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C H A P T E R 5 Operational Budgets. What are the Purposes of Budgeting ? OVERALL PURPOSE : To quantify a general plan so that performance in relation.

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Presentation on theme: "C H A P T E R 5 Operational Budgets. What are the Purposes of Budgeting ? OVERALL PURPOSE : To quantify a general plan so that performance in relation."— Presentation transcript:

1 C H A P T E R 5 Operational Budgets

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 PURPOSE FIRST: 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 budgeting Short-run planning includes production process prioritizing and operational budgeting or profit planning

4 List Reasons for Budgeting 1.Planning and setting objectives 2.Communication and coordination 3.Authorization 4.Motivation 5.Conflict resolution 6.Evaluation

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 considerations Involvement in preparing the budget

6 List Behavioral Considerations 1.Top management support 2.Employee participation 3.Addressing budget deviations

7 Describe the Top-Down Approach to Budgeting Top Management Manager Top management prepares the entire budget and distributes it to division managers.

8 Describe the Bottom-Up Approach to Budgeting Top Management Manager Each manager prepares a budget request, from which management creates an overall budget.

9 Master Budget—Manufacturing Sales Budget* Selling/Admin. Expense Budget* Production Budget Direct Labor Budget* Manufacturing Overhead Budget* Direct Materials Budget* Budgeted Income Statement Budgeted Balance Sheet Budgeted Cash Flows Cash Budget Capital Expenditures Budget Operating Budget Capital Project Plans Short-Term Objectives Strategic Goals and Plans Budgeted Product Sheet * These budgets all flow into the cash budget below. Planning Process Financial Budgeting ****

10 Sales Budget Master Budget—Manufacturing Define each budget. A schedule of projected sales over the budget period.

11 Example: Sales Budget Selling price per bike......$ 100 Expected sales (units)..... x 100 Expected revenues $10,000 Selling price per bike......$ 100 Expected sales (units)..... x 100 Expected revenues $10,000

12 Sales Budget Production Budget Master Budget—Manufacturing Define each budget. A schedule of production requirements for the budget period. A schedule of production requirements for the budget period.

13 Example: Production Budget Expected sales Add desired ending inventory Total number of bikes needed Less beginning inventory Bikes to be produced Expected sales Add desired ending inventory Total number of bikes needed Less beginning inventory Bikes to be produced Note: Ending inventory is estimated at 80% of the next period’s sales.

14 Sales Budget Production Budget Direct Materials Budget Master Budget—Manufacturing Define each budget. A schedule of direct materials to be used and purchased during the budget period.

15 Example: Direct Materials Budget Direct materials usage: Direct AmountUnit Total Materials RequiredCost Cost Metal 2,700 lbs. $2.00/ft. $5,400 Plastic 405 lbs. $1.00/ft. $ 405 Direct materials usage: Direct AmountUnit Total Materials RequiredCost Cost Metal 2,700 lbs. $2.00/ft. $5,400 Plastic 405 lbs. $1.00/ft. $ 405

16 Example: Direct Materials Budget Direct materials purchases: MetalPlastic Desired ending inventory.....2, Needed for production , Total needed , Less beginning inventory , Materials to be purchased....2, Unit cost x $2x $1 Total cost $4,000$ 510 Direct materials purchases: MetalPlastic Desired ending inventory.....2, Needed for production , Total needed , Less beginning inventory , Materials to be purchased....2, Unit cost x $2x $1 Total cost $4,000$ 510

17 Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Master Budget—Manufacturing Define each budget. A schedule of direct labor requirements for the budget period.

18 Example: Direct Labor Budget Number of bikes to produce Direct labor hours per bike.....x 3 Total hours required Rate per hour x $5 Total direct labor cost $2,025 Number of bikes to produce Direct labor hours per bike.....x 3 Total hours required Rate per hour x $5 Total direct labor cost $2,025

19 Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Master Budget—Manufacturing Define each budget. A schedule of production costs other than those for direct labor and direct materials.

20 Example: Manufacturing Overhead Budget Variable costs: Indirect materials costs $ 220 Indirect labor costs Total variable costs $ 820 Fixed costs: Insurance expense $200 Depreciation expense Total fixed costs $ 800 Total manufacturing overhead...$1,620 Variable costs: Indirect materials costs $ 220 Indirect labor costs Total variable costs $ 820 Fixed costs: Insurance expense $200 Depreciation expense Total fixed costs $ 800 Total manufacturing overhead...$1,620

21 Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Master Budget—Manufacturing Define each budget. Budgeted Product Cost Sheet Selling and Administrative Expense Budget A schedule to accumulate all the budgeted production cost to produce each bike

22 Budgeted Product Cost Sheet Input Required Cost Cost Inputs per Bike Metal $2.00/ft. 20 $40.00 Plastic $1.00/ft Direct labor $5.00/hr Fixed OH $1.98/hr Variable OH $2.02/hr Total variable cost per bike..... $70.00 Total fixed MOH $1,620 Divide by Production Volume 135 bikes Fixed MOH cost allocated per bike Total $82.00 Input Required Cost Cost Inputs per Bike Metal $2.00/ft. 20 $40.00 Plastic $1.00/ft Direct labor $5.00/hr Fixed OH $1.98/hr Variable OH $2.02/hr Total variable cost per bike..... $70.00 Total fixed MOH $1,620 Divide by Production Volume 135 bikes Fixed MOH cost allocated per bike Total $82.00

23 Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Master Budget—Manufacturing Define each budget. Selling and Administrative Expense Budget A schedule of all non-production spending expected to occur during the budget period.

24 Example: Selling and Administrative Budget Variable expenses: Sales commissions $ 400 Total variable expenses $ 400 Fixed expenses: Salaries expense $1,000 Depreciation Advertising expense Total fixed expenses $1,300 Total selling and administrative expenses $1,700

25 Sales Budget Purchases Budget Budgeted Income Statement Master Budget—Merchandising Define each budget. Selling and Administrative Expense Budget A schedule of projected purchases over the budget period.

26 Master Budget—Service Define each budget. Pro-Forma Income Statement Revenue Budget Wages and Salaries Budget Production Budget Cash Budget Pro-Forma Balance Sheet Selling/Admin. Expense Budget Overhead Budget Supplies Budget Pro-Forma Statement of Cash Flows A service entity’s budget that identifies how much revenue will be generated during a period.

27 Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Master Budget—Manufacturing Define each budget. Cash Budget Selling and Administrative Expense Budget A schedule of expected cash receipts and disbursements during the budget period. A schedule of expected cash receipts and disbursements during the budget period.

28 Example: Cash Budget Cash balance, beginning $ 4,900 Add collections from customers ,100 (1)Total cash available $15,000 Less disbursements for: Direct materials $ 3,000 Direct labor ,000 Equipment purchase ,000 (2)Total disbursements $ 7,000 Minimum cash balance desired ,000 Total cash needed $13,000 Excess (or deficiency) of cash available before financing..... $ 2,000 (3) Financing needed Ending cash balance [(1) – (2) + (3)] $ 2,000

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 Budgeting A 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.


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