PP for Chapter 9 - Budgeting - Final

8/11/2019 PP for Chapter 9 - Budgeting - Final

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Accounting: A Malaysian Perspective,

4

th

ed

(Adapted from Accounting 22

nd

ed

)

Warren, Reeve and

Duchac

9

Budgeting andControlling

Tools


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1. Describe budgeting, its objectives,and its impact on human behavior.

2. Describe the basic elements ofthe budget process, the twomajor types of budgeting, and the

use of computers in budgeting.

After studying this chapter, youshould be able to:


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3. Describe the master budget for amerchandising business.

4. Prepare the basic incomestatement budgets for amerchandising business.

5. Prepare balance sheet budgetsfor a merchandising business.

After studying this chapter, youshould be able to:


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Describe budgeting, itsobjectives, and its impact onhuman behavior.

Objective 1

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A budgetcharts a course for a business byoutlining the plans of the business in financialterms.

Establishing specific goals

Executing plans to achieve the goals

Periodically comparing actual results to the goals

Objectives of Budgeting

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Housing30%

Utilities5%

Food20%

Medical5%

Other4%

Clothing7%

Transportation15%

Entertainment6%

Savings8%

Estimated Portion of Your Total Monthly

Income That Should Be Budgeted for

Various Living Expenses

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Budgeting processes 9-1


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Planning

Budgeting supports the planning process byrequiring all organizational units to establishtheir goals for the upcoming period. These

goals motivate individuals and groups toperform at high levels. Planning alsomotivates employees to attain goals andimprove overall decision making.

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Directing

The budget can be used to directandcoordinateoperations in order toachieve the stated goals.

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The budgetary units of an organization arecalled responsibility centers. Eachresponsibility center is led by a manager who

has the authority over and responsibility for theunits performance.

Responsibility Centers9-1


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Controlling Through Feedback

As time passes, the actual performance ofan operation can be compared against the

planned goals. This provides promptfeedback to employees about theirperformance. If necessary, employees canuse such feedback to adjust their activities

in the future.

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Human behavior problems canarise if

1. the budget goal is too

tight and very hard forthe employee to achieve.

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2. the budget goal is too loose

and very easy for theemployee to achieve.

It is undesirable to set lowergoals than is attainable. Suchbudget padding is termedbudgetary slack.

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3. the budget goals of a

business conflict with theobjectives of the employees.

Goal conflictoccurs when individual self-

interest differs from business objectives orwhen different departments are givenconflicting objectives.

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Describe the basic elements of

the budget process, the twomajor types of budgeting, andthe use of computers in

budgeting.

Objective 2

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A variation of fiscal-year budgeting,called continuousbudgeting,maintains a twelve-month projection

into the future.

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One-Year Budget

Feb.2008

Mar.2008

Apr.2008

May2008

June2008

July2008

Aug.2008

Sep.2008

Oct.2008

Nov.2008

Dec.2008

Jan.2009

Delete on February 28

20Add February 2009

Feb.2008

Feb.2009

Continuous Budgeting9-2

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Zero-based budgetingrequiresmanagers to estimate sales,

production, and other operatingdata as though operations arebeing started for the first time.

Zero-Based Budgeting

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Static Budget

A static budgetshows the expectedresults of a responsibility center for onlyone activity level. The budget does not

change even if the activity changes.

A static budget is used by many servicecompanies and for some administrativefunctions of merchandising companies.

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Colter Manufacturing CompanyAssembly Department BudgetFor the Year Ending July 31, 2008

Direct labor $40,000Electric power 5,000Supervisor salaries 15,000Total department costs $60,000

Static Budget

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Strength:A static budget is simpleall expenses arebudgeted as fixed costs.

Weakness:

A static budget does not adjust for changes in

revenues and expenses that occur as volumeschange.

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Flexible Budget

Flexible budgetsshow theexpected results of a responsibility

center for several activity levels.

A flexible budget is especially usefulin estimating and controlling factory

costs and operating expenses.

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Flexible Budget9-2

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Strength:

Flexible budgeting provides information needed

to analyze the impact of volume changes on

actual operating results.

Weakness:

Flexible budgeting requires greater research into

costs. There must be a differentiation betweenfixed and variable costs.

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Static and Flexible Budgets

If Coulter Manufacturing Companys AssemblyDepartment spent $72,000 to produce 10,000units, how much over or under budget would

the department manager be using a staticbudget? A flexible budget?

