accounting, 21st edition

Chapter Chapter 2121BudgetingBudgeting

Accounting, 21st Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University

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1. Describe budgeting, its objectives, and its impact on human behavior.

2. Describe the basic elements of the budget process, the two major types of budgeting, and the use of computers in budgeting.

3. Describe the master budget for a manufacturing business.

4. Prepare the basic income statement budgets for a manufacturing business.

5. Prepare balance sheet budgets for a manufacturing business.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

Housing30%

Utilities5%

Food20%Medical

5%

Other4%

Clothing7%

Transportation15%

Entertainment6%

Savings8%

Nature and Objectives of BudgetingNature and Objectives of BudgetingNature and Objectives of BudgetingNature and Objectives of Budgeting

Estimated portion of your total monthly

income that should be budgeted

Feedback

• Establishing specific goals• Executing plans to achieve the goals• Periodically comparing actual results to the goals

Objectives of BudgetingObjectives of Budgeting

PLANNINGPLANNING DIRECTINGDIRECTING CONTROLLINCONTROLLINGG


Human Behavior and BudgetingHuman Behavior and Budgeting

Setting budget goals too tightly

Setting budget goals too loosely

Setting conflicting budget goals



Goal conflict occurs when individual self-interest differs from business objectives.

A student’s question, “Will this be on the test?” is evidence of goal conflict.

Continuous BudgetingContinuous BudgetingContinuous BudgetingContinuous Budgeting

One-Year Budget

Feb. 2006

Mar. 2006

Apr. 2006

May 2006

June 2006

July 2998

Aug. 2006

Sep. 2006

Oct. 2006

Nov. 2006

Dec. 2006

Jan. 2007

Delete on February 28

Continuous BudgetingContinuous BudgetingContinuous BudgetingContinuous Budgeting

One-Year Budget

Add February 2007

Mar. 2006

Apr. 2006

May 2006

June 2006

July 2998

Aug. 2006

Sep. 2006

Oct. 2006

Nov. 2006

Dec. 2006

Jan. 2007

Feb. 2007

Static BudgetsStatic BudgetsStatic BudgetsStatic BudgetsDescription: A budget that does not reflect

potential changes in volume or activity level

Strength: It is simple—all expenses are budgeted as fixed costs

Weakness: It does not reflect changes in revenues and expenses that occur as volumes change

Typical usage: Service organizations or administrative departments of retailers and manufacturers

Colter Manufacturing CompanyAssembly Department Budget

For the Month Ending July 31, 2006Direct labor $40,000Electric Power 5,000Supervisor salaries 15,000 Total department costs $60,000

Static BudgetsStatic BudgetsStatic BudgetsStatic Budgets

Flexible BudgetsFlexible BudgetsFlexible BudgetsFlexible BudgetsDescription: 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 costs—must differentiate fixed and variable costs

Typical usage: Operational departments of retailers and manufacturers whose costs change with sales and production


For the Month Ending July 31, 2006

Units of productionUnits of production 8,0008,000 9,0009,000 10,00010,000

Variable cost:Direct labor $40,000 $45,000 $50,000Electric power 4,000 4,500 5,000 Total variable cost $44,000 $49,500 $55,000

Cost per unit is $5.50 at all levels of activityCost per unit is $5.50 at all levels of activity


Fixed cost:Electric power $ 1,000 $ 1,000 $ 1,000Supervisor salaries 15,000 15,000 15,000 Total fixed cost $16,000 $16,000 $16,000






Fixed cost:Electric power $ 1,000 $ 1,000 $ 1,000Supervisor salaries 15,000 15,000 15,000 Total fixed cost $16,000 $16,000 $16,000

Total department costs $60,000 $65,500 $71,000



Static and Flexible BudgetsStatic and Flexible BudgetsStatic and Flexible BudgetsStatic and Flexible Budgets

Static Static BudgetBudget

Actual

Results

Overbudget

$60,000 $72,000

8,000 8,000 unitsunits

Actual

Results

$60,000 $72,000


$65,500


$71,000

Overbudget

Flexible Budget

Static and Flexible BudgetsStatic and Flexible BudgetsStatic and Flexible BudgetsStatic and Flexible Budgets

Master BudgetMaster BudgetMaster BudgetMaster Budget

Budgeted Income Statement

Sales budget

Cost of goods sold budget:

Production budget

Direct materials purchases budget

Direct labor cost budget

Selling and administrative expense budget

Budgeted Balance Sheet

Cash budget

Capital expenditure budget

Income Income Statement Statement BudgetsBudgets

SalesBudget

SalesBudget Production BudgetProduction Budget

Expected units of sales

+ Desired units in ending inventory

– Estimated units in beginning inventory

Total units to be produced

Production BudgetProduction Budget

Direct MaterialsPurchases Budget


Materials needed for production + Desired ending materials inventory

– Est. beginning materials inventory

Direct materials to be purchased

SalesBudget

SalesBudget

Production BudgetProduction Budget



Direct LaborCost Budget

Direct LaborCost Budget

Factory OverheadCost Budget

Factory OverheadCost Budget

Cost of GoodsSold Budget

Cost of GoodsSold Budget

Selling & Administrative

ExpensesBudget

Selling & Administrative

ExpensesBudget

SalesBudget

SalesBudget

Elite Accessories Inc.Sales Budget

For the Year Ending December 31, 2006

Wallet:East………………..287,000 $12.00 $ 3,444,000West……………….241,000 12.00 2,892,000 Total…………….528,000 $ 6,336,000

Handbag:East………………..156,400 $25.00 $ 3,910,000West……………….123,600 25.00 3,090,000 Total…………….280,000 $ 7,000,000

Total revenue from Sales……………….. $13,336,000

Unit Sales Unit Selling Total Product and Region Volume Price Sales

Elite Accessories Inc.Production Budget


Expected units to be sold 528,000 280,000

From sales budgetFrom sales budget

UnitsWallet Handbag



Expected units to be sold………….528,000 280,000Plus desired ending inventory,

December 31, 2006……………. 80,000 60,000Total 608,000 340,000

UnitsWallet Handbag



Expected units to be sold………….528,000 280,000Plus desired ending inventory,

December 31, 2006……………. 80,000 60,000Total………………………………. 608,000 340,000Less estimated beginning inventory,

January 1, 2006…………………. 88,000 48,000Total units to be produced…………520,000 292,000

UnitsWallet Handbag

Elite Accessories Inc.Direct Materials Purchases Budget

For the Year Ending December 31, 2006 Direct Materials

Leather Lining Total

Square yards required for production:Wallet (Note A)………………….. 156,000 52,000

Note A: Leather: 520,000 units x 0.30 sq. yd. per unit = 156,000 sq. yds.Lining: 520,000 units x 0.10 sq. yd. Per unit = 52,000 sq. yds.

Square yards required for production:Wallet (Note A)……..……..…….. 156,000 52,000Handbag (Note B)……………….. 365,000 146,000

Note B: Leather: 292,000 units x 1.25 sq. yd. per unit = 365,000 sq. yds.Lining: 292,000 units x 0.50 sq. yd. Per unit = 146,000 sq. yds.

Direct Materials Leather Lining Total



Square yards required for production:Wallet (Note A)……....………….. 156,000 52,000Handbag (Note B).………………. 365,000 146,000

Plus desired inventory, Dec. 31, 2006 20,000 12,000Total……………………………… 541,000 210,000




Square yards required for production:Wallet (Note A) …………………. 156,000 52,000Handbag (Note B) ………………. 365,000 146,000


Less estimated inventory, Jan. 1, 2006 18,000 15,000Total square yards to be produced.. 523,000 195,000




Square yards required for production:Wallet (Note A)………………….. 156,000 52,000Handbag (Note B).………………. 365,000 146,000


Less estimated inventory, Jan. 1, 2006 18,000 15,000Total square yards to be produced.. 523,000 195,000

Unit price (per square yard)…………. x $4.50 x $1.20Total direct materials to be purchased. $2,353,500 $234,000 $2,587,500




Elite Accessories Inc.Direct Labor Cost Budget


Cutting Sewing Total

Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

Hours required for production:Wallet (Note A)…………. 52,000 130,000


Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

Hours required for production:Wallet (Note A)…………. 52,000 130,000Handbag (Note B)……….. 43,800 116,800

. Note B: Cutting Department: 292,000 units x 0.15 hr. per unit = 43,800 hrs.

Sewing Department: 292,000 units x 0.40 hr. per unit = 116,800 hrs




Hours required for production:Wallet (Note A)…………. 52,000 130,000Handbag (Note B)……….. 43,800 116,800Total……………………... 95,800 246,800

Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs..

Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.

Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs




Hours required for production:Wallet (Note A)…………. 52,000 130,000Handbag (Note B)……….. 43,800 116,800Total……………………... 95,800 246,800

Hourly rate…………………… x $12.00 x $15.00Total direct labor cost………… $1,149,600 $3,702,000

$4,851,600Note A: Cutting Department: 520,000 units x 0.10 hr. per unit = 52,000 hrs.Sewing Department: 520,000 units x 0.25 hr. per unit = 130,000 hrs.

