Power Notes: Budgeting

Chapter 20
Budgeting
Power Notes
Learning Objectives
1. 2. 3. 4. 5. Nature and Objectives of Budgeting Budgeting Systems Master Budget Income Statement Budgets Balance Sheet Budgets C20
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Chapter 20
Budgeting
Power Notes
Slide #
3 8 11 37
Power Note Topics
Budgeting Methods and Approaches Flexible Budgeting Income Statement Budgets Cash Budgets
Note: To select a topic, type the slide # and press Enter.

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Nature and Objectives of Budgeting

Objectives of Budgeting Establishing specific future goals Executing plans to achieve the goals Comparing actual results to the goals
Human Behavior and Budgeting

Setting budget goals too tightly Setting budget goals too loosely Setting conflicting budget goals
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Static Budgets
Description: A budget that does not reflect potential changes in volume or activity level Strength: Simpleall expenses are budgeted as fixed costs
Weakness: Does not reflect changes in revenues and expenses that occur as volumes change Typical Usage: Service organizations or administrative departments of retailers and manufacturers
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Flexible Budgets
Description: A budget that shows revenues and expenses for a variety of volumes or activity levels Strength: Provides information needed to analyze the impact of volume changes on actual operating results Weakness: Requires greater research into costsmust differentiate fixed and variable costs Typical Usage: Operational departments of retailers and manufacturers whose costs change with sales and production
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Incremental Budgets
Description: A budget that is prepared by increasing last years budget by a fixed amount or a percentage Strength: Simple to prepare; management focuses on new programs and business changes Weakness: Little emphasis on analyzing last years budgetinefficiencies are passed on to the current year Typical Usage: Government, not-for-profit organizations
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Zero-Based Budgets
Description: A budget that requires management to start at zero and estimate all expenses as a new operation Strength: Forces a comprehensive analysis of business priorities and needs for resources Weakness: Difficult and time-consuming to prepare Typical Usage: Organizations focusing on cost reduction and evaluating efficiency
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Flexible Budgeting
Colter Manufacturing Company Assembly Department Budget For the Month Ending July 31, 2003
Units of production
8,000
9,000
10,000
Variable cost: Direct labor ($5 per unit) $40,000 Electricity ($0.5 per unit) 4,000 Total variable cost $44,000
$45,000 $50,000 4,500 5,000 $49,500 $55,000
Cost per unit is $5.50 at all levels of activity
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Flexible Budgeting
Units of production
8,000
9,000
10,000
Variable cost: Direct labor ($5 per unit) $40,000 Electricity ($0.5 per unit) 4,000 Total variable cost $44,000 Fixed cost: Electric power $ 1,000 Supervisor salaries 15,000 Total fixed cost $16,000
$45,000 $50,000 4,500 5,000 $49,500 $55,000 $ 1,000 $ 1,000 15,000 15,000 $16,000 $16,000
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Flexible Budgeting
Units of production
8,000
9,000
10,000
Variable cost: Direct labor ($5 per unit) $40,000 Electricity ($0.5 per unit) 4,000 Total variable cost $44,000 Fixed cost: Electric power $ 1,000 Supervisor salaries 15,000 Total fixed cost $16,000 Total department costs $60,000
$45,000 $50,000 4,500 5,000 $49,500 $55,000 $ 1,000 $ 1,000 15,000 15,000 $16,000 $16,000 $65,500 $71,000
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Income Statement Budgets
Sales Budget
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Sales Budget
Production Budget
Expected units of sales + Desired units in ending inventory
- Estimated units in beginning inventory

Total units to be produced
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Sales Budget
Production Budget
Direct Materials Purchases Budget
Materials needed for production + Desired ending materials inventory
- Estimated beginning materials inventory

