Professional Documents
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Chapter One Master Budgeting
Chapter One Master Budgeting
Master Budgeting
8-2
Budgeting
The quantitative expression of a proposed plan of
action by management for a specified period, and
An aid to coordinating what needs to be done to
implement that plan
May include both financial and nonfinancial data
A financial and/or quantitative statement, prepared
and approved prior to define period of time, of the
policy to be perused during that period for the
purpose of attaining a given objective.
8-3
Advantages of Budgets
Planning
Planning –– Control
Control ––
involves
involves developing
developing involves
involves the
the steps
steps taken
taken
objectives
objectives and
and by
by management
management to to
preparing
preparing various
various increase
increase the
the likelihood
likelihood that
that
budgets
budgets to
to achieve
achieve the
the objectives
objectives setset down
down
those
those objectives.
objectives. while
while planning
planning areare attained
attained
and
and that
that all
all parts
parts ofof the
the
organization
organization areare working
working
together
together toward
toward that
that goal.
goal.
Advantages of Budgeting
Define goals
and objectives
Communicate
plans
Advantages
Coordinate Means of allocating
activities resources
Uncover potential
bottlenecks
Responsibility Accounting
Managers should be held responsible for
those items - and only those items - that they
can actually control to a significant extent.
Responsibility accounting enables
organizations to react quickly to deviations
from their plans and to learn from feedback.
Choosing the Budget Period
Operating Budget
Operating
Operating budgets
budgets ordinarily
ordinarily AA continuous
continuous budget
budget is
is aa
cover
cover aa one-year
one-year period
period 12-month
12-month budget
budget that
that rolls
rolls
corresponding to a company’s
corresponding to a company’s forward one month (or quarter)
fiscal year. Many companies forward one month (or quarter)
fiscal year. Many companies as the current month (or quarter)
divide their annual budget as the current month (or quarter)
divide their annual budget is
into four quarters. is completed.
completed.
into four quarters.
Self-Imposed Budget
Top M anagem ent
M id d le M id d le
M anagem ent M anagem ent
S u p e r v is o r S u p e r v is o r S u p e r v is o r S u p e r v is o r
A self-imposed budget or participative budget is a budget that is
prepared with the full cooperation and participation of managers
at all levels.
Advantages of Self-Imposed Budgets
1.
1. Individuals
Individuals at
at all
all levels
levels of
of the
the organization
organization are
are viewed
viewed as
as
members
members of of the
the team
team whose
whose judgments
judgments are
are valued
valued by
by top
top
management.
management.
2.
2. Budget
Budget estimates
estimates prepared
prepared by
by front-line
front-line managers
managers are
are
often
often more
more accurate
accurate than
than estimates
estimates prepared
prepared by
by top
top
managers.
managers.
3.
3. Motivation
Motivation isis generally
generally higher
higher when
when individuals
individuals participate
participate
in
in setting
setting their
their own
own goals
goals than
than when
when the
the goals
goals are
are
imposed
imposed from
from above.
above.
4.
4. A
A manager
manager who
who is
is not
not able
able to to meet
meet aa budget
budget imposed
imposed
from
from above
above can
can claim
claim that
that itit was
was unrealistic.
unrealistic. Self-imposed
Self-imposed
budgets
budgets eliminate
eliminate this
this excuse.
excuse.
Self-Imposed Budgets
Self-imposed budgets should be reviewed
by higher levels of management to prevent
“budgetary slack.”
Most companies issue broad guidelines in
terms of overall profits or sales. Lower level
managers are directed to prepare budgets
that meet those targets.
Human Factors in Budgeting
The success of a budget program depends on three
important factors:
1.Top management must be enthusiastic and
committed to the budget process.
2.Top management must not use the budget to
pressure employees or blame them when
something goes wrong.
3.Highly achievable budget targets are usually
preferred when managers are rewarded based on
meeting budget targets.
The Master Budget: An Overview
Sales
Sales budget
budget
Selling
Selling and
and
Ending
Ending inventory
inventory administrative
administrative
Production
Production budget
budget
budget
budget budget
budget
Direct
Direct materials
materials Direct
Direct labor
labor Manufacturing
Manufacturing
budget
budget budget
budget overhead
overhead budget
budget
Cash
Cash Budget
Budget
Budgeted
Budgeted Budgeted
Budgeted
income
income balance
balance sheet
sheet
statement
statement
Seeing the Big Picture
1. How much sales revenue will we earn?
2. How much cash will we collect from customers?
3. How much raw material will we need to purchase?
4. How much manufacturing costs will we incur?
5. How much cash will we pay to our suppliers and our direct laborers, and how
much cash will we pay for manufacturing overhead resources?
6. What is the total cost that will be transferred from finished goods inventory to
cost of good sold?
7. How much selling and administrative expense will we incur and how much
cash will be pay related to those expenses?
8. How much money will we borrow from or repay to lenders – including
interest?
9. How much operating income will we earn?
10. What will our balance sheet look like at the end of the budget period?
The Master Budget: An Overview
From
From the
the Sales
Sales Budget
Budget for
for April.
