Chapter 15 - Bu. Controllin

8/11/2019 Chapter 15 - Bu. Controllin

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Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Li ana The McGraw-Hi ll Companies, Inc., 2007

Budgeting as aTool for Planningand Controlling

Chapter

15100 Shares

$1 par value

Budget????


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Learning Objectives

Describe the importanceand benefits ofbudgeting.

Explain the process ofbudget administration.

Describe a masterbudget and the process

of preparing it.

Prepare eachcomponent of a masterbudget and link each to

the budgeting process. Link both operating and

capital expendituresbudgets to budgeted

financial statements.


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Budget Goals: Avoid

Setting budget goalstoo tightly.

Setting budget goals

too loosely. Setting conflicting

budget goals.

Purposes and Goals of Budgeting

Purposes of Budgeting

Establishing specificfuture goals.

Executing plans to

achieve the goals.Comparing actualresults to the goals.


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Budgeting is the process of planning futurebusiness actions and expressing them asformal plans.

Budget is a formal statement of a companysfuture plans.

The role of accounting during the budgetingprocess is to:(a) provide historical data on revenues, costs,

and expenses,(b) express managements plans in financial terms

and(c) prepare periodic budget reports.

Nature of Budgeting


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Nature of Budgeting

Requires all management plan ahead. Provides definite objectives for evaluating

performance.

Creates an early warning system for potentialproblems. Facilitates the coordination of activities within

the business. Results in greater management awareness

of the entitys overall operations. Motivates personnel throughout the

organization to meet planned objectives


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Advantages

Communicates plans

and instructions

Promotes analysis and

a focus on the future

Motivates employees

Provides a basis forevaluating performance against

past or expected results

Coordinatesbusiness activities

Defines goalsand objectives

Budget Process


7/73Larson, Wild, Chiapetta, Ropidah, Haslinda, Aryati, Li ana The McGraw-Hi ll Companies, Inc., 2007

Budgeting is a detailed activity that requiresadministration.

3 aspects that are important:1. Budget Committee

2. Budget Reporting

3. Budget Period

Budget Adminstration



Provides central guidance toensure that individual

budgets submitted from alldepartments are realistic andcoordinated.

Budget Committee

Consists of managers from all departmentsof the organization.

Oversees the budget preparation.

Communication between originatingdepartment and budget committee.



Flow of Budget Data is abottom-upprocess.

Supervisor Supervisor

MiddleManagement

Supervisor Supervisor

MiddleManagement

Top Management

Budget Committee



Budget Reporting

Budget period coincides with the accountingperiod.

Budget period pertains to the time period for

which the budget is prepared such as a year ormonth.

Annual budget usually separated into quarterlyor monthly to allow management evaluate

performance and take action. Managers compare actual results with

budgeted to identify variance.



2005 2006 2007 2008

Operating Budget

The annual operating budgetmay be divided into quarterlyor monthly budgets.

Budget Timing



Continuous orRolling Budget

The budget may be a twelve-month

budget that rolls forward one monthas the current month is completed.

2005 2006 2007 2008

Budget Timing



Master Budget

A master budget is a formal overall plan for acompany consist of plans for businessoperations, capital expenditure and financialresults.

Several individual budgets are linked with eachother and consists of 3 types budgeting:

Operating budgets show the individualbudgets that result in the preparation of the

budgeted income statement. Capital expenditure budgetis a plannedcapital expenditure for fixed assets.

Financial Budgetfocus primarily on the cash

resources needed to fund expected operations



Financial Budgets

Cash Budget Budgeted Income Statement Budgeted Balance Sheet

Master Budget Components

Operating Budgets

Sales Budget Merchandise Purchase

Budget (for Merchandiser) Production Budget &

Manufacturing Budget (for

Manufacturer) Selling Expense Budget General and Administrative

Budget

Capital ExpendituresBudget



Master Budget Sequence

PrepareSales

budget

PrepareMerchandise

Purchases and/orProduction and

ManufacturingBudget.

Prepare financialbudgets:cash

incomestatement

balance sheet

Preparecapital

expenditurebudget

Prepareselling,

general andadministrative

budgets



SalesBudget

EstimatedUnit Sales

EstimatedUnit Price

Analysis of economic and market conditions+

Forecasts of customer needs from marketing personnel

Sales Budget



Sales Budget

The sales budget is the first budget prepared.

