McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 9 Budgetary Planning PowerPoint Authors:
Jon A. Booker, Ph.D., CPA, CIA Charles W. Caldwell, D.B.A., CMA Susan Coomer Galbreath, Ph.D., CPA

Describe the phases of the planning and control process.
9-3 Learning Objective 1 Describe the phases of the planning and control process. Learning objective 1 is to describe the phases of the planning and control process.

Role of Budgets in the Planning and Control Cycles
9-4 Role of Budgets in the Planning and Control Cycles A budget is a comprehensive financial plan for achieving the financial and operational goals of an organization. Planning Developing objectives for acquisition and use of resources. Control Steps taken by management to ensure that objectives are attained. Budgeting is part of the planning process and helps us formalize our and goals and objectives. Control involves the steps taken by management to ensure that we attain these goals, or at least that we are moving in the correct direction.

Functions of Management
9-5 Functions of Management Planning Control Organizing The four functions of management are planning, organizing, directing/leading, and control. Planning is the forward-looking function of the cycle where managers set long-term objectives and define short-term tactics that will help to achieve them. Organizing involves arranging for the necessary resources needed to achieve the plan. Directing, includes all the actions managers must take to implement the plan, including motivating employees to achieve results. Control is the backward-looking function of the cycle where managers compare actual results to budgeted figures to determine whether objectives that were set in the planning function have been met. If not, corrective action may be necessary. The control function also provides feedback for use in future planning. Directing/Leading

Short-term Objectives
9-6 Planning Process Strategic Plan Long-term Objectives Short-term Objectives The starting point of the planning process is management’s strategic plan, which is a vision of what they want the organization to accomplish over the long term. Then long-term and short-term objectives and goals are formulated that support management’s vision. Next the tactics necessary to achieve those objectives are developed. Tactics are specific actions that must be taken to meet the objectives. Tactics

Planning Process Pyramid of Success 2010 (Condensed) Vision Mission
9-7 Planning Process Vision Mission Daily Purpose Key Success Factors Brand Benefits Core Values Consider Cold Stone Creamery’s strategic vision called the Pyramid of Success A condensed version is shown on your screen. The pyramid shows what the company would like to accomplish by the year The top of the pyramid shows the company’s strategic vision, which is to become “the #1 best-selling ice cream brand in America by December 31, 2009.” This goal represents a specific long-term objective. To achieve this long-term goal, managers would then need to lay out their short-term objectives and tactics. So very high-level and long-run goals are at the top of the pyramid while the bottom of the pyramid tells Cold Stone’s managers and employees what they need to do well on a daily basis, in order to achieve more specific critical success factors. Pyramid of Success 2010 (Condensed)

List the key benefits of budgeting.
9-8 Learning Objective 2 List the key benefits of budgeting. Learning objective 2 is to list the key benefits of budgeting.

9-9 Benefits of Budgeting An important part of the planning process is the development of a budget that translates the company’s objectives into financial terms. The benefits of budgeting are: Budgets force managers to think about and plan for the future. The budgeting process can also uncover potential bottlenecks before they occur. Budgets communicate management’s plans throughout the organization. Budgets coordinate the activities of the entire organization by integrating the plans of its various parts. If properly implemented, budgets should help motivate employees to work toward the organization’s objectives. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent performance.

9-10 Learning Objective 3 Explain the behavioral effects of budgets and provide guidelines for implementing a budget. Learning objective 3 is to explain the behavioral effects of budgets and provide guidelines for implementing a budget.

Behavioral Effects of Budgets
9-11 Behavioral Effects of Budgets Budget Problems Perceived unfair or unrealistic goals. Poor management-employee communications. Solution Reasonable and attainable budgets. Employee participation in budgeting process. Budgets must be perceived to be fair and reasonable by employees whose performance will be compared to budgeted goals. If a goal is too easy, there is no since of satisfaction in achieving it, and effort will likely be less than desired. But if a goal too difficult, frustration may result in the attitude of “Why try, the goal is unattainable with any level of effort.” Participation in the budgeting process is an important part of the employee-management communication process. Participation leads to greater acceptance of the budgeted goals.

