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- 1. Chapter 9 Profit Planning, Activity-Based Budgeting and e- Budgeting McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
- 2. Learning Objective 1 McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
- 3. Purposes of Budgeting Systems Budget Planning a detailed plan, Facilitating expressed in Communication and quantitative terms, Coordination that specifies how Allocating Resources resources will be Controlling Profit and acquired and used Operations during a specified Evaluating Performance period of time. and Providing Incentives
- 4. Types of Budgets Detail Budget Detail Materials Budget Detail Production Budget Master Budget Covering all Sales phases of a company’s operations.
- 5. Types of Budgets Income Statement Budgeted Financial Statements Balance Statement of Sheet Cash Flows
- 6. Types of Budgets Capital budgets with acquisitions Capital budgets with acquisitions that normally cover several years. that normally cover several years. Financial budgets with financial Financial budgets with financial resource acquisitions. resource acquisitions. Long Range Budgets Continuous or 1999Rolling Budget2000 2001 2002 This budget is usually a twelve-month This budget is usually a twelve-month budget that rolls forward one month budget that rolls forward one month as the current month is completed. as the current month is completed.
- 7. Learning Objective 2 McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
- 8. Sales of Services or Goods Ending Inventory Production Budget Budget Work in Process and Finished Goods Ending Direct Direct Selling and Overhead Inventory Materials Labor Administrative Budget Budget Budget Budget Budget Direct Materials Cash Budget Budgeted Income Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows
- 9. Learning Objective 3 McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
- 10. Activity-Based Costing versus Activity-Based Budgeting Resources Resources Resources Resources Activity-Based Activity-Based Costing (ABC) Costing (ABC) Activities Activities Activities Activities Activity-Based Activity-Based Cost objects: Budgeting (ABB) Budgeting (ABB) Cost objects: Forecast of products Forecast of products products and services products and services and services to be and services to be produced, and produced, and produced and produced and customers served. customers served. customers served. customers served.
- 11. Learning Objective 4 McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
- 12. Sales Budget Breakers, Inc. is preparing budgets for the quarter Breakers, Inc. is preparing budgets for the quarter ending June 30. ending June 30. Budgeted sales for the next five months are: Budgeted sales for the next five months are: April April 20,000 units 20,000 units May May 50,000 units 50,000 units June June 30,000 units 30,000 units July July 25,000 units 25,000 units August August 15,000 units. 15,000 units. The selling price is $10 per unit. The selling price is $10 per unit.
- 13. Sales Budget April May June Quarter Budgeted sales (units) 20,000 50,000 30,000 100,000 Selling price per unit $ 10 $ 10 $ 10 $ 10 Total Revenue $ 200,000 $ 500,000 $ 300,000 $ 1,000,000
- 14. Production Budget Sales Production Budget Budget d e te pl Com Production must be adequate to meet budgeted sales and provide for sufficient ending inventory.
- 15. Production Budget The management of Breakers, Inc. wants The management of Breakers, Inc. wants ending inventory to be equal to 20% of the ending inventory to be equal to 20% of the following month’s budgeted sales in units. following month’s budgeted sales in units. On March 31, 4,000 units were on hand. On March 31, 4,000 units were on hand. Let’s prepare the production budget. Let’s prepare the production budget.
