1. C H A P T E R 5 Operational Budgets

2. Learning Objective 1 Describe the importance of personal budgeting.

3. What are the Purposes of Budgeting ? OVERALL PURPOSE :

4. Define Disposable Income

5. What are the Characteristics of Good Personal Budgeting?

6. Example: Monthly Budget Gross salary...............$2,000 Withholdings: Federal income taxes.......$250 State income taxes......... 150 Other withholdings.......... 150 (550) Net take-home pay.......$1,450 Fixed expenses: House mortgage expense....$450 Car payment expense....... 250 Insurance expense......... 100 (800) Disposable income........$ 650 Utilities expense............$ 65 Food expense..............200 Miscellaneous expenses...... 350 (615) Net surplus.............. $ 35

7. Learning Objective 2 Identify the purposes of budgeting for organizations.

8. Describe Two Types of Planning

9. List Reasons for Budgeting

10. Learning Objective 3 Explain the budgeting process and its behavioral implications in organizations.

11. Budgeting Process Who or what is the budget committee? What are two issues of the budgeting process?

12. List Behavioral Considerations 1. 2. 3.

13. Describe the Top-Down Approach to Budgeting Top Management Manager

14. Describe the Bottom-Up Approach to Budgeting Top Management Manager

15. Learning Objective 4 Construct an operating budget and it components for manufacturing firms.

16. Master Budget—Manufacturing Sales Budget* Selling/Admin. Expense Budget* Production Budget Direct Labor Budget* Manufacturing Overhead Budget* Direct Materials Budget* Budgeted Income Statement Budgeted Balance Sheet Budgeted Cash Flows Cash Budget Capital Expenditures Budget Operating Budget Capital Project Plans Short-Term Objectives Strategic Goals and Plans Budgeted Product Sheet * These budgets all flow into the cash budget below. Planning Process Financial Budgeting ****

17. Sales Budget Master Budget—Manufacturing Define each budget.

18. Example: Sales Budget Selling price per bike......$ 100 Expected sales (units)..... x 100 Expected revenues.......$10,000 Selling price per bike......$ 100 Expected sales (units)..... x 100 Expected revenues.......$10,000

19. Sales Budget Production Budget Master Budget—Manufacturing Define each budget.

20. Example: Production Budget Expected sales............... 100 Add desired ending inventory.... 105 Total number of bikes needed.. 205 Less beginning inventory....... 70 Bikes to be produced.......... 135 Expected sales............... 100 Add desired ending inventory.... 105 Total number of bikes needed.. 205 Less beginning inventory....... 70 Bikes to be produced.......... 135 Note: Ending inventory is estimated at 80% of the next period’s sales.

21. Sales Budget Production Budget Direct Materials Budget Master Budget—Manufacturing Define each budget.

22. Example: Direct Materials Budget Direct materials usage: Direct AmountUnit Total Materials RequiredCost Cost Metal 2,700 lbs. $2.00/ft. $5,400 Plastic 405 lbs. $1.00/ft. $ 405 Direct materials usage: Direct AmountUnit Total Materials RequiredCost Cost Metal 2,700 lbs. $2.00/ft. $5,400 Plastic 405 lbs. $1.00/ft. $ 405

23. Example: Direct Materials Budget Direct materials purchases: MetalPlastic Desired ending inventory.....2,100315 Needed for production....... 2,700 405 Total needed..............4,800720 Less beginning inventory..... 2,800 210 Materials to be purchased....2,000510 Unit cost.................. x $2x $1 Total cost................$4,000$ 510 Direct materials purchases: MetalPlastic Desired ending inventory.....2,100315 Needed for production....... 2,700 405 Total needed..............4,800720 Less beginning inventory..... 2,800 210 Materials to be purchased....2,000510 Unit cost.................. x $2x $1 Total cost................$4,000$ 510

24. Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Master Budget—Manufacturing Define each budget.