Note B: Cutting Department: 520,000 units x 0.15 hr. per unit = 43,800 hrs.Sewing Department: 520,000 units x 0.40 hr. per unit = 116,800 hrs



Elite Accessories Inc.Factory Overhead Cost Budget


Indirect factory wages……………………... $ 732,800Supervisory salaries………………………... 360,000Power and light…………………………….. 306,000Depreciation of plant and equipment………. 288,000Indirect materials…………………………… 182,800Maintenance………………………………... 140,280Insurance and property taxes………………. 79,200Total factory overhead cost………………... $2,089,080

Elite Accessories Inc.Cost of Goods Sold Budget


Note A: Leather: 18,000 sq. yds. x $4.50 per sq. yd$81,000

Lining: 15,000 sq. yds. x $1.20 per sq. yd 18,000

Direct materials inventory,

January 1, 2006$99,000

Note A: Leather: 18,000 sq. yds. x $4.50 per sq. yd$81,000

Lining: 15,000 sq. yds. x $1.20 per sq. yd 18,000

Direct materials inventory,

January 1, 2006$99,000

Finished goods inventory, January 1 ,2006….. $ 1,095,600Work in process inventory, January 1, 2006… $ 214,400Direct materials:

Direct materials inventory, January 1, 2006 (Note A)………………………………….$ 99,000

Finished goods inventory, January 1 ,2006….. $ 1,095,600Work in process inventory, January 1, 2006… $ 214,400Direct materials:

Direct materials inventory, January 1, 2006 (Note A)………………………………….$ 99,000

Note B: Leather: 20,000 sq. yds. x $4.50 per sq. yd$ 90,000

Lining: 12,000 sq. yds. x $1.20 per sq. yd 14,400Direct materials inventory, December 31, 2006$104,400

Note B: Leather: 20,000 sq. yds. x $4.50 per sq. yd$ 90,000

Lining: 12,000 sq. yds. x $1.20 per sq. yd 14,400Direct materials inventory, December 31, 2006$104,400



Finished goods inventory, January 1 ,2006…. $ 1,095,600Work in process inventory, January 1, 2006... $ 214,400Direct materials:

Direct materials inventory, January 1, 2006 (Note A)…………………………………. $ 99,000Direct materials purchases (Slide 3)…….. 2,587,500Cost of direct materials available for use…. $2,686,500Less direct materials inventory, December 31, 2006 (Note B)……………. 104,400Cost of direct materials placed in production $2,582,100

Direct labor (Slide 35)………………………. 4,851,600Factory overhead (Slide 36)………………….. 2,089,080Total manufacturing costs……………………. 9,522,780Total work in process during period…………. $9,737,180



Less work in process inventory, December 31, 2006 220,000Cost of goods manufactured………………………... 9,517,180Cost of finished goods available for sale…………... $10,612,780Less finished goods inventory, December 31, 2006.. 1,565,000Cost of goods sold………………………………….. $ 9,047,780

Finished goods inventory, January 1 ,2006………... $ 1,095,600

Work in process inventory, January 1, 2006……….. $ 214,500Total manufacturing costs………………………….. 9,522,780Total work in process during period……………….. $9,737,180



Elite Accessories Inc.Selling and Administrative Expenses Budget


Selling expenses:Sales salaries expense…………………………. $715,000Advertising expense…………………………... 360,000Travel expense…………………………………. 115,000

Total selling expenses………………………... $1,190,000Administrative expenses:

Officers’ salaries expense………………………. $360,000Office salaries expense…………………………. 258,000Office rent expense……………………………... 34,500Office supplies expense…………………………. 17,500Miscellaneous administrative expense………….. 25,000

Total administrative expenses………………… 695,000Total selling and administrative expenses………… $1,885,000

Revenue from sales (slide 23) $13,336,000Cost of goods sold (slide 40) 9,047,780Gross profit $ 4,288,220Selling & administrative expenses:

Selling expenses (slide 41) $1,190,000Administrative expenses (slide 41) 695,000 Total sell. & Admin. Expenses 1,885,000

Income from operations $ 2,403,220Other income:

Interest revenue $ 98,000Other expense:

Interest expense 90,000 8,000Income before income tax $ 2,411,220Income tax 600,000Net income $ 1,811,220

Elite Accessories Inc.Budgeted Income Statement


The cash budget is one of the most important elements of the budgeted balance sheet. We’ll

begin with a schedule of collection from sales.

The cash budget is one of the most important elements of the budgeted balance sheet. We’ll

begin with a schedule of collection from sales.