Behavioral Effects of Budgets
9-12 Behavioral Effects of Budgets Budget Problems Building budget slack into budgets. A “use-it-or-lose-it” mentality. Solution Different budgets for planning and for performance evaluation. Continuous, or rolling budgets. Zero-based budgeting. Managers may build a little extra cushion, or budget slack, into their budgets. This is generally done by understating expected sales or overstating budgeted expenses, making it more likely that actual results will come in under budget for expenses or over budget for revenues. Organizations can address the budget slack problem by using different budgets for planning and for performance evaluation. Budget slack causes problems in planning; it is not necessarily a problem during performance evaluation, because it provides a way for managers to hedge against uncertainty. Some slack can be beneficial in organizations that face fluctuations in demand or costs that are beyond the manager’s control. Budgets can also create a “use-it-or-lose-it” mentality among managers, who may feel they need to spend their entire budgets to avoid a reduction in the next budget period. This attitude is most prevalent at the end of periods when managers have unused resources. The “use-it-or-lose-it” problem is addressed by using continuous (rolling) budgets and zero-based budgeting. Continuous budgets automatically add a budget period as one budget period expires, keeping managers in continuous planning mode and always looking into the future. Zero-based budgeting requires that the entire budget must be constructed from zero each period, rather than starting with the last period’s actual results.

9-13 Learning Objective 4 Describe the major components of the master budget and their interrelationships. Learning objective 4 is to describe the major components of the master budget and their interrelationships.

Components of the Master Budget
9-14 Components of the Master Budget Operating Budgets Financial Budgets Sales Budget Cash Budget Capital Purchases Budget Financing Budget Selling and Administrative Budget Production Budget Direct Labor Budget Material Purchases Budget Manufact. Overhead Budget Cost of Goods Sold Budget Part I The master budget consists of a number of separate but interdependent budgets. The sales budget shows the expected sales for the budget period expressed in dollars and units. It is usually based on a company’s sales forecast. All other parts of the master budget are dependent on the sales budget. Part II The production budget is prepared after the sales budget. It lists the number of units that must be produced during each budget period to meet sales needs and to provide for the desired ending inventory. The production budget in turn directly influences the raw material purchases budget, the direct labor budget, the manufacturing overhead budget, and the cost of goods sold budget. Part III These budgets are then combined with data from the sales budget and the selling and administrative expense budget, along with the capital purchases budget and the financing budget, to determine the cash budget. The cash budget is a detailed plan showing how cash resources will be acquired and used over a specified time period. All of the operating budgets have an impact on the cash budget. Part IV The last step of the process is to prepare a budgeted income statement and a budgeted balance sheet. The budgeted income statement is prepared using the operating budgets and the budgeted balance sheet is prepared using the financial budgets. Budgeted Income Statement Budgeted Balance Sheet

Prepare the following components of the operating budget:
9-15 Learning Objective 5 Prepare the following components of the operating budget: Sales budget. Production budget. Raw materials purchases budget. Direct labor budget. Manufacturing overhead budget. Cost of goods sold budget. Selling and administrative budget. Budgeted income statement. Learning objective 5 is to prepare the following components of the operating budget: a. Sales budget. b. Production budget. c. Raw materials purchases budget. d. Direct labor budget. e. Manufacturing overhead budget. f. Cost of goods sold budget. g. Selling and administrative budget. Budgeted income statement.

Preparation of the Operating Budgets
9-16 Preparation of the Operating Budgets Let’s take a closer look at the operating budgets. We’ll use Cold Stone Creamery as our company example. We begin the budgeting process with the operating budgets. We will prepare the operating budget for a single Cold Stone Creamery location.

