Needles Powers Crosson Principles of Accounting 12e The Budgeting Process 22 C H A P T E R ©human/iStockphoto

Concepts Underlying the Budgeting Process  Budgeting is the process of identifying, gathering, summarizing, and communicating financial and nonfinancial information about an organization’s future activities. –Budgets are plans of action based on forecasted transactions, activities, and events. –Budgeting provides managers the opportunity to match their organizational goals with the resources necessary to accomplish those goals. –It empowers all in the organization to understand the goals in terms of their responsibilities and be held accountable for budget plans and results, since they can be compared. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Master Budget (slide 1 of 2)  A master budget consists of a set of operating budgets and a set of financial budgets that detail an organization’s financial plans for a specific period, generally a year.  Operating budgets are plans used in daily operations. They include: –sales budget –production budget –direct materials purchases budget –direct labor budget –overhead budget –selling and administrative expenses budget –cost of goods manufactured budget ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Master Budget (slide 2 of 2)  The sales budget is prepared first because it is used to estimate sales volume and revenues.  Operating budgets are the basis for preparing the financial budgets, which are projections of financial results for the period. They include: –a budgeted income statement –a capital expenditures budget –a cash budget –a budgeted balance sheet  The budgeted income statement and budgeted balance sheet are also called pro forma financial statements, meaning that they show projections rather than actual results. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Sales Budget (slide 1 of 2)  The first step in preparing a master budget is to prepare a sales budget. –A sales budget shows expected sales during a period, expressed in both units and dollars. –The following equation is used to determine the total budgeted sales: Total Budgeted Sales = Estimated Selling Price per Unit × Estimated Sales in Units –To help estimate sales volume, managers often use a sales forecast, which is a projection of the estimated sales in units, based on an analysis of external and internal factors. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Sales Budget (slide 2 of 2) –External factors include:  the state of the local and national economies  the state of the industry’s economy  the nature of the competition and its sales volume and selling –Internal factors include:  the number of units sold in prior periods  the organization’s credit policies  the organization’s collection policies  the organization’s pricing policies  any new products that the organization plans to introduce to the market  the capacity of the organization’s manufacturing facilities ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Production Budget  A production budget shows the number of units that a company must produce to meet budgeted sales and inventory needs. –To prepare a production budget, managers must know the budgeted number of unit sales (from the sales budget) and the desired level of ending finished goods inventory for each period in the budget year. –The following formula identifies the production needs for each period: ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Direct Materials Purchases Budget (slide 1 of 2)  The direct materials purchases budget identifies the quantity of purchases required to meet budgeted production and inventory needs and the costs associated with those purchases. –To prepare this budget, managers must know what production needs will be in each period (from the production budget). They must also know the desired level of the direct materials inventory for each period and the per-unit cost of direct materials.  Step 1: Calculate each period’s total production needs in units of direct materials using the following formula: ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Direct Materials Purchases Budget (slide 2 of 2)  Step 2: Determine the quantity of direct materials to be purchased during each accounting period in the budget using the following formula:  Step 3: Calculate the cost of the direct materials purchases using the following formula: ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Direct Labor Budget  A direct labor budget shows the direct labor hours needed during a period and the associated costs. –The following two steps are used to prepare a direct labor budget:  Step 1: Estimate the total direct labor hours using the following formula:  Step 2: Calculate the total budgeted direct labor cost using the following formula: ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Overhead Budget  An overhead budget shows the anticipated manufacturing costs, other than direct materials and direct labor costs, that must be incurred to meet budgeted production needs. It has two purposes: –To integrate the overhead cost budgets developed by the managers of production and production-related departments. –To group information for the calculation of overhead rates for the next accounting period.  The single overhead rate is computed using the following formula: Estimated Total Overhead Costs ÷ Estimated Total Direct Labor Hours ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Selling and Administrative Expenses Budget  A selling and administrative expenses budget shows the operating expenses, other than those related to production, that are needed to support sales and overall operations during a period. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Cost of Goods Manufactured Budget  A cost of goods manufactured budget summarizes the estimated costs of production during a period. –The sources of information for total manufacturing costs are the direct materials, direct labor, and overhead budgets. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Budgeted Income Statement  A budgeted income statement projects an organization’s net income for a period based on the revenues and expenses estimated for that period. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Capital Expenditures Budget  A capital expenditures budget outlines the anticipated amount and timing of capital outlays for long-term assets during a period. –Managers rely on the information in a capital expenditures budget when making decisions about such matters as buying equipment or building a new plant. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Cash Budget  A cash budget is a projection of the cash that an organization will receive and pay out during a period. It summarizes the cash flow prospects of all transactions considered in the master budget. –The following formula is used in preparing a cash budget: ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

The Budgeted Balance Sheet  A budgeted balance sheet projects an organization’s financial position at the end of a period. –It uses all estimated data compiled in preparing a master budget and is the final step in the budgeting process. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Budgeting and the Management Process (slide 1 of 3)  Budgeting helps managers achieve both long-term and short-term goals. –Strategic planning is the process by which management establishes an organization’s long-term goals.  The organization’s management plays a central role in coordinating the budgeting process. –Managers set the basics of the budgeting process, including assigning budget authority, inviting employee participation, selecting the budget period, and implementing the budget.  The key to a successful budget is participative budgeting, a process in which personnel at all levels of an organization actively engage in making decisions about the budget. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Budgeting and the Management Process (slide 2 of 3)  Budgets generally cover a one-year period, but may be divided further into monthly or quarterly periods. –Static budgets are prepared once a year and do not change during the annual budget period. –A continuous budget is a forward-rolling budget that summarizes budgets for the next 12 months. –Traditional budgeting requires managers to justify only budget changes over the past year. –Zero-based budgeting requires that every budget item be justified annually, thus building the budget from scratch.  The budget committee, which includes the controller and many of the organization’s top management, has overall responsibility for budget implementation. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Budgeting and the Management Process (slide 3 of 3)  Successful budget implementation depends on two factors—clear communication and the support of top management. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.