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Profit

Planning and
Activity-Based Budgeting
(Short-term Budgeting)

Purposes of Budgeting Systems


Budget

1. Planning
a detailed plan, expressed
in quantitative terms, that 2. Facilitating
Communication and
specifies how resources will
be acquired and used
Coordination
during a specified period of 3. Allocating Resources
time.
4. Controlling Profit and
Operations
5. Evaluating
Performance and
Providing Incentives

Types of Budgets

Pro
duc
tion

Master
Budget

Detail
Budget

Detail
Budget

Detail
Budget

Covering all
phases of
a companys
operations.
9-4

Types of Budgets
Income
Statement

Budgeted
Financial
Statements
Balance
Sheet

Statement of
Cash Flows
9-5

Types of Budgets

Capital budgets with acquisitions


that normally cover several years.
Financial budgets with financial
resource acquisitions.

Long Range Budgets


Continuous or

1999Rolling Budget2000

2001

2002

This budget is usually a twelve-month


budget that rolls forward one month
as the current month is completed.

9-6

Sales of Services or Goods


Ending
Inventory

Production
Budge
t

Budget

Work in Process
and Finished
Goods

Ending
Inventory
Budget

Direct
Materials
Budget

Direct
Labor
Budget

Overhead
Budget

Selling and
Administrative
Budget

Direct Materials

Cash Budget
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows

Budgeted Income
Statement

9-8

Activity-Based Costing versus


Activity-Based Budgeting
Resources

Resources
Activity-Based
Costing (ABC)

Activities

Cost objects:
products and services
produced, and
customers served.

Activities
Activity-Based
Budgeting (ABB)

Forecast of products
and services to be
produced and
customers served.
9-10

Sales Budget

Breakers, Inc. is preparing budgets for the quarter


ending June 30.

Budgeted sales for the next five months are:


April
May
June
July
August

20,000 units
50,000 units
30,000 units
25,000 units
15,000 units.

The selling price is $10 per unit.


9-12

Sales Budget
April
Budgeted
sales (units)
Selling price
per unit
Total
Revenue

May

20,000

June

50,000

Quarter

30,000

100,000

10

10

10

10

200,000

500,000

300,000

1,000,000

9-13

Production Budget
The management of Breakers, Inc. wants
ending inventory to be equal to 20% of the
following months budgeted sales in units.
On March 31, 4,000 units were on hand.
Lets prepare the production budget.

9-14

Production Budget

From
sales
budget

Sales in units
Add: desired
end. inventory
Total needed
Less: beg.
inventory
Units to be
produced

May sales
Desired percent

50,000
20%

Desired inventory

10,000 units

April
20,000

May
50,000

June
30,000

Quarter
100,000

10,000
30,000

Ending inventory becomes


6,000beginning5,000inventory the 5,000next
56,000
35,000month 105,000

4,000

10,000

6,000

4,000

26,000

46,000

29,000

101,000

March 31
ending inventory
9-15

Direct-Material Budget

At Breakers, five pounds 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 pounds of material are on hand.
Material cost $.40 per pound.

Lets prepare the direct materials budget.


9-16

From our

production -Material Budget


budget

Production in units
Materials per unit
Production needs
Add: desired
ending inventory
Total needed
Less: beginning
inventory
Materials to be
purchased

April
26,000
5
130,000

May
46,000
5
230,000

June
29,000
5
145,000

Quarter
101,000
5
505,000

23,000
153,000

14,500
244,500

11,500
156,500

11,500
516,500

13,000

23,000

14,500

13,000

140,000

221,500

142,000

503,500

10% of the following


months production

March 31
inventory
9-17

Direct-Material Budget
July Production

April 25,000
May
Sales in units
Add: desired
i ventory
3,000 46,000
Productionendingu its
26,000
Total units needed
28,000
5
Materials per unit
5
Less: beginning inventory 130,000 5,000 230,000
Production needs
Production in units
23,000
n

June
29,000
5
145,000

Add: desired
ending inventory
23,000
14,500
11,500
Total needed
156,500
153,000
244,500
Less: beginning
June Ending Inventory
inventory
14,500
13,000
23,000
23,000
MaterialsJulytoproductionbe in units
purchasedMaterials per unit
5
221,500
Total units needed
115,000
Inventory percentage
10%
June desired ending inventory
11,500
140,000

142,000

Quarter
101,000
5
505,000
11,500
516,500
13,000
503,500

9-18

Direct-Labor Budget

At Breakers, each unit of product requires 0.1 hours of


direct labor.
The Company has a no layoff policy so all employees will
be paid for 40 hours of work each week.