- 16. Production Budget April May June Quarter Sales in units 20,000 Add: desired end. inventory Total needed Less: beg. inventory Units to be produced From sales budget
- 17. Production Budget April May June Quarter Sales in units 20,000 Add: desired end. inventory 10,000 Total needed 30,000 Less: beg. inventory Units to be produced
- 18. Production Budget April May June Quarter Sales in units 20,000 Add: desired end. inventory 10,000 Total needed 30,000 Less: beg. inventory 4,000 Units to be produced 26,000 March 31 ending inventory
- 19. Production Budget April May June Quarter Sales in units 20,000 50,000 Add: desired end. inventory 10,000 6,000 Total needed 30,000 56,000 Less: beg. inventory 4,000 10,000 Units to be produced 26,000 46,000
- 20. Production Budget April May June Quarter Sales in units 20,000 50,000 30,000 100,000 Add: desired end. inventory 10,000 6,000 5,000 5,000 Total needed 30,000 56,000 35,000 105,000 Less: beg. inventory 4,000 10,000 6,000 4,000 Units to be produced 26,000 46,000 29,000 101,000
- 21. Direct-Material Budget •• At Breakers, five pounds of material are required At Breakers, five pounds of material are required per unit of product. per unit of product. •• Management wants materials on hand at the end Management wants materials on hand at the end of each month equal to 10% of the following of each month equal to 10% of the following month’s production. month’s production. •• On March 31, 13,000 pounds of material are on On March 31, 13,000 pounds of material are on hand. Material cost $.40 per pound. hand. Material cost $.40 per pound. Let’s prepare the direct materials budget. Let’s prepare the direct materials budget.
- 22. Direct-Material Budget From our production budget
- 23. Direct-Material Budget 10% of the following month’s production
- 26. Direct-Material Budget July Production Sales in units 25,000 Add: desired ending inventory 3,000 Total units needed 28,000 Less: beginning inventory 5,000 Production in units 23,000 June Ending Inventory July production in units 23,000 Materials per unit 5 Total units needed 115,000 Inventory percentage 10% June desired ending inventory 11,500
- 27. Direct-Labor Budget • At Breakers, each unit of product requires 0.1 hours of direct labor. • The Company has a “no layoff” policy so all employees will be paid for 40 hours of work each week. • In exchange for the “no layoff” policy, workers agreed to a wage rate of $8 per hour regardless of the hours worked (No overtime pay). • For the next three months, the direct labor workforce will be paid for a minimum of 3,000 hours per month. Let’s prepare the direct labor budget.
- 28. Direct-Labor Budget From our production budget
- 30. Direct-Labor Budget This is the greater of labor hours required or labor hours guaranteed.
- 32. Overhead Budget Here is Breakers’ Overhead Budget for the quarter.
- 33. Selling and Administrative Expense Budget •• At Breakers, variable selling and administrative At Breakers, variable selling and administrative expenses are $0.50 per unit sold. expenses are $0.50 per unit sold. •• Fixed selling and administrative expenses are Fixed selling and administrative expenses are $70,000 per month. $70,000 per month. •• The $70,000 fixed expenses include $10,000 in The $70,000 fixed expenses include $10,000 in depreciation expense that does not require a cash depreciation expense that does not require a cash outflows for the month. outflows for the month.
- 34. Selling and Administrative Expense Budget From our Sales budget
- 35. Selling and Administrative Expense Budget
- 36. Selling and Administrative Expense Budget
- 37. Cash Receipts Budget •• At Breakers, all sales are on account. At Breakers, all sales are on account. •• The company’s collection pattern is: The company’s collection pattern is: 70% collected in the month of sale, 70% collected in the month of sale, 25% collected in the month following sale, 25% collected in the month following sale, 5% is uncollected. 5% is uncollected. •• The March 31 accounts receivable balance of The March 31 accounts receivable balance of $30,000 will be collected in full. $30,000 will be collected in full.
- 40. Cash Disbursement Budget •• Breakers pays $0.40 per pound for its materials. Breakers pays $0.40 per pound for its materials. •• One-half of a month’s purchases are paid for in the One-half of a month’s purchases are paid for in the month of purchase; the other half is paid in the month of purchase; the other half is paid in the following month. following month. •• No discounts are available. No discounts are available. •• The March 31 accounts payable balance is The March 31 accounts payable balance is $12,000. $12,000.