Receipts from cash sales:Cash sales (10%)(see Note A)……………………...$108,000 $ 124,000 $ 97,000

January February March

Note A: $108,000 = $1,080,000 x 10%$124,000 = $1,240,000 x 10%$ 97,000 = $ 970,000 x 10%

Note A: $108,000 = $1,080,000 x 10%$124,000 = $1,240,000 x 10%$ 97,000 = $ 970,000 x 10%

Elite Accessories Inc.Schedule of Collections from Sales

For the Three Months Ending March 31, 2006


Receipts from sales on account:Collections from prior month’ssales (40%)(see Note B)…….$370,000$ 388,800 $446,400


Note B: $370,000, given as January 1, 2006 Accounts Receivable balance$388,800 = $1,080,000 x 90% x 40%$446,400 = $1,240,000 x 90% x 40%

Note B: $370,000, given as January 1, 2006 Accounts Receivable balance$388,800 = $1,080,000 x 90% x 40%$446,400 = $1,240,000 x 90% x 40%




Receipts from sales on account:Collections from prior month’ssales (40%)(see Note B)…….$370,000$ 388,800 $446,400Collections from currentmonth’s sales (60%)(see NoteC)…………………………… 583,200 669,600 523,800


Note C: $583,200 = $1,080,000 x 90% x 60%$669,600 = $1,240,000 x 90% x 60%$523,800 = $ 970,000 x 90% x 60%

Note C: $583,200 = $1,080,000 x 90% x 60%$669,600 = $1,240,000 x 90% x 60%$523,800 = $ 970,000 x 90% x 60%



Receipts from cash sales:Cash sales (10%)(see Note A)……………………... $108,000 $ 124,000$ 97,000

Receipts from sales on account:Collections from prior month’ssales (40%)(see Note B)……. $370,000 $ 388,800$446,400Collections from current month’s sales (60%)

(see NoteC)…………………………… 583,200 669,600 523,800

Total receipts from sales on account……………………... $953,200 $1,058,400$970,200




Payment of prior month’s

manufacturing costs (25%)

(see Note A)………………… $190,000 $204,000 $189,000


Elite Accessories Inc.Schedule of Payments for Manufacturing CostsFor the Three Months Ending March 31, 2006

Note A: $190,000, given as January 1, 2006 Accounts Payable balance$204,000 = ($840,000 –$24,000) x 25%$189,000 = ($780,000 – $24,000) x 75%

Note A: $190,000, given as January 1, 2006 Accounts Payable balance$204,000 = ($840,000 –$24,000) x 25%$189,000 = ($780,000 – $24,000) x 75%



(see Note A)………………… $190,000 $204,000 $189,000

Payment of current month’s


(see Note B)…………………. 612,000 567,000 591,000


Note B: $612,000 = ($840,000 – $24,000) x 75%$567,000 = ($780,000 – $24,000) x 75%$591,000 = ($812,000 – $24,000) x 75%

Note B: $612,000 = ($840,000 – $24,000) x 75%$567,000 = ($780,000 – $24,000) x 75%$591,000 = ($812,000 – $24,000) x 75%




(see Note A)………………… $190,000 $204,000 $189,000

Payment of current month’s


(see Note B)…………………. 612,000 567,000 591,000

Total payments………………. $802,000 $771,000 $780,000



Estimated cash receipts:Cash sales (Slide 45)………….. $ 108,000 $ 124,000 $ 97,000Collections of accounts

receivable (Slide 48)………... 953,200 1,058,400 970,200Interest revenue………………... — — 24,500

Total cash receipts…………….$1,061,200 $1,182,400 $1,091,700

Elite Accessories Inc.Cash Budget









Estimated cash payments for:Manufacturing costs (Slide 51).. $ 802,000 $ 771,000 $ 780,000Selling and administrative expenses……………………… 160,000 165,000 145,000Capital additions 274,000Interest expense 22,500Income taxes 150,000







Estimated cash payments for:Manufacturing costs (Slide 51).. $ 802,000 $ 771,000 $ 780,000Selling and administrative expenses……………………… 160,000 165,000 145,000Capital additions 274,000Interest expense 22,500Income taxes 150,000

Total cash payments…………. $ 984,500 $1,210,000 $1,075,000


receivable (Slide 48)………... 953,200 1,058,400 970,200


Capital additions 274,000Interest expense……………….. 22,500Income taxes…………………... 150,000

Total cash payments………….$ 984,500 $1,210,000 $1,075,000

Cash increase (decrease)…………. $ 76,700 $ (27,600) $ 16,700Cash balance at beginning of month 280,000 356,700 329,100Cash balance at end of month……. $ 356,700 $ 329,100 $ 345,800Minimum cash balance…………… 340,000 340,000 340,000Excess (deficiency)………………. $ 16,700 $ (10,900) $ 5,800



The EndThe End

Chapter 21Chapter 21

accounting, 21st edition

Documents

objectives of budgeting

budget process

flexible budgets static

budgetingsetting budget

business objectives

levels of activity cost

objectives of budgetingsavings

objectives objectives1