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C H A P T E R 5 Operational Budget

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Page 1: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

C H A P T E R 5

Operational BudgetsOperational Budgets

Page 2: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Learning Objective 1

Describe the importance of personal budgeting.

Page 3: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

What are the Purposes of Budgeting ?

OVERALL PURPOSE:

Page 4: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Define Disposable Income

Page 5: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

What are the Characteristics of Good Personal Budgeting?

Page 6: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Monthly Budget

Gross salary. . . . . . . . . . . . . . . $2,000 Withholdings: Federal income taxes . . . . . . . $250 State income taxes . . . . . . . . . 150 Other withholdings. . . . . . . . . . 150 (550) Net take-home pay . . . . . . . $1,450 Fixed expenses: House mortgage expense. . . . $450 Car payment expense. . . . . . . 250 Insurance expense . . . . . . . . . 100 (800) Disposable income. . . . . . . . $ 650 Utilities expense . . . . . . . . . . . . $ 65Food expense. . . . . . . . . . . . . . 200Miscellaneous expenses. . . . . . 350 (615)

Net surplus. . . . . . . . . . . . . . $ 35

Page 7: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Learning Objective 2

Identify the purposes of budgeting for organizations.

Page 8: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Describe Two Types of Planning

Page 9: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

List Reasons for Budgeting

Page 10: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Learning Objective 3

Explain the budgeting process and its behavioral implications in organizations.

Page 11: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Budgeting Process

Who or what is the budget committee?

What are two issues of the budgeting process?

Page 12: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

List Behavioral Considerations

1.

2.

3.

Page 13: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Describe the Top-Down Approach to Budgeting

TopManagement

Manager ManagerManager

Page 14: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Describe the Bottom-Up Approach to Budgeting

TopManagement

Manager ManagerManager

Page 15: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Learning Objective 4

Construct an operating budget and it components for manufacturing firms.

Page 16: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Master Budget—Manufacturing

Sales Budget*

Selling/Admin.Expense Budget*

Production Budget

Direct Labor

Budget*

ManufacturingOverhead Budget*

Direct Materials Budget*

Budgeted Income Statement

BudgetedBalance Sheet

BudgetedCash Flows

Cash BudgetCapital Expenditures Budget

Operating Budget

Capital Project Plans

Short-TermObjectives

Strategic Goalsand Plans

BudgetedProduct Sheet

* These budgets all flow into the cash budget below.

Planning Process

Financial Budgeting* ***

Page 17: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Sales Budget

Master Budget—ManufacturingDefine each budget.

Page 18: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Sales Budget

Selling price per bike . . . . . . $ 100

Expected sales (units). . . . . x 100

Expected revenues . . . . . . . $10,000

Selling price per bike . . . . . . $ 100

Expected sales (units). . . . . x 100

Expected revenues . . . . . . . $10,000

Page 19: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Sales Budget

Production Budget

Master Budget—ManufacturingDefine each budget.

Page 20: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Production Budget

Expected sales. . . . . . . . . . . . . . . 100

Add desired ending inventory. . . . 105

Total number of bikes needed . . 205

Less beginning inventory . . . . . . . 70

Bikes to be produced . . . . . . . . . . 135

Expected sales. . . . . . . . . . . . . . . 100

Add desired ending inventory. . . . 105

Total number of bikes needed . . 205

Less beginning inventory . . . . . . . 70

Bikes to be produced . . . . . . . . . . 135

Note: Ending inventory is estimated at 80% of the next period’s sales.

Page 21: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Sales Budget

Production Budget

Direct MaterialsBudget

Master Budget—ManufacturingDefine each budget.