- 41. Cash Disbursement Budget 140,000 lbs. × $.40/lb. = $56,000
- 43. Cash Disbursement Budget Breakers: Breakers: – Maintains a 12% open line of credit for $75,000. – Maintains a 12% open line of credit for $75,000. – Maintains a minimum cash balance of $30,000. – Maintains a minimum cash balance of $30,000. – Borrows and repays loans on the last day of the – Borrows and repays loans on the last day of the month. month. – Pays a cash dividend of $25,000 in April. – Pays a cash dividend of $25,000 in April. – Purchases $143,700 of equipment in May and – Purchases $143,700 of equipment in May and $48,300 in June paid in cash. $48,300 in June paid in cash. – Has an April 1 cash balance of $40,000. – Has an April 1 cash balance of $40,000.
- 44. Cash Budget (Collections and Disbursements) From our Cash Receipts Budget
- 45. Cash Budget (Collections and Disbursements) From our Cash Disbursements Budget
- 46. Cash Budget (Collections and Disbursements) From our Direct Labor Budget
- 47. Cash Budget (Collections and Disbursements) From our Overhead Budget
- 48. Cash Budget (Collections and Disbursements) From our Selling and Administrative Expense Budget
- 49. Cash Budget (Collections and Disbursements) To maintain a cash balance of $30,000, Breakers must borrow $35,000 on its line of credit.
- 50. Cash Budget (Financing and Repayment) Ending cash balance for April is the beginning May balance.
- 51. Cash Budget (Collections and Disbursements) Breakers must borrow an addition $13,800 to maintain a cash balance of $30,000.
- 52. Cash Budget (Financing and Repayment)
- 53. Cash Budget (Collections and Disbursements) At the end of June, Breakers has enough cash to repay the $48,800 loan plus interest at 12%.
- 54. Cash Budget (Financing and Repayment)
- 55. Cash Budget (Collections and Disbursements)
- 56. Cash Budget (Financing and Repayment)
- 57. Cost of Goods Manufactured April May June Quarter Direct material: Beg.material inventory $ 5,200 $ 9,200 $ 5,800 $ 5,200 Add: Materials purchases 56,000 88,600 56,800 201,400 Material available for use 61,200 97,800 62,600 206,600 Deduct: End. material inventory 9,200 5,800 4,600 4,600 Direct material used 52,000 92,000 58,000 202,000 Direct labor 24,000 36,800 24,000 84,800 Manufacturing overhead 56,000 76,000 59,000 191,000 Total manufacturing costs 132,000 204,800 141,000 477,800 Add: Beg. Work-in-process inventory 3,800 16,200 9,400 3,800 Subtotal 135,800 221,000 150,400 481,600 Deduct: End.Work-in-process inventory 16,200 9,400 17,000 17,000 Cost of goods manufactured $ 119,600 $ 211,600 $ 133,400 $ 464,600
- 58. Cost of Goods Sold April May June Quarter Cost of goods manufactured $ 119,600 $ 211,600 $ 133,400 $ 464,600 Add: Beg. finished-goods inventory 18,400 46,000 27,600 18,400 Cost of goods available for sale 138,000 257,600 161,000 483,000 Deduct: End. finished-goods inventory 46,000 27,600 23,000 23,000 Cost of goods sold $ 92,000 $ 230,000 $ 138,000 $ 460,000
- 59. Budgeted Income Statement Cost of Budgeted Goods Income Manufact- d Statement e te uredpland om C Sold After we complete the cost of goods manufactured and sold schedules, we can prepare the budgeted income statement for Breakers.
