Profit Planning,

Activity-Based
Budgeting and
e-Budgeting
Purposes of Budgeting Systems
 Planning
 Facilitating
Budget
Budget Communication and
aa detailed
detailed plan,
plan, expressed
expressed Coordination
in
in quantitative
quantitative terms,
terms,
that
that specifies
specifies how
how
resources
resources will
will be
be  Allocating Resources
acquired
acquired andand used
used  Controlling Profit and
during
during aa specified
specified period
period Operations
of
of time.
time.
 Evaluating Performance
and Providing Incentives
 Resources
Resources Resources
Resources
Activity-Based
Activity-Based
Costing
Costing (ABC)
(ABC)
Activities
Activities Activities
Activities

Activity-Based
Activity-Based
Cost Budgeting
Budgeting (ABB)
(ABB)
Cost objects:
objects: Forecast
Forecast of
of products
products
products
products and
and services
services and
and services
services to
to be
be
produced,
produced, and
and produced
produced andand
customers
customers served.
served. customers
customers served.
served.
 Detail
Budget
Detail

Materials
Budget
Detail

Production
Budget
Master
Budget
Covering all Sales
phases of
a company’s
operations.
 Capital
Capital budgets
budgets with
with acquisitions
acquisitions
that
that normally
normally cover
cover several
several years.
years.
Long Range Budgets

Continuous or
Rolling Budget
1999 2000 2001 2002

This
This budget
budget is
is usually
usually aa twelve-month
twelve-month
budget
budget that
that rolls
rolls forward
forward one
one month
month
as
as the
the current
current month
month isis completed.
completed.
 Sales of Services or Goods

Ending
Inventory
Budget Production
Work
Work in
in Process
Process Budget
and
and Finished
Finished
Goods
Goods

Direct Direct Selling and

Overhead
Materials Labor Administrative
Budget Budget Budget
Budget

Ending
Inventory
Budget
Direct
Direct Materials
Materials
 Sales of Services or Goods
Exh.
9-1

Ending
Inventory
Budget Production
Work
Work in
in Process
Process Budget
and
and Finished
Finished
Goods
Goods

Direct Direct Selling and

Overhead
Materials Labor Administrative
Budget Budget Budget
Budget

Ending Cash Budget

Inventory
Budget
Direct
Direct Materials
Materials Budgeted Financial Statements
Sales Budget

Breakers,
Breakers, Inc.
Inc. is
is preparing
preparing budgets
budgets for
for the
the quarter
quarter
ending
ending June
June 30.
30.

Budgeted
Budgeted sales
sales for
for the
the next
next five
five months
months are:
are:
 April
April 20,000
20,000 units
units
 May
May 50,000
50,000 units
units
 June
June 30,000
30,000 units
units
 July
July 25,000
25,000 units
units
 August
August 15,000
15,000 units.
units.

The
The selling
selling price
price is
is $10
$10 per
per unit.
unit.
 April
April May
May June
June Quarter
Quarter
Budgeted
Budgeted
sales
sales (units)
(units) 20,000
20,000 50,000
50,000 30,000
30,000 100,000
100,000
Selling
Selling price
price
per
per unit
unit $$ 10
10 $$ 10
10 $$ 10
10 $$ 10
10
Total
Total
Revenue
Revenue $$200,000
200,000 $$500,000
500,000 $$300,000
300,000 $$1,000,000
1,000,000
 Sales Production
Budget Budget
t ed
e
pl
om
C

Production must be adequate to meet budgeted

sales and provide for sufficient ending inventory.
Production Budget
The
The management
management of of Breakers,
Breakers, Inc.
Inc. wants
wants ending
ending
inventory
inventory to
to be
be equal
equal to
to 20%
20% of
of the
the following
following
month’s
month’s budgeted
budgeted sales
sales in
in units.
units.

On
On March
March 31
31stst ,, 4,000
4,000 units
units were
were on
on hand.
hand.

