5 Budgeting Systems Continuous Budget Static budget Flexible budget Zero Based Budgeting
6 Master Budget Manufacturing Company Parts Budgeted income statement Sales budgetCost of goods sold budgetProduction budgetDirect materials purchases budgetDirect labor cost budgetFactory overhead cost budgetSelling and administrative expense budgetBudgeted balance sheetCash budgetCapital Expenditure Budget
7 Sales BudgetIndicates for each product the quantity of sales and expected selling priceExample 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
8 Sales Budget Brite Lite Sales Budget For year 2008 Product A Product B Units sold:United States5,00020,000Canada10,0006,000Total units sold15,00026,000Sales price per unitX $100X $50Total sales$1,500,0001,300,000$2,800,000
9 Production BudgetCoordinates with sales budget to ensure that production and sales are kept in balance during the periodNumber of units manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget.
10 Production Budget Formula Expected units to be sold+ Desired Ending Inventory-Estimated Beginning InventoryTotal units to be produced
11 Production budgetBrite 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
12 Production Budget Brite Lite Production Budget For year 2008 Product A Product BExpected sales (in units)15,00026,000Plus desired ending inventory+ 1,500+ 2,600Minus estimated beginning inventory- 3,000- 5,000Total production13,50023,600
13 Example 2 Class problem Geo produces three products X, Y, and Z. Sales:10,000 units to X,15,000 units to Y25,000 to Z. BBeginning inventory is estimated at3,000 to X,5000 to Y,2,500 to Z.Ending inventory is estimated at1,500 to X,4,000 to Y4,000 to Z. Complete production budget.
14 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:
15 Direct Materials Budget Formula Materials required for production+Desired Ending Materials Inventory-Estimated Beginning Materials InventoryDirect materials to be purchasedX Cost per unitTotal Direct Materials Cost
16 Direct Materials Purchases Budget Estimates purchase levels for the next year and costsMaterials required for production plus ending inventory minus beginning inventory
17 Ending Inventory (lbs) Beginning inventory (lbs.) Direct MaterialsProduct 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 Inventory (lbs)Beginning inventory (lbs.)Plastic4,0007,300Aluminum6,0003,600Paper8,0005,200
18 ALPlasticPaperTotalProduct A (13,500 units)13,500 x 3 lbs.40,50013,500 x 2 lbs.27,00013,500 x 0 lbs.Product B (23,600 units)23, 600 x 1lbs.23.60023,600 x ½ lbs.11,80023,600 x 2 lbs.47,200Total needed for production64,10038,800+ Desired Ending inventory4,0006,0008,000Total units needed68,10044,80055,200- Beginning Inventory-7,300-3,600-5,200Total direct materials purchased60,80041,20050,000Unit cost for materialX $5X $10X $2Total costs$304,000$412,000$100,000$816,000
19 Direct Labor BudgetProduction 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.
20 Example Department 1 Department 2 Total Product A (13,500 units) 6 hours per unit x 13,50081,0002 hours per unit x 13,50027,000Product B (23,600 units)4 hours x 23,600 units94,400½ hour x 23,600 units11,800Total hours per department175,40038,800Labor cost per hourX $10X $7$1,754,000$271,600$2,025,600
26 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
27 Cash Budget Is one of the most important elements of budgets Presents the expected receipts and payments of cash for a period of timeThree parts of the budget”Cash receiptsCash paymentsOther itemsWe prepare a schedule for cash receipts and cash payments
28 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..
29 Calculations January Sales Sales $ 1,080,000.00 Less cash portion ( 10% of sales)$ 108,000.00Credit sales$ 972,000.00Collections in February$ 583, *Remainder collected in March$ 388,800.00* 60% of Credit sales = $972,000 x 60%
30 Calculations February Sales Sales $ 1,240,000.00 Less cash portion ( 10% of sales)$ 124,000.00Credit sales$ 1,116,000.00Collections in February$ 669,600.00Remainder collected in March$ 446,400.00
31 Calculations March Sales Sales $ 970,000.00 $ 970,000.00Less cash portion ( 10% of sales)$ ,000.00Credit sales$ 873,000.00Collections in February$ 523,800.00Remainder collected in March$ 349,200.00
32 Schedule of Cash Receipts JanuaryFebruaryMarchReceipts of Cash Sales$108,000$124,000$97,000Receipt from collections:Collection from last month’s sales$370,000$388,800$446,400Collection from current month’s583,200669,600523,800Total receipts953,2001,058,400970,200
33 Schedule of Cash Payments Reduction in cash from manufacturing, selling and administrative, capital expenditure, and other expensesExample: 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 $24,000 per month which is included in manufacturing costs. Manufacturing costs payments are allocated at 75% in month incurred and remainder the next month.
34 January Manufacturing Costs Total manufacturing costs for month$ 840,000.00Less depreciation expense$ ,000.00Total manufacturing costs owed$ 816,000.00Payment in January'75% paid in month incurredX 75%$ 612,000.00Less payment in JanuaryPayment in February$ 204,000.00
35 February Manufacturing Costs Total manufacturing costs for month$ 780,000.00Less depreciation expense$ ,000.00Total manufacturing costs owed$ 756,000.00Payment in February'75% paid in month incurred75%$ 567,000.00Less payment in FebruaryPayment in March$ 189,000.00
36 March Manufacturing Costs Total manufacturing costs for month$ 812,000.00Less depreciation expense$ ,000.00Total manufacturing costs owed$ 788,000.00Payment in March'75% paid in month incurred75%$ 591,000.00Less payment in MarchPayment in April$ 197,000.00
37 Schedule of Cash Payments JanuaryFebruaryMarchPayments of prior month’s manufacturing costs$190,000$204,000$189,000Payments of current month’s manufacturing costs612,000567,000591,000Total payments$802,000$771,000$780,000
38 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.
39 Completing the Budget Cash balance on January 1 - $280,000 Quarterly tax due on March 31 - $150,000Quarterly interest paid to creditors on January 10 - $22,500Selling and administrative expenses:January $160,000February $165,000March $145,000Interest revenue to be received on March 21 - $24,500Capital expenditures on equipment payable on February 28 - $274,000Minimum cash balance of $340,000 is required by the corporation’s Board of Directors
40 Cash Budget January February March Estimated cash receipts JanuaryFebruaryMarchEstimated cash receiptsCash receipts$ ,000.00$ ,000.00$ ,000.00Collections of accounts receivables$ ,200.00$ ,058,400.00$ ,200.00Interest revenue$ ,500.00Total cash receipts$ ,061,200.00$ ,091,700.00Estimated cash paymentsManufacturing costs$ ,000.00$ ,000.00$ ,000.00Selling and administrative$ ,000.00$ ,000.00$ ,000.00Capital expenditures$ ,000.00Interest expense$ ,500.00Tax payment$ ,000.00Total cash payments$ ,500.00$ ,210,000.00$ ,075,000.00Cash increase$ ,700.00$ (148,800.00)$ ,700.00Cash balance at beg of month$ ,000.00$ ,700.00$ ,900.00Cash balance at end of month$ ,600.00Minimum cash balance$ ,000.00Excess$ (132,100.00)$ (115,400.00)Cash Budget