C H A P T E R 5 Operational Budgets

Learning Objective 1 Describe the importance of personal budgeting.

What are the Purposes of Budgeting ? OVERALL PURPOSE :

Define Disposable Income

What are the Characteristics of Good Personal Budgeting?

Example: Monthly Budget Gross salary $2,000 Withholdings: Federal income taxes $250 State income taxes Other withholdings (550) Net take-home pay $1,450 Fixed expenses: House mortgage expense....$450 Car payment expense Insurance expense (800) Disposable income $ 650 Utilities expense $ 65 Food expense Miscellaneous expenses (615) Net surplus $ 35

Learning Objective 2 Identify the purposes of budgeting for organizations.

Describe Two Types of Planning

List Reasons for Budgeting

Learning Objective 3 Explain the budgeting process and its behavioral implications in organizations.

Budgeting Process Who or what is the budget committee? What are two issues of the budgeting process?

List Behavioral Considerations

Describe the Top-Down Approach to Budgeting Top Management Manager

Describe the Bottom-Up Approach to Budgeting Top Management Manager

Learning Objective 4 Construct an operating budget and it components for manufacturing firms.

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 ****

Sales Budget Master Budget—Manufacturing Define each budget.

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

Sales Budget Production Budget Master Budget—Manufacturing Define each budget.

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.

Sales Budget Production Budget Direct Materials Budget Master Budget—Manufacturing Define each budget.

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

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

Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Master Budget—Manufacturing Define each budget.

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

Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Master Budget—Manufacturing Define each budget.

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

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

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

Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Master Budget—Manufacturing Define each budget. Selling and Administrative Expense Budget

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

Learning Objective 5 Compare the operating budget for a manufacturing firm to that of a merchandising or service firm..

Sales Budget Purchases Budget Budgeted Income Statement Master Budget—Merchandising Define each budget. Selling and Administrative Expense Budget

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

Expanded Material Learning Objective 6 Create the cash budget.

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

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

Expanded Material Learning Objective 7 Prepare pro- forma financial statements.

Example: Pro-Forma Income Statement Sales revenue $10,000 Cost of goods sold: Beginning finished goods inventory $ 4,900 Manufacturing costs: Direct materials used $ 5,805 Direct labor ,025 Manufacturing overhead ,620 9,450 Total cost of goods available for sale......$14,350 Less ending finished goods inventory (7,350) Cost of goods sold (7,000) Gross margin $ 3,000 Selling and administrative expenses ,700 Operating income $ 1,300 Interest expense Income before taxes $ 1,300

ASSETS Current assets: Cash $ 15,000 Accounts receivable ,000 Finished goods ,350 $ 25,350 Long-term operating assets: Equipment $ 12,000 Less accumulated depreciation (3,300) 8,700 Total assets $ 34,050 Pro-Forma Balance Sheet LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 8,000 Notes payable ,000 $ 15,000 Stockholders’ equity: Common stock $ 11,850 Retained earnings ,200 19,050 Total liabilities and stockholders’ equity $ 34,050

Example: Pro-Forma Statement of Cash Flows Cash flows from operating activities: Net income $ 1,300 Add (subtract) adjustments: Depreciation $ 700 Increase in finished goods (2,450) Increase in accounts receivable ,550 3,800 Net cash provided by operating activities.. $ 5,100 Cash flows from operating activities: Net income $ 1,300 Add (subtract) adjustments: Depreciation $ 700 Increase in finished goods (2,450) Increase in accounts receivable ,550 3,800 Net cash provided by operating activities.. $ 5,100 Cash flows from investing activities: Purchase of equipment $(2,000) Net cash used in investing activities.... (2,000) Cash flows from investing activities: Purchase of equipment $(2,000) Net cash used in investing activities.... (2,000) Cash flows from financing activities: Cash obtained from borrowing $ 7,000 Net cash used in financing activities.... 7,000 Net increase in cash $ 10,100 Cash flows from financing activities: Cash obtained from borrowing $ 7,000 Net cash used in financing activities.... 7,000 Net increase in cash $ 10,100

Learning Objective 8 Distinguish between static and flexible budgets.

Define Static versus Flexible Budgeting Static Budgeting: Flexible Budgeting

Static Budget Cost per unit: Direct materials Direct labor Manufacturing overhead Total unit cost $2.50 Budgeting production (units) ,000 Budgeted manufacturing costs: Direct materials $ 6,000 Direct labor ,000 Manufacturing overhead ,500 Total manufacturing costs $12,500

Static Budget— Performance Report Actual Budgeted Difference Production (units) 4,800 5,000 (200) Manufacturing costs: Direct materials $ 5,500 $ 6,000 $ (500) Direct labor ,800 4,000 (200) Manufacturing overhead. 2,450 2,500 (50) Total actual and budgeted manufacturing costs.... $11,750 $12,500 $ (750)

Flexible Budget What are the three steps to prepare a flexible budget?

Flexible Budget Manufacturing Range of Production (units) Costs per Unit4,8005,0005,200 Direct materials. $1.20$ 5,760$ 6,000$ 6,240 Direct labor ,8404,0004,160 Manufacturing overhead ,400 2,500 2,600 Total $2.50$12,000$12,500$13,000

Flexible Budget— Performance Report Actual production (units) ,800 Budgeted production (units) ,000 Difference (200) Actual BudgetedDifference Direct materials $ 5,500$ 5,760 $ (260) Direct labor ,8003,840 (40) Manufacturing overhead.. 2,450 2, Total costs $11,750 $12,000 $ 250

Chapter 5 Managerial Accounting is Finished