Chapter 13 Planning and Budgeting

Budgeting A quantitative plan of what we expect in the future Personal budgets Purposes –Planning –Control

Budgeting Strategic Plans –Critical success factors –Objectives –Organization goals –Long-range plan Master Budget

Advantages Planning for future makes you think about what will happen If shortfalls are seen, something can be done about it ahead of time (obtain a line of credit, hire more workers, get contracts with other suppliers) Avoid bottlenecks You have to know what to expect in order to control resources

Budgeting Time Horizon –Long term (strategic planning) –Medium term (tactical and capital budget) –Day to day (master budget) Detail –Little (strategic planning) –More (tactical and capital budgeting) –Most (master budget)

Budgeting Participation by Employees –Top management (strategic planning) –Middle and top management (tactical and capital budgeting) –Everyone (master budget) Other behavioral considerations –If budgets used for performance evaluation, employees will try to make them even if not properly prepared –PEOPLE EMHASIZE WHAT GETS REWARDED!!

Master Budget Operating Budget (income statement items) –Revenues –Production (including DM, DL, and OH) –Marketing and administrative Financial Budget –Cash –Budgeted financial statements

Sales Budget Units of sales X selling price per unit = Dollars of sales Units of sales goes to Production budget Dollars of sales goes to Income statement Schedule of cash collections of sales goes to cash budget

Production Budget Units of sales + Desired ending inventory = Units needed - Beginning inventory = Units to be produced Units to be produced goes to DM, DL, OH budgets

Purchases Budget Finished units to be produced X DM needed per finished unit = Material needs + Desired ending inventory of DM - Beginning inventory of DM = DM to be purchased Goes to income statement and cash budget

Direct Labor Budget Finished units to produce X standard time allowed per unit = Standard labor time needed X per hour labor cost = Total direct labor cost Goes to income statement and cash budget

Manufacturing Overhead Budget Predicted activity base X variable OH rate = Total Variable OH + Fixed OH in total = Total Manufacturing overhead cost Goes to income statement and cash budget

Cost of Goods Sold Budget Start with beginning finished goods inventory Add Cost of goods manufactured Subtract ending finished goods inventory = Cost of Goods Sold Goes to income statement

Marketing and Administrative Budget Predicted sales dollars X variable marketing and admin. rate = Total variable marketing and admin. cost + Fixed marketing and admin. total cost =Total marketing and admin. cost Goes to income statement and cash budget

Budgeted Income Statement Sales (from sales forecast) Cost of goods sold –Beginning inventory (from previous balance sheet) –COGM - compute cost per unit from DM, DL, OH budgets x units manufactured OR Actual purchases made for a retailer –Ending inventory budgets Marketing and administrative expenses (from M&A budget) Compute to arrive at budgeted net income

Cash Budget Beginning Balance + Cash receipts for period = Cash available - Cash disbursements for period = Excess (Deficiency) over cash available Financing (loans, interest payments, stock sales, etc.) Ending cash balance

Cash Collections Cash sales Cash collections of credit sales –Collected for this month’s sales –Collected for prior month’s sales –Minus sales discounts Any other cash receipts (sales of property, plant & equipment, dividends received, etc.)

Cash Disbursements Purchases –Cash purchases –Credit purchases Percentage paid this month less discount taken Percentage paid of prior month’s purchases –Operating expenses –NOT DEPRECIATION –Equipment payments –Dividend payments

Budgeted Balance Sheet Assets –Cash (from cash budget) –Accts. Rec. (credit sales that have not been collected) –Inventory (from production and purchases budgets) –Property, plant & Equipment (Beg. Balance + changes) Liabilities –Accounts Payable (from purchases budget) –Notes Payable (from cash budget) Owners’ equity –Common stock (Beg. Balance + Changes) –Retained earnings (Beg. Bal. + Net income – Divs.)

Other Issues in Budgeting Budgeting in retail and wholesale organizations Budgeting in service organizations Ethical problems in budgeting Budgeting under uncertainty