Direct materials to be purchased
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Sales Budget
Production Budget
Direct Materials Purchases Budget Direct Labor Cost Budget
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Sales Budget
Production Budget
Direct Materials Purchases Budget Direct Labor Cost Budget Factory Overhead Cost Budget
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Sales Budget
Production Budget
Cost of Goods Sold Budget
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Sales Budget
Production Budget
Cost of Goods Sold Budget
Selling & Administrative Expenses Budget
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Elite Accessories Inc. Sales Budget For the Year Ending December 31, 2003
Unit Sales Unit Selling Product and Region Volume Price
Total Sales
Wallet: East West Total
287,000 241,000 528,000
$12.00 12.00
$3,444,000 2,892,000 $6,336,000
How are these numbers determined?
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Total Sales
Wallet: East West Total Handbag: East West Total
287,000 241,000 528,000 156,400 123,600 280,000
$12.00 12.00
$3,444,000 2,892,000 $6,336,000 $3,910,000 3,090,000 $7,000,000
$25.00 25.00
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Total Sales
Wallet: East 287,000 West 241,000 Total 528,000 Handbag: East 156,400 West 123,600 Total 280,000 Total sales revenue
$12.00 12.00
$3,444,000 2,892,000 $6,336,000 $3,910,000 3,090,000 $7,000,000 $13,336,000
$25.00 25.00
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Elite Accessories Inc. Production Budget For the Year Ending December 31, 2003 Units Wallet Handbag
Sales
528,000
280,000
From sales budget
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Sales Plus desired ending inventory, Dec. 31, 2003 Total
528,000
280,000
80,000 608,000
60,000 340,000
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Sales Plus desired ending inventory, Dec. 31, 2003 Total Less estimated beginning inventory, Jan. 1, 2003 Total production
528,000
280,000
80,000 608,000
88,000 520,000
60,000 340,000
48,000 292,000
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Elite Accessories Inc. Direct Materials Purchases Budget For the Year Ending December 31, 2003
Leather
Units required for production: Wallet (Note A) Handbag (Note B)
156,000 sq. yds. 365,000
Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds. Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds.
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Leather
Units required for production: Wallet (Note A) Handbag (Note B) Plus desired inventory, Dec. 31, 2003 Total
156,000 sq. yds. 365,000 20,000 541,000 sq. yds.
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Leather
Units required for production: Wallet (Note A) Handbag (Note B) Plus desired inventory, Dec. 31, 2003 Total Less estimated inventory, Jan. 1, 2003 Total square yards to be purchased
156,000 sq. yds. 365,000 20,000 541,000 sq. yds. 18,000 523,000 sq yds.
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Leather
Units required for production: Wallet (Note A) 156,000 sq. yds. Handbag (Note B) 365,000 Plus desired inventory, Dec. 31, 2003 20,000 Total 541,000 sq. yds. Less estimated inventory, Jan. 1, 2003 18,000 Total square yards to be purchased 523,000 sq yds. Unit price x $ 4.50 Total direct materials purchased $2,353,500 Note A: 520,000 units x 0.30 sq yd./unit = 156,000 sq. yds. Note B: 292,000 units x 1.25 sq. yds./unit = 365,000 sq yds.
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Elite Accessories Inc. Direct Labor Cost Budget For the Year Ending December 31, 2003 Cutting Sewing Total
Hours required for production: Wallet (Note A) 52,000 Handbag (Note B) 43,800
130,000 116,800
Note A:
Note B:
Cutting Dept.: 520,000 units x 0.10 hrs. per unit = 52,000 hrs. Sewing Dept.: 520,000 units x 0.25 hrs. per unit = 130,000 hrs. Cutting Dept.: 292,000 units x 0.15 hrs. per unit = 43,800 hrs. Sewing Dept.: 292,000 units x 0.40 hrs. per unit = 116,800 hrs.
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Hours required for production: Wallet (Note A) 52,000 Handbag (Note B) 43,800 Total 95,800 Hourly rate x $12
Note A:
130,000 116,800 246,800 x $15
Note B:
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Hours required for production: Wallet (Note A) 52,000 130,000 Handbag (Note B) 43,800 116,800 Total 95,800 246,800 Hourly rate x $12 x $15 Total direct labor cost $1,149,600 $3,702,000
Note A:
$4,851,600
Note B:
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Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2003
Indirect factory wages Supervisor salaries Power and light Depreciation of plant and equipment Indirect materials Maintenance Insurance and property taxes
$ 732,800 360,000 306,000 288,000 182,800 140,280 79,200
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Elite Accessories Inc. Factory Overhead Cost Budget For the Year Ending December 31, 2003
