1. Chapter 21 Budgeting Accounting, 21st Edition Warren Reeve Fess
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3. After studying this chapter, you should be able to:
Objectives
1. Describe budgeting, its objectives, and its impact on human behavior.
2. Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting.
3. Describe the master budget for a manufacturing business.
4. Prepare the basic income statement budgets for a manufacturing business.
5. Prepare balance sheet budgets for a manufacturing business.
After studying this chapter, you should be able to:

4. Nature and Objectives of Budgeting
Estimated portion of your total monthly income that should be budgeted

5. Nature and Objectives of Budgeting
Establishing specific goals
Executing plans to achieve the goals
Periodically comparing actual results to the goals
Feedback
PLANNING
DIRECTING
CONTROLLING

6. Nature and Objectives of Budgeting Human Behavior and Budgeting
Setting budget goals too tightly
Setting budget goals too loosely
Setting conflicting budget goals

7. Nature and Objectives of Budgeting
Goal conflict occurs when individual self-interest differs from business objectives.
A student’s question, “Will this be on the test?” is evidence of goal conflict.

8. Continuous Budgeting One-Year Budget Delete on February 28 Feb. 2006
Mar
Apr. 2006
May 2006
June 2006
July 2998
Aug. 2006
Sep. 2006
Oct. 2006
Nov. 2006
Dec. 2006
Jan. 2007
Delete on February 28

9. Continuous Budgeting One-Year Budget Add February 2007 Mar. 2006
Apr. 2006
May 2006
June 2006
July 2998
Aug. 2006
Sep. 2006
Oct. 2006
Nov. 2006
Dec. 2006
Jan. 2007
Feb. 2007
Add February 2007

10. Static Budgets
Description: A budget that does not reflect potential changes in volume or activity level
Strength: It is simple—all expenses are budgeted as fixed costs
Weakness: It does not reflect changes in revenues and expenses that occur as volumes change
Typical usage: Service organizations or administrative departments of retailers and manufacturers

11. Static Budgets Electric Power 5,000 Supervisor salaries 15,000
Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Direct labor $40,000
Electric Power 5,000
Supervisor salaries 15,000
Total department costs $60,000

12. Flexible Budgets
Description: A budget that shows revenues and expenses for a variety of volumes or activity levels
Strength: Provides information needed to analyze the impact of volume changes on actual operating results
Weakness: Requires greater research into costs—must differentiate fixed and variable costs
Typical usage: Operational departments of retailers and manufacturers whose costs change with sales and production

13. Cost per unit is $5.50 at all levels of activity
Colter Manufacturing Company
Assembly Department Budget
For the Month Ending July 31, 2006
Units of production 8,000 9,000 10,000
Variable cost:
Direct labor $40,000 $45,000 $50,000
Electric power 4,000 4,500 5,000
Total variable cost $44,000 $49,500 $55,000
Cost per unit is $5.50 at all levels of activity

14. Colter Manufacturing Company Assembly Department Budget
For the Month Ending July 31, 2006
Units of production 8,000 9,000 10,000
Variable cost:
Direct labor $40,000 $45,000 $50,000
Electric power 4,000 4,500 5,000
Total variable cost $44,000 $49,500 $55,000
Fixed cost:
Electric power $ 1,000 $ 1,000 $ 1,000
Supervisor salaries 15,000 15,000 15,000
Total fixed cost $16,000 $16,000 $16,000

15. Colter Manufacturing Company Assembly Department Budget
For the Month Ending July 31, 2006
Units of production 8,000 9,000 10,000
Variable cost:
Direct labor $40,000 $45,000 $50,000
Electric power 4,000 4,500 5,000
Total variable cost $44,000 $49,500 $55,000
Fixed cost:
Electric power $ 1,000 $ 1,000 $ 1,000
Supervisor salaries 15,000 15,000 15,000
Total fixed cost $16,000 $16,000 $16,000
Total department costs $60,000 $65,500 $71,000

16. Static and Flexible Budgets
Overbudget
Static Budget
Actual Results
$60,000
$72,000

17. Static and Flexible Budgets
Overbudget
10,000 units
9,000 units
8,000 units
Actual Results
Flexible Budget
$60,000
$65,500
$71,000
$72,000

18. Budgeted Income Statement Budgeted Balance Sheet
Master Budget
Budgeted Income Statement
Budgeted Balance Sheet
Sales budget
Cost of goods sold budget:
Production budget
Direct materials purchases budget
Direct labor cost budget
Selling and administrative expense budget
Cash budget
Capital expenditure budget

19. Income Statement Budgets

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

21. – Est. beginning materials inventory
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Materials needed for production
+ Desired ending materials inventory
– Est. beginning materials inventory
Direct materials to be purchased

