Forecast of sales revenues Cornerstone of master budget ◦ Level of sales affects all elements 10Copyright 2009 Prentice Hall. All rights reserved. Budgeted total sales Sales price Expected number of units sold
11 Purchases = Cost of goods sold + Ending inventory – Beginning inventory Copyright 2009 Prentice Hall. All rights reserved. Cost of goods sold = Beginning inventory + Purchases – Ending inventory
SALES BUDGET Quarter endedNine-month total March 31June 30Sept. 30 Cash sales 30%$30,000$45,000$37,500$112,500 Credit sales 70%70,000105,00087,500262,500 Total sales$100,000$150,000$125,000$375,000 Copyright 2009 Prentice Hall. All rights reserved.12
Inventory, Purchases and Cost of Goods Sold Budget March 31June 30Sept. 309-month total Cost of goods sold (60% of total sales)$60,000$90,000$75,000$225,000 + Desired ending inventory ($25,000 plus 10% next quarter’s cost of goods sold)34,00032,50037,000 Total inventory required94,000122,500112,000 - Beginning inventory(11,000)(34,000)(32,500) = Budgeted purchases$83,000$88,500$79,500 Copyright 2009 Prentice Hall. All rights reserved.13
Expenses can be either fixed or variable Includes items such as: ◦ Salaries ◦ Rent ◦ Insurance ◦ Advertising Copyright 2009 Prentice Hall. All rights reserved.14
Copyright 2009 Prentice Hall. All rights reserved.16 Cash Budget Budgeted Balance Sheet Budgeted Statement of Cash Flows
Details how the business expects to go from the beginning cash balance to the desired ending balance Four major parts: ◦ Cash collections from customers ◦ Cash payments for purchases ◦ Cash payments for operating expense ◦ Cash payments for capital expenditures 17Copyright 2009 Prentice Hall. All rights reserved.
Cash collections from customers ◦ Cash sales from the sales budget ◦ Collections of previous month’s credit sales Accounts receivable Cash payments for purchases ◦ Payment of current month purchases from the purchases budget ◦ Payment of prior month purchases Accounts payable 18Copyright 2009 Prentice Hall. All rights reserved.
Payments for operating expense ◦ Use data from operating expense budget ◦ Do not include noncash expenses such as depreciation Payments for capital expenditures ◦ Use budgeted data 19Copyright 2009 Prentice Hall. All rights reserved.
Copyright 2009 Prentice Hall. All rights reserved.21 (a) Book value of equipment: Cost$22,000 Less: Accumulated depreciation(7,000) Book value$15,000 Plus: Gain4,000 Expected cash receipt$19,000
Copyright 2009 Prentice Hall. All rights reserved.22 AugustSeptember Expected sales in units7,8009,100 Selling price$13 Expected sales$101,400$118,300 Cash sales (30%)30,42035,490 Credit sales (70%)70,98082,810 Cash sales$35,490 September credit sales collected 82,810 x ¾62,108 August credit sales collected70,980 x ¼17,745 Expected cash collections in September$115,343
Copyright 2009 Prentice Hall. All rights reserved.23 Rent and property taxes$4,000 Sales commissions & selling expense: September: (9,100 x 13 x 25%) x 2/319,717 August: (7,800 x 13 x 25%) x 1/38,450 Expected cash payments for expenses$32,167 Sales commissions & selling expenses AugustSeptember 25% of sales$25,350$29,575
Actual results often differ from budgeted amounts Sensitivity analysis ◦ What-if technique that determines the result if predicted amounts differ from those budgeted Spreadsheet programs used for budgeting make sensitivity analysis cost-effective 25Copyright 2009 Prentice Hall. All rights reserved.
Company- wide budget Department A Budget Department A1 Budget Department A2 Budget Department B Budget Department Sub – B Budget Copyright 2009 Prentice Hall. All rights reserved.26
Company’s individual operating units roll up budgets to prepare company-wide budget Budget management software used ◦ Often part of Enterprise Resource Planning (ERP) system Software allows managers to spend more time analyzing data Copyright 2009 Prentice Hall. All rights reserved.27
Prepare performance reports for responsibility centers
Subunit of organization whose manager is accountable for specific activities Four types: 29Copyright 2009 Prentice Hall. All rights reserved. Cost center Revenue center Profit center Investment center
Cost center ◦ Managers accountable for costs only Goal – to control costs Revenue center ◦ Managers primarily accountable for revenues Goal – increase revenues Profit center ◦ Managers accountable for both revenues and costs Goal – increase profits Copyright 2009 Prentice Hall. All rights reserved.30
Investment center ◦ Managers accountable for investments, revenues, and costs ◦ Responsible for: Generating sales Controlling expenses Managing investment needed to earn the income ◦ Goal – increase return on investment, residual income, or economic value added Copyright 2009 Prentice Hall. All rights reserved.31
Performance reports compare budgeted and actual amounts Reporting at all levels: ◦ Division (investment centers) ◦ Product lines (profit centers) ◦ Production (cost centers) ◦ Sales (revenue centers) Management by exception ◦ Shows variances between actual and budgeted amounts 32Copyright 2009 Prentice Hall. All rights reserved.