Budgeting Systems Continuous Budget Static budget Flexible budget Zero Based Budgeting
Master Budget Manufacturing Company Parts Budgeted income statement Sales budget Cost of goods sold budget Production budget Direct materials purchases budget Direct labor cost budget Factory overhead cost budget Selling and administrative expense budget Budgeted balance sheet Cash budget Capital Expenditure Budget
Sales Budget Indicates for each product the quantity of sales and expected selling price Example 1: Brite Lite sells two products in United States and Canada. Product A is estimated to sell 5,000 units in the United States and 10,000 units in Canada at $100 per unit. Product B sells 20,000 units in United States and 6,000 units in Canada at $50 per unit
Sales Budget Product AProduct B Units sold: United States5,00020,000 Canada10,0006,000 Total units sold15,00026,000 Sales price per unit X $100X $50 Total sales $1,500,0001,300,000$2,800,000 Brite Lite Sales Budget For year 2008
Production Budget Coordinates with sales budget to ensure that production and sales are kept in balance during the period Number of units manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget.
Production Budget Formula Expected units to be sold + Desired Ending Inventory -Estimated Beginning Inventory Total units to be produced
Production budget Brite Lite expects to have beginning inventory of 3,000 units of Product A and 5,000 units of Product B. The company would like its ending inventory to be 10% of estimated sales
Production Budget Brite Lite Production Budget For year 2008 Product AProduct B Expected sales (in units)15,00026,000 Plus desired ending inventory+ 1,500+ 2,600 Minus estimated beginning inventory - 3,000- 5,000 Total production13,50023,600
Example 2 Class problem Geo produces three products X, Y, and Z. Sales: 10,000 units to X, 15,000 units to Y 25,000 to Z. B Beginning inventory is estimated at 3,000 to X, 5000 to Y, 2,500 to Z. Ending inventory is estimated at 1,500 to X, 4,000 to Y 4,000 to Z. Complete production budget.
Direct Materials Budget The production budget is the starting point for determining the estimated quantities of direct materials to be purchased. Estimates purchase levels for the next year and costs. Formula:
Direct Materials Budget Formula Materials required for production +Desired Ending Materials Inventory -Estimated Beginning Materials Inventory Direct materials to be purchased X Cost per unit Total Direct Materials Cost
Direct Materials Purchases Budget Estimates purchase levels for the next year and costs Materials required for production plus ending inventory minus beginning inventory
Direct Materials Product A uses 2 lbs. of plastic and 3 lbs. of aluminum. Product B uses ½ lb. of plastic, 1 lb. of aluminum, and 2 lbs. of paper. Aluminum sells for $5 per lb. Plastic sells for $10 per lbs, and paper sells for $2 per lbs. Ending Invent ory (lbs) Beginnin g invent ory (lbs.) Plastic4,0007,300 Aluminum6,0003,600 Paper8,0005,200
ALPlasticPaperTotal Product A (13,500 units) 13,500 x 3 lbs.40,500 13,500 x 2 lbs.27,000 13,500 x 0 lbs.0 Product B (23,600 units) 23, 600 x 1lbs ,600 x ½ lbs.11,800 23,600 x 2 lbs.47,200 Total needed for production64,10038,80047,200 + Desired Ending inventory 4,0006,0008,000 Total units needed68,10044,80055,200 - Beginning Inventory-7,300-3,600-5,200 Total direct materials purchased 60,80041,20050,000 Unit cost for materialX $5X $10 X $2 Total costs$304,000$412,000$100,000$816,000
Direct Labor Budget Production budget also provides the starting point for preparing the direct labor cost budget. Example: Department 1 has a labor cost of $10 per hour. Product A uses 6 hours in Department 1 and Product B uses 4 hours. Department 2 has a labor cost of $7 per hours. Production A uses 2 hours of Department 2’s labor and Product B uses ½ hour. Prepare a direct labor budget.
Example Department 1Department 2Total Product A (13,500 units) 6 hours per unit x 13,50081,000 2 hours per unit x 13,50027,000 Product B (23,600 units) 4 hours x 23,600 units94,400 ½ hour x 23,600 units11,800 Total hours per department 175,40038,800 Labor cost per hourX $10X $7 Total$1,754,000$271,600$2,025,600
Cost of goods sold budget: Is composed of the budgets for production, direct materials, direct labor and factory overhead
Selling and Administrative Budget: Sales budget is often used as the starting point for estimating the selling and administrative expenses.