In exchange for the no layoff policy, workers agreed


to a wage rate of $8 per hour regardless of the hours
worked (No overtime pay).
For the next three months, the direct labor workforce will
be paid for a minimum of 3,000 hours per month.

Lets prepare the direct labor budget.


9-19

Direct-Labor Budget
Production in units
Direct labor hours
Labor hours required
Guaranteed labor
hours
Labor hours paid
Wage rate
Total direct labot cost

From our
production
budget

$
$

April
26,000
0.10
2,600

May
46,000
0.10
4,600

June
29,000
0.10
2,900

Quarter
101,000
0.10
10,100

3,000
3,000
8
24,000

3,000
4,600
8
36,800

3,000
3,000
8
24,000

10,600
8
84,800

$
$

$
$

$
$

This is the greater of


labor hours required or
labor hours guaranteed.
9-20

Overhead Budget
Here is Breakers Overhead Budget for the quarter.
April
Indirect labor

17,500

7,000
4,200
13,300
5,800
8,200
56,000

Indirect material
Utilities
Rent
Insurance
Maintenance

May
$

26,500

12,600
8,400
13,300
5,800
9,400
76,000

June
$

17,900

8,600
5,200
13,300
5,800
8,200
59,000

Quarter
$

61,900

28,200
17,800
39,900
17,400
25,800
191,000

9-21

Selling and Administrative Expense


Budget

At Breakers, variable selling and administrative


expenses are $0.50 per unit sold.
Fixed selling and administrative expenses are
$70,000 per month.

The $70,000 fixed expenses include $10,000 in


depreciation expense that does not require a cash
outflows for the month.

9-22

Selling and Administrative Expense


Budget
Sales in units
Variable S&A rate
Variable expense
Fixed S&A
expense
Total expense
Less: noncash
expenses
Cash
disbursements

April
20,000
$
0.50
$ 10,000

May
50,000
$
0.50
$ 25,000

June
30,000
$
0.50
$ 15,000

Quarter
100,000
$
0.50
$ 50,000

70,000
80,000

70,000
95,000

70,000
85,000

210,000
260,000

10,000

10,000

10,000

30,000

$ 70,000

$ 85,000

$ 75,000

$ 230,000

From our
Sales budget
9-23

Cash Receipts Budget

At Breakers, all sales are on account.


The companys collection pattern is:

70% collected in the month of sale,


25% collected in the month following sale,
5% is uncollected.

The March 31 accounts receivable balance of $30,000


will be collected in full.

9-24

Cash Receipts Budget


Accounts rec. - 3/31
April sales
70% x $200,000
25% x $200,000
May sales
70% x $500,000
25% x $500,000
June sales
70% x $300,000
Total cash collections

April
30,000

May

June

140,000
$

140,000
50,000

50,000
350,000

$ 170,000

$ 400,000

Quarter
$ 30,000

$ 125,000

350,000
125,000

210,000
$ 335,000

210,000
$ 905,000

9-25

Cash Disbursement Budget

Breakers pays $0.40 per pound for its materials.


One-half of a months purchases are paid for in the
month of purchase; the other half is paid in the
following month.

No discounts are available.


The March 31 accounts payable balance is $12,000.

9-26

Cash Disbursement Budget


Accounts pay. 3/31
April purchases
50% x $56,000
50% x $56,000
May purchases
50% x $88,600
50% x $88,600
June purchases
50% x $56,800
Total cash payments
for materials

April
$ 12,000

May

June

28,000

28,000
28,000

$ 28,000
44,300

$ 40,000

$ 72,300

Quarter
$ 12,000

$ 44,300

44,300
44,300

28,400

28,400

$ 72,700

$ 185,000

140,000 lbs. $.40/lb. = $56,000


9-27

Cash Disbursement Budget


Breakers:

Maintains a 12% open line of credit for $75,000.