22. Selling & Administrative
Sales
Budget
Production Budget
Direct Materials
Purchases Budget
Cost of Goods
Sold Budget
Direct Labor
Cost Budget
Selling & Administrative
Expenses
Budget
Factory Overhead
Cost Budget

23. For the Year Ending December 31, 2006
Elite Accessories Inc.
Sales Budget
For the Year Ending December 31, 2006
Unit Sales Unit Selling Total
Product and Region Volume Price Sales
Wallet:
East……………….. 287,000 $12.00 $ 3,444,000
West………………. 241, ,892,000
Total……………. 528,000 $ 6,336,000
Handbag:
East……………….. 156,400 $25.00 $ 3,910,000
West………………. 123, ,090,000
Total……………. 280,000 $ 7,000,000
Total revenue from
Sales……………….. $13,336,000

24. For the Year Ending December 31, 2006
Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet Handbag
Expected units to be sold 528, ,000
From sales budget

25. For the Year Ending December 31, 2006
Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet Handbag
Expected units to be sold………….528, ,000
Plus desired ending inventory, December 31, 2006…………… , ,000
Total 608, ,000

26. For the Year Ending December 31, 2006
Elite Accessories Inc.
Production Budget
For the Year Ending December 31, 2006
Units
Wallet Handbag
Expected units to be sold…………. 528, ,000
Plus desired ending inventory, December 31, 2006…………… , ,000
Total………………………………. 608, ,000
Less estimated beginning inventory, January 1, 2006…………………. 88, ,000
Total units to be produced………… 520, ,000

27. Direct Materials Purchases Budget
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A)………………….. 156,000 52,000
Note A: Leather: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds.
Lining: ,000 units x 0.10 sq. yd. Per unit = 52,000 sq. yds.

28. Direct Materials Purchases Budget
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A)……..……..…….. 156,000 52,000
Handbag (Note B)……………….. 365, ,000
Note B: Leather: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds.
Lining: ,000 units x 0.50 sq. yd. Per unit = 146,000 sq. yds.

29. Direct Materials Purchases Budget
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A)……....………….. 156,000 52,000
Handbag (Note B).………………. 365, ,000
Plus desired inventory, Dec. 31, , ,000
Total……………………………… 541, ,000

30. Direct Materials Purchases Budget
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A) …………………. 156,000 52,000
Handbag (Note B) ………………. 365, ,000
Plus desired inventory, Dec. 31, , ,000
Total……………………………… 541, ,000
Less estimated inventory, Jan. 1, , ,000
Total square yards to be produced.. 523, ,000

31. Direct Materials Purchases Budget
Elite Accessories Inc.
Direct Materials Purchases Budget
For the Year Ending December 31, 2006
Direct Materials
Leather Lining Total
Square yards required for production:
Wallet (Note A)………………….. 156,000 52,000
Handbag (Note B).………………. 365, ,000
Plus desired inventory, Dec. 31, , ,000
Total……………………………… 541, ,000
Less estimated inventory, Jan. 1, , ,000
Total square yards to be produced.. 523, ,000
Unit price (per square yard)…………. x $4.50 x $1.20
Total direct materials to be purchased. $2,353,500 $234,000 $2,587,500

32. Direct Labor Cost Budget For the Year Ending December 31, 2006
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Cutting Sewing Total
Hours required for production:
Wallet (Note A)…………. 52, ,000
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

33. Direct Labor Cost Budget For the Year Ending December 31, 2006
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Cutting Sewing Total
Hours required for production:
Wallet (Note A)…………. 52, ,000
Handbag (Note B)……… , ,800
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs. .
Note B: Cutting Department: 292,000 units x 0.15 hr. per unit = 43,800 hrs.
Sewing Department: 292,000 units x 0.40 hr. per unit = 116,800 hrs

34. Direct Labor Cost Budget For the Year Ending December 31, 2006
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Cutting Sewing Total
Hours required for production:
Wallet (Note A)…………. 52, ,000
Handbag (Note B)……… , ,800
Total…………………… , ,800
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs. .
Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.
Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs

35. Direct Labor Cost Budget For the Year Ending December 31, 2006
Elite Accessories Inc.
Direct Labor Cost Budget
For the Year Ending December 31, 2006
Cutting Sewing Total
Hours required for production:
Wallet (Note A)…………. 52, ,000
Handbag (Note B)……… , ,800
Total…………………… , ,800
Hourly rate…………………… x $12.00 x $15.00
Total direct labor cost………… $1,149,600 $3,702,000 $4,851,600
Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.
Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.
Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.
Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs

36. Factory Overhead Cost Budget For the Year Ending December 31, 2006
Elite Accessories Inc.
Factory Overhead Cost Budget
For the Year Ending December 31, 2006
Indirect factory wages……………………... $ ,800
Supervisory salaries……………………… ,000
Power and light…………………………….. 306,000
Depreciation of plant and equipment………. 288,000
Indirect materials…………………………… 182,800
Maintenance……………………………… ,280
Insurance and property taxes……………… ,200
Total factory overhead cost………………... $2,089,080

37. Cost of Goods Sold Budget For the Year Ending December 31, 2006
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006….. $ 1,095,600
Work in process inventory, January 1, 2006… $ 214,400
Direct materials:
Direct materials inventory, January 1, 2006
(Note A)…………………………………. $ ,000
Note A: Leather: 18,000 sq. yds. x $4.50 per sq. yd $81,000
Lining: 15,000 sq. yds. x $1.20 per sq. yd ,000
Direct materials
inventory,
January 1, $99,000

38. Cost of Goods Sold Budget For the Year Ending December 31, 2006
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006….. $ 1,095,600
Work in process inventory, January 1, 2006… $ 214,400
Direct materials:
Direct materials inventory, January 1, 2006
(Note A)…………………………………. $ ,000
Note B: Leather: 20,000 sq. yds. x $4.50 per sq. yd $ 90,000
Lining: 12,000 sq. yds. x $1.20 per sq. yd ,400
Direct materials inventory, December 31, 2006 $104,400

39. Cost of Goods Sold Budget For the Year Ending December 31, 2006
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006…. $ 1,095,600
Work in process inventory, January 1, $ 214,400
Direct materials:
Direct materials inventory, January 1, 2006
(Note A)…………………………………. $ ,000
Direct materials purchases (Slide 3)…… ,587,500
Cost of direct materials available for use…. $2,686,500
Less direct materials inventory,
December 31, 2006 (Note B)…………… ,400
Cost of direct materials placed in production $2,582,100
Direct labor (Slide 35)………………………. 4,851,600
Factory overhead (Slide 36)………………….. 2,089,080
Total manufacturing costs……………………. 9,522,780
Total work in process during period…………. $9,737,180

40. Cost of Goods Sold Budget For the Year Ending December 31, 2006
Elite Accessories Inc.
Cost of Goods Sold Budget
For the Year Ending December 31, 2006
Finished goods inventory, January 1 ,2006………... $ 1,095,600
Work in process inventory, January 1, 2006……….. $ 214,500
Total manufacturing costs………………………… ,522,780
Total work in process during period……………….. $9,737,180
Less work in process inventory, December 31, ,000
Cost of goods manufactured……………………… ,517,180
Cost of finished goods available for sale…………... $10,612,780
Less finished goods inventory, December 31, ,565,000
Cost of goods sold………………………………….. $ 9,047,780

41. Selling and Administrative Expenses Budget
Elite Accessories Inc.
Selling and Administrative Expenses Budget
For the Year Ending December 31, 2006
Selling expenses:
Sales salaries expense…………………………. $715,000
Advertising expense………………………… ,000
Travel expense………………………………… ,000
Total selling expenses………………………... $1,190,000
Administrative expenses:
Officers’ salaries expense………………………. $360,000
Office salaries expense…………………………. 258,000
Office rent expense……………………………... 34,500
Office supplies expense…………………………. 17,500
Miscellaneous administrative expense………… ,000
Total administrative expenses………………… ,000
Total selling and administrative expenses………… $1,885,000

42. Budgeted Income Statement For the Year Ending December 31, 2006
Elite Accessories Inc.
Budgeted Income Statement
For the Year Ending December 31, 2006
Revenue from sales (slide 23) $13,336,000
Cost of goods sold (slide 40) ,047,780
Gross profit $ 4,288,220
Selling & administrative expenses:
Selling expenses (slide 41) $1,190,000
Administrative expenses (slide 41) ,000
Total sell. & Admin. Expenses ,885,000
Income from operations $ 2,403,220
Other income:
Interest revenue $ 98,000
Other expense:
Interest expense , ,000
Income before income tax $ 2,411,220
Income tax ,000
Net income $ 1,811,220

43. Budgeted Balance Sheet

44. The cash budget is one of the most important elements of the budgeted balance sheet. We’ll begin with a schedule of collection from sales.