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Over Budget

StaticBudget

$60,000 $72,000

ActualResults

Static and Flexible Budgets

(Continued)

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8,000

units

$60,000

9,000

units

$65,500

10,000

units

$71,000

OverBudget

Flexible Budget

$72,000

ActualResults

(Concluded)

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Describe the master

budget for amerchandising business.

Objective 3

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Budgeted Balance Sheet

Cash budget

Capital expenditures

budget

Budgets That Are Linked Together in a Master Budget

Budgeted Income Statement

Sales budget

Purchase budget

Inventory budget

Cost of goods sold budget

Selling and administrativeexpense budget

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Income Statement

Budgets Sales Budget

Purchases Budget

Inventory Budget

Cost of Goods Sold

Budget

Budgeted Income

Statement

Selling and Administrative

Expenses Budget

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Prepare the basic incomestatement budgets for amerchandising business.

Objective 4

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Sales Budget

The sales budgetnormally indicates foreach product

(1) the quantity of estimated sales and

(2) the expected unit selling price.

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Factors Expected to Affect Future

Sales include

backlog of unfilled sales orders

planned advertising and promotion

expected industry and general economicconditions

productive capacity

projected pricing policy findings of market research studies

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Sales Budget (Exhibit 1)

Elite Sports Enterprise

Sales Budget

For the Months of January, February and March

Month Forecasted Sales

Volume

Unit Selling

Price

Total Sales

January 2,700 RM400 RM1,080,000

February 3,100 RM400 RM1,240,000

March 2,425 RM400 RM 970,000

Total revenue from sales RM3,290,000

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Purchase Budget

Purchase budget is used to estimate the quantity ofmerchandises needed to be purchased in order tofulfill the targeted sales demand. Use the following

formulation to determine total purchase needed.Budgeted Cost of goods sold

(+) Desired Ending inventory

Total inventory needed

(-) Estimated Beginning inventory

Total Purchase needed

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Purchases Budget (Exhibit 2)

Elite Sports Enterprise

Purchases Budget

For the Months of January, February and March

January February March Total

Cost of goods sold

(50% of current sales) 540,000 620,000 485,000 1,645,000Plus Desired ending inventory

(70% of next month cost of goods sold) 434,000 339,500 *420,000 420,000

Total inventory needed 974,000 959,500 905,000 2,065,000

Less Beginning inventory # 378,000 434,000 339,500 378,000

Total Purchases (RM) 596,000 525,500 565,500 1,687,000

Note* : RM420,000 = (3,000 x 400) x 50% x 70%# : RM378,000 = given as December 31, 2009, Accounts Receivable balance, or

= 70% x January cost of goods sold of RM540,000

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Selling and administrative expense

The sales budget is often used as thestarting point for estimating the selling andadministrative expenses.

For example, a budgeted increase in salesmay require more advertising. Otherexamples of expenses driven by sales

volume are sales commissions, packagingand delivery expenses.

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Selling and Administrative Expense Budget

(Exhibit 3) Elite Sports EnterpriseSelling and Administrative Expenses BudgetFor the Months of January, February and March

January February March Total

Administrative expenses:Salaries (fixed)

RentDepreciationMiscellaneous expenses

20,000

2,0006,00010,800

20,000

2,0006,00012,400

20,000

2,0006,0009,700

60,000

6,00018,00032,900

Total administrative expenses 38,800 40,400 37,700 116,900Selling expenses:

CommissionsAdvertising

Others

162,00021,600

10,000

186,00024,800

10,000

145,50019,400

10,000

493,50065,800

30,000Total selling expenses 193,600 220,800 174,900 589,300Total selling andadministrative expenses

232,400 261,200 212,600 706,200

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Prepare balance sheetbudgets for a

merchandising business.

Objective 5

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Cash Budget

The cash budgetis one of the mostimportant elements of the budgetedbalance sheet. The cash budget

presents the expected receipts(inflows) and payments (outflows) ofcash for a period of time.