April.
Expected Cash Collections
From
From the
the Sales
Sales Budget
Budget for
for May.
May.
Quick Check
What will be the total cash collections for
the quarter?
a. $700,000
b. $220,000
c. $190,000
d. $905,000
Expected Cash Collections
Prepare a production budget.
The Production Budget
Sales Production
Budget Budget
ed
and l et
p
Expected
o m
C
Cash
Collections
IfIf oo was
was aa merchandising
merchandising company
company itit would
would prepare
prepare aa
merchandise
merchandise purchase
purchase budget
budget instead
instead of
of aa production
production budget.
budget.
The Production Budget
The Production Budget
From
From production
production budget.
budget.
The Direct Materials Budget
The Direct Materials Budget
March 31 inventory.
Greater
Greater of
of labor
labor hours
hours required
required
or
or labor
labor hours
hours guaranteed.
guaranteed.
The Direct Labor Budget
Quick Check
What would be the total direct labor cost for
the quarter if the company follows its no lay-
off policy, but pays $15 (time-and-a-half) for
every hour worked in excess April ofMay
1,500Junehours
Quarter
Labor hours required 1,300 2,300 1,450
in a month?Regular hours paid 1,500 1,500 1,500 4,500
a. $79,500 Overtime hours paid - 800 - 800
Let’s
Let’s prepare
prepare the
the manufacturing
manufacturing overhead
overhead budget.
budget.
Manufacturing Overhead Budget
Direct
Direct Labor
Labor Budget.
Budget.
Manufacturing Overhead Budget
* rounded
Manufacturing Overhead Budget
Depreciation
Depreciation is
is aa noncash
noncash charge.
charge.
Ending Finished Goods Inventory Budget
Direct
Direct materials
materials
budget
budget and
and information.
information.
Ending Finished Goods Inventory
Budget
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $ 10.00 0.50
Manufacturing overhead 0.05 hrs. $ 49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost $ 4.99
Ending finished goods inventory $ 24,950
Direct
Direct labor
labor budget.
budget.
Ending Finished Goods Inventory
Budget
Production costs per unit Quantity Cost Total
Direct materials 5.00 lbs. $ 0.40 $ 2.00
Direct labor 0.05 hrs. $10.00 0.50
Manufacturing overhead 0.05 hrs. $49.70 2.49
$ 4.99
Budgeted finished goods inventory
Ending inventory in units 5,000
Unit product cost $ 4.99
Ending finished goods inventory ?
Production
Production Budget.
Budget.
Prepare a selling and
administrative expense
budget.
Selling and Administrative Expense
Budget
• At Olbirat, the selling and administrative expense budget is
divided into variable and fixed components.
• The variable selling and administrative expenses are $0.50
per unit sold.
• Fixed selling 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.
Schedule
Schedule of
of Expected
Expected
Cash
Cash Collections.
Collections.
The Cash Budget
Schedule
Schedule of
of Expected
Expected
Cash
Cash Disbursements.
Disbursements.
Direct
Direct Labor
Labor
Budget.
Budget.
Manufacturing
Manufacturing
Overhead
Overhead Budget.
Budget.
Selling
Selling and
and Administrative
Administrative
Expense
Expense Budget.
Budget.
The Cash Budget
Because
Because Royal
Royal maintains
maintains
aa cash
cash balance
balance of of $30,000,
$30,000,
the
the company
company mustmust borrow
borrow
$50,000
$50,000 on
on its
its line-of-credit.
line-of-credit.
The Cash Budget
Because
Because Royal
Royal maintains
maintains
aa cash
cash balance
balance of of $30,000,
$30,000,
the
the company
company mustmust borrow
borrow
$50,000
$50,000 on
on its
its line-of-credit.
line-of-credit.
Ending
Ending cash
cash balance
balance for
for April
April
is
is the
the beginning
beginning May
May balance.
balance.
The Cash Budget
Quick Check
What is the excess (deficiency) of cash
available over disbursements for June?
a. $ 85,000
b. $(10,000)
c. $ 75,000
d. $ 95,000
The Cash Budget
$50,000
$50,000 ×× 16%
16% ×× 3/12
3/12 == $2,000
$2,000
Borrowings
Borrowings on
on April
April 11 and
and
repayment
repayment on
on June
June 30.
30.
The Budgeted Income Statement
Cash Budgeted
Budget Income
Statement
t ed
e
pl
om
C
Cash
Cash Budget.
Budget.
Prepare a budgeted
balance sheet.
The Budgeted Balance Sheet
Royal reported the following account
balances prior to preparing its budgeted
financial statements:
• Land - $50,000
• Common stock - $200,000
• Retained earnings - $146,150 (April 1)
• Equipment - $175,000
Royal Company
Budgeted Balance Sheet
June 30
Assets:
Cash $ 43,000
Accounts receivable 75,000
Raw materials inventory 4,600
Finished goods inventory 24,950
Land 50,000
Equipment 367,000
Total assets 564,550