Topic 3 Budgeting - a comprehensive guidelines

23-1
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Operational
Operational Budgeting
Budgeting
Chapter 23

23-2
Budgeting: The Basis for Planning
Budgeting: The Basis for Planning
and Control
and Control
Control
Steps taken by
management to
ensure that
objectives are
attained.
Planning
Developing
objectives for
acquisition
and use of
resources.
A budget is a comprehensive financial
plan for achieving the financial and
operational goals of an organization.

23-3
Coordination
of activities
Performance
evaluation
Enhanced management
responsibility
Assignment of decision-
making responsibilities
Benefits Derived from Budgeting
Benefits Derived from Budgeting
Benefits

23-4
Flow of Budget Data
S upervisor S upervisor
M iddle
M anagem ent
S upervisor S upervisor
M iddle
M anagem ent
To p M anagem ent
Selecting and Using a Budgeting Approach:
Selecting and Using a Budgeting Approach:
Managers Should Participate Activel
Managers Should Participate Actively
y

23-5
2012 2013 2014 2015
Capital Budgets are for longer periods of time.
The annual operating budget may be
divided into quarterly or monthly budgets.
The Budget Period
The Budget Period

23-6
The Master Budget
The Master Budget

23-7
Sales Budget
1-7
April May June Quarter
Budgeted
sales (units) 20,000 50,000 30,000 100,000
Selling
price per
unit 10
$ 10
$ 10
$ 10
$
Total
Revenue 200,000
$ 500,000
$ 300,000
$ 1,000,000
$
 Breakers, Inc. 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.
Total Budgeted
Sales
=
Estimated Selling
Price per Unit
x
Estimated
Sales in Units

23-8
Production Budget
1-8
Sales in units 20,000 50,000 30,000 100,000
Add: desired
end. inventory 10,000 6,000 5,000 5,000
Total needed 30,000 56,000 35,000 105,000
Less: beg.
inventory 4,000 10,000 6,000 4,000
Units to be
produced 26,000 46,000 29,000 101,000
The management of Breakers, Inc. wants ending inventory to be equal to
20% of the following month’s budgeted sales in units.
On March 31, 4,000 units were on hand.
 Let’s prepare the production budget.
Total
Production
Units
=
Budgeted
Sales in Units
+
Desired Units of
Ending Finished
Goods Inventory
–
Desired Units of
Beginning Finished
Goods Inventory

23-9
Production Budget (cont)
1-9
Sales in units 20,000 50,000 30,000 100,000
Add: desired
end. inventory 10,000 6,000 5,000 5,000
Total needed 30,000 56,000 35,000 105,000
Less: beg.
inventory 4,000 10,000 6,000 4,000
Units to be
produced 26,000 46,000 29,000 101,000
From
sales
budget
March 31
March 31
nding inventory (as given)
nding inventory (as given)
Ending inventory becomes
Ending inventory becomes
beginning inventory the next
beginning inventory the next
month
month

23-10
Direct-Material Budget
1-10
• At 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 month’s production.
• On March 31, 13,000 pounds of material are on hand. Material cost $.40 per pound.
Total Units of
Direct Materials
to Be Purchased
=
Total Production
Needs in Units of
Direct Materials
+
Desired Units of
Ending Direct
Materials
Inventory
–
Desired Units of
Beginning Direct
Materials
Inventory

23-11
Direct-Material Budget (cont)
From our
production budget
10% of the following
month’s production
March 31
inventory
June Ending Inventory
July production in units 23,000
Materials per unit 5
Total units needed 115,000
Inventory percentage 10%
June desired ending inventory 11,500
July Production
Sales in units 25,000
Add: desired ending inventory 3,000
Total units needed 28,000
Less: beginning inventory 5,000
Production in units 23,000

23-12
Direct-Labor Budget
From our production
budget
• At Breakers, each unit of product requires 0.1 hours of direct labor.
 Let’s prepare the direct labor budget.
Total Budgeted
Direct Labor Cost
=
Estimated Total
Direct Labor Hours
x
Estimated Direct Labor
Cost per Hour

23-13
Manufacturing Overhead Budget
1-13
Here is Breakers’ Overhead Budget for the quarter.
• At Breakers, variable manufacturing overhead (MOH) is $0.50 per unit produced.
• Fixed MOH is $50,000 per month.
• The $50,000 fixed expenses include $10,000 in depreciation expense that does not
require a cash outflows for the month.