Sales Budget Sales Budget Estimated Unit Sales Estimated Unit Price
9-17 Sales Budget Sales Budget Estimated Unit Sales Estimated Unit Price The starting point for preparing the master budget is the sales forecast or sales budget which begins with a forecast of unit sales for each period. The forecast of unit sales might come from one or more of the following sources: • Last period’s actual sales. • Research on overall industry trends. • Input from top management about overall sales objectives (for example, market share goals). • Input from research and development about new product introductions and/or new features of existing products. • Planned marketing activities (for example, advertising and sales promotions). In addition, management must forecast the unit price which is then multiplied times the forecasted unit sales to obtain forecasted sales revenue. Analysis of economic and market conditions + Forecasts of customer needs from marketing personnel

9-18 Sales Budget We begin the preparation of operating budgets with the sales budget using information from a single Cold Stone Creamery location. We will use unit sales forecasts and unit sales prices from Cold Stone Creamery to develop a sales budget. Cold Stone forecasts sales for four quarters and for the year. After forecasting unit sales, the unit price is multiplied times the forecasted unit sales to obtain the budgeted sales revenue. We prepare the sales budget by multiplying the number of units we expect to sell times the budgeted unit price.

9-19 Production Budget The production budget is directly related to the sales budget and to the quantity of inventory the company wants to have on hand at the beginning and end of each period. The relationship between budgeted production, sales, and inventory is summarized in the following formula: After the sales budget is completed, we can prepare the production budget. The production budget is a function of budgeted sales and desired finished goods inventory levels. If the company is planning to build its finished goods inventory, production will need to be greater than sales. If the company is planning to reduce its finished goods inventory, then production can be less than sales. Budgeted Production Units Budgeted Unit Sales Budgeted Ending Finished Goods Inventory Budgeted Beginning Finished Goods Inventory = + –

9-20 Production Budget Prepare a production budget for Cold Stone Creamery using the sales budget and the following inventory policy: Cold Stone maintains an ending inventory of finished goods equal to 5 percent of budgeted sales in units for the current period. The beginning inventory for quarter 1 (for the year) is 900 units. Let’s prepare a production budget for Cold stone Creamery using the sales budget and the following inventory policy: Cold Stone maintains an ending inventory of finished goods equal to 5 percent of budgeted sales in units for the current period. The beginning inventory for quarter 1 (for the year) is 900 units. Budgeted Production Units Budgeted Unit Sales Budgeted Ending Finished Goods Inventory Budgeted Beginning Finished Goods Inventory = + –

Production Budget 5% of 15,000 5% of 20,000 5% of 27,000 5% of 23,000
9-21 Production Budget 5% of 15,000 5% of 20,000 5% of 27,000 5% of 23,000 Part I We start the production budget for each period with budgeted unit sales for the period. Next we incorporate the finished goods inventory policy by adding the budgeted ending inventory and subtracting the budgeted beginning inventory. Note that production is highest in the summer (Quarter 3) when sales are highest. Part II The ending inventory for each quarter is 5 percent of the budgeted unit sales for that quarter. Part III The ending inventory for each quarter becomes the beginning inventory for the next quarter. Part IV The ending inventory for the year is equal to the ending inventory for Quarter 4. The beginning inventory for the year is equal to the beginning inventory for Quarter 1.

Raw Materials Purchases Budget
9-22 Raw Materials Purchases Budget Next, we must determine what quantity of raw materials to purchase to use for the production budget. Budgeted material purchases will depend on budgeted production needs, as well as on the planned levels for beginning and ending raw materials inventory. The relationship between budgeted raw material purchases, budgeted production, and raw materials inventory is summarized in the following formula: After the production budget is completed, we can prepare the raw materials purchases budget. The formula for the raw materials purchases budget is very similar to the formula for the production budget. The only differences are that we start with production instead of sales and we adjust for beginning and ending materials inventory instead of finished goods inventory. The raw materials purchases budget is a function of budgeted production requirements for materials and desired inventory levels of materials. If the company is planning to build its inventory of materials, purchases will need to be greater than production requirements. If the company is planning to reduce its inventory of materials, then purchases can be less than production requirements. Budgeted Material Purchases Budgeted Production Needs Budgeted Ending Raw Materials Inventory Budgeted Beginning Raw Materials Inventory = + –

