide 45)…………..$ 108,000$ 124,000$ 97,000 Collections of accounts receivable (Slide 48)………...953,2001,058,400970,200 Interest revenue………………... — — 24,500 Total cash receipts…………….$1,061,200$1,182,400$1,091,700 Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006 January February March Estimated cash payments for: Manufacturing costs (Slide 51)..$ 802,000$ 771,000$ 780,000 Selling and administrative expenses………………………160,000165,000145,000 Capital additions274,000 Interest expense22,500 Income taxes150,000

54 Estimated cash receipts: Cash sales (Slide 45)…………..$ 108,000$ 124,000$ 97,000 Collections of accounts receivable (Slide 48)………...953,2001,058,400970,200 Interest revenue………………... — — 24,500 Total cash receipts…………….$1,061,200$1,182,400$1,091,700 Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006 January February March Estimated cash payments for: Manufacturing costs (Slide 51)..$ 802,000$ 771,000$ 780,000 Selling and administrative expenses………………………160,000165,000145,000 Capital additions274,000 Interest expense22,500 Income taxes 150,000 Total cash payments………….$ 984,500$1,210,000$1,075,000

55 Estimated cash receipts: Cash sales (Slide 45)…………..$ 108,000$ 124,000$ 97,000 Collections of accounts receivable (Slide 48)………...953,2001,058,400970,200 January February March Capital additions274,000 Interest expense………………..22,500 Income taxes…………………...150,000 Total cash payments………….$ 984,500$1,210,000$1,075,000 Cash increase (decrease)………….$ 76,700$ (27,600)$ 16,700 Cash balance at beginning of month 280, , ,100 Cash balance at end of month…….$ 356,700$ 329,100 $ 345,800 Minimum cash balance…………… 340, , ,000 Excess (deficiency)……………….$ 16,700$ (10,900)$ 5,800 Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2006

56 ATTENTION COMMERCE STUDENTS ACCOUNTING(FINANCIAL & COST) OF ICMAP STAGE 1,2,3,4 CA..MODULE B,C,D PIPFA (FOUNDATION,INTERMEDIATE,FINAL) ACCA-F1,F2,F3 BBA,MBA B.COM(FRESH),M.COM MA-ECONOMICS..O/A LEVELS KHALID AZIZ… kARACHI /cost-accountants


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