23-14
Selling and Administrative Expense Budget
1-14
From our Sales budget
• At 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.

23-15
Cash Budget
The cash budget is divided into four
The cash budget is divided into four
sections:
sections:
1.
1.Cash receipts section lists all cash
Cash receipts section lists all cash
inflows excluding cash received from
inflows excluding cash received from
financing;
financing;
2.
2.Cash disbursements section consists
Cash disbursements section consists
of all cash payments excluding
of all cash payments excluding
repayments of principal and interest;
repayments of principal and interest;
3.
3.Cash excess or deficiency section
Cash excess or deficiency section
determines if the company will need to
determines if the company will need to
borrow money or if it will be able to repay
borrow money or if it will be able to repay
funds previously borrowed; and
funds previously borrowed; and
4.
4.Financing section details the
Financing section details the
borrowings and repayments projected to
borrowings and repayments projected to
take place during the budget period.
take place during the budget period.
Estimated Ending
Cash Balance
=
Total
Estimated
Cash Receipts
–
Total
Estimated
Cash
Payments
+
Estimated
Beginning Cash
Balance

23-16
Cash Receipts Budget
• At Breakers, all sales are on account.
• The company’s 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.

23-17
Cash Disbursement Budget
140,000 lbs. × $.40/lb. = $56,000
• Breakers pays $0.40 per pound for its materials.
• One-half of a month’s 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.

23-18
Cash Budget
(Collections and Disbursements)
From our Cash Receipts
From our Cash Receipts
Budget
Budget
From our Cash Disbursements
From our Cash Disbursements
Budget
Budget
From our Direct Labor Budget
From our Direct Labor Budget
From our Overhead Budget
From our Overhead Budget
From our Selling and
From our Selling and
Administrative Expense
Administrative Expense
Budget
Budget
Breakers has an April 1 cash balance of $40,000.

23-19
Cash Budget (cont)
(Collections and Disbursements)
Breakers:
– Pays a cash dividend of $25,000 in April.
– Purchases $143,700 of equipment in May and $48,300 in June paid in cash.

23-20
Cash Budget
(Financing and Repayment)
Breakers must
borrow an addition
$31,800 to maintain
a cash balance of
$30,000.
At the end of June,
Breakers has
enough cash to
repay the $45,600
loan plus interest at
12%.
Breakers:
– 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.

23-21
Participative Vs Top Down Budgeting
• A self-imposed budget or participative budget - a budget that
is prepared with the full cooperation and participation of
managers at all levels
• Top Down/Authoritative budgeting - Process in which higher
management personnel dictate targets for the budget
Flow of Budget Data
Flow of Budget Data
Top-Down
budgeting process
Participative
budgeting process

23-22
Behavioral Impact of Budgets
1-22
 The use budget for Performance Evaluation
• People often perceive that their performance will look
better in their superiors’ eyes if they can “beat the budget.”
 Impact of Budgets
• Budgetary slack (or padding the budget) exists when a
manager deliberately underestimates revenues or
overestimates costs in an effort to make the future period
appear less attractive in the budget than they think it will
be in reality.
• The act of padding the budget is unethical. It is certainly not
communicating information fairly and objectively and
constitutes a violation of the credibility standard.

23-23
End of Chapter 23
End of Chapter 23

Topic 3 Budgeting - a comprehensive guidelines

More Related Content

Similar to Topic 3 Budgeting - a comprehensive guidelines (20)

More from alamgirbd (20)

Recently uploaded (20)

Topic 3 Budgeting - a comprehensive guidelines

Editor's Notes