9-23 Raw Materials Purchases Budget Prepare a raw materials purchases budget for Cold Stone Creamery using the production budget and the following inventory policy: Cold Stone maintains an ending inventory of materials equal to 3 percent of the next quarter’s production needs, making the beginning inventory for each quarter equal to 3 percent of the current quarter’s production needs. The ending inventory for quarter 4 (for the year) is assumed to be 3,510 ounces. Each Cold Stone ice cream creation requires a total of 10 ounces of milk, cream, and sugar, at an average cost of $.05 per ounce. Let’s prepare a raw materials purchases budget for Cold Stone Creamery using the production budget and the following materials inventory policy: Cold Stone maintains an ending inventory of materials equal to 3 percent of the next period’s production requirements, making the beginning inventory for each quarter equal to 3 percent of the current quarter’s production needs. The ending inventory for quarter 4 (for the year) is assumed to be 3,510 ounces of ice cream. Each Cold Stone ice cream creation requires a total of 10 ounces of milk, cream, and sugar, at an average cost of $.05 per ounce. Budgeted Material Purchases Budgeted Production Needs Budgeted Ending Raw Materials Inventory Budgeted Beginning Raw Materials Inventory = + –

9-24 Raw Materials Purchases Budget From Production Budget 3% of 202,500 3% of 273,500 3% of 228,000 3% of 148,500 Part I We start the raw materials purchases budget for each period with budgeted unit production for the period. Next we multiply the budgeted production in units by the 10 ounces per unit to determine the total production needs for material for each period. Part II Then we incorporate the materials inventory policy by adding the budgeted ending inventory of materials and subtracting the budgeted beginning inventory of materials. The ending inventory for each quarter is 3 percent of the budgeted unit production for the next quarter. The ending inventory for quarter 4 (for the year) is assumed to be 3,510 ounces. Part III The beginning inventory for each quarter is equal the ending inventory of the previous quarter, and can also be calculated as 3 percent of the current quarter. For example, the beginning inventory for quarter 1 is 3 percent of 148,500.

9-25 Raw Materials Purchases Budget Part I The ending inventory for the year is equal to the ending inventory for Quarter 4. The beginning inventory for the year is equal to the beginning inventory for Quarter 1. Part II Finally, we multiply the cost per ounce times total purchases to get the cost of purchases.

9-26 Raw Materials Purchases Budget The cost of mix-in ingredients (candies and nuts) is 40 percent of the cost of milk, cream, and sugar. 40% of 13,607 40% of 7,506 40% of 10,232 The cost of mix-in ingredients such as candies and nuts, is 40 percent of the cost of the milk, cream, and sugar. Adding the cost of mix-in ingredients to the cost of milk, cream, and sugar purchases results in total material purchases. 40% of 11,233

9-27 Direct Labor Budget Each Cold Stone Creamery creation requires 0.10 hour (6 minutes) of direct labor (DL) time to take customers’ orders and payments, to mix and serve the ice cream, and to clean up. The direct labor rate is $8.00 per hour. Let’s prepare the direct labor budget. Part I After the production budget is completed, we can prepare the direct labor budget. Each Cold Stone Creamery creation requires 0.10 hour (6 minutes) of labor time to take customers’ orders and payments, to mix and serve the ice cream and to clean-up. The direct labor rate is $8.00 per hour. Part II Here you see the direct labor budget for Cold Stone Creamery.

Manufacturing Overhead Cost Budget
9-28 Manufacturing Overhead Cost Budget Cold Stone Creamery’s variable manufacturing overhead cost is $0.10 per unit and the fixed manufacturing overhead cost is $8,525 per quarter. Let’s prepare the manufacturing overhead budget. Part I The third component of production cost is manufacturing overhead. Just as with direct material and direct labor, we can also prepare the manufacturing overhead budget once the production budget is completed. Recall that manufacturing overhead is all manufacturing costs, other than direct materials and direct labor, that Cold Stone incurs to make and serve ice cream. For Cold Stone, manufacturing overhead includes the costs of rent, depreciation on equipment, and other indirect costs, such as utilities and paper supplies. It does not include selling costs, such as advertising and promotion, or administrative costs for legal counsel, accounting services, insurance, and franchise fees. Some manufacturing overhead costs, such as those for indirect materials and paper supplies, will vary with the number of units produced. Other costs, such as those for rent and depreciation, will be incurred regardless of the number of units produced. We will assume that Cold Stone Creamery’s variable manufacturing overhead cost is $0.10 per unit and the fixed manufacturing overhead cost is $8,525 per quarter. Part II Here you see the manufacturing overhead budget for Cold Stone Creamery.

