Introduction to Budgeting

& Master Budget

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Presentation Outline

I. An Overview of Budgeting
II. The Master Budget and Selected Budget Formats

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I. An Overview of Budgeting

A. The Stages of Budgeting

B. Developing the Budget 3
A. The Stages of Budgeting

1. Planning
2. Control

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1. Planning

The budget process forces managers to consider carefully

their goals and objectives and to specify means of
achieving them.

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 2. Control
Budgets provide a means of evaluating performance. Potential causes of
significant deviations from budgets include:

 Budget was poorly conceived.

 Conditions have changed since the budget was prepared.
 Managers have done a particularly good or poor job.

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B. Developing the Budget

1. The Budget Committee

2. The Budget Time Period

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1. The Budget Committee

Various budgets are approved by a

budget committee that is
composed of senior managers such
as the president, CFO, VP of
operations, and the controller.

Budgets may be developed with either

a top-down or bottom-up
approach.

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2. The Budget Time Period

Budgets may cover a variety of

time periods including a
month, quarter, year, or even
longer.

Generally, longer budget

periods provide less detail.

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II. The Master Budget and
Budget Formats
A. A Formal Summary of Company Plans
B. Selected Budget Formats

The master budget

coordinates the
organization’s
activities.

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A. A Formal Summary of Company
Plans
 It sets specific targets for sales, production, selling and admin.,
and capital acquisitions.

 It culminates a budgeted income statement, balance sheet, and

cash receipt and disbursement summary.

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III. Selected Budget Formats

A. Sales Budget
B. Production Budget
C. Direct Materials Budget
D. Direct Labor Budget
E. Overhead Budget
F. Cash Receipts and Disbursements Budget

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A. Sales Budget

Projected sales
x Selling price per unit
= Budgeted sales revenue 13
B. Production Budget

Budgeted sales in units

+ Desired ending inventory of finished goods
= Total needs
- Beginning inventory of finished goods
= Units to be produced 14
C. Direct Materials Budget
Units to be produced
x Cost of parts per unit
= Cost of parts needed for production
+ Desired ending inventory of parts
= Total needed
- Beginning inventory of parts
= Cost of purchases
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D. Direct Labor Budget

Direct labor hours per unit

x Labor rate per hour
= Direct labor cost per unit
x Units to be produced
= Total direct labor cost 16
E. Overhead Budget

Units to be produced
x Variable costs per unit
= Total variable overhead
+ Budgeted fixed overhead
= Total budgeted overhead
- Noncash expenses
= Cash disbursements for overhead
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F. Cash Receipts and Disbursements
Budget
Cash receipts
- Cash disbursements
= Excess (deficiency) of cash
available over disbursements
+ Beginning cash balance
= Ending cash balance

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IV. Static v. Flexible Budget

A. Static Budget
B. Static Budget Illustration
C. Flexible Budget
D. Flexible Budget Illustration

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A. Static Budget

A budget designed for only one

Why are level of activity.
we so off
from
budget? Differences from the budget can
be misleading when an
organization actually operates
at a different level of activity.

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 B. Static Budget Illustration
Standard
cost per Original
unit Actual Budget Variance
Units produced and sold 8,000 10,000 2,000 U

Variable Overhead Costs:

Maintenance $ 0.60 $ 4,500 $ 6,000 $ 1,500 F
Indirect materials 1.40 12,000 14,000 2,000 F
Utilities 1.00 9,500 10,000 500 F
26,000 30,000 4,000 F

Fixed Overhead Costs:

Depreciation 40,000 40,000 $ -
Supervision 49,000 50,000 1,000 F
Insurance 10,000 10,000 -
Total fixed overhead 99,000 100,000 1,000 F
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Total overhead costs $ 125,000 $ 130,000 $ 5,000 F
 C. Flexible Budget
A budget designed to cover a range of activity. Can be used to
compare actual costs incurred to budgeted costs around that
level of activity.

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 D. Flexible Budget Illustration
Standard
cost per unit Units
Units produced and sold 5,000 10,000 15,000

Variable Overhead Costs:

Maintenance $ 0.60 $ 3,000 $ 6,000 $ 9,000
Indirect materials 1.40 7,000 14,000 21,000
Utilities 1.00 5,000 10,000 15,000
$ 3.00 15,000 30,000 45,000

Fixed Overhead Costs:

Depreciation 40,000 40,000 40,000
Supervision 50,000 50,000 50,000
Insurance 10,000 10,000 10,000
Total fixed overhead 100,000 100,000 100,000
Total overhead costs $ 115,000 $ 130,000
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$ 145,000
Summary

 Planning and control stages of budget

 Budget committees, & time periods
 Formal plan culminating in projected financial
statements
 Budget formats
 Static and flexible budgets

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