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Chapter 5 Master Budgets
Chapter 5 Master Budgets
Chapter 5 Master Budgets
5
MASTER BUDGETS &
FLEXIBLE BUDGETS
BUDGETING & ITS ROLES IN PLANNING,
CONTROL AND DECISION MAKING
Goals and
Budgets objectives
Compel
managers
to think
ahead Provide a standard for
performance evaluation
5. Overhead budget
Selling and
Production
Administrative
Budget
Budget
COGS
Budget
Budgeted
Income statement
OPERATING BUDGET
Production
Budget
Ending finished
Good inventory
Budget
COGS
Budget
THE SALES BUDGET
Detailed schedule showing expected sales for
the coming periods expressed in units and
dollars.
Start with sales forecast provided by the
marketing department
Then be adjusted up or down by the budget
committee
BUDGETING EXAMPLE
Royal Company 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.
THE SALES BUDGET
Sales Production
Budget Budget
From production
budget
THE DIRECT MATERIALS BUDGET
April May June Quarter
Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add desired
ending inventory
Total needed
Less beginning
inventory
Materials to be
purchased
THE DIRECT MATERIALS BUDGET
April May June Quarter
Production 26,000 46,000 29,000 101,000
Materials per unit 5 5 5 5
Production needs 130,000 230,000 145,000 505,000
Add desired
ending inventory 23,000
Total needed 153,000
Less beginning
inventory
Materials to be
purchased
March 31
inventory
EXPECTED CASH DISBURSEMENT FOR
MATERIALS
Royal 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.
The March 31 accounts payable balance is $12,000.
Let’s calculate expected cash
disbursements.
EXPECTED CASH DISBURSEMENT FOR
MATERIALS
April May June Quarter
Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
May purchases
June purchases
Total cash
disbursements
EXPECTED CASH DISBURSEMENT FOR
MATERIALS
April May June Quarter
Accounts pay. 3/31 $ 12,000 $ 12,000
April purchases
50% x $56,000 28,000 28,000
50% x $56,000 $ 28,000 28,000
May purchases
June purchases
Total cash
disbursements $ 40,000 ?
Direct materials
budget and information
ENDING FINISHED GOODS
INVENTORY BUDGET
Direct labor
budget
ENDING FINISHED GOODS
INVENTORY BUDGET
*rounded
SELLING AND ADMINISTRATIVE
EXPENSE BUDGET
AtRoyal, variable selling and administrative
expenses are $0.50 per unit sold.
Fixedselling and administrative expenses are
$70,000 per month.
The fixed selling and administrative expenses
include $10,000 in costs – primarily depreciation
– that are not cash outflows of the current
month.
Cash Budgeted
Budget Income
Statement
Dysfunctional behavior
managers make poor decisions
BEHAVIORAL DIMENSION OF BUDGETING
Some key features of a good budgetary system:
Frequent feedback on performance
Monetary and nonmonetary incentives
Participate budgeting
Realistic standards
Controllability of costs
Multiple measures of performance
(Read more in page 388, 389 and 390)
STATIC BUDGETS AND PERFORMANCE
EVALUATION
A static budget is a
budget for a particular Hmm! Comparing
level of activity. static budgets with
actual costs is like
comparing apples
and oranges.
Performance evaluation is
difficult when actual
activity differs from the
planned level of activity.
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labor $ 40,000 $ 34,000 $6,000 F
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Fixed costs
Depreciation 12,000 12,000 0
Insurance 2,000 2,050 50 U
Total overhead costs $ 89,000 $ 77,350 $11,650 F
STATIC BUDGETS AND PERFORMANCE
REPORTS CheeseCo
Static Actual
Budget Results Variances
Machine hours 10,000 8,000 2,000 U
Variable costs
Indirect labor $ 40,000 $ 34,000 $6,000 F
Indirect materials 30,000 25,500 4,500 F
Power 5,000 3,800 1,200 F
Since cost variances are favorable, have
Fixed costs
we done a good job controlling
Depreciation 12,000 costs?
12,000 0
Insurance 2,000 2,050 50 U
Total overhead costs $ 89,000 $ 77,350 $11,650 F
STATIC BUDGETS AND PERFORMANCE
REPORTS
I don’t think I
can answer the
question using
a static budget.
Because actual activity is below
budgeted activity.
STATIC BUDGETS AND PERFORMANCE
REPORTS
The relevant question is . . .
“How much of the favorable cost variance is
due to lower activity, and how much is due to good
cost control?”
Fixed
PREPARING A FLEXIBLE BUDGET
PREPARING A FLEXIBLE
CheeseCoBUDGET
Fixed costs
Fixed costs are
Depreciation $12,000
Insurance 2,000 expressed as a
Total fixed cost total amount.
Total overhead costs
PREPARING A FLEXIBLE
CheeseCoBUDGET
Fixed costs
Depreciation $4.00 per hour × 8,000 hours = $32,000
$12,000
Insurance 2,000
Total fixed cost
Total overhead costs
PREPARING A FLEXIBLE
CheeseCoBUDGET
Fixed costs
Depreciation $12,000 $ 12,000
Insurance 2,000 2,000
Total fixed cost $ 14,000
Total overhead costs $ 74,000 ?
FLEXIBLE BUDGET
PERFORMANCE REPORT
FLEXIBLE BUDGET
PERFORMANCE REPORT
CheeseCo
Cost Total
FlexibleFormula
budget is
Fixed Flexible Actual
prepared for theCosts
Per Hour Budget Results Variances
Machine hours
same activity level 8,000 8,000 0
(8,000 hours) as
Variable costs
actually$achieved.
Indirect labor 4.00 $ 34,000
Indirect material 3.00 25,500
Power 0.50 3,800
Total variable costs $ 7.50 $ 63,300
Fixed Expenses
Depreciation $ 12,000 $ 12,000
Insurance 2,000 2,050
Total fixed costs $ 14,050
Total overhead costs $ 77,350
FLEXIBLE BUDGET
PERFORMANCE REPORT
CheeseCo
Cost Total
Formula Fixed Flexible Actual
Per Hour Costs Budget Results Variances
Machine hours 8,000 8,000 0
Variable costs
Indirect labor $ 4.00 $ 34,000
Indirect material 3.00 25,500
Power 0.50 3,800
Total variable costs $ 7.50 $ 63,300
Fixed Expenses
Depreciation $ 12,000 $ 12,000
Insurance 2,000 2,050
Total fixed costs $ 14,050
Total overhead costs $ 77,350
FLEXIBLE BUDGET
PERFORMANCE REPORT