Page 22: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Direct Materials Budget

Direct materials usage:

Direct Amount Unit TotalMaterials Required Cost Cost

Metal 2,700 lbs. $2.00/ft. $5,400

Plastic 405 lbs. $1.00/ft. $ 405

Direct materials usage:

Direct Amount Unit TotalMaterials Required Cost Cost

Metal 2,700 lbs. $2.00/ft. $5,400

Plastic 405 lbs. $1.00/ft. $ 405

Page 23: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Direct Materials Budget

Direct materials purchases: Metal Plastic

Desired ending inventory. . . . . 2,100 315

Needed for production. . . . . . . 2,700 405

Total needed . . . . . . . . . . . . . . 4,800 720

Less beginning inventory. . . . . 2,800 210

Materials to be purchased . . . . 2,000 510

Unit cost. . . . . . . . . . . . . . . . . . x $2 x $1

Total cost . . . . . . . . . . . . . . . . $4,000 $ 510

Direct materials purchases: Metal Plastic

Desired ending inventory. . . . . 2,100 315

Needed for production. . . . . . . 2,700 405

Total needed . . . . . . . . . . . . . . 4,800 720

Less beginning inventory. . . . . 2,800 210

Materials to be purchased . . . . 2,000 510

Unit cost. . . . . . . . . . . . . . . . . . x $2 x $1

Total cost . . . . . . . . . . . . . . . . $4,000 $ 510

Page 24: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Sales Budget

Production Budget

Direct MaterialsBudget

Direct LaborBudget

Master Budget—ManufacturingDefine each budget.

Page 25: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Direct Labor Budget

Number of bikes to produce. . . . 135

Direct labor hours per bike. . . . .x 3

Total hours required. . . . . . . . . 405

Rate per hour. . . . . . . . . . . . . . . .x $5

Total direct labor cost. . . . . . . . $2,025

Number of bikes to produce. . . . 135

Direct labor hours per bike. . . . .x 3

Total hours required. . . . . . . . . 405

Rate per hour. . . . . . . . . . . . . . . .x $5

Total direct labor cost. . . . . . . . $2,025

Page 26: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Sales Budget

Production Budget

Direct MaterialsBudget

Direct LaborBudget

Manufacturing Overhead

Budget

Master Budget—ManufacturingDefine each budget.

Page 27: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Manufacturing Overhead Budget

Variable costs:Indirect materials costs. . . . . . . . . $ 220Indirect labor costs . . . . . . . . . . . . 600 Total variable costs. . . . . . . . . . . $ 820

Fixed costs:Insurance expense. . . . . . . . . . . . $ 200Depreciation expense. . . . . . . . . . 600 Total fixed costs . . . . . . . . . . . . . $ 800

Total manufacturing overhead . . . $1,620

Variable costs:Indirect materials costs. . . . . . . . . $ 220Indirect labor costs . . . . . . . . . . . . 600 Total variable costs. . . . . . . . . . . $ 820

Fixed costs:Insurance expense. . . . . . . . . . . . $ 200Depreciation expense. . . . . . . . . . 600 Total fixed costs . . . . . . . . . . . . . $ 800

Total manufacturing overhead . . . $1,620

Page 28: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Sales Budget

Production Budget

Direct MaterialsBudget

Direct LaborBudget

Manufacturing Overhead

Budget

Master Budget—ManufacturingDefine each budget.

Budgeted Product

Cost Sheet

Selling and Administrative

Expense Budget

Page 29: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Budgeted Product Cost Sheet

Input Required Cost Cost Inputs per Bike

Metal $2.00/ft. 20 $40.00

Plastic $1.00/ft. 3 3.00

Direct labor $5.00/hr. 3 15.00

Fixed OH $1.98/hr. 3 5.94

Variable OH $2.02/hr. 3 6.06

Total variable cost per bike . . . . . $70.00

Total fixed MOH $1,620Divide by Production Volume 135 bikes

Fixed MOH cost allocated per bike 12.00

Total $82.00

Input Required Cost Cost Inputs per Bike

Metal $2.00/ft. 20 $40.00

Plastic $1.00/ft. 3 3.00

Direct labor $5.00/hr. 3 15.00

Fixed OH $1.98/hr. 3 5.94

Variable OH $2.02/hr. 3 6.06

Total variable cost per bike . . . . . $70.00

Total fixed MOH $1,620Divide by Production Volume 135 bikes

Fixed MOH cost allocated per bike 12.00

Total $82.00

Page 30: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Sales Budget

Production Budget

Direct MaterialsBudget

Direct LaborBudget

Manufacturing Overhead

Budget

Master Budget—ManufacturingDefine each budget.