Each of the other budgets depends on the sales

budget. It is derived from the sales forecast. It represents managements bestestimateof sales

revenue for the budget period.

Sales = Budgeted x Unit

Budget Unit Sales Price



Sales Budget

Sales budget alwaysfollowed by BudgetedCash Receiptsor Cash

Receipts Schedule.

Preparing a CashReceipts Schedule from

customers is useful inpreparing a cash budget.


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In September 2006, Hockey Den sold 700hockey sticks at $100 each. Hockey Denprepared the following sales budget for the next

four months:

Sales Budget - Illustration


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Sales Budget

HOCKEY DEN

MONTHLY SALES BUDGET

OCTOBER 2006 JANUARY 2007

Budgeted Budgeted BudgetedUnit Sales Unit Price Total Sales

September 2006 (actual) 700 100$ 70,000$

October 2006 1,000 100$ 100,000$

November 2006 800 100 80,000December 2006 1,400 100 140,000

Total 3,200 100$ 320,000$

January 2007 900 100$ 90,000$


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Merchandise Purchases Budget

It is prepared based on sales budget. It estimates the quantity of merchandises

needed in order to fulfill the estimated sales.

It also depends on the estimated beginninginventory and the desired ending inventory asa preparation for the following sales.

Inventoryto be

purchased

=Budgetedending

inventory

+Budgeted

cost of salesfor the period

Budgetedbeginninginventory


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Purchase budget alwaysfollowed by BudgetedCash Disbursementsfor

Purchases or CashDisbursement Schedule.

Preparing a CashDisbursements Scheduleto suppliers is useful inpreparing a cash budget.


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The quantity purchased is affected by:

Just-in-time inventory systemsthat enablepurchases of smaller, frequently delivered

quantities.

Safety stock inventory systemsthat provideprotection against lost sales caused by

delays in supplier shipments.



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Merchandise Purchases Budget -Illustration

Hockey Den buys hockey sticks for $60.00 eachand maintains an ending inventory equal to 90percent of the next months budgeted sales. 900hockey sticks are on hand on September 30.

Lets prepare the purchases budget for Hockey Den.


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HOCKEY DEN

MERCHANDISE PURCHASE BUDGET

OCTOBER 2006 DECEMBER 2006

October November December

Nextmonth's unit sales 800 1,400 900Ending inventory percentage 90% 90% 90%

Budgeted ending inventory units 720 1,260 810

Add:current month's unit sales

Total units needed

Less: beginning inventory units

Number of units to be purchased

Budgeted cost per unitBudgeted cost of purchases


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HOCKEY DEN

MERCHANDISE PURCHASES BUDGET





Add current month's unit sales 1,000 800 1,400

Total units needed 1,720 2,060 2,210

Less: beginning inventory units

Number of units to be purchased

Budgeted cost per unitBudgeted cost of purchases


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HOCKEY DEN








Less: beginning inventory units (900)

Number of units to be purchased 820

Budgeted cost per unit $ 60Budgeted cost of purchases 49,200$

Beginning inventory is last month's ending inventory.


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HOCKEY DEN








Less: beginning inventory units (900) (720) (1,260)

Number of units to be purchased 820 1,340 950

Budgeted cost per unit $ 60 $ 60 $ 60Budgeted cost of purchases 49,200$ 80,400$ 57,000$

Beginning inventory is last month's ending inventory.


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Lets prepare the selling expense budget for Hockey Den.

Hockey Den pays salescommissions equal to 10percent of total sales.

Hockey Den pays amonthly salary of $2,000to its sales manager.

Selling Expense Budget - Illustration


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From Hockey Dens sales budget

Selling Expense Budget

HOCKEY DEN

SELLING EXPENSE BUDGET

OCTOBER 2006

DECEMBER 2006

October November December Total

Budgeted sales 100,000$ 80,000$ 140,000$ 320,000$

Sales commission % 10% 10% 10% 10%

Sales commission 10,000$ 8,000$ 14,000$ 32,000$

Sales manager salary 2,000 2,000 2,000 6,000Total selling expenses 12,000$ 10,000$ 16,000$ 38,000$


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Lets prepare the general and administrative

expense budget for Hockey Den.