- 60. Budgeted Income Statement Breakers, Inc. Budgeted Income Statement For the Three Months Ended June 30 Revenue (100,000 × $10) $ 1,000,000 Cost of goods sold 460,000 Gross margin 540,000 Operating expenses: Selling and admin. expenses $ 260,000 Interest expense 838 Total operating expenses 260,838 Net income $ 279,162
- 61. Budgeted Statement of Cash Flows April May June Quarter Cash flows from operating activities: Cash receipts from customers $ 170,000 $ 400,000 $ 335,000 $ 905,000 Cash payments: To suppliers of raw material (40,000) (72,300) (72,700) (185,000) For direct labor (24,000) (36,800) (24,000) (84,800) For manufacturing-overhead expenditures (56,000) (76,000) (59,000) (191,000) For selling and administrative expenses (70,000) (85,000) (75,000) (230,000) For interest - - (838) (838) Total cash payments (190,000) (270,100) (231,538) (691,638) Net cash flow from operating activities $ (20,000) $ 129,900 $ 103,462 $ 213,362 Cash flows from investing activities: Purchase of equipment - (143,700) (48,300) (192,000) Net cash used by investing activities $ - $ (143,700) $ (48,300) $ (192,000) Cash flows from financing activities: Payment of dividends (25,000) - - (25,000) Principle of bank loan 35,000 13,800 - 48,800 Repayment of bank loan - - (48,800) (48,800) Net cash provided by financing activities $ 10,000 $ 13,800 $ (48,800) $ - Net increase in cash $ (10,000) $ - $ 6,362 $ (3,638) Balance in cash, beginning 40,000 30,000 30,000 40,000 Balance in cash. end of month $ 30,000 $ 30,000 $ 36,362 $ 36,362
- 62. Budgeted Balance Sheet Breakers reports the following account balances Breakers reports the following account balances on June 30 prior to preparing its budgeted on June 30 prior to preparing its budgeted financial statements: financial statements: • Land -- $50,000 • Land $50,000 • Building (net) -- $148,000 • Building (net) $148,000 • Common stock -- $217,000 • Common stock $217,000 • Retained earnings -- $46,400 • Retained earnings $46,400
- 63. 25%of June sales of $300,000 11,500 lbs. at $.40 per lb. 5,000 units at $4.60 per unit.
- 64. 50% of June purchases of $56,800
- 65. Learning Objective 5 McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
- 66. Sales of Services or Goods Ending Inventory Production Budget Budget Work in Process and Finished Goods When the interactions of the elements Endingthe master budget are expressed as and of Direct Direct Selling Overhead Inventory Materials Labor Budget a set of mathematical relations,Administrative Budget Budget Budget it Budget becomes a financial planning model Direct Materials that can be used to answer “what if” Cash Budget questions about unknown variables.Income Budgeted Statement Budgeted Balance Sheet Budgeted Statement of Cash Flows
- 67. Learning Objective 6 McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
- 68. Budget Administration The Budget Committee is a standing committee responsible for . . . overall policy matters relating to the budget. overall policy matters relating to the budget. coordinating the preparation of the budget. coordinating the preparation of the budget.
- 69. E-Budgeting Employees throughout an organization can submit and retrieve budget information electronically. This tends to streamline the entire budgeting process.
- 70. Firewalls and Information Security Budget information is extremely sensitive and confidential. A firewall is a computer or router placed between a company’s internal network and the internet to control all information between the outside world and the company’s local network.
- 71. Zero-Base Budgeting To receive funding during the budgeting process, each activity must be justified in terms of its continued usefulness.
- 72. International Aspects of Budgeting Firms with international operations face Firms with international operations face special problems when preparing a special problems when preparing a budget. budget. Fluctuations in foreign currency exchange Fluctuations in foreign currency exchange rates. rates. High inflation rates in some foreign countries. High inflation rates in some foreign countries. Differences in local economic conditions. Differences in local economic conditions.
- 73. Learning Objective 7 McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
- 74. Budgeting Product Life-Cycle Costs Product planning Product planning and concept and concept Design. Design. Distribution Distribution Preliminary Preliminary and customer and customer design. design. service. service. Detailed design Detailed design Production. Production. and testing. and testing.
- 75. Learning Objective 8 McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
- 76. Behavioral Impact of Budgets Budgetary Slack: Padding the Budget People often perceive that their performance will look better in their superiors’ eyes if they can “beat the budget.”