Let’s
Let’s prepare
prepare the
the production
production budget.
budget.
 April
April May
May June
June Quarter
Quarter
Sales
Salesin inunits
units 20,000
20,000
Add:
Add: desired
desired
end.
end. inventory
inventory
Total
Totalneeded
needed
Less:
Less: beg.
beg.
inventory
inventory
Units
Unitstotobe
be
started
started

From sales
budget
 April
April May
May June
June Quarter
Quarter
Sales
Salesin inunits
units 20,000
20,000
Add:
Add: desired
desired
end.
end. inventory
inventory 10,000
10,000
Total
Totalneeded
needed 30,000
30,000
Less:
Less: beg.
beg.
inventory
inventory
Units
Unitstotobe
be
started
started
 April
April May
May June
June Quarter
Quarter
Sales
Salesin inunits
units 20,000
20,000
Add:
Add: desired
desired
end.
end. inventory
inventory 10,000
10,000
Total
Totalneeded
needed 30,000
30,000
Less:
Less: beg.
beg.
inventory
inventory 4,000
4,000
Units
Unitstotobe
be
started
started 26,000
26,000

March 31
ending inventory
 April
April May
May June
June Quarter
Quarter
Sales
Salesin inunits
units 20,000
20,000 50,000
50,000
Add:
Add: desired
desired
end.
end. inventory
inventory 10,000
10,000 6,000
6,000
Total
Totalneeded
needed 30,000
30,000 56,000
56,000
Less:
Less: beg.
beg.
inventory
inventory 4,000
4,000 10,000
10,000
Units
Unitstotobe
be
started
started 26,000
26,000 46,000
46,000
 April
April May
May June
June Quarter
Quarter
Sales
Salesin inunits
units 20,000
20,000 50,000
50,000 30,000
30,000 100,000
100,000
Add:
Add: desired
desired
end.
end. inventory
inventory 10,000
10,000 6,000
6,000 5,000
5,000 5,000
5,000
Total
Totalneeded
needed 30,000
30,000 56,000
56,000 35,000
35,000 105,000
105,000
Less:
Less: beg.
beg.
inventory
inventory 4,000
4,000 10,000
10,000 6,000
6,000 4,000
4,000
Units
Unitstotobe
be
started
started 26,000
26,000 46,000
46,000 29,000
29,000 101,000
101,000
Direct-Material Budget

At
AtBreakers,
Breakers,five
fivepounds
poundsof
ofmaterial
materialare
arerequired
requiredper
per
unit
unitof
ofproduct.
product.

Management
Managementwants wantsmaterials
materialson
onhand
handat
atthe
theend
endof
of
each
eachmonth
monthequal
equalto to10%
10%of
ofthe
thefollowing
followingmonth’s
month’s
production.
production.

On
OnMarch
March3131stst,,13,000
13,000pounds
poundsofofmaterial
materialare
areon
onhand.
hand.
Material
Materialcost
cost$.40
$.40perperpound.
pound.

 Let’s
Let’sprepare
preparethe
thedirect
directmaterials
materialsbudget.
budget.
 From our
production
budget
10% of the following
month’s production
March 31
inventory
 July
June Ending Inventory
July Production
Production
Sales July production in units
Salesinin units
units 25,000
25,000
Add: Materials per unit
Add: desired
desired ending
ending inventory
inventory 3,000
3,000
Total
Total units
unitsneeded
needed 28,000
28,000 Total units needed
Less:
Less: beginning
beginning inventory
inventory 5,000
5,000 Inventory percentage
Production
Production inin units
units 23,000
23,000 June desired ending inventory
Direct-Labor Budget
At
At Breakers,
Breakers, each
each unit
unit of
of product
product requires
requires 0.1
0.1 hours
hours of
of
direct
direct labor.
labor.
The
The Company
Company has
has aa “no
“no layoff”
layoff” policy
policy so
so all
all employees
employees
will
will be
be paid
paid for
for 40
40 hours
hours of
of work
work each
each week.
week.
In
In exchange
exchange for
for the
the “no
“no layoff”
layoff” policy,
policy, workers
workers agreed
agreed
to
to aa wage
wage rate
rate of
of $8
$8 per
per hour
hour regardless
regardless of
of the
the hours
hours
worked
worked (No
(No overtime
overtime pay).
pay).
For
For the
the next
next three
three months,
months, the
the direct
direct labor
labor workforce
workforce
will
will be
be paid
paid for
for aa minimum
minimum of
of 3,000
3,000 hours
hours per
per month.
month.
 Let’s
Let’s prepare
prepare the
the direct
direct labor
labor budget.
budget.
 From our
production
budget
 This is the greater of
labor hours required or
labor hours guaranteed.
Overhead Budget
Here is Breakers’ Overhead Budget for the quarter.
Selling and Administrative Expense
Budget