General andadministrative salaries are$4,500 per month.

Depreciation of equipmentis $1,500 per month.

General and Administrative ExpenseBudget - Illustration


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General and Administrative ExpenseBudget

HOCKEY DEN

GENERAL AND ADMINISTRATIVE EXPENSE BUDGET

OCTOBER 2006

DECEMBER 2006

October November December Total

Administrative salaries 4,500$ 4,500$ 4,500$ 13,500$

Equipment depreciation 1,500 1,500 1,500 4,500

Total 6,000$ 6,000$ 6,000$ 18,000$


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Operating Budgets : Merchandiser

SalesBudget

Schedule

Cash DisbursementsSchedule

Cash Receipts Schedule

Merchandise PurchaseBudget

Selling, General andAdministrative

Expenses Budget


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Operating Budgets : Manufacturer

SalesBudget

Schedule

Cash DisbursementsSchedule


ProductionBudget

Manufacturing Budget :Direct Materials, Direct labor,

Factory Overhead

Selling, General andAdministrative

Expenses Budget


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CashBudget

ExpectedReceipts

andDisbursements

BudgetedIncome

Statement

BudgetedBalanceSheet

Financial Budgets


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Cash Receipts Schedule - Illustration

Forty percent of HockeyDens sales are for cash.

The remaining sixty percentare credit sales that arecollected in full in the monthfollowing sale.

Lets prepare the cash receipts budget for Hockey Den.


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HOCKEY DEN

CASH RECEIPTS SCHEDULE


September October November DecemberBudgeted sales 70,000$ 100,000$ 80,000$ 140,000$

Accounts receivable

Cash receipts from:

Cash sales

Collection of receivables

Total cash receipts

60 percent of September sales are collected in October

From Hockey Dens sales budget



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HOCKEY DEN




Accounts receivable 42,000$ 60,000$ 48,000$ 84,000$

Cash receipts from:

Cash sales 40,000$ 32,000$ 56,000$

Collection of receivables

Total cash receipts

40% of sales

60% of sales



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HOCKEY DEN




Accounts receivable 42,000$ 60,000$ 48,000$ 84,000$

Cash receipts from:

Cash sales 40,000$ 32,000$ 56,000$

Collection of receivables 42,000 60,000 48,000

Total cash receipts 82,000$ 92,000$ 104,000$



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Hockey Dens purchases ofmerchandise are entirely onaccount.

Full payment is made in themonth following purchase.

The 30 September balance

of Accounts Payable is$58,200.

Lets look at cash disbursementsfor purchases for Hockey Den.

Cash Disbursements Schedule -Illustration


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HOCKEY DEN

CASH DISBURSEMENTS SCHEDULE

OCTOBER 2006 - DECEMBER 2006

October payments (30 September balance) 58,200$

November payments (October purchases) 49,200

December payments (November purchases) 80,400

From merchandise purchases budget

Cash Disbursements Schedule


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Hockey Den:will pay a cash dividend of $3,000 in November.

will purchase $25,000 of equipment in

December.has an income tax liability of $20,000 from the

previous quarter that will be paid in October.

has a 30 September cash balance of $20,000.

has an agreement with its bank for loans at the

end of each month to enable a minimum cash

balance of $20,000.

Cash Budget - Illustration


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Hockey Den:pays interest equal to one percent of the prior

months ending loan balance.

repays loans when the ending cash balanceexceeds $20,000.

owes $10,000 on this loan arrangement on

September 30.has 40 percent income tax rate.

will pay taxes for current quarter next year.

Lets prepare the cash budget for Hockey Den.

Cash Budget


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HOCKEY DEN

CASH BUDGET



Beginning cash balance 20,000$

Receipts from customers 82,000 92,000 104,000

Total cash available 102,000$

Disbursements

Payments for merchandise

Sales commissions

Sales salaries

Administrative salaries

Income taxes

DividendsInterest

Equipment purchase

Total disbursements

Preliminary balance

From Cash Receipts Schedule


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HOCKEY DEN

CASH BUDGET






Disbursements

Payments for merchandise 58,200$ 49,200$ 80,400$

Sales commissions

Sales salaries


Income taxes

DividendsInterest

Equipment purchase

Total disbursements

Preliminary balance

From Cash DisbursementsSchedule


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HOCKEY DEN

CASH BUDGET






Disbursements


Sales commissions 10,000 8,000 14,000

Sales salaries 2,000 2,000 2,000


Income taxes

DividendsInterest

Equipment purchase

Total disbursements

Preliminary balance

From Selling Expense Budget


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HOCKEY DEN

CASH BUDGET






Disbursements




Administrative salaries 4,500 4,500 4,500

Income taxes

DividendsInterest

Equipment purchase

Total disbursements

Preliminary balance

From General andAdministrative Expense Budget

Depreciation is anon-cash expense.


