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What is a budget?
Budgets
Characteristics of a budget
creating benchmarks.
A budget is a rationally prepared set of
benchmarks.
By comparing actual performance to the
budget, deviations can be ascertained and
evaluated.
Within reasonable limits, the budget
points to accomplishments or lack thereof.
major types:
Operating budget could includes several subbudgets (e.g. Revenue budget, production
budget, marketing budget, etc.)
Top
Management
Middle
Management
Middle
Management
Supervisor
Supervisor
Supervisor
Supervisor
Note: Initial flow of budget data in a participatory system is from lower levels of responsibility to
higher levels of responsibility. Each responsibility center manager prepares his/her budget
estimates and submits to the next higher level of management. These estimates are reviewed and
consolidated as they move upward in the organization.
Mylar Company
Manufactures
40,000
2
60,000
3
100,000
Year 3
Quarter
4
50,000
1
70,000
2
80,000
Sales are collected: 75% in the qr. Sales are made, remaining 25% in the
following quarter. On Jan. 1, Year 2, the balance sheet showed $65,000 in
accounts receivable, all of which will be collected in the first quarter of
the year. Bad debts are negligible and can be ignored.
Company desires an ending inventory of finished units on hand at the
end of each quarter equal to 30% of the budgeted sales for the next
quarter. On Dec. 31, year 1, the company 12,000 units on hand.
Five pounds of raw materials are required to complete one unit of
product. Company requires an ending inventory of raw materials on
hand at the end of each quarter equal to 10% of the production needs of
the following quarter. On Dec. 31, Year 1, the company had 23,000
pounds of raw materials on hand.
The raw material costs $0.80 per pound. Purchases of raw material are
paid for in the following pattern: 60% in the quarter purchases are
made, remaining 40% in the following quarter. On Jan. 1, Year 2, the
companys balance sheet showed $81,500 in accounts payable for raw
material purchases, all of which will be paid for in the first quarter of the
year.
Mylar Company
We
will prepare:
A sales budget and a schedule of expected
cash collections.
A production budget
A direct materials purchases budget and a
schedule of expected cash payments for
material purchases.
40,000
Selling X $8
price
per unit
Total
Sales
Year
60,000
100,000
60,000
250,000
X $8
X $8
X $8
X $8
$2,000,000
65,000
240,000
80,000
360,000
320,000
120,000
600,000
Year
65,000
440,000
720,000
480,000
200,000
800,000
300,000
300,000
500,000
1,965,000
One more example for you to take a look at Revenue (Sales) budget
Davenport Company Data
Sales
Month
Sales
Jan.
12,369,348
July
21,747,839
Feb.
15,936,293
Aug
14,908,534
Mar.
13,294,309
Sep
11,984,398
Apr.
19,373,689
Oct
18,894,535
May
20,957,566
Nov
21,983,545
June
18,874,717
Dec
20,408,367