1. Budgeting

2. Advantages of Budgeting
Define goals
and objectives
Communicate
plans
Think about and
plan for the future
Advantages
Coordinate
activities
Allocate
resources
Uncover potential
bottlenecks

3. Budget Planning and Control
Planning -- involves developing objectives and preparing various budgets to achieve these objectives.
Control -- involves the steps taken by management that attempt to ensure the objectives are attained.

4. Choosing the Budget Period
Operating Budget
2011
2012
2013
2014
The annual operating budget
may be divided into quarterly
or monthly budgets.

5. The Basic Framework of Budgeting
Detail
Budget
Master
Summary of
a company’s
plans.
Sales
Purchases
SG&A

6. The Master Budget-Manufacturer
Sales
Budget
Selling and
Administrative
Budget

7. The Master Budget-Manufacturer
Sales
Budget
Ending
Inventory
Budget
Selling and
Administrative
Budget
Production
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget

8. The Master Budget-Manufacturer
Sales
Budget
Ending
Inventory
Budget
Selling and
Administrative
Budget
Production
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Manufacturing
Overhead
Budget
Cash
Budget
Budgeted Financial Statements

9. The Master Budget-Merchandiser
Sales
Budget
Selling and
Administrative
Budget

10. The Master Budget-Merchandiser
Sales
Budget
Ending
Inventory
Budget
Selling and
Administrative
Budget
Purchases
Budget
Direct
Materials
Budget
Manufacturing
Overhead
Budget
Direct
Labor
Budget

11. The Master Budget-Merchandiser
Sales
Budget
Ending
Inventory
Budget
Selling and
Administrative
Budget
Purchases
Budget
Manufacturing
Overhead
Budget
Direct
Materials
Budget
Direct
Labor
Budget
Cash
Budget
Budgeted Financial Statements

12. The Budgeted Income Statement
Cash
Budget
Budgeted
Income
Statement
Completed
After we complete the cash budget, we can prepare the budgeted income statement.

13. And the Budgeted Balance Sheet and Cash Flow Statement

14. Pro forma Financial Statements
Cash Receipts
and Payments
Schedules
Operating
Budgets
Pro forma Financial Statements
Start
Cash
receipts
Income statement
Sales
budget
Cash
payments for inventory
Inventory purchases budget
Balance sheet
Cash payments for S & A
S & A expense budget
Statement of cash flows
Cash budget 14

15. The Sales Budget
Detailed schedule showing expected sales for the coming periods expressed in units and dollars.

16. Budgeting Example
Royal Company is preparing budgets for the quarter ending June 30.
Budgeted sales for the next five months are:
April 20,000 units
May 50,000 units
June 30,000 units
July 25,000 units
August 15,000 units.
The selling price is $10 per unit.

17. The Sales Budget

18. The Sales Budget

19. Expected Cash Collections
All sales are on account.
Royal’s collection pattern is:
70% collected in the month of sale,
25% collected in the month following sale,
5% is uncollectible.
The March 31 accounts receivable balance of $30,000 will be collected in full.

20. Expected Cash Collections

21. Expected Cash Collections
From the Sales Budget for April.

22. Expected Cash Collections
From the Sales Budget for May.

23. Expected Cash Collections

24. Budget and Expected Cash Collections
The Production Budget
Sales
Budget and Expected Cash Collections
Production
Budget
Completed
Production must be adequate to meet budgeted
sales and provide for sufficient ending inventory. 24

25. The Direct Materials Budget The Direct Labor Budget The Overhead Budget25

26. Inventory Purchases Budget
The total amount of inventory needed for each month is equal to the amount of the cost of budgeted sales plus the desired ending inventory.
Now we can move on to the inventory purchases budget. The general format used to determine the amount of the purchases is to take the cost of budgeted sales, plus the desired ending inventory, minus the beginning inventory. This computation gives us the amount we need to purchase.
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27. Inventory Purchases Budget
HH’s policy is that ending inventory should be equal to 25% of next month’s projected cost of goods sold. At HH, cost of goods sold normally equal 70% of sales.
Suppliers require HH to pay 60% of inventory purchases in the month goods are purchased and the remaining 40% in the month after the purchase.
Let’s prepare the inventory purchases budget and the schedule of cash payments for inventory purchases.
January’s cost of goods sold is budgeted at $140,000.
To prevent a stock-out of inventory, management has decided that ending inventory should always be equal to 25% of next month’s projected cost of goods sold. Cost of goods sold normally equals 70% of sales.
Based on past experience, management knows that suppliers require that 60% of the inventory purchases be paid for in the month of purchase and 40% be paid for in the month following the month of purchase.
Given this additional information, let’s prepare two budgets. The first will be the inventory purchase budget and the second will be the cash payments schedule for inventory purchases.
January’s cost of goods sold is budgeted at $140,000.
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28. Sales Budget
Exhibit 7.2
Sales Budget
Sales revenue on the income statement will be the sum of the monthly sales ($582,400).
Part I
The only cash collected in October is from the cash sales.
Part II The October sales on account will be collected in November, and the November sales on account will be collected in December.
Part III The sales revenue on the pro forma income statement will be $582,400, the sum of the budgeted sales. Total cash collections for the quarter will be $409,600.
7-28

29. $145,600 × 60% = $87,360
$145,600 × 40% = $58,240 29 29

30. Selling and Administrative Expense Budget
The details of the Selling and Administrative (S&A) Budget are shown on the next screen. It is important to note that sales commission (based on 2% of sales) is paid in the month following the sale, while supplies expense (based on 1% of sales) is paid in the month of the sale. The utility expense is paid in the month following the usage of the electricity, gas, and water. 30 30

31. 31 31

32. The Cash Budget The cash budget is divided into four sections:
9-32
The Cash Budget
The cash budget is divided into four sections:
Cash receipts listing all cash inflows excluding borrowing
Cash disbursements listing all payments excluding repayments of principal and interest
Cash excess or deficiency
The financing section listing all borrowings, repayments and interest
The preparation of the cash budget can be quite complex. We have to pay close attention to details from our other budgets if we are to be successful in preparing the cash budget. On your screen, we listed the four major sections of the cash budget. As we prepare the budget, you will clearly see these four sections. 32

33. Cash Budget
HH plans to purchase, for cash, store fixtures with a cost of $130,000 in October. HH borrows or repays principal and interest on the last day of each month. Any money borrowed from the bank bears interest at an annual rate of 12% (1% per month). The management at HH wants to maintain a cash balance of at least $10,000 at the end of every month. Borrowings must be in $1000 increments. 33

34. 34

35. Pro Forma Income Statement35

36. 36

37. 37

38. End of Chapter 7
End of Chapter 15.