Selling and Administrative

Expense Budget

Page 31: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Selling and Administrative Budget

Variable expenses:Sales commissions . . . . . . . . . . . . . . $ 400 Total variable expenses. . . . . . . . . . $ 400

Fixed expenses:Salaries expense . . . . . . . . . . . . . . . $1,000Depreciation . . . . . . . . . . . . . . . . . . . 100Advertising expense. . . . . . . . . . . . . 200 Total fixed expenses. . . . . . . . . . . . $1,300Total selling and administrative expenses. . . . . . . . . $1,700

Page 32: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Learning Objective 5

Compare the operating budget for a manufacturing firm to that of a merchandising or service firm..

Page 33: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Sales Budget

PurchasesBudget

BudgetedIncome

Statement

Master Budget—MerchandisingDefine each budget.

Selling and Administrative

Expense Budget

Page 34: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Master Budget—ServiceDefine each budget.

Pro-Forma IncomeStatement

Revenue Budget

Wages andSalaries Budget

Production Budget

Cash Budget

Pro-FormaBalance Sheet

Selling/Admin.Expense Budget

OverheadBudget

SuppliesBudget

Pro-Forma Statementof Cash Flows

Page 35: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Expanded MaterialLearning Objective 6

Create the cash budget.

Page 36: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Sales Budget

Production Budget

Direct MaterialsBudget

Direct LaborBudget

Manufacturing Overhead

Budget

Master Budget—ManufacturingDefine each budget.

Cash Budget

Selling and Administrative

Expense Budget

Page 37: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Cash Budget

Cash balance, beginning . . . . . . . . . $ 4,900Add collections from customers . . . . 10,100(1)Total cash available. . . . . . . . . . $15,000Less disbursements for: Direct materials . . . . . . . . . . . . . $ 3,000 Direct labor. . . . . . . . . . . . . . . . . 2,000 Equipment purchase . . . . . . . . . 2,000(2)Total disbursements. . . . . . . . . . $ 7,000Minimum cash balance desired. . . . . 6,000Total cash needed. . . . . . . . . . . . . . . $13,000Excess (or deficiency) of cash available before financing. . . . . $ 2,000(3) Financing needed . . . . . . . . . . . 0

Ending cash balance [(1) – (2) + (3)] $ 2,000

Page 38: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Expanded MaterialLearning Objective 7

Prepare pro-forma financial statements.

Page 39: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Pro-FormaIncome Statement

Sales revenue . . . . . . . . . . . . . . . . . . . . . . . . $10,000 Cost of goods sold:Beginning finished goods inventory. . . . . . . . $ 4,900 Manufacturing costs: Direct materials used. . . . . . . . . . . . . . . . . . $ 5,805 Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . 2,025 Manufacturing overhead . . . . . . . . . . . . . . . 1,620 9,450 Total cost of goods available for sale . . . . . . $14,350 Less ending finished goods inventory. . . . . . (7,350)Cost of goods sold. . . . . . . . . . . . . . . . . . . . . (7,000)Gross margin. . . . . . . . . . . . . . . . . . . . . . . . . $ 3,000 Selling and administrative expenses. . . . . . . 1,700 Operating income . . . . . . . . . . . . . . . . . . . . . $ 1,300 Interest expense . . . . . . . . . . . . . . . . . . . . . . 0 Income before taxes . . . . . . . . . . . . . . . . . . . $ 1,300

Page 40: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

ASSETS

Current assets: Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,000 Accounts receivable . . . . . . . . . . . . . . . . . . . . . . 3,000 Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . 7,350 $ 25,350Long-term operating assets: Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 12,000 Less accumulated depreciation. . . . . . . . . . . . . (3,300) 8,700

Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,050

Pro-Forma Balance Sheet

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities: Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . $ 8,000 Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 $ 15,000

Stockholders’ equity: Common stock. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,850 Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . 7,200 19,050