Indirect factory wages $ 732,800 Supervisory salaries 360,000 Power and light 306,000 Depreciation of plant and equipment 288,000 Indirect materials 182,800 Maintenance 140,280 Insurance and property taxes 79,200 Total factory overhead cost $2,089,080
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Elite Accessories Inc. Budgeted Income Statement For the Year Ending December 31, 2003
Revenue from sales $13,336,000 Cost of goods sold 9,047,780 Gross profit $4,288,220 Selling & admin. expenses: Selling expenses $1,190,000 Administrative expenses 695,000 Total sell. & admin. exp. 1,885,000 Income from operations $2,403,220 Other income: Interest revenue $ 98,000 Other expense: Interest expense 90,000 8,000 Income before income tax $2,411,220 Income tax 600,000 Net income $1,811,220
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Elite Accessories Inc. Schedule of Collections from Sales For the Three Months Ending March 31, 2003 January February March
Budgeted sales Cash sales (10%) Credit sales (90%)
$1,080,000 $1,240,000 $970,000 108,000 124,000 97,000 $972,000 $1,116,000 $873,000
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$1,080,000 $1,240,000 $970,000 108,000 124,000 97,000 $972,000 $1,116,000 $873,000
Collections on account: Current month (60%) $583,200 $669,600 $523,800
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$1,080,000 $1,240,000 $970,000 108,000 124,000 97,000 $972,000 $1,116,000 $873,000
Collections on account: Current month (60%) $583,200 $669,600 $523,800 Prior month (40%) 370,000 388,800 446,400 Total on account $953,200 $1,058,400 $970,200
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$1,080,000 $1,240,000 $970,000 108,000 124,000 97,000 $972,000 $1,116,000 $873,000
Collections on account: Current month (60%) $583,200 $669,600 $523,800 Prior month (40%) 370,000 388,800 446,400 Total on account $953,200 $1,058,400 $970,200 Plus cash sales 108,000 124,000 97,000 Total collections $1,061,200 $1,182,400 $1,067,200
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Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 Estimated cash receipts: Cash sales Accounts receivable Interest Revenue Total cash receipts January $108,000 953,200 $1,061,200 February March $124,000 $97,000 1,058,400 970,200 24,500 $1,182,400 $1,091,700
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Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 January February March Estimated cash receipts: Cash sales $108,000 $124,000 $97,000 Accounts receivable 953,200 1,058,400 970,200 Interest Revenue 24,500 Total cash receipts $1,061,200 $1,182,400 $1,091,700 Estimated cash payments: Manufacturing costs $802,000 $771,000 $780,000 Selling & administrative exp. 160,000 165,000 145,000 Capital additions 274,000 Interest expense 22,500 Income taxes 150,000 Total cash payments $984,500 $1,210,000 $1,075,000
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Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 January February March Estimated cash receipts: Cash sales $108,000 $124,000 $97,000 Accounts receivable 953,200 1,058,400 970,200 Interest Revenue 24,500 Total cash receipts $1,061,200 $1,182,400 $1,091,700 Estimated cash payments: Manufacturing costs $802,000 $771,000 $780,000 Selling & administrative exp. 160,000 165,000 145,000 Capital additions 274,000 Interest expense 22,500 Income taxes 150,000 Total cash payments $984,500 $1,210,000 $1,075,000 Cash increase (decrease) $76,700 $(27,600) $16,700
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Elite Accessories Inc. Cash Budget January February March Estimated cash receipts: Cash sales $108,000 $124,000 $97,000 Accounts receivable 953,200 1,058,400 970,200 Interest Revenue 24,500 Total cash receipts $1,061,200 $1,182,400 $1,091,700 Estimated cash payments: Manufacturing costs $802,000 $771,000 $780,000 Selling & administrative exp. 160,000 165,000 145,000 Capital additions 274,000 Interest expense 22,500 Income taxes 150,000 Total cash payments $984,500 $1,210,000 $1,075,000 Cash increase (decrease) $76,700 $(27,600) $16,700 Beginning cash balance 280,000 356,700 329,100 Ending cash balance $356,700 329,100 $345,800
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Elite Accessories Inc. Cash Budget For the Three Months Ending March 31, 2003 January February March Estimated cash receipts: Cash sales $108,000 $124,000 $97,000 Accounts receivable 953,200 1,058,400 970,200 Interest Revenue 24,500 Total cash receipts $1,061,200 $1,182,400 $1,091,700 Estimated cash payments: Manufacturing costs $802,000 $771,000 $780,000 Selling & administrative exp. 160,000 165,000 145,000 Capital additions 274,000 Interest expense 22,500 Income taxes 150,000 Total cash payments $984,500 $1,210,000 $1,075,000 Cash increase (decrease) $76,700 $(27,600) $16,700 Beginning cash balance 280,000 356,700 329,100 Ending cash balance $356,700 329,100 $345,800 Minimum cash balance 340,000 340,000 340,000 Excess (deficiency) $16,700 $ (10,900) $ 5,800
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Chapter 20
Budgeting
Power Notes
This is the last slide in Chapter 20.