45. Schedule of Collections from Sales
Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January February March
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………... $108,000 $ 124,000 $ 97,000
Note A: $108,000 = $1,080,000 x 10%
$124,000 = $1,240,000 x 10%
$ 97,000 = $ 970,000 x 10%

46. Schedule of Collections from Sales
Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January February March
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………... $108,000 $ 124,000 $ 97,000
Receipts from sales on account:
Collections from prior month’s
sales (40%)(see Note B)……. $370,000 $ 388,800 $446,400
Note B: $370,000, given as January 1, Accounts
Receivable balance
$388,800 = $1,080,000 x 90% x 40%
$446,400 = $1,240,000 x 90% x 40%

47. Schedule of Collections from Sales
Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January February March
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………... $108,000 $ 124,000 $ 97,000
Receipts from sales on account:
Collections from prior month’s
sales (40%)(see Note B)……. $370,000 $ 388,800 $446,400
Collections from current month’s sales (60%)(see Note
C)…………………………… 583, , ,800
Note C: $583,200 = $1,080,000 x 90% x 60%
$669,600 = $1,240,000 x 90% x 60%
$523,800 = $ 970,000 x 90% x 60%

48. Schedule of Collections from Sales
Elite Accessories Inc.
Schedule of Collections from Sales
For the Three Months Ending March 31, 2006
January February March
Receipts from cash sales:
Cash sales (10%)(see
Note A)……………………... $108,000 $ 124,000 $ 97,000
Receipts from sales on account:
Collections from prior month’s
sales (40%)(see Note B)……. $370,000 $ 388,800 $446,400
Collections from current month’s sales (60%)(see Note
C)…………………………… 583, , ,800
Total receipts from sales on account……………………... $953,200 $1,058,400 $970,200

49. Schedule of Payments for Manufacturing Costs
Elite Accessories Inc.
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2006
January February March
Payment of prior month’s
manufacturing costs (25%) (see Note A)………………… $190,000 $204,000 $189,000
Note A: $190,000, given as January 1, 2006 Accounts
Payable balance
$204,000 = ($840,000 –$24,000) x 25%
$189,000 = ($780,000 – $24,000) x 75%

50. Schedule of Payments for Manufacturing Costs
Elite Accessories Inc.
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2006
January February March
Payment of prior month’s
manufacturing costs (25%) (see Note A)………………… $190,000 $204,000 $189,000
Payment of current month’s
manufacturing costs (75%)
(see Note B)………………… , , ,000
Note B: $612,000 = ($840,000 – $24,000) x 75%
$567,000 = ($780,000 – $24,000) x 75%
$591,000 = ($812,000 – $24,000) x 75%

51. Schedule of Payments for Manufacturing Costs
Elite Accessories Inc.
Schedule of Payments for Manufacturing Costs
For the Three Months Ending March 31, 2006
January February March
Payment of prior month’s
manufacturing costs (25%) (see Note A)………………… $190,000 $204,000 $189,000
Payment of current month’s
manufacturing costs (75%)
(see Note B)………………… , , ,000
Total payments………………. $802,000 $771,000 $780,000

52. For the Three Months Ending March 31, 2006
Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
January February March
Estimated cash receipts:
Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ ,000
Collections of accounts
receivable (Slide 48)……… ,200 1,058, ,200
Interest revenue……………… — — ,500
Total cash receipts……………. $1,061,200 $1,182,400 $1,091,700

53. For the Three Months Ending March 31, 2006
Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
January February March
Estimated cash receipts:
Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ ,000
Collections of accounts
receivable (Slide 48)……… ,200 1,058, ,200
Interest revenue……………… — — ,500
Total cash receipts……………. $1,061,200 $1,182,400 $1,091,700
Estimated cash payments for:
Manufacturing costs (Slide 51).. $ 802,000 $ 771,000 $ 780,000
Selling and administrative expenses……………………… 160, , ,000
Capital additions 274,000
Interest expense 22,500
Income taxes 150,000

54. For the Three Months Ending March 31, 2006
Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
January February March
Estimated cash receipts:
Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ ,000
Collections of accounts
receivable (Slide 48)……… ,200 1,058, ,200
Interest revenue……………… — — ,500
Total cash receipts……………. $1,061,200 $1,182,400 $1,091,700
Estimated cash payments for:
Manufacturing costs (Slide 51).. $ 802,000 $ 771,000 $ 780,000
Selling and administrative expenses……………………… 160, , ,000
Capital additions 274,000
Interest expense 22,500
Income taxes ,000
Total cash payments…………. $ 984,500 $1,210,000 $1,075,000

55. For the Three Months Ending March 31, 2006
Elite Accessories Inc.
Cash Budget
For the Three Months Ending March 31, 2006
January February March
Estimated cash receipts:
Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ ,000
Collections of accounts
receivable (Slide 48)……… ,200 1,058, ,200
Capital additions 274,000
Interest expense……………….. 22,500
Income taxes………………… ,000
Total cash payments…………. $ 984,500 $1,210,000 $1,075,000
Cash increase (decrease)…………. $ ,700 $ (27,600) $ ,700
Cash balance at beginning of month , , ,100
Cash balance at end of month……. $ 356,700 $ ,100 $ 345,800
Minimum cash balance…………… , , ,000
Excess (deficiency)………………. $ ,700 $ (10,900) $ ,800

56. Chapter 21
The End