C H A P T E R 5

Operational BudgetsOperational Budgets

What are the Purposes of Budgeting ?

OVERALL PURPOSE:

To quantify a general plan so that performance in relation to a goal can be carefully monitored.

TWOFOLD PURPOSE

FIRST:To allow individuals or companies to develop a plan to meet a specified goal.

SECOND:To allow ongoing comparison between actual results and the plan in order to control operations or activities.

Describe Two Types of Planning

Long-run planning includes strategic planning and capital budgeting

Short-run planning includes production process prioritizing and operational budgeting or profit planning

List Reasons for Budgeting

1. Planning and setting objectives

2. Communication and coordination

3. Authorization

4. Motivation

5. Conflict resolution

6. Evaluation

Budgeting Process

Who or what is the budget committee?

A management group responsible for establishing budgeting policy and for coordinating the preparation of budgets.

What are two issues of the budgeting process?

Behavioral considerations

Involvement in preparingthe budget

List Behavioral Considerations

1. Top management support

2. Employee participation

3. Addressing budget deviations

Describe the Top-Down Approach to Budgeting

TopManagement

Manager ManagerManager

Top management prepares the entire budget and distributes it to division managers.

Describe the Bottom-Up Approach to Budgeting

TopManagement

Manager ManagerManager

Each manager prepares a budget request, from which management creates an overall budget.

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.

A schedule of projected sales over the budget period.

A schedule of projected sales over the budget period.

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.

A schedule of production requirements for the budget period.

A schedule of production requirements for the budget period.

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.

A schedule of direct materials to be used and purchased during the budget period.

A schedule of direct materials to be used and purchased during the budget period.

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.

A schedule of direct labor requirements for the budget period.

A schedule of direct labor requirements for the budget period.

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.

A schedule of production costs other than those for direct labor and direct materials.

A schedule of production costs other than those for direct labor and direct materials.

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

A schedule to accumulate all the budgeted production cost to produce each bike

A schedule to accumulate all the budgeted production cost to produce each bike

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

A schedule of all non-production spending expected to occur during the budget period.

A schedule of all non-production spending expected to occur during the budget period.

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

Sales Budget

PurchasesBudget

BudgetedIncome

Statement

Master Budget—MerchandisingDefine each budget.

Selling and Administrative

Expense Budget

A schedule of projected purchases over the budget period.A schedule of projected purchases over the budget period.

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

A service entity’s budget that identifies how much revenue will be generated during a period.

Sales Budget

Production Budget

Direct MaterialsBudget

Direct LaborBudget

Manufacturing Overhead

Budget

Master Budget—ManufacturingDefine each budget.

Cash Budget

Selling and Administrative

Expense Budget

A schedule of expected cash receipts and disbursements during the budget period.

A schedule of expected cash receipts and disbursements during the budget period.

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

Define Static versusFlexible Budgeting

•Static Budgeting:

• A quantified plan that projects revenues and costs for only one level of activity.

• Not useful for controlling costs and measuring performance because the actual level of activity may have differed significantly from the planned level.

•Flexible Budgeting

• A quantified plan that projects revenues and costs for varying levels of activity.

• More useful for control and performance evaluation because it is not confined to one level of activity.