Budgeted Cost of Goods Sold
9-29 Budgeted Cost of Goods Sold First, let’s compute the manufacturing cost per unit, and then we will compute cost of goods sold for each period. The budgeted cost of goods sold includes all the costs required to manufacture the product --- direct materials, direct labor, and manufacturing overhead. The cost information to calculate the manufacturing cost per unit is from the direct materials , direct labor, and manufacturing overhead budgets that we prepared earlier. Pay particular attention to the computation of the fixed manufacturing overhead cost per unit. Unlike the variable costs (direct material, direct labor, and variable overhead) fixed manufacturing overhead is a total amount that does not change with production increases or decreases. The fixed manufacturing overhead per unit is computed by dividing the total budgeted fixed manufacturing overhead for the year by the total budgeted production in units for the year.

Budgeted Cost of Goods Sold
9-30 Budgeted Cost of Goods Sold Using the unit manufacturing cost of $2.00 and the budgeted sales in units, we can compute cost of goods sold for each period by multiplying the unit cost times the budgeted sales for the period. Using the unit manufacturing cost of $2.00 and the budgeted sales in units, we can compute cost of goods sold for each period by multiplying the unit cost times the budgeted sales for the period.

Selling and Administrative Expense Budget
9-31 Selling and Administrative Expense Budget Variable selling expenses for a period are 5 percent of sales revenue for that same period. Fixed administrative expenses are $10,000 per quarter. 5% of $75,000 5% of $100,000 5% of $135,000 5% of $115,000 The selling and administrative expense budget includes all the costs related to selling the product (such as advertising and promotion) and managing the business (such as franchise fees, legal counsel, accounting services, and insurance). Variable selling expenses for a period are 5 percent of sales revenue for that same period. Fixed administrative expenses are $10,000 per quarter.

Budgeted Income Statement
9-32 Budgeted Income Statement We can now combine all of the operating budgets to prepare a budgeted income statement.

9-33 Learning Objective 6 Prepare the cash budget and describe the other financial budgets required to produce a budgeted balance sheet. Learning objective 6 is to prepare the cash budget and describe the other financial budgets required to produce a budgeted balance sheet.

Preparation of the Financial Budgets
9-34 Preparation of the Financial Budgets Now, let’s focus on the financial budgets for Cold Stone Creamery. Let’s turn our attention to financial budgets for Cold Stone Creamery. The financial budgets focus on the financial resources needed to support the company’s operations, including cash receipts and disbursements, inventory, capital expenditures, and financing. To illustrate how to budget for cash collections over multiple budget periods, we will focus on the months of October, November, and December in the fourth quarter of Cold Stone Creamery's budget period.

9-35 Cash Budget Our focus is on cash flows that arise from operating activities and are directly related to the operating budgets for Cold Stone Creamery. The relationship between budgeted cash collections and budgeted cash payments from operating activities and cash balances is summarized in the following formula: The cash budget is a future-oriented version of the statement of cash flows, which summarizes the cash flowing into and out of the business during a given period of time. In this chapter, we focus primarily on the cash flows that arise from operating activities, which are directly related to the operating budgets described previously. The only financing activity we consider is the potential need for a short-term bank loan to maintain a minimum cash balance. Budgeted cash collections are based on the sales budget, while budgeted cash payments are based on all of the operating expense budgets, including the raw materials purchases budget, direct labor budget, manufacturing overhead budget, and selling and administrative expense budget. But remember that sales revenue is not the same as cash. Sales are recognized when revenue is earned, not when cash is received. Similarly, expenses are recorded when incurred, which may not correspond to the time that cash is paid. Let’s prepare the cash collections budget for Cold Stone Creamery. Beginning Cash Balance Budgeted Cash Collections Budgeted Cash Payments Cash Borrowed or Repaid Ending Cash Balance + + – = –