- 77. Participative Budgeting Top M anagem ent M id d le M id d le M anagem ent M anagem ent S u p e rv is o r S u p e rv is o r S u p e rv is o r S u p e rv is o r Flow of Budget Data
- 78. End of Chapter 9
Notas del editor
- A budget is a detailed plan, expressed in quantitative terms, that specifies how resources will be acquired and used during a specified period of time. The procedures used to develop a budget constitute a budgeting system. Budgeting systems have five primary purposes: (1) planning, (2) facilitating communication and coordination, (3) allocating resources, (4) controlling profit and operations and (5) evaluating performance and providing incentives. (LO1)
- Different types of budgets serve different purposes. A master budget, or profit plan, is a comprehensive set of detailed budgets covering all phases of an organization’s operations for a specified period of time. (LO1)
- Budgeted financial statements, often called pro forma financial statements, show how the organization’s financial statements will appear at a specified time if operations proceed according to plan. Budgeted financial statements include a budgeted income statement, a budgeted balance sheet, and a budgeted statement of cash flows. (LO1)
- A capital budget is a plan for the acquisition of capital assets, such as buildings and equipment. A financial budget is a plan that shows how the organization will acquire its financial resources, such as through the issuance of stock or incurrence of debt. Budgets are developed for specific time periods. Short-range budgets cover a year, a quarter, or a month, whereas long-range budgets cover periods longer than a year. Rolling budgets are continually updated by periodically adding a new incremental time period, such as a quarter, and dropping the period just completed. Rolling budgets are also called revolving budgets or continuous budgets . (LO1)
- The master budget comprises many separate budgets, or schedules, that are interdependent. Based on the sales budget, a company develops a set of operational budgets that specify how its operations will be carried out to meet the demand for its goods or services. A manufacturing company develops a production budget, which shows the number of product units to be manufactured and ending inventory budgets. From the production budget, a manufacturer develops budgets for the direct materials, direct labor, and overhead that will be required in the production process. A budget for selling and administrative expenses also is prepared. The operational portion of the master budget is similar in a merchandising firm, but instead of a production budget for goods, a merchandiser develops a budget for merchandise purchases. A merchandising firm will not have a budget for direct materials. Based on the sales budget for its services, a service industry firm develops a set of budgets that show how the demand for those services will be met. Every business prepares a cash budget. This budget shows expected cash receipts, as a result of selling goods or services, and planned cash disbursements, to pay the bills incurred by the firm. The final portion of the master budget includes a budgeted income statement, a budgeted balance sheet, and a budgeted statement of cash flows. (LO2)
- Applying ABC concepts to the budgeting process yields activity-based budgeting or ABB. Under ABB, the first step is to specify the products or services to be produced and the customers to be served. Then the activities that are necessary to produce these products and services are determined. Finally, the resources necessary to perform the specified activities are quantified. Conceptually, ABB takes the ABC model and reverses the flow of the analysis. ABC assigns resource costs to activities, and then it assigns activity costs to products and services produced and customers served. ABB, on the other hand, begins by forecasting the demand for products and services as well as the customers to be served. These forecasts then are used to plan the activities for the budget period and budget the resources necessary to carry out the activities. (LO3)
- Breakers, Inc. is preparing budgets for the quarter ending June 30. The unit sales are projected for the months of April through August. The selling price per unit is budgeted at $10. (LO4)
- The projected units are multiplied by $10 for each month to determine the budgeted revenue for the months of April, May, June and the quarter. (LO4)
- Now that the sales budget is complete, the production budget can be prepared. The purpose of the production budget is to ensure that production meets budgeted sales and provides sufficient ending inventory. (LO4)
- Management has determined that the ending inventory should be equal to 20% of the sales for the following month. At the end of March, there were 4,000 units on hand. (LO4)
- The number of units projected to be sold in the first month is obtained from the sales budget. (LO4)