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Receipts from cash sales:

Cash sales (10% x current

months salesNote A) $108,000 $124,000 $97,000

January February March

Note A: $108,000 = $1,080,000 x 10%

$124,000 = $1,240,000 x 10%

$ 97,000 = $ 970,000 x 10%

Determine estimated Cash Receipts from cash sales9-5

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months salesNote A). $108,000 $124,000 $ 97,000


Note B: $370,000, given as Jan. 1, 2008 Accts. Rec. balance

$388,800 = $1,080,000 x 90% x 40%

$446,400 = $1,240,000 x 90% x 40%

Receipts from sales on account:

Collections from prior monthssales (40% of previous months

credit salesNote B).. $370,000 $388,800 $446,400

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months salesNote A) $108,000 $124,000 $ 97,000


Receipts from sales on account:

Collections from prior monthssales (40% of previous months

credit salesNoteB)... $370,000 $388,800 $446,400

Collections from current

months sales (60%) (see Note

C) 583,200 669,600 523,800

Note C: $583,200 = $1,080,000 x 90% x 60%

$669,600 = $1,240,000 x 90% x 60%

$523,800 = $ 970,000 x 90% x 60%

Cash Receipts from current month credit sales9-5

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Scheduleof

Collections

from Sales

(exhibit 5)

Elite Sports EnterpriseSchedule of Collections from Sales

For the three months ending March 31, 2010

2009

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Schedule of Payments for purchase

Estimated cash paymentsare planned reductions in cashfrom cost of goods purchased, selling and administrativeexpenses, capital expenditures, and other sources, such asbuying securities or paying interest or dividends. Asupporting schedule can be used in estimating the cashpayments for purchases.

Consider the following assumption to determine

estimated cash payment for purchase: Firm expects topay 75% of the purchases in the month in which theyare incurred and the balance in the following month.

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Schedule of Payments for purchase (exhibit 5)

Elite Sports EnterpriseSchedule of Payments for Purchases

For the Three Months Ending March 31, 2010


Payments of current monthspurchases(75% x current monthspurchases) Note A 447,000 394,125 424,125

Payments of prior monthspurchases(25% x previous monthspurchases) Note B 133,050 149,000 131,375

Total payments 580,050 543,125 555,500

Note A: 75% x 596,000 = 447,000

75% x 525,500 = 394,125

75% x 565,500 = 424,125

Note B: 133,050 given as December 31, 2009 Accounts payable balance, or

25% x Dec. purchases =[(2,570 x 400) x 50%] + [70% x 540,000]

[70% x 514,000)] = 532,200 x 25% = 133,050

25% x 596,000 = 149,000

25% x 525,500 = 131,375

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Schedule of Payments for selling and

administrative expenses (exhibit 6)

Elite Sports EnterpriseSchedule of Payments for Selling and Administrative Expenses

For the Three Months Ending March 31, 2010January February March

Selling and Administrative Expenses:Salaries (fixed)Miscellaneous expenses

20,00010,800

20,00012,400

20,0009,700

Commissions (previous months)AdvertisingOthers

154,20021,60010,000

162,00024,80010,000

186,00019,40010,000

Total Payments 216,600 229,200 245,100

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Completing the Cash Budget

Consider additional information as given below in

preparing cash budget:

1. pay a new year bonus of RM280,000 on January

10

2. Pay a quarterly interest expense of RM22,500 onMarch 31.

3. The company plans to buy a new warehouse

costing RM145,000 in early January (assume that

the depreciation of the warehouse is alreadyincluded in the depreciation of the fixed assets).

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Completing the Cash Budget

Consider additional information as given below inpreparing cash budget:

4. The company requires a minimum of RM200,000

as a cash balance at the end of each month.

5. Loan-related information:

Assume that firm can borrow or repay

loans in multiples of RM1,000.

Loan interest rate of 10% per year,

Borrowing occurs at the beginning and repaymentat the end of the months.

Firm will borrow only when necessary and will

repay as promptly as possible.

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Elite Sports EnterpriseCash Budget

For the Three Months Ending March 31, 2010January

RMFebruary

RMMarch

RMBeginning cash balance 190,000 200,630 205,380Estimated cash receipts from sales

(from Exhibit 3) 953,280 1,058,400 970,200Total available cash (a) 1,143,280 1,259,030 1,175,580Estimated cash payments for:

Merchandise purchases (from Exhibit 5)Selling and administrative expenses(from Exhibit 6)

Interest expenseNew year bonusAcquisition of a new warehouse

580,050

216,600

280,000145,000

543,125

229,200

555,500

245,100

22,500

Total payments 1,221,650 772,325 823,100

Completing the Cash Budget (exhibit 7)9-5


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Budgeted Balance Sheet

The budgeted balancesheetestimates the financial condition at

the end of a budget period.

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Documents

PP for Chapter 9 - Budgeting - Final