At
AtBreakers,
Breakers,variable
variableselling
sellingand
andadministrative
administrative
expenses
expensesare
are$0.50
$0.50per
perunit
unit sold
sold..

Fixed
Fixedselling
sellingand
andadministrative
administrativeexpenses
expensesare
are
$70,000
$70,000per
permonth.
month.

The
The$70,000
$70,000fixed
fixedexpenses
expensesinclude
include$10,000
$10,000in
in
depreciation
depreciationexpense
expensethat
thatdoes
doesnot notrequire
requireaacash
cash
outflows
outflowsfor
forthe
themonth.
month.
 From our
Sales budget
Cash Receipts Budget

At
AtBreakers,
Breakers,all
allsales
salesare
areon
onaccount.
account.

The
Thecompany’s
company’scollection
collectionpattern
patternis:
is:
 70% collected in the month of sale,
70% collected in the month of sale,
 25% collected in the month following sale,
25% collected in the month following sale,
 5% is uncollected.
5% is uncollected.

The
TheMarch
March31
31accounts
accountsreceivable
receivablebalance
balanceof
of
$30,000
$30,000will
willbe
becollected
collectedin
infull.
full.
Cash Disbursement Budget

Breakers
Breakerspays
pays$0.40
$0.40per
perpound
poundfor
forits
itsmaterials.
materials.

One-half
One-halfof
ofaamonth’s
month’spurchases
purchasesare
arepaid
paidfor
forin
inthe
the
month
monthof ofpurchase;
purchase;the
theother
otherhalf
halfisispaid
paidin
inthe
the
following
followingmonth.
month.

No
Nodiscounts
discountsare
areavailable.
available.

The
TheMarch
March31
31accounts
accountspayable
payablebalance
balanceisis$12,000.
$12,000.
140,000 lbs. × $.40/lb. = $56,000 ref; D/M Budget
 Cash Disbursement Budget
Continued
Breakers:
Breakers:

Maintains
Maintainsaa12%
12%open
openline
lineof
ofcredit
creditfor
for$75,000.
$75,000.

Maintains
Maintainsaaminimum
minimumcash
cashbalance
balanceof
of$30,000.
$30,000.

Borrows
Borrowsand
andrepays
repaysloans
loanson
onthe
thelast
lastday
dayof
ofthe
themonth.
month.

Pays
Paysaacash
cashdividend
dividendof
of$25,000
$25,000in
inApril.
April.

Purchases
Purchases$143,700
$143,700of
ofequipment
equipmentin
inMay
Mayand
and$48,300
$48,300in
in
June
Junepaid
paidin
incash.
cash.
$40,000..

Has
Hasan
anApril
April11cash
cashbalance
balanceof
of$40,000
 From our Cash
Receipts Budget
From our Cash
Disbursements
Budget
From our Direct
Labor Budget
 From our
Overhead Budget
 From our
Selling and Administrative
Expense Budget
 To maintain a cash
balance of $30,000,
Breakers must borrow
$35,000 on its line of credit.
Ending cash balance for April
is the beginning May balance.
 Breakers must
borrow an
addition $13,800
to maintain a
cash balance
of $30,000.
At the end of June, Breakers has enough cash
to repay the $48,800 loan plus interest at 12%.
 Cash Budgeted
Budget Income
Statement
t ed
e
pl
om
C

After we complete the cash budget, we can prepare

the budgeted income statement for Breakers.
Manufacturing overhead is applied on the basis of direct labor hours.