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HOCKEY DEN

CASH BUDGET






Disbursements





Income taxes 20,000

DividendsInterest 100

Equipment purchase

Total disbursements 94,800$

Preliminary balance 7,200$

0.01 $10,000

Because Hockey Denmaintains a minimum

cash balance of $20,000,the company mustborrow $12,800.


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HOCKEY DEN

CASH BUDGET



Preliminary balance 7,200$

Additional borrowing 12,800

Loan repayment

Ending cash balance 20,000$

Ending loan balance 22,800$

Ending cash balance for Octoberis the beginning November balance.

Cash Budget Continued


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HOCKEY DEN

CASH BUDGET



Beginning cash balance 20,000$ 20,000$


Total cash available 102,000$ 112,000$

Disbursements





Income taxes 20,000

Dividends 3,000Interest 100 228

Equipment purchase

Total disbursements 94,800$ 66,928$

Preliminary balance 7,200$ 45,072$

0.01 $22,800

Cash balanceis sufficientto repay the

$22,800 loan.


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HOCKEY DEN

CASH BUDGET



Preliminary balance 7,200$ 45,072$

Additional borrowing 12,800

Loan repayment (22,800)

Ending cash balance 20,000$ 22,272$

Ending loan balance 22,800$ $ 0

Ending cash balance for Novemberis the beginning December balance.



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HOCKEY DEN

CASH BUDGET



Beginning cash balance 20,000$ 20,000$ 22,272$


Total cash available 102,000$ 112,000$ 126,272$

Disbursements





Income taxes 20,000

Dividends 3,000Interest 100 228

Equipment purchase 25,000

Total disbursements 94,800$ 66,928$ 125,900$

Preliminary balance 7,200$ 45,072$ 372$


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HOCKEY DEN

CASH BUDGET



Preliminary balance 7,200$ 45,072$ 372$

Additional borrowing 12,800 19,628

Loan repayment (22,800)

Ending cash balance 20,000$ 22,272$ 20,000$Ending loan balance 22,800$ $ 0 19,628$



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Lets prepare the budgeted incomestatement for Hockey Den.

CashBudget

BudgetedIncome

Statement

Budgeted Income Statement

From the Sales Budget


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HOCKEY DEN

BUDGETED INCOME STATEMENT

FOR THE THREE MONTHS ENDED 31 DECEMBER 2006

Sales (3,200 units @ $100) 320,000$

Cost sales (3,200 units @ $60) 192,000

Gross profit 128,000$

Operating expensesSales commissions (32,000)$

Sales salaries (6,000)

Administrative salaries (13,500)

Equipment depreciation (4,500)

Interest expense (328)

Profit before taxes 71,672$

Income tax expense (28,669)

Profit for the period 43,003$

g

From the Merchandise


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HOCKEY DEN

BUDGETED INCOME STATEMENTFOR THE THREE MONTHS ENDED 31 DECEMBER 2006

Sales (3,200 units @ $100) 320,000$

Cost of sales (3,200 units @ $60) 192,000


Operating expenses

Sales commissions (32,000)$



Equipment depreciation (4,500)Interest expense (328)




Purchases Budget


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HOCKEY DEN

BUDGETED INCOME STATEMENT

FOR THE THREE MONTHS ENDED 31 DECEMBER 2006

Sales (3,200 units @ $100) 320,000$



Operating expenses

Sales commissions (32,000)$Sales salaries (6,000)


Equipment depreciation (4,500)

Interest expense (328)Profit before taxes 71,672$


Profit for the period 43,003$From the SellingExpense Budget


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HOCKEY DEN


Sales (3,200 units @ $100) 320,000$



Operating expenses




Equipment depreciation (4,500)Interest expense 328




From the General and AdministrativeExpense Budget

Depreciation is a non-cash expense.


