1. Budgeting for Planning and Control
Prepared by
Douglas Cloud Pepperdine University

2. After studying this chapter, you should be able to:
Objectives
1. Define budgeting, and discuss its role in planning, controlling, and decision making.
2. Prepare the operating budget, identify its major components, and explain the interrelationships of the various components.
3. Identify the components of the financial budget, and prepare a cash budget.
4. Describe the budgets for merchandise and service firms.
After studying this chapter, you should be able to:

3. The Master Budget and Its Interrelationships
Strategic Plan
Planning:
The Master Budget and Its Interrelationships
Long-Term Objectives
Control:
Compare actual results with planned amounts
F e edba ck
Short-Term Objectives
Budgets
Production, Service, and Sales
Operations

4. Purposes of Budgeting 1. It forces managers to plan.
2. It provides resource information that can be used to improve decision making.
3. It provides a standard for performance evaluation.
4. It improves communication and coordination.

5. Two Dimensions of Budgeting
1. How is the budget prepared?
2. How is the budget used to implement the organization’s plan?

6. Preparing the Operating Budget
1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
5. Overhead budget
6. Ending finished goods inventory budget
7. Cost of goods sold budget
8. Marketing expense budget
9. Research and development budget
10. Administrative expense budget
11. Budgeted income statement

7. Schedule 1 (in thousands) For the Year Ended December 31, 2004
ABT, Inc.
Sales Budget
For the Year Ended December 31, 2004
Quarter
Year
Units 2,000 6,000 6,000 2,000 16,000
Unit selling price x $0.70 x $0.70 x $0.80 x $ x $0.75
Sales $ 1,400 $ 4,200 $ 4,800 $ 1,600 $12,000
The sales forecast is the basis for the sales budget. The accuracy of the sales forecast strongly affects the soundness of the entire master budget.

8. Computing Units to be Produced
Expected unit sales + Units, ending inventory – Units, beginning inventory

9. Schedule 2 (in thousands) For the Year Ended December 31, 2004
ABT, Inc.
Production Budget
For the Year Ended December 31, 2004
Quarter
Year
Sales (Schedule 1) 2,000 6,000 6,000 2,000 16,000
Desired ending inventory
Total needs 2,500 6,500 6,100 2,100 16,100
Less: Beginning inventory
Units to be produced 2,400 6,000 5,600 2,000 16,000

10. Continued Schedule 3 (in thousands) ABT, Inc.
Direct Materials Purchases Budget
For the Year Ended December 31, 2004
Quarter
Year
Units to be produced (Schedule 2) 2,400 6,000 5,600 2,000 16,000
Direct materials per unit (lbs.) x x x x x 26 Production needs 62, , ,600 52, ,000
Desired ending inventory (lbs.) 8, , , , ,000
Total needs 70, , ,600 57, ,000
Continued

11. Quarter
Year
Total needs 70, , ,600 57, ,000
Less beginning inventory 5, , , , ,000
Direct materials to be purchased (lbs.) 65, , ,600 52, ,000
Cost per pound x $0.01 x $0.01 x $0.01 x $ x $0.01
Total purchase cost $ $ 1,560 $ 1,426 $ $ 4,160

12. Schedule 4 (in thousands) For the Year Ended December 31, 2004
ABT, Inc.
Direct Labor Budget
For the Year Ended December 31, 2004
Quarter
Year
Units to be produced (Schedule 2) 2,400 6,000 5,600 2,000 16,000
Direct labor time per unit (hrs.) x x x x x 0.015
Total hours needed
Wage per hour x $ x $ x $ x $ x $8
Total direct labor cost $ $ $ $ $ 1,920

13. Schedule 5 (in thousands) For the Year Ended December 31, 2004
ABT, Inc.
Overhead Budget
For the Year Ended December 31, 2004
Quarter
Year
Budgeted direct labor hours (Schedule 4)
Variable overhead rate x $8 x $8 x $8 x $ x $8
Budgeted variable overhead $288 $ $672 $240 $1,920
Budgeted fixed overhead ,280
Total overhead $608 $1,040 $992 $560 $3,200

14. Finished goods: Concrete blocks 100 $0.58 $58
Schedule 6 (in thousands)
ABT, Inc.
Ending Finished Goods Inventory Budget
For the Year Ended December 31, 2004
Unit-cost computation:
Direct materials (26 $0.01) $0.26
Direct labor (0.015 $8) 0.12
Overhead:
Variable (0.015 $8) 0.12
Fixed (0.015 $5.33)
Total unit cost $0.58
Units Unit Cost Total
Finished goods: Concrete blocks $ $58

15. Schedule 7 (in thousands) ABT, Inc. Cost of Goods Sold Budget
For the Year Ended December 31, 2004
Direct materials used (Schedule 3) $4,160
Direct labor used (Schedule 4) 1,920
Overhead (Schedule 5) 3,200
Budgeted manufacturing costs $9,280
Beginning finished goods
Goods available for sale $9,335
Less: Ending finished goods (Schedule 6)
Budgeted cost of goods sold $9,277