9-36 Cash Budget Assume that the budgeted sales for the last four months of the year are as follows: All budgeted cash collections will come from sales revenue. To calculate the budgeted cash collections, we will assume that 40% of Cold Stone's revenue is from cash sales. The other 60% is from sales on credit, which is collected as follows: 75% of credit sales collected in the month of sale. 25% of credit sales collected in the month following the sale. Part I To illustrate how to budget for cash collections over multiple budget periods, we will focus on the months of October, November, and December in the fourth quarter of Cold Stone Creamery's budget period. Part II All budgeted cash collections will come from sales revenue. To calculate the budgeted cash collections, we will assume that 40% of Cold Stone's revenue is from cash sales. The other 60% is from sales on credit, which is collected as follows: 75% of credit sales collected in the month of sale. 25% of credit sales collected in the month following the sale.

Budgeted Cash Collections
9-37 Budgeted Cash Collections 40% of $60,000 (60% of $60,000) × 0.75) Part I We multiply sales revenue for the period by 40 percent to determine the amount of cash collected from customers at the point of sale. October's cash sales are equal to 40% of budgeted sales revenue ($60,000 x 40% = $24,000). The computation for October is shown. Part II The remaining 60% of sales are on credit, some of which will be collected during October and the remainder during November. The portion of October's credit sales that will be collected during October is $27,000 ($60,000 x .60 x .75). The computation for October credit sales collected in October is shown. Part III The remaining 25% of October's credit sales are budgeted to be collected in November ($60,000 x .60 x .25 = $9,000). The computation for October credit sales collected in November is shown. Also note that the portion of September sales collected during October is $5,250 ($35,000 x 60% on credit x 25% collected the month following the sale). Can you complete the computations to verify the remaining amounts in the cash collections budget before moving to the next slide? (60% of $60,000) × 0.25)

Budgeted Cash Payments
9-38 Budgeted Cash Payments We will use the following additional information to develop a cash payments budget for Cold Stone Creamery: 20% of raw materials purchases are paid for during the month purchased; 80% are paid for in the following month. September purchases of raw materials were $20,000. • Direct labor, manufacturing overhead costs, and selling and administrative costs are paid for during the month incurred. The operating budgets include $1,000 in depreciation (a noncash expense). We will use the following additional information to develop a cash disbursements budget for Cold Stone Creamery: • 20 percent of raw materials purchases are paid for during the month purchased; percent are paid for in the following month. September raw material purchases were $20,000. • Direct labor, manufacturing overhead costs, and selling and administrative costs are paid for during the month in which they are incurred. The operating budgets include $1,000 in depreciation (a noncash expense).

Budgeted Cash Payments for Merchandise Purchases
9-39 Budgeted Cash Payments for Merchandise Purchases 20% of $6,000 80% of $6,000 Part I Since 20 percent of direct materials purchases are paid for during the month purchased we multiply the dollar amount of material purchases by 20 percent to get the cash paid for purchases mad in each month. The computation for October purchases paid for in October (20% of $6,000) is shown. Part II 80 percent of the current month’s direct material purchases are paid for in the following month. The computation for October purchases paid for in November (80% of $6,000) is shown. Note that during October, Cold Stone would pay for 80% of the raw materials that were purchased in September ($20,000 x 80% = $16,000). Can you complete the computations to verify the remaining amounts in the cash collections budget before moving to the next slide?

Budgeted Cash Payments
9-40 Budgeted Cash Payments Next, we add the cash paid for direct labor, manufacturing overhead costs, and selling and administrative expenses. The amounts come from the direct labor budget, the manufacturing overhead budget, and the selling and administrative expense budget. All of these amounts are paid in the month incurred. Remember that the operating budgets include $1,000 in depreciation (a noncash expense) that is deducted in the cash payments budget on your screen. Now that we have completed the cash collections budget and the cash payments budget, we can combine them, with the help of some additional information to prepare the cash budget.