Total liabilities and stockholders’ equity. . . . . . . . . $ 34,050

Page 41: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Example: Pro-Forma Statement of Cash Flows

Cash flows from operating activities:Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,300 Add (subtract) adjustments:

Depreciation . . . . . . . . . . . . . . . . . . . . . . . $ 700 Increase in finished goods . . . . . . . . . . . . (2,450)Increase in accounts receivable. . . . . . . . 5,550 3,800

Net cash provided by operating activities . . $ 5,100

Cash flows from operating activities:Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,300 Add (subtract) adjustments:

Depreciation . . . . . . . . . . . . . . . . . . . . . . . $ 700 Increase in finished goods . . . . . . . . . . . . (2,450)Increase in accounts receivable. . . . . . . . 5,550 3,800

Net cash provided by operating activities . . $ 5,100

Cash flows from investing activities:Purchase of equipment . . . . . . . . . . . . . . $(2,000)

Net cash used in investing activities . . . . (2,000)

Cash flows from investing activities:Purchase of equipment . . . . . . . . . . . . . . $(2,000)

Net cash used in investing activities . . . . (2,000)

Cash flows from financing activities:Cash obtained from borrowing . . . . . . . . $ 7,000

Net cash used in financing activities. . . . 7,000

Net increase in cash. . . . . . . . . . . . . . . . . . $ 10,100

Cash flows from financing activities:Cash obtained from borrowing . . . . . . . . $ 7,000

Net cash used in financing activities. . . . 7,000

Net increase in cash. . . . . . . . . . . . . . . . . . $ 10,100

Page 42: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Learning Objective 8

Distinguish between static and flexible budgets.

Page 43: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Define Static versusFlexible Budgeting

•Static Budgeting:

•Flexible Budgeting

Page 44: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Static Budget

Cost per unit:Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . 1.20Direct labor. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.80Manufacturing overhead . . . . . . . . . . . . . . . . . . 0.50

Total unit cost . . . . . . . . . . . . . . . . . . . . . . . . $2.50

Budgeting production (units) . . . . . . . . . . . . . . . 5,000

Budgeted manufacturing costs:Direct materials. . . . . . . . . . . . . . . . . . . . . . $ 6,000Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . 4,000Manufacturing overhead. . . . . . . . . . . . . . . 2,500

Total manufacturing costs. . . . . . . . . . . . $12,500

Page 45: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Static Budget—Performance Report

Actual Budgeted Difference

Production (units) 4,800 5,000 (200)

Manufacturing costs:Direct materials. . . . . . . . .$ 5,500 $ 6,000 $ (500) Direct labor . . . . . . . . . . . . 3,800 4,000 (200) Manufacturing overhead . 2,450 2,500 (50)

Total actual and budgetedmanufacturing costs . . . . $11,750 $12,500 $ (750)

Page 46: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Flexible Budget

What are the three steps to prepare a flexible budget?

Page 47: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Flexible Budget

Manufacturing Range of Production (units) Costs per Unit 4,800 5,000 5,200

Direct materials . $1.20 $ 5,760 $ 6,000 $ 6,240

Direct labor. . . . . . 0.80 3,840 4,000 4,160

Manufacturingoverhead. . . . . . 0.50 2,400 2,500 2,600

Total. . . . . . . . $2.50 $12,000 $12,500 $13,000

Page 48: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Flexible Budget—Performance Report

Actual production (units) . . . . . . . . . . . . . . . . . . 4,800 Budgeted production (units) . . . . . . . . . . . . . . . 5,000 Difference. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (200)

Actual Budgeted Difference

Direct materials. . . . . . . . . . $ 5,500 $ 5,760 $ (260) Direct labor . . . . . . . . . . . . . 3,800 3,840 (40) Manufacturing overhead . . 2,450 2,400 50

Total costs . . . . . . . . . . . . $11,750 $12,000 $ 250

Page 49: C H A P T E R 5 Operational Budgets. Learning Objective 1 Describe the importance of personal budgeting

Chapter 5 Managerial Accounting is Finished