23-1 PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA Copyright © 2012 The McGraw-Hill Companies, Inc.McGraw-Hill/Irwin Operational Budgeting Chapter 23

23-2 Profit Rich, Yet Cash Poor Conditions leading to cash shortages when profits are high. Consider the following cash-to-cash cycle. Large investments in assets to support rapid revenue growth. Long operating cycles (cash-to-cash cycles).

23-3 Cash 247 Days Even if sales are growing rapidly, cash is tied up in inventory and receivables for so long that a cash shortage will be the likely result. Profit Rich, Yet Cash Poor Cash Inventories DM  WIP  FG 166 days Accounts Receivable 81 days

23-4 Budgeting: The Basis for Planning and Control Control Steps taken by management to ensure that objectives are attained. Planning Developing objectives for acquisition and use of resources. A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization.

23-5 Coordination of activities Performance evaluation Enhanced management responsibility Assignment of decision- making responsibilities Benefits Derived from Budgeting Benefits

23-6 Budget Problems  Perceived unfair or unrealistic goals.  Poor management- employee communications. Budget Problems  Perceived unfair or unrealistic goals.  Poor management- employee communications. Solution  Reasonable and achievable budgets.  Employee participation in budgeting process. Solution  Reasonable and achievable budgets.  Employee participation in budgeting process. Establishing Budgeted Amounts: Behavioral Approach

23-7 Establishing Budgeted Amounts: Total Quality Management Approach A commitment to the goal of completely eliminating inefficiency. Budgeted amounts set at levels representing absolute efficiency. Small failures to achieve budgeted amounts direct management to areas where improvement is possible.

23-8 Production budgets Financial budgets: cash flow income stmt. balance sheet capital Cash budget Selling and administrative budget Cost of goods manufactured and sold budget The Master Budget Sales budget

23-9 Sales Budget Estimated Unit Sales Estimated Unit Price Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel Steps in Preparing a Master Budget

23-10 The Production Budget The management of Basket wants ending inventory to be 20 percent of the next month’s budgeted sales in units. 4,000 units were on hand March 31.  Let’s prepare the production budget. Production must be adequate to meet budgeted sales and to provide sufficient ending inventory. Budgeted product sales in units +Desired product units in ending inventory =Total product units needed – Product units in beginning inventory =Product units to produce

23-11 The Production Budget

23-12 The material purchases budget is based on production quantity and desired material inventory levels. Units to produce × Material needed per unit =Material needed for units to produce +Desired units of material in ending inventory =Total units of material needed – Units of material in beginning inventory =Units of material to purchase The Production Budget Material Purchases

23-13 The Production Budget Direct Labor Each unit produced requires 3 minutes (.05 hours) of direct labor. Basket employs 30 persons for 40 hours each week at a rate of $10 per hour. Any extra hours needed are obtained by hiring temporary workers also at $10 per hour.

23-14 Cash Payments for Manufacturing Overhead

23-15 Cash Receipts Budget

23-16 $50,000 ×.16 × 3/12 = $2,000

23-17 The Budgeted Income Statement Computation of unit cost follows after we complete the income statement

% of June purchases of $56,800 50% of June purchases of $56,800 25% of June sales of $300,000 25% of June sales of $300,000 5,000 $4.99 each 5,000 $4.99 each 11,500 $.40 per lb.

23-19 Improve performance evaluation. May be prepared for any activity level in the relevant range. Show expenses that should have occurred at the actual level of activity. Reveal variances due to cost control or lack of cost control. Flexible Budgeting

23-20 Indirect labor and indirect material have unfavorable variances because actual costs are more than the flexible budget costs. Flexible Budgeting Performance Report Power has a favorable variance because the actual cost is less than the flexible budget cost.

23-21 End of Chapter 23