16. Schedule 8 (in thousands) ABT, Inc. Marketing Expense Budget
For the Year Ended December 31, 2004
Quarter
Year
Planned sales in units (Schedule 1) 2,000 6,000 6,000 2,000 16,000
Variable marketing expenses per unit x$0.05 x$0.05 x$0.05 x$0.05 x$0.05 Total variable expenses $ $ $ $ $ 800
Continued

17. Quarter
Year
Fixed marketing expenses:
Salaries $ 10 $ 10 $ 10 $ 10 $ 40
Advertising
Depreciation
Travel
Total fixed expenses $ 28 $ 28 $ 28 $ 28 $112
Total marketing expenses $128 $328 $328 $128 $912

18. Schedule 9 (in thousands) ABT, Inc.
Research and Development Expenses Budget
For the Year Ended December 31, 2004
Quarter
Year
Sales $18 $18 $18 $18 $ 72
Prototype design and
development
Total R & D expenses $28 $28 $28 $28 $112

19. Schedule 10 (in thousands) ABT, Inc. Administrative Expense Budget
For the Year Ended December 31, 2004
Quarter
Year
Salaries $25 $25 $25 $25 $100
Insurance
Depreciation
Travel
Total administrative expenses $37 $37 $52 $37 $163

20. Schedule 11 (in thousands) ABT, Inc. Cost of Goods Sold Budget
For the Year Ended December 31, 2004
Sales (Schedule 1) $12,000 Less: Cost of goods sold (Schedule 7) 9,277
Gross margin $ 2,723 Less: Marketing expenses (Schedule 8) -912
R & D expenses (Schedule 9) Administrative expenses (Schedule 10)
Operating income $ 1,536 Less: Interest expense (Schedule 12)
Income before taxes $ 1,494 Less: Income taxes
Net income $

21. Schedule 11 (in thousands) ABT, Inc. Cost of Goods Sold Budget
For the Year Ended December 31, 2004
Sales (Schedule 1) $12,000
Less: Cost of goods sold (Schedule 7) 9,277
Gross margin $ 2,723
Less: Marketing expenses (Schedule 8) -912
R & D expenses (Schedule 9) -112
Administrative expenses (Schedule 10)
Operating income $ 1,536
Less: Interest expense (Schedule 12)
Income before taxes $ 1,494
Less: Income taxes
Net income $

22. The Financial Budgets The usual financial budgets prepared are:
The cash budget
The budgeted balance sheet
The budgeted statement of cash flows
The budget for capital expenditures

23. The Cash Budget Beginning cash balance + Cash receipts Cash available
- Cash disbursements
- Minimum cash balance
Excess or deficiency of cash
- Repayments
+ Loans
+ Minimum cash balance
Ending cash balance

24. Schedule 12 (in thousands) For the Year Ended December 31, 2004
ABT, Inc.
Cash Budget
For the Year Ended December 31, 2004
Quarter
Year
Beginning cash balance $ $ $ $1,334 $
Cash collections 1, , , , ,060
Total cash available $1,610 $3,893 $4,862 $3,414 $12,180
Total disbursements $2,097 $3,317 $3,310 $2,079 $10,803
Minimum cash balance
Total cash needs $2,197 $3,417 $3,410 $2,179 $10,903
Excess (deficiency) of cash -$ $ $1,452 $1,235 $ 1,277
Add: Borrowings
Less: Repayments
Less: Interest paid
Ending cash balance $ $ $1,234 $1,235 $ 1,235
Plus: Minimum cash balance
Ending cash balance $ $ 152 $1,334 $1,335 $ 1,335

25. Schedule of Cash Receipts (in thousands)
ABT, Inc.
Schedule of Cash Receipts (in thousands)
Source Quarter 1 Quarter 2 Quarter 3 Quarter 4
Cash sales $ $2,100 $2,400 $ 800
Received on account from sales in: Quarter 4,
Quarter 1,
Quarter 2, ,
Quarter 3, ,
Quarter 4,
Total cash receipts $1,490 $3,780 $4,710 $2,080

26. Balance Sheet (in thousands)
ABT, Inc.
Balance Sheet (in thousands)
December 31, 2003
Note that this is the actual balance sheet for 2003
Assets
Current assets:
Cash $ 120
Accounts receivable 300
Material inventory 50
Finished goods inventory
Total current assets $ 525
Property, plant, and equipment:
Land $2,500
Building and equipment 9,000
Accumulated depreciation -4,500
Total property, plant, and equipment 7,000
Total assets $7,525
Continued

27. Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 100
Stockholders’ equity:
Common stock, no par $ 600
Retained earnings 6,825
Total stockholders’ equity 7,425
Total liabilities and stockholders’ equity $7,525

28. Schedule 13 (in thousands) Budgeted Balance Sheet
ABT, Inc.
Budgeted Balance Sheet
December 31, 2004
Assets
Current assets:
Cash $1,335
Accounts receivable 240
Material inventory 50
Finished goods inventory
Total current assets $1,683
Property, plant, and equipment:
Land $2,500
Building and equipment 9,600
Accumulated depreciation -5,360
Total property, plant, and equipment 6,740
Total assets $8,423
Continued

29. Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 104
Stockholders’ equity:
Common stock, no par $ 600
Retained earnings 7,719
Total stockholders’ equity 8,319
Total liabilities and stockholders’ equity $8,423

30. End of
Chapter