Chap 009

Purposes of Budgeting SystemsBudgeta detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time.PlanningFacilitating Communication and CoordinationAllocating ResourcesControlling Profit and OperationsEvaluating Performance and Providing Incentives

Types of BudgetsDetailBudgetDetailBudgetDetailBudgetMasterBudgetCovering allphases ofa companysoperations.SalesProductionMaterials

Types of BudgetsBudgeted Financial StatementsBalance SheetIncome StatementStatement of Cash Flows

Types of Budgets1999200020012002Continuous or Rolling BudgetThis budget is usually a twelve-month budget that rolls forward one month as the current month is completed.L o n g R a n g e B u d g e t sCapital budgets with acquisitions that normally cover several years.Financial budgets with financial resource acquisitions.

Copyright 2009 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning Objective2

Budgeted Income StatementCash BudgetSales of Services or GoodsEndingInventoryBudget Work in Processand FinishedGoodsProductionBudgetDirectMaterialsBudgetSelling andAdministrativeBudgetDirectLabor BudgetOverheadBudgetEndingInventoryBudget Direct MaterialsBudgeted Balance SheetBudgeted Statement of Cash Flows


Learning Objective3

Activity-Based Costing versus Activity-Based BudgetingResourcesCost objects: products and services produced, and customers served.ActivitiesResourcesForecast of products and services to be produced and customers served.Activities


Learning Objective4

Sales BudgetBreakers, Inc. is preparing budgets for the quarter ending June 30.Budgeted sales for the next five months are:April 20,000 unitsMay 50,000 unitsJune 30,000 unitsJuly 25,000 unitsAugust 15,000 units.The selling price is $10 per unit.

Sales Budget

Production BudgetThe management of Breakers, Inc. wants ending inventory to be equal to 20% of the following months budgeted sales in units. On March 31, 4,000 units were on hand. Lets prepare the production budget.

Production BudgetFrom salesbudgetMarch 31ending inventoryEnding inventory becomes beginning inventory the next month

Direct-Material BudgetAt Breakers, five pounds of material are required per unit of product.Management wants materials on hand at the end of each month equal to 10% of the following months production.On March 31, 13,000 pounds of material are on hand. Material cost $.40 per pound. Lets prepare the direct materials budget.

Direct-Material BudgetFrom our productionbudget 10% of the following months production March 31 inventory

Direct-Material Budget

Direct-Labor BudgetAt Breakers, each unit of product requires 0.1 hours of direct labor.The Company has a no layoff policy so all employees will be paid for 40 hours of work each week.In exchange for the no layoff policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay).For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month.Lets prepare the direct labor budget.

Direct-Labor BudgetFrom ourproductionbudgetThis is the greater oflabor hours required orlabor hours guaranteed.

Overhead BudgetHere is Breakers Overhead Budget for the quarter.

Selling and Administrative Expense BudgetAt Breakers, variable selling and administrative expenses are $0.50 per unit sold.Fixed selling and administrative expenses are $70,000 per month.The $70,000 fixed expenses include $10,000 in depreciation expense that does not require a cash outflows for the month.

Selling and Administrative Expense BudgetFrom ourSales budget

Cash Receipts BudgetAt Breakers, all sales are on account.The companys collection pattern is:70% collected in the month of sale,25% collected in the month following sale,5% is uncollected.The March 31 accounts receivable balance of $30,000 will be collected in full.

Cash Receipts Budget

Cash Disbursement BudgetBreakers pays $0.40 per pound for its materials.One-half of a months purchases are paid for in the month of purchase; the other half is paid in the following month.No discounts are available.The March 31 accounts payable balance is $12,000.

Cash Disbursement Budget140,000 lbs. $.40/lb. = $56,000

Cash Disbursement BudgetBreakers:Maintains a 12% open line of credit for $75,000.Maintains a minimum cash balance of $30,000.Borrows and repays loans on the last day of the month.Pays a cash dividend of $25,000 in April.Purchases $143,700 of equipment in May and $48,300 in June paid in cash.Has an April 1 cash balance of $40,000.

Cash Budget(Collections and Disbursements)To maintain a cashbalance of $30,000,Breakers must borrow$35,000 on its line of credit.From our CashReceipts BudgetFrom our Cash DisbursementsBudgetFrom our Direct Labor BudgetFrom our Overhead BudgetFrom our Selling and Administrative Expense Budget

Cash Budget(Collections and Disbursements)Breakers mustborrow anaddition $13,800to maintain acash balanceof $30,000.

Cash Budget(Collections and Disbursements)At the end of June, Breakers has enough cash to repaythe $48,800 loan plus interest at 12%.

Cash Budget(Collections and Disbursements)

Cash Budget(Financing and Repayment)Ending cash balance for Aprilis the beginning May balance.