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Power Notes: Budgeting

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Chapter 20

Power Note Topics

Note: To select a topic, type the slide # and press Enter.

Nature and Objectives of Budgeting

Human Behavior and Budgeting

$45,000 $50,000 4,500 5,000 $49,500 $55,000

Cost per unit is $5.50 at all levels of activity

Income Statement Budgets

Income Statement Budgets

Expected units of sales + Desired units in ending inventory

- Estimated units in beginning inventory

Income Statement Budgets

Materials needed for production + Desired ending materials inventory

- Estimated beginning materials inventory

Income Statement Budgets

Income Statement Budgets

Income Statement Budgets

Cost of Goods Sold Budget

Income Statement Budgets

Cost of Goods Sold Budget

Selling & Administrative Expenses Budget

Unit Sales Unit Selling Product and Region Volume Price

Wallet: East West Total

287,000 241,000 528,000

$3,444,000 2,892,000 $6,336,000

How are these numbers determined?

Unit Sales Unit Selling Product and Region Volume Price

Wallet: East West Total Handbag: East West Total

287,000 241,000 528,000 156,400 123,600 280,000

$3,444,000 2,892,000 $6,336,000 $3,910,000 3,090,000 $7,000,000

Unit Sales Unit Selling Product and Region Volume Price

$3,444,000 2,892,000 $6,336,000 $3,910,000 3,090,000 $7,000,000 $13,336,000

From sales budget

Sales Plus desired ending inventory, Dec. 31, 2003 Total

Units required for production: Wallet (Note A) Handbag (Note B)

156,000 sq. yds. 365,000

156,000 sq. yds. 365,000 20,000 541,000 sq. yds.

130,000 116,800 246,800 x $15

$ 732,800 360,000 306,000 288,000 182,800 140,280 79,200

Budgeted sales Cash sales (10%) Credit sales (90%)

$1,080,000 $1,240,000 $970,000 108,000 124,000 97,000 $972,000 $1,116,000 $873,000

Budgeted sales Cash sales (10%) Credit sales (90%)

$1,080,000 $1,240,000 $970,000 108,000 124,000 97,000 $972,000 $1,116,000 $873,000

Collections on account: Current month (60%) $583,200 $669,600 $523,800

Budgeted sales Cash sales (10%) Credit sales (90%)

$1,080,000 $1,240,000 $970,000 108,000 124,000 97,000 $972,000 $1,116,000 $873,000

Budgeted sales Cash sales (10%) Credit sales (90%)

$1,080,000 $1,240,000 $970,000 108,000 124,000 97,000 $972,000 $1,116,000 $873,000

This is the last slide in Chapter 20.

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