Budgeting Student Version

Describe budgeting, its objectives, and its impact on human behavior. 21-2

Planning involves setting goals as a guide for making decisions. Objectives of Budgeting 1 2.Directing involves decisions and actions to achieve budgeted goals. 3.Controlling involves comparing actual performance against the budgeted goals.

A budgetary unit of a company is called responsibility center. Each responsibility center is led by a manager who has the authority and responsibility for achieving the center’s budgeted goals. Responsibility Centers 1

Controlling Through Feedback As time passes, the actual performance of an operation can be compared against the planned goals. This provides prompt feedback to employees about their performance. If necessary, employees can use such feedback to adjust their activities in the future. 1

Although it is desirable to establish attainable goals, it is undesirable to plan lower goals than may be possible. Such budget “padding” is termed budgetary slack. Budgetary Slack 1

Goal conflict occurs when individual self-interest differs from business objectives or when different departments are given conflicting objectives. Goal Conflict 1

Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting. 21-8

Continuous Budgeting A variation of fiscal-year budgeting, called continuous budgeting, maintains a twelve-month projection into the future. 2

Zero-based budgeting requires managers to estimate sales, production, and other operating data as though operations are being started for the first time. Zero-Based Budgeting 2

Static Budget A static budget shows the expected results of a responsibility center for only one activity level. The budget does not change even if the activity changes. 2

Flexible Budget Flexible budgets show the expected results of a responsibility center for several activity levels. A flexible budget is, in effect, a series of static budgets for different levels of activity. 2

Describe the master budget for a manufacturing company

Master Budget The master budget is an integrated set of operating, investing, and financing budgets for a period of time. 3

Prepare the basic income statement budgets for a manufacturing company

Sales Budget The sales budget begins by estimating the quantity of sales. Once sales quantities are estimated, the expected sales revenue can be determined by multiplying the volume by the expected unit sales price. 4

Production Budget The production budget estimates the number of units to be manufactured to meet budgeted sales and desired inventory levels. 4

Production Budget Expected units of sales +Desired units in ending inventory –Estimated units in beginning inventory Total units to be produced Sales Budget 4

Production Budget From Exhibit 8 528,000 +Desired units in ending inventory –Estimated units in beginning inventory Total units to be produced Sales Budget Wallets 4

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 4

Direct Materials Purchase Budget ( continued ) 4 Exhibit 10 Note A: 520,000 units × 0.30 sq. yd. per unit = 156,000 sq. yds.

Direct Materials Purchase Budget (continued) Note A: 520,000 units × 0.10 sq. yd. per unit = 52,000 sq. yds. ( continued ) 4 Exhibit 10

( continued ) 4 Direct Materials Purchase Budget (continued) Exhibit 10 Note B: 292,000 units × 1.25 sq. yd. per unit = 365,000 sq. yds.

Note B: 292,000 units ×.50 sq. yd. per unit = 146,000 sq. yds. 4 Direct Materials Purchase Budget (concluded) Exhibit 10

Direct Labor Cost Budget The direct labor cost budget estimates the direct labor hours and related cost needed to support budgeted production. 4

Production Budget Direct Materials Purchases Budget Direct Materials Purchases Budget Direct Labor Cost Budget Direct Labor Cost Budget Sales Budget 4

Direct Labor Cost Budget Note A: 520,000 units × 0.10 hr. per unit = 52,000 hrs. 4 Exhibit 11 (continued )

Direct Labor Cost Budget (continued) (continued ) Note A: 520,000 units × 0.25 hr. per unit = 130,000 hrs. 4 Exhibit 11

(continued) Note B: 292,000 units × 0.15 hr. per unit = 43,800 hrs. 4 Direct Labor Cost Budget (continued) Exhibit 11

Direct Labor Cost Budget (concluded) Exhibit 11 Note B: 292,000 units × 0.40 hr. per unit = 116,800 hrs.

Factory Overhead Cost Budget The factory overhead cost budget estimates the cost for each item of factory overhead needed to support budgeted production. 4

Factory Overhead Cost Budget 4 Exhibit 12

Cost of Goods Sold Budget Direct materials purchases budget Direct labor cost budget Factory overhead cost budget 4 Exhibit 13

Selling and Administrative Expenses Budget The sales budget is often used as the starting point for the selling and administrative expenses budget. This budget is normally supported by departmental schedules. 4

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 Selling & Administrative Expenses Budget Sales Budget 4

Selling and Administrative Expenses Budget 4 Exhibit 14

Budgeted Income Statement Sales budget Cost of goods sold budget Selling and administrative expenses budget 4 Exhibit 15

Prepare balance sheet budgets for a manufacturing company

Schedule of Collections from Sales 5 Exhibit 16

Schedule of Payments for Manufacturing Costs 5 Exhibit 17

Cash Budget Schedule of collections from sales Schedule of cash payments for manufacturing costs 5 Exhibit 18

Capital Expenditure Budget The capital expenditure budget summarizes plans for acquiring fixed assets. Such expenditures are necessary as machinery and other fixed assets wear out or become obsolete. 5

Budgeted Balance Sheet The budgeted balance sheet is prepared and based on the operating, financing, and investing budgets of the master budget. It is similar to a normal balance sheet except that estimated amounts are used. 5