Production
Productioncosts
costsper
perunit
unit Quantity
Quantity Cost
Cost Total
Total
Direct
Directmaterials
materials 5.00
5.00 lbs.
lbs. $$ 0.40
0.40 $$ 2.00
2.00
Direct
Directlabor
labor 0.10
0.10 hrs.
hrs. $$ 8.00
8.00 0.80
0.80
Manufacturing
Manufacturingoverhead
overhead 0.10
0.10 hrs.
hrs. $$18.02
18.02 1.80
1.80
$$ 4.60
4.60
Budgeted
Budgetedfinished
finishedgoods
goodsinventory
inventory
Ending
Endinginventory
inventory ininunits
units 5,000
5,000
Unit
Unitproduct
productcost
cost $$ 4.60
4.60
Ending
Endingfinished
finishedgoods
goodsinventory
inventory $$23,000
23,000

Total overhead $191,000

Total labor hours 10,600 hrs. = $18.02 per hr.*

*rounded
 Breakers,
Breakers,Inc.
Inc.
Budgeted
BudgetedIncome
IncomeStatement
Statement
For
Forthe
theThree
ThreeMonths
MonthsEnded
EndedJune
June30
30
Revenue
Revenue(100,000
(100,000××$10)
$10) $$ 1,000,000
1,000,000
Cost
Costof ofgoods
goodssold
sold(100,000
(100,000××$4.60)
$4.60) 460,000
460,000
Gross
Grossmargin
margin 540,000
540,000
Operating
Operatingexpenses:
expenses:
Selling
Sellingand
andadmin.
admin.Expenses
Expenses $$ 260,000
260,000
Interest
Interestexpense
expense 838
838
Total
Totaloperating
operatingexpenses
expenses 260,838
260,838
Net
Netincome
income $$ 279,162
279,162
Budgeted Balance Sheet
Breakers
Breakers reports
reports the
the following
following account
account balances
balances on
on
June
June 30
30 prior
prior to
to preparing
preparing its
its budgeted
budgeted financial
financial
statements:
statements:

Land
Land -- $50,000
$50,000

Building
Building (net)
(net) -- $148,000
$148,000

Common
Common stock
stock -- $200,000
$200,000

Retained
Retained earnings
earnings -- $46,400
$46,400
 25%of June
sales of
$300,000

11,500 lbs. at
$.40 per lb.

5,000 units at
$4.60 per unit.
50% of June
purchases
of $56,800
Budget Administration
The
The Budget
Budget Committee
Committee is
is aa standing
standing
committee
committee responsible
responsible for
for .. .. ..

 overall
overall policy
policy matters
matters relating
relating to
to the
the budget.
budget.
 coordinating

coordinating the
the preparation
preparation of
of the
the budget.
budget.
E-Budgeting
Employees throughout an organization
can submit and retrieve budget
information electronically. This tends to
streamline the entire budgeting process.
Firewalls and Information Security
Budget information is extremely
extremely sensitive
sensitive and
confidential. A firewall is a computer or router
placed between a company’s internal network
and the internet to control all information
between the outside world and the company’s
local network.
Zero-Base Budgeting
To receive funding during the budgeting process,
each activity must be justified in terms of its
continued usefulness.
International Aspects of Budgeting
Firms
Firms with
with international
international operations
operations face
face special
special
problems
problems when
when preparing
preparing aa budget.
budget.

Fluctuations
Fluctuations in
in foreign
foreign currency
currency exchange
exchange rates.
rates.

High
High inflation
inflation rates
rates in
in some
some foreign
foreign countries.
countries.

Differences
Differences in
in local
local economic
economic conditions.
conditions.
Budgeting Product Life-Cycle Costs
Product
Product planning
planning
and
and concept
concept
Design.
Design.

Distribution
Distribution Preliminary
Preliminary
and
and customer
customer design.
design.
service.
service.

Detailed
Detailed design
design
Production.
Production. and
and testing.
testing.
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.”
 Top M anagem ent

M id d le M id d le
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S u p e rv is o r S u p e rv is o r S u p e rv is o r S u p e rv is o r

Flow of Budget Data