Maintains a minimum cash balance of $30,000.

Borrows and repays loans on the last day of the month.

Pays a cash dividend of $25,000 in April.

Purchases $143,700 of equipment in May and $48,300 in June


paid in cash.

Has an April 1 cash balance of $40,000.

9-28

From our Cash


Receipts

CashBudgetBudget

(Collections and Disbursements)


April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)

May

June

Quarter

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.
9-29

Cash Budget
(Collections and Disbursements)
April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)

May
$ 30,000
400,000
430,000
72,300
36,800
76,000
85,000
143,700
413,800

June

Quarter

Breakers must
borrow an
addition $13,800
to maintain a
cash balance of
$30,000.

$ 16,200
9-30

Cash Budget
(Collections and Disbursements)
May
$ 30,000
400,000
430,000

June
$ 30,000
335,000
365,000

24,000
56,000
70,000
25,000
215,000

72,300
36,800
76,000
85,000
143,700
413,800

72,700
24,000
59,000
75,000
48,300
279,000

$ (5,000)

$ 16,200

$ 86,000

April
Beginning cash balance $ 40,000
At the end of June, Breakers
Add: ca h collections
170,000
has enough cash to repay

Total cash available

210,000

the $48,800 loan plus interest

Less: disbursements

at 12%.

Materials
Direct labor
Mfg. overhead
Selling and admin.
Equipment purchase
Dividends
Total disbursements
Excess (deficiency) of
Cash available over
disbursements

40,000

Quarter

9-31

Cash Budget
(Collections and Disbursements)
April
Beginning cash balance $ 40,000
Add: cash collections
170,000
Total cash available
210,000
Less: disbursements
Materials
40,000
Direct labor
24,000
Mfg. overhead
56,000
Selling and admin.
70,000
Equipment purchase
Dividends
25,000
Total disbursements
215,000
Excess (deficiency) of
Cash available over
disbursements
$ (5,000)

May
$ 30,000
400,000
430,000

June
$ 30,000
335,000
365,000

Quarter
$ 40,000
905,000
945,000

72,300
36,800
76,000
85,000
143,700
413,800

72,700
24,000
59,000
75,000
48,300
279,000

185,000
84,800
191,000
230,000
192,000
25,000
907,800

$ 16,200

$ 86,000

$ 37,200
9-32

Ending cash
balanceCashforAprilBudget is
the beginning

May(Financingbalance. and Repayment)


April
Excess (deficiency) of
Cash available over
disbursements
Financing:
Borrowing
Repayments
Interest
Total financing
Ending cash balance

May

June

Quarter

$ (5,000)

$ 16,200

$ 86,000

$ 37,200

35,000
35,000
$ 30,000

13,800
13,800
$ 30,000

(48,800)
(838)
(49,638)
$ 36,362

48,800
(48,800)
(838)
(838)
$ 36,362

Borrowing
$ 35,000
13,800

Rate
12%
12%

=
=

Annual
Months
Interest
Interest
Outstanding
Expense
$ 4,200
2 mths
= $
700
1,656
1 mth.
=
138
$
838
9-33

Cost of Goods Manufactured


April

May

June

Quarter

Direct material:
Beg.material inventory
$
5,200 $
9,200 $
5,800 $ 5,200
Add: Materials purchases
56,000
88,600
56,800 201,400
Material available for use
61,200
97,800
62,600 206,600
Deduct: End. material inventory
9,200
5,800
4,600
4,600
Direct material used
52,000
92,000
58,000 202,000
24,000
36,800
24,000
84,800
Direct labor
Manufacturing overhead
56,000
76,000
59,000 191,000
Total manufacturing costs
132,000
204,800
141,000 477,800
3,800
16,200
9,400
3,800
Add: Beg. Work-in-process inventory
135,800
221,000
150,400 481,600
Subtotal
16,200
9,400
17,000
17,000
Deduct: End.Work-in-process inventory
Cost of goods manufactured
$ 119,600 $ 211,600 $ 133,400 $ 464,600