- The desired ending inventory is calculated by multiplying the projected sales for the next month, May, by 20%. This is added to the projected sales to determine the units needed for April. (LO4)
- The ending inventory for the previous month, March, is deducted from the amount needed to determine the number of units that must be produced. (LO4)
- The ending inventory for the first month, April, becomes the beginning inventory for the second month. The May and June production budget are prepared in the same manner as April. (LO4)
- Sales in units for the quarter is the sum of April, May and June sales. Since the end of June is also the end of the quarter, the ending inventory for the quarter is the same as the ending inventory for June. Since the beginning of April is also the beginning of the quarter, the beginning inventory for the quarter is the same as April’s beginning inventory. Total units needed for the quarter is the sum of the sales units and the ending inventory. The beginning inventory is subtracted from the total units needed to arrive at the units to be produced for the quarter. (LO4)
- Five pounds for materials are required to produce on unit. Management has determined that direct materials ending inventory should be 10% of the next month’s production. There are 31,000 pounds of direct materials in March’s ending inventory. The cost is 40 cents per pound. (LO4)
- The first row in the direct materials budget is the units to be produced each month and for the quarter. This information is obtained from the production budget. (LO4)
- For each month, the units to be produced needs to be multiplied by 5 pounds to determine the amount of direct materials needed in each month. The ending inventory for April is 10% of May’s direct material needs. The desired ending inventory for April is added to the production needs for April. (LO4)
- The beginning inventory is subtracted from the total direct material needed for the month to arrive at the materials to be purchased. (LO4)
- The calculations are the same for each month. As in the production budget, the ending inventory for the quarter is the same as the ending inventory for June and the beginning inventory for the quarter is the same as the beginning inventory in April. (LO4)
- The ending direct material inventory for June requires a bit more explanation. The projections for July must be expanded upon to determine the production budget for July, which will provide the information necessary to calculate the materials needed for June’s ending inventory. (LO4)
- Each unit can be produced in one tenth of an hour. Breaker’s pays employees for 40 hours each week. The wage rate is $8 per hour and there is no overtime pay. Management has projected that direct laborers will be paid for a minimum of 3,000 hours per month for the next three month. (LO4)
- The direct labor budget starts with the units to be produced from the production budget. (LO4)
- The production for each month and the quarter is multiplied by one tenth of an hour to determine the labor hours required. (LO4)
- The labor hours required is compared to the guaranteed of labor hours. The labor hours to be paid is the greater of the two for each month. The labor hours to be paid for the quarter is the sum of the labor hours paid for the three months. (LO4)
- The labor hours paid is multiplied by the $8 wage rate to determine the total direct labor cost. (LO4)
- The manufacturing-overhead budget shows the cost of overhead expected to be incurred in the production process during the budget period. Breaker’s manufacturing overhead budget lists the expected cost of each overhead item by month. At the bottom of the schedule, the total budgeted overhead for each month is shown. (LO4)
- Management at Breaker’s has projected the variable selling and administrative expenses to by 50 cents per unit sold. The fixed selling and administrative costs are projected to be $70,000 per month. $10,000 of the fixed expenses is for depreciation, which does not require a cash outflow. This information will be important when the cash disbursements budget is prepared. (LO4)
- Once again, we start with the units sales for each month and the quarter from the sales budget. (LO4)
- The sales for each month and the quarter are multiplied by the variable selling and administrative cost rate of 50 cents to determine the variable S&A costs. This is added to the fixed S&A costs of $70,000 for each month to arrive at the total S&A expenses for each month. Don’t forget that the fixed S&A expenses for the quarter is the sum of fixed S&A expenses for the three months. (LO4)
- The noncash expenses are deducted from the total expenses to determine the amount of cash disbursements required for each month and the quarter for selling and administrative expenses. (LO4)