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HOCKEY DEN


Sales (3,200 units @ $100) 320,000$



Operating expenses




Equipment depreciation (4,500)Interest expense 328



Profit for the period 43,003$From the Cash Budget


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HOCKEY DEN


Sales (3,200 units @ $100) 320,000$



Operating expenses




Equipment depreciation (4,500)Interest expense (328) 56,328



Profit for the period 43,003$$71,672 0.40


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Lets prepare the budgeted balancesheet for Hockey Den.

BudgetedBalance

Sheet

BudgetedIncome

Statement

Budgeted Balance Sheet

P i B d t d


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Hockey Den reports the following accountbalances on 30 September prior topreparing its budgeted financial statements:

Equipment $200,000

Accumulated depreciation $ 36,000

Common stock $150,000

Retained earnings $ 41,800

Lets prepare the budgeted balancesheet for Hockey Den.

Preparing a BudgetedBalance Sheet

HOCKEY DENBUDGETED BALANCE SHEET


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AS AT 31 DECEMBER 2006

ASSETS

Non Current Assets

Equipment $225,000

Accumulated depreciation - Equipment (40,500) $184,500

Total non current assets $184,500

Current Assets

Cash $20,000

Accounts receivable 84,000

Inventory 48,600

Total current assets $152,600

Total Assets $337,100EQUITY AND LIABILITIES

Equity

Common shares $150,000

Retained earnings 81,803 $231,803

Total Equity $231,803

Non Current Liabilities

Bank loan payable $19,628 $19,628

Total non current liabilities $19,628

Current Liabilities

Accounts payable $57,000

Income taxes payable 28,669

Total current liabilities $85,669

Total Liabilities $105,297

Total Equity and Liabilities $337,100



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ASSETS

Non Current Assets

Equipment $225,000



Current Assets

Cash $20,000


Inventory 48,600


Total Assets $337,100

EQUITY AND LIABILITIES

Equity







Current Liabilities






From the Cash Budget




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ASSETS

Non Current Assets

Equipment $225,000



Current Assets

Cash $20,000


Inventory 48,600




Equity







Current Liabilities






From the Cash ReceiptsSchedule




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ASSETS

Non Current Assets

Equipment $225,000



Current Assets

Cash $20,000


Inventory 48,600




Equity







Current Liabilities






From the Merchandise Purchases Budget8,100 units @ $6




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ASSETS

Non Current Assets

Equipment $225,000



Current Assets

Cash $20,000


Inventory 48,600




Equity







Current Liabilities






$200,000 30 September balance plus the$25,000 December acquisition




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ASSETS

Non Current Assets

Equipment $225,000



Current Assets

Cash $20,000


Inventory 48,600




Equity







Current Liabilities






$36,000 30 September balance plus the $4,500from the General and

Administrative Expense Budget




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$105,297Total Liabilities

$85,669Total current liabilities

$19,628$19,628Bank loan payable

$19,628Total non current liabilities

Current Liabilities

$57,000Accounts payable

$337,100Total Equity and Liabilities

28,669Income taxes payable


$231,803Total Equity

$231,80381,803Retained earnings

$150,000Common shares

Equity


$337,100Total Assets

$152,600Total current assets

48,600Inventory

84,000Accounts receivable

$20,000Cash

Current Assets

$184,500Total non current assets

$184,500(40,500)Accumulated depreciation - Equipment

$225,000Equipment

Non Current Assets

ASSETS


From the MerchandisePurchases Budget




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ASSETS

Non Current Assets

Equipment $225,000



Current Assets

Cash $20,000


Inventory 48,600




Equity







Current Liabilities






From the BudgetedIncome Statement




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ASSETS

Non Current Assets

Equipment $225,000



Current Assets

Cash $20,000


Inventory 48,600




Equity







Current Liabilities






From the Cash Budget




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ASSETS

Non Current Assets

Equipment $225,000



Current Assets

Cash $20,000


Inventory 48,600




Equity







Current Liabilities






Beginning retained earnings 41,800$

Add net income 43,003

Deduct dividends (3,000)

Ending retained earnings 81,803$


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End of Chapter 15

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Chapter 15 - Bu. Controllin