25. Example: Direct Labor Budget Number of bikes to produce.... 135 Direct labor hours per bike.....x 3 Total hours required......... 405 Rate per hour................x $5 Total direct labor cost........ $2,025 Number of bikes to produce.... 135 Direct labor hours per bike.....x 3 Total hours required......... 405 Rate per hour................x $5 Total direct labor cost........ $2,025

26. Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Master Budget—Manufacturing Define each budget.

27. Example: Manufacturing Overhead Budget Variable costs: Indirect materials costs.........$ 220 Indirect labor costs............ 600 Total variable costs...........$ 820 Fixed costs: Insurance expense............ $200 Depreciation expense.......... 600 Total fixed costs.............$ 800 Total manufacturing overhead...$1,620 Variable costs: Indirect materials costs.........$ 220 Indirect labor costs............ 600 Total variable costs...........$ 820 Fixed costs: Insurance expense............ $200 Depreciation expense.......... 600 Total fixed costs.............$ 800 Total manufacturing overhead...$1,620

28. Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Master Budget—Manufacturing Define each budget. Budgeted Product Cost Sheet Selling and Administrative Expense Budget

29. Budgeted Product Cost Sheet Input Required Cost Cost Inputs per Bike Metal $2.00/ft. 20 $40.00 Plastic $1.00/ft. 3 3.00 Direct labor $5.00/hr. 3 15.00 Fixed OH $1.98/hr. 3 5.94 Variable OH $2.02/hr. 3 6.06 Total variable cost per bike..... $70.00 Total fixed MOH $1,620 Divide by Production Volume 135 bikes Fixed MOH cost allocated per bike 12.00 Total $82.00 Input Required Cost Cost Inputs per Bike Metal $2.00/ft. 20 $40.00 Plastic $1.00/ft. 3 3.00 Direct labor $5.00/hr. 3 15.00 Fixed OH $1.98/hr. 3 5.94 Variable OH $2.02/hr. 3 6.06 Total variable cost per bike..... $70.00 Total fixed MOH $1,620 Divide by Production Volume 135 bikes Fixed MOH cost allocated per bike 12.00 Total $82.00

30. Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Master Budget—Manufacturing Define each budget. Selling and Administrative Expense Budget

31. Example: Selling and Administrative Budget Variable expenses: Sales commissions..............$ 400 Total variable expenses..........$ 400 Fixed expenses: Salaries expense...............$1,000 Depreciation................... 100 Advertising expense............. 200 Total fixed expenses............$1,300 Total selling and administrative expenses.........$1,700

32. Learning Objective 5 Compare the operating budget for a manufacturing firm to that of a merchandising or service firm..

33. Sales Budget Purchases Budget Budgeted Income Statement Master Budget—Merchandising Define each budget. Selling and Administrative Expense Budget

34. Master Budget—Service Define each budget. Pro-Forma Income Statement Revenue Budget Wages and Salaries Budget Production Budget Cash Budget Pro-Forma Balance Sheet Selling/Admin. Expense Budget Overhead Budget Supplies Budget Pro-Forma Statement of Cash Flows

35. Expanded Material Learning Objective 6 Create the cash budget.

36. Sales Budget Production Budget Direct Materials Budget Direct Labor Budget Manufacturing Overhead Budget Master Budget—Manufacturing Define each budget. Cash Budget Selling and Administrative Expense Budget

37. Example: Cash Budget Cash balance, beginning......... $ 4,900 Add collections from customers.... 10,100 (1)Total cash available.......... $15,000 Less disbursements for: Direct materials.............$ 3,000 Direct labor................. 2,000 Equipment purchase......... 2,000 (2)Total disbursements.......... $ 7,000 Minimum cash balance desired..... 6,000 Total cash needed............... $13,000 Excess (or deficiency) of cash available before financing..... $ 2,000 (3) Financing needed........... 0 Ending cash balance [(1) – (2) + (3)] $ 2,000

