1 Click to edit Master title style Budget A budget charts a course for a business by outlining the plans of the business in financial terms. 6-1

2 Click to edit Master title style Housing 30% Utilities 5% Food 20% Medical 5% Other 4% Clothing 7% Transportation 15% Entertainment 6% Savings 8% Estimated Portion of Your Total Monthly Income That Should Be Budgeted for Various Living Expenses 6-1

3 Click to edit Master title style  Establishing specific goals Objectives of Budgeting 6-1  Executing plans to achieve the goals  Periodically comparing actual results to the goals

4 Click to edit Master title style Example Exercise At the beginning of the period, the Assembly Department budgeted direct labor of $45,000 and supervisor salaries of $30,000 for 5,000 hours of production. The department actually completed 6,000 hours of production. Determine the budget for the department, assuming that it uses flexible budgeting? 32

5 Click to edit Master title style For Practice: PE6-1A, PE6-1B Follow My Example Variable cost: Direct labor (6,000 hours x $9.00* per hour)$54,000 *45,000/5,000 hours Fixed cost: Supervisor 30,000 Total department cost$84,000

6 Click to edit Master title style 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 expenditures budget 6-3 Budgets That Are Linked Together in a Master Budget

7 Click to edit Master title style Income Statement Budgets 6-3

8 Click to edit Master title style Sales Budget The sales budget normally indicates for each product— (1) the quantity of estimated sales and (2)the expected unit selling price. 6-4

9 Click to edit Master title style Production Budget The number of units to be manufactured to meet budgeted sales and inventory needs for each product is set forth in the production budget. 6-4

10 Click to edit Master title style Production Budget Expected units of sales +Desired units in ending inventory –Estimated units in beginning inventory Total units to be produced Sales Budget Sales Budget 6-4

11 Click to edit Master title style 11 Example Exercise Landon Awards Co. projected sales of 45,000 brass plaques for The estimated January 1, 2008 inventory is 3,000 units, and the desired December 31, 2008 inventory is 5,000 units. What is the budgeted production (in units) for 2008? 43

12 Click to edit Master title style 12 For Practice: PE6-2A, PE6-2B Follow My Example Expected units to be sold45,000 Plus: desired ending inventory, December 31, ,000 Total50,000 Less estimated beginning inventory, January 1, ,000 Total units to be produced47,000

13 Click to edit Master title style Direct Materials Purchases Budget Production Budget Direct Materials Purchases Budget Direct Materials Purchases Budget Materials needed for production +Desired ending materials inventory – Estimated beginning materials inventory Direct materials to be purchased Sales Budget Sales Budget 6-4

14 Click to edit Master title style 14 Example Exercise Landon Awards Co. budgeted production of 47,000 brass plaques in Brass sheet is required to produce a brass plaque. Assume 96 square inches of brass sheet is required for each brass plaque. The estimated January 1, 2008 brass sheet inventory is 240,000 square inches. The desired December 31, 2008 brass sheet inventory is 200,000 square inches. If brass sheets costs $0.12 per square inch, determine the materials budget for

15 Click to edit Master title style 15 For Practice: PE6-3A, PE6-3B Follow My Example Square inches required for production: Brass plaque (47,000 x 96 sq. in.)4,512,000 Plus: desired ending inventory, December 31, ,000 Total4,712,000 Less estimated beginning inventory, January 1, ,000 Total square inches to purchase4,472,000 Unit price (per square inch) x $0.12 Total direct materials to be purchased$ 536,640

16 Click to edit Master title style Production Budget Direct Materials Purchases Budget Direct Materials Purchases Budget Direct Labor Cost Budget Direct Labor Cost Budget Sales Budget Sales Budget Direct Labor Cost Budget 6-4

17 Click to edit Master title style 17 Example Exercise Landon Awards Co. budgeted production of 47,000 brass plaques in Assume that 12 minutes are required to engrave each plaque. If engraving labor costs $11.00 per hour, determine the direct labor budget for

18 Click to edit Master title style 18 For Practice: PE6-4A, PE6-4B Follow My Example Hours required for engraving: Brass plaque (47,000 x 12 min.)564,000 min. Convert minutes to hour/ 60 min. Engraving hours9,400 hrs. Hou rly rate x $11.00 Total direct labor cost$103,400

19 Click to edit Master title style Production Budget Direct Materials Purchases Budget Direct Materials Purchases Budget Direct Labor Cost Budget Direct Labor Cost Budget Factory Overhead Cost Budget Factory Overhead Cost Budget Sales Budget Sales Budget Factory Overhead Cost Budget 6-4

20 Click to edit Master title style Cost of Goods Sold Budget Direct materials purchase budget Direct labor cost budget Factory overhead cost budget 6-4

21 Click to edit Master title style Production Budget Direct Materials Purchases Budget Direct Materials Purchases Budget Direct Labor Cost Budget Direct Labor Cost Budget Factory Overhead Cost Budget Factory Overhead Cost Budget Cost of Goods Sold Budget Cost of Goods Sold Budget Sales Budget Sales Budget Factory Overhead Cost Budget 6-4

22 Click to edit Master title style Selling and Administrative Expense Budget 6-4

23 Click to edit Master title style Production Budget Direct Materials Purchases Budget Direct Materials Purchases Budget Direct Labor Cost Budget Direct Labor Cost Budget Factory Overhead Cost Budget Factory Overhead Cost Budget Cost of Goods Sold Budget Cost of Goods Sold Budget Selling & Administrative Expenses Budget Selling & Administrative Expenses Budget Sales Budget Sales Budget Selling and Administrative Expense Budget 6-4

24 Click to edit Master title style Budgeted Income Statement Sales budget Cost of goods sold budget Selling and administrative expenses budget 6-4

25 Click to edit Master title style 25 Cash Budget The cash budget is one of the most important elements of the budgeted balance sheet. The cash budget presents the expected receipts (inflows) and payments (outflows) of cash for a period of time. 6-5

26 Click to edit Master title style 26 Example Exercise Landon Awards Co. collects 25% of its sales on account in the month of the sale and 75% in the month following the sale. If sales on account are budgeted to be $100,000 for March and $126,000 for April, what are the budgeted cash receipts from sales on account for April? 72

27 Click to edit Master title style 27 Follow My Example April Collections from March sales (75% x $100,000)$ 75,000 Collections from April sales (25% x $126,000) 31,500 Total receipts from sales on account$106,500 For Practice: PE6-6A, PE6-6B

28 Click to edit Master title style Capital Expenditure Budget The capital expenditure budget summarizes plans for acquiring fixed assets. 6-5