2 What are the Purposes of Budgeting ? OVERALL PURPOSE:To quantify a general plan so that performance in relation to a goal can be carefully monitored.TWOFOLD PURPOSEFIRST:To allow individuals or companies to develop a plan to meet a specified goal.SECOND:To allow ongoing comparison between actual results and the plan in order to control operations or activities.
3 Describe Two Types of Planning Long-run planning includes strategic planning and capital budgetingShort-run planning includes production process prioritizing and operational budgeting or profit planning
4 List Reasons for Budgeting Planning and setting objectivesCommunication and coordinationAuthorizationMotivationConflict resolutionEvaluation
5 Budgeting Process Who or what is the budget committee? A management group responsible for establishing budgeting policy and for coordinating the preparation of budgets.What are two issues of the budgeting process?Behavioral considerationsInvolvement in preparingthe budget
6 List Behavioral Considerations 1. Top management support2. Employee participation3. Addressing budget deviations
7 Describe the Top-Down Approach to Budgeting Top management prepares the entire budget and distributes it to division managers.TopManagementManagerManagerManager
8 Describe the Bottom-Up Approach to Budgeting Each manager prepares a budget request, from which management creates an overall budget.TopManagementManagerManagerManager
9 Master Budget—Manufacturing Planning ProcessCapital ProjectPlansStrategic Goalsand PlansShort-TermObjectivesOperating BudgetProductionBudgetSales Budget*DirectMaterialsBudget*DirectLaborBudget*ManufacturingOverheadBudget*Selling/Admin.ExpenseBudget** These budgets all flow into the cash budget below.BudgetedProduct SheetBudgetedIncome StatementFinancial Budgeting****Capital ExpendituresBudgetCash BudgetBudgetedBalance SheetBudgetedCash Flows
10 Master Budget—Manufacturing Define each budget. Sales BudgetA schedule of projected sales over the budget period.
11 Example: Sales Budget Selling price per bike . . . . . . $ 100 Expected sales (units) x 100Expected revenues $10,000
12 Master Budget—Manufacturing Define each budget. Sales BudgetProductionBudgetA schedule of productionrequirements for the budget period.
13 Example: Production Budget Expected salesAdd desired ending inventoryTotal number of bikes neededLess beginning inventoryBikes to be producedNote: Ending inventory is estimated at 80%of the next period’s sales.
14 Master Budget—Manufacturing Define each budget. Sales BudgetProductionBudgetA schedule of direct materials to be used and purchased during the budget period.Direct MaterialsBudget
15 Example: Direct Materials Budget Direct materials usage:Direct Amount Unit TotalMaterials Required Cost CostMetal ,700 lbs $2.00/ft. $5,400Plastic lbs $1.00/ft. $ 405
16 Example: Direct Materials Budget Direct materials purchases:Metal PlasticDesired ending inventory ,Needed for production ,Total needed ,Less beginning inventory ,Materials to be purchased ,Unit cost x $2 x $1Total cost $4,000 $ 510
17 Master Budget—Manufacturing Define each budget. Sales BudgetProductionBudgetA schedule of direct labor requirements for the budget period.Direct MaterialsBudgetDirect LaborBudget
18 Example: Direct Labor Budget Number of bikes to produceDirect labor hours per bike xTotal hours requiredRate per hour x $5Total direct labor cost $2,025
19 Master Budget—Manufacturing Define each budget. A schedule of production costs other than those for direct labor and direct materials.Sales BudgetProductionBudgetDirect MaterialsBudgetDirect LaborBudgetManufacturingOverheadBudget
21 Master Budget—Manufacturing Define each budget. Sales BudgetA schedule to accumulate all the budgeted production cost to produce each bikeProductionBudgetSelling andAdministrativeExpense BudgetDirect MaterialsBudgetDirect LaborBudgetManufacturingOverheadBudgetBudgetedProductCost Sheet
22 Budgeted Product Cost Sheet Input Required CostCost Inputs per BikeMetal $2.00/ft $40.00Plastic $1.00/ftDirect labor $5.00/hrFixed OH $1.98/hrVariable OH $2.02/hrTotal variable cost per bike $70.00Total fixed MOH $1,620Divide by Production Volume bikesFixed MOH cost allocated per bikeTotal $82.00
23 Master Budget—Manufacturing Define each budget. Sales BudgetA schedule of all non-production spending expected to occur during the budget period.ProductionBudgetSelling andAdministrativeExpense BudgetDirect MaterialsBudgetDirect LaborBudgetManufacturingOverheadBudget
25 Master Budget—Merchandising Define each budget. Sales BudgetPurchasesBudgetSelling andAdministrativeExpense BudgetA schedule of projected purchases over the budget period.BudgetedIncomeStatement
26 Master Budget—Service Define each budget. A service entity’s budget that identifies how much revenue will be generated during a period.Pro-Forma IncomeStatementRevenue BudgetWages andSalaries BudgetProductionBudgetCash BudgetPro-FormaBalance SheetSelling/Admin.Expense BudgetOverheadSuppliesPro-Forma Statementof Cash Flows
27 Master Budget—Manufacturing Define each budget. Sales BudgetA schedule of expected cash receipts anddisbursements during the budget period.ProductionBudgetSelling andAdministrativeExpense BudgetDirect MaterialsBudgetDirect LaborBudgetManufacturingOverheadBudgetCash Budget
29 Define Static versus Flexible Budgeting Static Budgeting:A quantified plan that projects revenues and costs for only one level of activity.Not useful for controlling costs and measuring performance because the actual level of activity may have differed significantly from the planned level.Flexible BudgetingA quantified plan that projects revenues and costs for varying levels of activity.More useful for control and performance evaluation because it is not confined to one level of activity.