38. Expanded Material Learning Objective 7 Prepare pro- forma financial statements.

39. Example: Pro-Forma Income Statement Sales revenue........................$10,000 Cost of goods sold: Beginning finished goods inventory........$ 4,900 Manufacturing costs: Direct materials used..................$ 5,805 Direct labor.........................2,025 Manufacturing overhead...............1,620 9,450 Total cost of goods available for sale......$14,350 Less ending finished goods inventory...... (7,350) Cost of goods sold..................... (7,000) Gross margin.........................$ 3,000 Selling and administrative expenses....... 1,700 Operating income.....................$ 1,300 Interest expense...................... 0 Income before taxes...................$ 1,300

40. ASSETS Current assets: Cash................................... $ 15,000 Accounts receivable...................... 3,000 Finished goods.......................... 7,350 $ 25,350 Long-term operating assets: Equipment...............................$ 12,000 Less accumulated depreciation............. (3,300) 8,700 Total assets...............................$ 34,050 Pro-Forma Balance Sheet LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable......................... $ 8,000 Notes payable........................... 7,000 $ 15,000 Stockholders’ equity: Common stock........................... $ 11,850 Retained earnings........................ 7,200 19,050 Total liabilities and stockholders’ equity.........$ 34,050

41. Example: Pro-Forma Statement of Cash Flows Cash flows from operating activities: Net income..........................$ 1,300 Add (subtract) adjustments: Depreciation.......................$ 700 Increase in finished goods............(2,450) Increase in accounts receivable........ 5,550 3,800 Net cash provided by operating activities.. $ 5,100 Cash flows from operating activities: Net income..........................$ 1,300 Add (subtract) adjustments: Depreciation.......................$ 700 Increase in finished goods............(2,450) Increase in accounts receivable........ 5,550 3,800 Net cash provided by operating activities.. $ 5,100 Cash flows from investing activities: Purchase of equipment..............$(2,000) Net cash used in investing activities.... (2,000) Cash flows from investing activities: Purchase of equipment..............$(2,000) Net cash used in investing activities.... (2,000) Cash flows from financing activities: Cash obtained from borrowing........$ 7,000 Net cash used in financing activities.... 7,000 Net increase in cash.................. $ 10,100 Cash flows from financing activities: Cash obtained from borrowing........$ 7,000 Net cash used in financing activities.... 7,000 Net increase in cash.................. $ 10,100

42. Learning Objective 8 Distinguish between static and flexible budgets.

43. Define Static versus Flexible Budgeting Static Budgeting: Flexible Budgeting

44. Static Budget Cost per unit: Direct materials.........................1.20 Direct labor.............................0.80 Manufacturing overhead.................. 0.50 Total unit cost........................$2.50 Budgeting production (units)...............5,000 Budgeted manufacturing costs: Direct materials...................... $ 6,000 Direct labor.........................4,000 Manufacturing overhead............... 2,500 Total manufacturing costs............$12,500

45. Static Budget— Performance Report Actual Budgeted Difference Production (units) 4,800 5,000 (200) Manufacturing costs: Direct materials.........$ 5,500 $ 6,000 $ (500) Direct labor............ 3,800 4,000 (200) Manufacturing overhead. 2,450 2,500 (50) Total actual and budgeted manufacturing costs.... $11,750 $12,500 $ (750)

46. Flexible Budget What are the three steps to prepare a flexible budget?

47. Flexible Budget Manufacturing Range of Production (units) Costs per Unit4,8005,0005,200 Direct materials. $1.20$ 5,760$ 6,000$ 6,240 Direct labor...... 0.803,8404,0004,160 Manufacturing overhead...... 0.50 2,400 2,500 2,600 Total........$2.50$12,000$12,500$13,000

48. Flexible Budget— Performance Report Actual production (units).................. 4,800 Budgeted production (units)............... 5,000 Difference...............................(200) Actual BudgetedDifference Direct materials..........$ 5,500$ 5,760 $ (260) Direct labor.............3,8003,840 (40) Manufacturing overhead.. 2,450 2,400 50 Total costs............$11,750 $12,000 $ 250

49. Chapter 5 Managerial Accounting is Finished