c h a p t e r 5 operational budgets. learning objective 1 describe the importance of personal...
TRANSCRIPT
C H A P T E R 5
Operational BudgetsOperational Budgets
Learning Objective 1
Describe the importance of personal budgeting.
What are the Purposes of Budgeting ?
OVERALL PURPOSE:
Define Disposable Income
What are the Characteristics of Good 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
Learning Objective 2
Identify the purposes of budgeting for organizations.
Describe Two Types of Planning
List Reasons for Budgeting
Learning Objective 3
Explain the budgeting process and its behavioral implications in organizations.
Budgeting Process
Who or what is the budget committee?
What are two issues of the budgeting process?
List Behavioral Considerations
1.
2.
3.
Describe the Top-Down Approach to Budgeting
TopManagement
Manager ManagerManager
Describe the Bottom-Up Approach to Budgeting
TopManagement
Manager ManagerManager
Learning Objective 4
Construct an operating budget and it components for manufacturing firms.
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* ***
Sales Budget
Master Budget—ManufacturingDefine each budget.
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
Sales Budget
Production Budget
Master Budget—ManufacturingDefine each budget.
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.
Sales Budget
Production Budget
Direct MaterialsBudget
Master Budget—ManufacturingDefine each budget.
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
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
Sales Budget
Production Budget
Direct MaterialsBudget
Direct LaborBudget
Master Budget—ManufacturingDefine each budget.
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
Sales Budget
Production Budget
Direct MaterialsBudget
Direct LaborBudget
Manufacturing Overhead
Budget
Master Budget—ManufacturingDefine each budget.
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
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
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
Sales Budget
Production Budget
Direct MaterialsBudget
Direct LaborBudget
Manufacturing Overhead
Budget
Master Budget—ManufacturingDefine each budget.
Selling and Administrative
Expense Budget
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
Learning Objective 5
Compare the operating budget for a manufacturing firm to that of a merchandising or service firm..
Sales Budget
PurchasesBudget
BudgetedIncome
Statement
Master Budget—MerchandisingDefine each budget.
Selling and Administrative
Expense Budget
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
Expanded MaterialLearning Objective 6
Create the cash budget.
Sales Budget
Production Budget
Direct MaterialsBudget
Direct LaborBudget
Manufacturing Overhead
Budget
Master Budget—ManufacturingDefine each budget.
Cash Budget
Selling and Administrative
Expense Budget
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
Expanded MaterialLearning Objective 7
Prepare pro-forma financial statements.
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
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
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
Learning Objective 8
Distinguish between static and flexible budgets.
Define Static versusFlexible Budgeting
•Static Budgeting:
•Flexible 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. . . . . . . . . . . . $12,500
Static Budget—Performance Report
Actual Budgeted Difference
Production (units) 4,800 5,000 (200)
Manufacturing costs:Direct materials. . . . . . . . .$ 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)
Flexible Budget
What are the three steps to prepare a flexible budget?
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
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
Chapter 5 Managerial Accounting is Finished