9-41 Cash Budget We will use the following additional information to develop the cash budget for Cold Stone Creamery: At the beginning of October, the cash account balance was $50,000. Cold Stone Creamery has a bank agreement enabling the company to borrow and repay cash as needed to maintain a minimum cash balance of $50,000. At the beginning of the year, the company had borrowed $100,000 to finance the start-up of the business. By the end of the 3rd quarter (beginning of October), the company still owed $50,000 on this "revolving line of credit“. We will use the following additional information to develop the cash budget for Cold Stone Creamery: At the beginning of October, the cash account balance was $50,000. Cold Stone Creamery has a bank agreement enabling the company to borrow and repay cash as needed to maintain a minimum cash balance of $50,000. At the beginning of the year, the company had borrowed $100,000 to finance the start-up of the business. By the end of the 3rd quarter (beginning of October), the company still owed $50,000 on this "revolving line of credit“. Let’s prepare the cash budget for Coldstone Creamery.

9-42 Cash Budget The cash collections budget and the cash payments budget can now be combined into a summary cash budget for Cold Stone Creamery. Notice that the ending cash balance for each month is also the beginning cash balance for the next month. Cold Stone expects to have sufficient cash to reduce the loan balance in October and November, but additional borrowing is anticipated in December.

Budgeted Balance Sheet
9-43 Budgeted Balance Sheet From Cash Budget. (60% of $10,000) × 0.25) 3,510 $0.05 1,150 $2.00 Now we can prepare the budgeted balance sheet. Just as the operating budgets were combined into a budgeted income statement, the financial budgets can be combined into a budgeted balance sheet. We will assume the following in order to prepare the budgeted balance sheet: Long-term assets are $412,000. Long-term liabilities are $200,000. Owner’s equity is $261,205 after closing the current year’s income into equity. In addition, the computations shown reflect the following information from budgets that we have prepared: The ending cash balance of $50,000 would appear as an asset on the budgeted balance sheet. Credit sales not yet collected would be shown as Accounts Receivable. December's credit sales were 60% of $10,000, or $6,000. The portion of December's credit sales budgeted for collection in January (25% x $6,000 = $1,500) would appear as Accounting Receivable on the year- end balance sheet. Raw Materials, Work-in-Process, or Finished Goods on hand the end of the year would be shown as Inventory on the Balance Sheet. The raw materials purchases budget was based on having 3,510 ounces of raw materials on hand at the end of the year. This Raw Materials Inventory would be valued at the $0.05 purchase cost per ounce, or $ (3,510 x $0.05). The production budget was based on having 1,150 units in Finished Goods Inventory at year-end. These units would be valued at the budgeted manufacturing cost per unit of $2.00, resulting in Finished Goods Inventory of $2,300 (1,150 x $2). Raw materials purchased but not yet paid would appear as a liability on the balance sheet. The cash payment budget showed that 80 percent of December's raw materials purchases ($3,726) would not be paid until January. The amount owed to supplier (80% x $3,726 = $2,980.80) would appear as Accounts Payable on the year-end balance sheet. The $1,790 borrowed from the bank during December would appear as a short-term liability on the balance sheet. 80% × $3,726 From Cash Budget.

Budgeting in Non-Manufacturing Firms
9-44 Budgeting in Non-Manufacturing Firms The primary operating budget for a merchandiser is a merchandise purchases budget which is similar in form to a raw materials purchases budget for a manufacturer. Budgeted Merchandise Purchases Budgeted Sales Budgeted Ending Finished Goods Inventory Budgeted Beginning Finished Goods Inventory = + – The Cold Stone Creamery example illustrated the budgeted process for a manufacturer. Budgeting for a merchandising company is just slightly different because a merchandising company purchases finished goods for resale instead of purchasing raw materials and converting those raw materials into finished goods in a manufacturing process. The primary operating budget for a merchandising company is a merchandise purchases budget which is similar in form to the materials purchases budget for a manufacturer. Since a merchandising company does not manufacture, it does not have raw material, direct labor, and manufacturing overhead budgets. Since a merchandising company does not manufacture, it does not have raw material, direct labor, and manufacturing overhead budgets.

End of Chapter 9 End of chapter 9.

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