Budgeted Income Statement: Budgeted Income Statement Revenue from sales $ 13,336, Cost of goods sold $ 9,047, Gross profit $ 4,288, Selling and administrative expenses $ 1,885, Income from operations $ 2,403, Other income Interest revenue $ 98, Other expenses Interest expenses $ 90, $ 8, Income before income tax $ 2,411, Income tax $ 600, Net income $ 1,811,220.00
Balance Sheet Budgets Cash Budget Capital Expenditure Budget
Capital Expenditures Budget Lists dollar amounts to be both received from plant asset disposals and spent to purchase additional plant assets to carry out the budgeted business activities
Cash Budget Is one of the most important elements of budgets Presents the expected receipts and payments of cash for a period of time Three parts of the budget” Cash receipts Cash payments Other items We prepare a schedule for cash receipts and cash payments
Schedule of Cash Receipts : Magna Corporation has estimated sales of January $1,080,000, February $1,240,000, and March $970,000. Accounts receivable has a balance on January 1 of $370,000. The company expects that 10% of its sales will be in cash and the remainder in credit. Of the credit sales, 60% will be collected in the next month and the remainder the following month. Required: Prepare a schedule of cash receipts..
Calculations January Sales Sales $ 1,080, Less cash portion ( 10% of sales) $ 108, Credit sales $ 972, Credit sales $ 972, Collections in February $ 583, * Remainder collected in March $ 388, * 60% of Credit sales = $972,000 x 60%
Calculations February Sales Sales $ 1,240, Less cash portion ( 10% of sales) $ 124, Credit sales $ 1,116, Credit sales $ 1,116, Collections in February $ 669, Remainder collected in March $ 446,400.00
Calculations March Sales Sales $ 970, Less cash portion ( 10% of sales) $ 97, Credit sales $ 873, Credit sales $ 873, Collections in February $ 523, Remainder collected in March $ 349,200.00
Schedule of Cash Receipts JanuaryFebruaryMarch Receipts of Cash Sales$108,000$124,000$97,000 Receipt from collections: Collection from last month’s sales $370,000$388,800$446,400 Collection from current month’s 583, , ,800 Total receipts953,2001,058,400970,200
Schedule of Cash Payments Reduction in cash from manufacturing, selling and administrative, capital expenditure, and other expenses Example: Magna Company has manufacturing costs of $840,000 in January, $780,000 in February, and $812,000 for March. The beginning balance in accounts payable is $190,000. Depreciation expense is $24,000 per month which is included in manufacturing costs. Manufacturing costs payments are allocated at 75% in month incurred and remainder the next month.
January Manufacturing Costs Total manufacturing costs for month $ 840, Less depreciation expense $ 24, Total manufacturing costs owed $ 816, Payment in January Total manufacturing costs owed $ 816, '75% paid in month incurredX 75% Payment in January $ 612, Total manufacturing costs owed $ 816, Less payment in January $ 612, Payment in February $ 204,000.00
February Manufacturing Costs Total manufacturing costs for month $ 780, Less depreciation expense $ 24, Total manufacturing costs owed $ 756, Payment in February Total manufacturing costs owed $ 756, '75% paid in month incurred75% Payment in February $ 567, Total manufacturing costs owed $ 756, Less payment in February $ 567, Payment in March $ 189,000.00
March Manufacturing Costs Total manufacturing costs for month $ 812, Less depreciation expense $ 24, Total manufacturing costs owed $ 788, Payment in March Total manufacturing costs owed $ 788, '75% paid in month incurred75% Payment in March $ 591, Total manufacturing costs owed $ 788, Less payment in March $ 591, Payment in April $ 197,000.00
Schedule of Cash Payments JanuaryFebruaryMarch Payments of prior month’s manufacturing costs $190,000$204,000$189,000 Payments of current month’s manufacturing costs 612,000567,000591,000 Total payments$802,000$771,000$780,000
Completing the Cash Budget After preparing the schedule of cash receipts and the schedule of cash payments, we review additional items and prepare the formal cash budget.
Completing the Budget Cash balance on January 1 - $280,000 Quarterly tax due on March 31 - $150,000 Quarterly interest paid to creditors on January 10 - $22,500 Selling and administrative expenses: January $160,000 February $165,000 March $145,000 Interest revenue to be received on March 21 - $24,500 Capital expenditures on equipment payable on February 28 - $274,000 Minimum cash balance of $340,000 is required by the corporation’s Board of Directors
Cash Budget January February March Estimated cash receipts Cash receipts $ 108, $ 124, $ 97, Collections of accounts receivables $ 953, $ 1,058, $ 970, Interest revenue $ 24, Total cash receipts $ 1,061, $ 1,091, Estimated cash payments Manufacturing costs $ 802, $ 771, $ 780, Selling and administrative $ 160, $ 165, $ 145, Capital expenditures $ 274, Interest expense $ 22, Tax payment $ 150, Total cash payments $ 984, $ 1,210, $ 1,075, Cash increase $ 76, $ (148,800.00) $ 16, Cash balance at beg of month $ 280, $ 356, $ 207, Cash balance at end of month $ 356, $ 207, $ 224, Minimum cash balance $ 340, Excess $ 16, $ (132,100.00) $ (115,400.00)