Professional Documents
Culture Documents
Topic 1 Budgeting
Topic 1 Budgeting
Topic 1 Budgeting
(CHAPTER 9)
9-2
Types of Budgets
Detail
Budget
Detail
Budget
Detail
Production
Budget
Master
Budget
Covering all
phases of
a companys
operations.
9-3
Types of Budgets
Income
Statement
Budgeted
Financial
Statements
Balance Statement of
Sheet Cash Flows
9-4
Sales of Services or Goods
Ending
Inventory Production
Budget Budget
Work in Process
and Finished
Goods
Cash Budget
Budgeted Income
Statement
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
9-5
OPERATING BUDGETS
1. Sales budget
2. Production budget
3. Direct materials purchases budget
4. Direct labor budget
5. Overhead budget
6. Selling & administrative budget
7. Ending finished goods inventory budget
8. Cost of goods sold budget
6
Sales Budget
Breakers, Inc. is preparing budgets for the quarter ending June 30.
Budgeted
sales (units) 20,000 50,000 30,000
Selling price
per unit $ 10 $ 10 $ 10
Total
Revenue $ 200,000 $ 500,000 $ 300,000
Production Budget
Sales Production
Budget Budget
From sales
budget
Production Budget
April May June
Sales in units 20,000
May sales 50,000 units
Add: desired Desired percent 20%
end. inventory 10,000 Desired inventory 10,000 units
Total needed 30,000
Less: beg.
inventory
Units to be
started
Production Budget
April May June
Sales in units 20,000
Add: desired
end. inventory 10,000
Total needed 30,000
Less: beg.
inventory 4,000
Units to be
started 26,000
March 31
ending inventory
Production Budget
April May June
Sales in units 20,000 50,000
Add: desired
end. inventory 10,000 6,000
Total needed 30,000 56,000
Less: beg.
inventory 4,000 10,000
Units to be
started 26,000 46,000
Production Budget
April May June
Sales in units 20,000 50,000 30,000
Add: desired
end. inventory 10,000 6,000 5,000
Total needed 30,000 56,000 35,000
Less: beg.
inventory 4,000 10,000 6,000
Units to be
started 26,000 46,000 29,000
Direct-Material Budget
At Breakers, five kilo 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 kilo of material are on hand. Material cost
$.40 per kilo.
From our
production
budget
Direct-Material Budget
April May June
Production in units 26,000 46,000 29,000
Materials per unit 5 5 5
Production needs 130,000 230,000 145,000
Add: desired
ending inventory
Total needed
Less: beginning
inventory
Materials to be
purchased
Direct-Material Budget
April May June
Production in units 26,000 46,000
Materials per unit 5 5
Production needs 130,000 230,000
Add: desired
ending inventory 23,000
Total needed 153,000
Less: beginning
inventory
Materials to be
purchased
March 31
inventory
Direct-Material Budget
April May June
Production in units 26,000 46,000 29,000
Materials per unit 5 5 5
Production needs 130,000 230,000 145,000
Add: desired
ending inventory 23,000 14,500 11,500
Total needed 153,000 244,500 156,500
Less: beginning
inventory 13,000 23,000 14,500
Materials to be
purchased 140,000 221,500 142,000
Direct-Material
July Production
Budget
Sales in units 25,000
Add: desired ending inventory
April 3,000
May June
Total units needed
Production in units 26,000 28,000
46,000 29,000
Less: beginning
Materials inventory 5
per unit 5,0005 5
Production
Productioninneeds
units 130,000 23,000
230,000 145,000
Add: desired
ending inventory 23,000 14,500 11,500
Total needed 153,000 244,500 156,500
Less: beginning
inventory 13,000 23,000 14,500
Materials to beJune Ending Inventory
July production in units 23,000
purchased 140,000 221,500 142,000
Materials per unit 5
Total units needed 115,000
Inventory percentage 10%
June desired ending inventory 11,500
Direct-Labor Budget
At Breakers, each unit of product requires 0.1 hours
of direct labor.
Workers agreed to a wage rate of $8 per hour
Direct-Labor Budget
April May June
Production in units 26,000 46,000 29,000
Direct-labor hours
Labor hours required
Wage rate
Total direct-labor cost
From our
production
budget
Direct-Labor Budget
April May June
Production in units 26,000 46,000 29,000
Direct-labor hours 0.10 0.10 0.10
Labor hours required 2,600 4,600 2,900
Wage rate
Total direct-labor cost
Direct-Labor Budget
Top management set the overall goals for the budget period and prepares the budget
for the entire organization, including those at the lower operational level to achieve
these goals.
1. In a newly-formed organizations
2. In a very small businesses
3. During periods of economic hardship
4. Operational managers lack budgeting skills
5. Different units in the organization requires
precise coordination.
Advantages:
The budgets are developed by the lower-level managers who will then submit the
budgets to the superiors. The budgets are based on the perception of what is
achievable (and the associated resources necessary) by those who are supposed to
carry out the budgets
Effective when:
1. Well-established organizations
2. Large Organizations
3. Period of economic affluence
4. Availability of strong skilled budget managers
5. Organization different units act autonomously
Advantages:
1. Time consuming
2. Cause manager to introduce budgetary slack
3. Empire building
4. Require early start to budgetary process
5. Managers unqualified to participate might lead to unachievable
budget
Negotiated Style Budgeting
Final budget are therefore most likely to lie between what top
management would really like and what junior managers believe is
feasible. The budgeting process is hence a bargaining process and it
is this bargaining process which is of vital importance, determining
whether the budget is an effective tool or simply a clerical device.
Behavioral Impact of Budgets
Budgetary Slack: Padding the Budget
People often perceive that their performance will look better in their
superiors eyes if they can beat the budget.
International Aspects of Budgeting
Firms with international operations face special problems when
preparing a budget.
1. Fluctuations in foreign currency exchange rates.
2. High inflation rates in some foreign countries.
3. Differences in local economic conditions.
End of LO1