9-34

Cost of Goods
Sold
April
May
June
Quarter
Cost of goods manufactured
$ 119,600 $ 211,600 $ 133,400 $ 464,600
Add: Beg. finished-goods inventory
18,400
46,000
27,600
18,400
Cost of goods available for sale
138,000
257,600
161,000 483,000
Deduct: End. finished-goods inventory
46,000
27,600
23,000
23,000
Cost of goods sold
$ 92,000 $ 230,000 $ 138,000 $ 460,000

9-35

Budgeted Income Statement


Breakers, Inc.
Budgeted Income Statement
For the Three Months Ended June 30
Revenue (100,000 $10)
Cost of goods sold
Gross margin
Operating expenses:
Selling and admin. expenses
Interest expense
Total operating expenses
Net income

$ 1,000,000
460,000
540,000
$ 260,000
838
$

260,838
279,162

9-36

Budgeted Statement of Cash Flows


Cash flows from operating activities:
Cash receipts from customers
Cash payments:
To suppliers of raw material
For direct labor
For manufacturing-overhead expenditures
For selling and administrative expenses
For interest

Total cash payments


Net cash flow from operating activities
Cash flows from investing activities:
Purchase of equipment

Net cash used by investing activities


Cash flows from financing activities:
Payment of dividends
Principle of bank loan
Repayment of bank loan

Net cash provided by financing activities

Net increase in cash


Balance in cash, beginning
Balance in cash. end of month

April

May

170,000 $

400,000 $

335,000 $

905,000

(40,000)
(24,000)
(56,000)
(70,000)
-

(72,300)
(36,800)
(76,000)
(85,000)
-

(72,700)
(24,000)
(59,000)
(75,000)
(838)

(185,000)
(84,800)
(191,000)
(230,000)
(838)

(190,000)

(270,100)

(231,538)

(691,638)

(20,000) $
-

(143,700)

- $ (143,700) $
(25,000)
35,000
-

129,900 $

June

Quarter

103,462 $

213,362

(48,300)

(192,000)

(48,300) $

(192,000)

13,800
-

(48,800)

(25,000)
48,800
(48,800)

10,000 $

13,800 $

(48,800) $

(10,000) $
40,000
30,000 $

- $
30,000
30,000 $

6,362 $
30,000
36,362 $

(3,638)
40,000
36,362

9-37

Budgeted Balance Sheet


Breakers reports the following account balances
on June 30 prior to preparing its budgeted
financial statements:


Land - $50,000
Building (net) - $148,000
Common stock - $217,000
Retained earnings - $46,400

9-38

25%of June

Breakers, Inc.

sales of

Budgeted Balance Sheet


June 30

$300,000
Current assets

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

5,000 units at
$4.60 per unit.
50% of June
purchases
of $56,800
Beginning balance $ 46,400
Add: net income 279,162
Deduct: dividends (25,000)
Ending balance

$300,562

Cash
Accounts receivable
Raw materials inventory

Work-in-process inventory
Finished goods inventory

36,362
75,000
4,600
17,000
23,000

Total current assets


Property and equipment
Land

155,962
50,000

Building

148,000

Equipment
Total property and equipment

192,000
390,000

Total assets

545,962

Accounts payable

28,400

Common stock

217,000

Retained earnings
Total liabilities and equities

300,562
545,962

Sales of Services or Goods


Ending
Inventory
Budget

Production
Budget

Work in Process
and Finished

Goods
of the

When the interactions of the elements

Ending
Inventory
Budget

a set

becomes a financial

master

budget are

Dir ct
Materials

Direct
Labor

Budget

Budget

of mathematical

Direct Materials

expressed

Overhead
relations,Budget
planning model

as

Selling and
Administrative
it
Budget

that can be used to answer what if


Cash Budget

questions about unknown variablesBudgetd .Income


Statement
Budgeted Balance
Sheet
Budgeted Statement
of Cash Flows
9-41

Budget Administration
The Budget Committee is a standing
committee responsible for . . .
l

overall policy matters relating to the budget.

coordinating the preparation of the budget.

9-43

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.

9-44

Budgeting Product Life-Cycle Costs


Product
planning and
concept Design.
Distribution
and customer
service.

Preliminary
design.

Production.

Detailed design
and testing.

9-46

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.

9-48

Participative Budgeting
Top Management
Middle
Management

Supervisor

Supervisor

Middle
Management

Supervisor

Flow of Budget Data

Supervisor