Cost of Goods Manufactured

Sheet1

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000

20080,000140,000100,000

30080,000170,000150,000

40080,000200,000200,000

50080,000230,000250,000

60080,000260,000300,000

70080,000290,000350,000

80080,000320,000400,000

Sheet2

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000100,000

20080,000140,000100,000Profit

30080,000170,000150,00080,000

40080,000200,000200,000

50080,000230,000250,00060,000

60080,000260,000300,000

70080,000290,000350,00040,000

80080,000320,000400,000

20,000

0

`

(20,000)100200300400500600700

Units

(40,000)

(60,000)

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

100200300400500600700800

Units

Sheet3

Sheet4

A. Traditional Format

ACCUTIME COMPANY

Income Statement

For the Year Ended December 31, 20x1

Sales$500,000

Less:380,000

Gross margin$120,000

Less: Operating expenses:

Selling expenses$35,000

Administrative expenses35,00070,000

Net income$50,000

B. Contribution Format

ACCUTIME COMPANY

Income Statement


Sales$500,000

Less: Variable expenses:

Variable manufacturing$280,000

Variable selling15,000

Variable administrative5,000300,000

Contribution margin$200,000

Less: Fixed expenses:

Fixed manufacturing$100,000

Fixed selling20,000

Fixed administrative30,000150,000

Net income$50,000

Sheet5

TargetTarget

after-tax=before-tax(1-t)

net incomeincome

Sheet6

Direct material (see schedule 3 for details):

Raw-material inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64,800a

Add: Purchases of raw material . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,400,000b

Raw material available for use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,464,800b

Deduct: Raw-material inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,800a

Direct material used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,400,000b

Direct labor (see schedule 4 for details) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375,000

Manufacturing overhead (see schedule 5 for details) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000

Total manufacturing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Add:Work-in-process inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0c

Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Deduct:Work-in-process inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0c

Cost of goods manufactured . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

Add: Finished-goods inventory, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,750d

Cost of goods available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,256,750

Deduct: Finished-goods inventory, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,750d

Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000

AprilMayJuneQuarter

Direct material:

Beg.material inventory5,2009,2005,8005,200

Add: Materials purchases$56,000$88,600$56,800$201,400

Material available for use$61,200$97,800$62,600$206,600

Deduct: End. material inventory$9,200$5,800$4,600$4,600

Direct material used$52,000$92,000$58,000$202,000

Direct labor$24,000$36,800$24,000$84,800

Manufacturing overhead$56,000$76,000$59,000$191,000

Total manufacturing costs$132,000$204,800$141,000$477,800

Add: Beg. Work-in-process inventory$3,800$16,200$9,400$3,800

Subtotal$135,800$221,000$150,400$481,600

Deduct: End.Work-in-process inventory$16,200$9,400$17,000$17,000

Cost of goods manufactured119,600211,600133,400464,600

Add: Beg. finished-goods inventory$18,400$46,000$27,600$18,400

Cost of goods available for sale$138,000$257,600$161,000$483,000

Deduct: End. finished-goods inventory$46,000$27,600$23,000$23,000

Cost of goods sold92,000230,000138,000460,000

MBD00559E2F.xls

Sheet1

191000

10600

Breakers, Inc.18.0188679245

Budgeted Income Statement

For the Three Months Ended June 30

Revenue (100,000 $10)$1,000,000

Cost of goods sold (100,000 $4.60)460,000

Gross margin540,000

Operating expenses:

Selling and admin. Expenses$260,000

Interest expense838

Total operating expenses260,838

Net income$279,162

Sheet2

Sheet3

Sheet4

Sheet5

Sheet6

Cost of Goods Sold

Sheet1

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000

20080,000140,000100,000

30080,000170,000150,000

40080,000200,000200,000

50080,000230,000250,000

60080,000260,000300,000

70080,000290,000350,000

80080,000320,000400,000

Sheet2

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000100,000

20080,000140,000100,000Profit

30080,000170,000150,00080,000

40080,000200,000200,000

50080,000230,000250,00060,000

60080,000260,000300,000

70080,000290,000350,00040,000

80080,000320,000400,000

20,000

0

`

(20,000)100200300400500600700

Units

(40,000)

(60,000)

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

100200300400500600700800

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ACCUTIME COMPANY

Income Statement


Sales$500,000

Less:380,000





Net income$50,000


ACCUTIME COMPANY

Income Statement


Sales$500,000








Fixed selling20,000


Net income$50,000

Sheet5

TargetTarget


net incomeincome

Sheet6











Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000







AprilMayJuneQuarter

Direct material:






Direct labor$24,000$36,800$24,000$84,800




Subtotal$135,800$221,000$150,400$481,600


AprilMayJuneQuarter

Cost of goods manufactured119,600211,600133,400464,600


Cost of goods available for sale$138,000$257,600$161,000$483,000



MBD00559E2F.xls

Sheet1

191000

10600




Revenue (100,000 $10)$1,000,000


Gross margin540,000

Operating expenses:


Interest expense838


Net income$279,162

Sheet2

Sheet3

Sheet4

Sheet5

Sheet6

Budgeted Statement of Cash Flows

Sheet1

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000

20080,000140,000100,000

30080,000170,000150,000

40080,000200,000200,000

50080,000230,000250,000

60080,000260,000300,000

70080,000290,000350,000

80080,000320,000400,000

Sheet2

FCTCTR

0.080,00080,0000.0

10080,000110,00050,000100,000

20080,000140,000100,000Profit

30080,000170,000150,00080,000

40080,000200,000200,000

50080,000230,000250,00060,000

60080,000260,000300,000

70080,000290,000350,00040,000

80080,000320,000400,000

20,000

0

`

(20,000)100200300400500600700

Units

(40,000)

(60,000)

450,000

400,000

350,000

300,000

250,000

200,000

150,000

100,000

50,000

100200300400500600700800

Units

Sheet3

Sheet4


ACCUTIME COMPANY

Income Statement


Sales$500,000

Less:380,000





Net income$50,000


ACCUTIME COMPANY

Income Statement


Sales$500,000








Fixed selling20,000


Net income$50,000

Sheet5

TargetTarget


net incomeincome

Sheet6











Subtotal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,175,000







AprilMayJuneQuarter

Direct material:






Direct labor$24,000$36,800$24,000$84,800




Subtotal$135,800$221,000$150,400$481,600


AprilMayJuneQuarter

Cost of goods manufactured$119,600$211,600$133,400$464,600$26,000


Cost of goods available for sale$138,000$257,600$161,000$483,000$30,000



Sheet7

AprilMayJuneQuarter

Cash flows from operating activities:

Cash receipts from customers170,000400,000335,000905,000

Cash payments:

To suppliers of raw material$(40,000)$(72,300)$(72,700)$(185,000)

For direct labor$(24,000)$(36,800)$(24,000)$(84,800)

For manufacturing-overhead expenditures$(56,000)$(76,000)$(59,000)$(191,000)

For selling and administrative expenses$(70,000)$(85,000)$(75,000)$(230,000)

For interest0.00.0$(838)$(838)

Total cash payments$(190,000)$(270,100)$(231,538)$(691,638)

Net cash flow from operating activities(20,000)129,900103,462213,362

Cash flows from investing activities:

Purchase of equipment0.0$(143,700)$(48,300)$(192,000)

Net cash used by investing activities0.0(143,700)(48,300)(192,000)

Cash flows from financing activities:

Payment of dividends$(25,000)0.00.0$(25,000)

Principle of bank loan$35,000$13,8000.0$48,800

Repayment of bank loan0.00.0$(48,800)$(48,800)

Net cash provided by financing activities10,00013,800(48,800)0.0

Net increase in cash(10,000)0.06,362(3,638)

Balance in cash, beginning$40,000$30,000$30,000$40,000

Balance in cash. end of month30,00030,00036,36236,362

MBD0059B721.xls

MBD0059D636.xls

Sheet11

AprilMayJuneQuarter

Excess (deficiency) of Cash available over disbursements$(5,000)$16,200$86,000$37,200

Financing:

Borrowing35,00013,80048,800

Repayments0.00.0(48,800)(48,800)

Interest0.00.0(838)(838)

Total financing35,00013,800(49,638)(838)

Ending cash balance$30,000$30,000$36,362$36,362

&A

Page &P

MBD00559E2F.xls

Sheet1

191000

10600




Revenue (100,000 $10)$1,000,000


Gross margin540,000

Operating expenses:


Interest expense838


Net income$279,162

Sheet2

Sheet3

Sheet4

Sheet5

Sheet6

Budgeted Balance SheetBreakers reports the following account balances on June 30 prior to preparing its budgeted financial statements:Land - $50,000Building (net) - $148,000Common stock - $217,000Retained earnings - $46,400

25%of Junesales of $300,00011,500 lbs. at$.40 per lb.5,000 units at$4.60 per unit.50% of Junepurchases of $56,800


Learning Objective5

Budgeted Income StatementCash BudgetSales of Services or GoodsEndingInventoryBudget Work in Processand FinishedGoodsProductionBudgetDirectMaterialsBudgetSelling andAdministrativeBudgetDirectLabor BudgetOverheadBudgetEndingInventoryBudget Direct MaterialsBudgeted Balance SheetBudgeted Statement of Cash FlowsWhen the interactions of the elements of the master budget are expressed as a set of mathematical relations, it becomes a financial planning model that can be used to answer what if questions about unknown variables.


Learning Objective6

Budget AdministrationThe Budget Committee is a standing committee responsible for . . .overall policy matters relating to the budget.coordinating the preparation of the budget.

International Aspects of BudgetingFirms with international operations face special problems when preparing a budget.Fluctuations in foreign currency exchange rates.High inflation rates in some foreign countries.Differences in local economic conditions.


Learning Objective7

Budgeting Product Life-Cycle CostsProduct planningand conceptDesign.Preliminarydesign.Detailed designand testing.Production.Distributionand customerservice.


Learning Objective8

Behavioral Impact of BudgetsBudgetary Slack: Padding the BudgetPeople often perceive that their performance will look better in their superiors eyes if they can beat the budget.

Participative BudgetingFlow of Budget Data

End of Chapter 9

Documents

Chap 009