- All sales at Breakers are on account. The company has experienced the following collection pattern: 70% collected in the month of the sale, 25% is collected in the month following the sale, 5% becomes uncollectible. The accounts receivable balance at the end of March is $30,000 and is expected to be collected in full in April. (LO4)
- During April, the remained of March’s sales will be collected, which is the $30,000 accounts receivable balance on March 31. 70% of April’s sales are also expected to be collected in April. Therefore, the total collections expected in April is $170,000. (LO4)
- May’s collections will be 25% of April’s sales and 70% of May’s sales. June’s collections will be 25% of May’s sales and 70% of June’s sales. The collections for the quarter is the sum of the collections for the three months. (LO4)
- Breakers pays 40 cents per pound for its materials. The company pays for half of its materials purchases in the month of the purchase and the remaining half is paid for in the following month. There are no discounts available to Breakers. The balance in accounts payable is $12,000 at the end of March. (LO4)
- The purchases for each month is multiplied by 40 cents to determine the cost of materials purchased for the month. This cost is then multiplied by 50%. 50% of April’s materials purchases will be paid for in April, the remaining 50% will be paid in May. This pattern is followed in May and June to determine the cash disbursements for materials for each month. (LO4)
- The cash disbursements for each month are added together to determine the cash disbursements for the quarter. (LO4)
- Breakers will also make cash disbursements for payments on an open line of credit, loans, a cash dividend, and equipment purchases. All borrowings and repayments occur on the last day of each month. (LO4)
- The cash budget is a combination of the cash receipts budget, the cash disbursements for materials budget and other cash disbursements required, such as for direct materials, overhead, etc. The cash budget starts with the beginning cash balance for April. This is also the beginning cash balance for the quarter. The cash collections for the month are found on the cash receipts budget and added to the beginning cash balance to arrive at the total cash available. (LO4)
- The cash outflow for materials is found on the cash disbursements budget. (LO4)
- The cash outflow for wages can be found on the direct labor budget. (LO4)
- Cash outflow requirements for manufacturing overhead can be found on the overhead budget. (LO4)
- Cash outflow for S&A costs can be found on the selling and administrative expense budget. (LO4)
- There are no equipment purchases made in April, but there are dividends paid. The disbursements are totalled and them subtracted from the total cash available for the month. In April, there is a cash deficit. (LO4)
- Because there is a cash deficit, Breakers must borrow $35,000 to maintain the $30,000 minimum balance required. The ending cash balance for April becomes the beginning cash balance for May. (LO4)
- Cash collections and disbursements are determined in the same manner for the month of May. Although there is not a cash deficit at the end of May, the $16,200 available is still below the $30,000 minimum balance requirement by $13,800. (LO4)
- Therefore, Breakers must borrow an additional $13,800 at the end of May to have a $30,000 cash balance for the beginning of June. (LO4)
- June’s collections and disbursements budget follows the same format. There will be enough cash at the end of June to repay the amounts borrowed in April and May plus the 12% interest. (LO4)
- The $35,000 borrowed at the end of April requires a $700 interest payment and the $13,800 borrowed at the end of May requires an interest payment of $138. The total to be repaid for principle and interest is $49,638. The ending cash balance for June is also the ending cash balance for the quarter. (LO4)
- The beginning cash balance for the quarter is April’s beginning cash balance. The cash collections for the quarter are added to determine the total cash available for the quarter. Each item’s cash disbursements are totalled for the quarter and then added together to determined the total cash disbursements for the quarter. The disbursements for the quarter are then deducted from the collections for the quarter. There is a $37,200 cash surplus for the quarter. (LO4)
- The borrowings for the quarter is the sum of the borrowings in April and May. The repayments and interest for the quarter occurred in June. The ending cash balance for the quarter is the ending cash balance for June since the end of June is also the end of the quarter. (LO4)
- The cost of goods manufactured schedule is prepared from the direct materials budget, the direct labor budget and the overhead budget. The ending work-in-process inventory amounts are estimates provided by management. The amounts for direct materials are in dollars, not units. The direct materials beginning inventory, purchases and ending inventory amounts were taken from the direct materials budget. These amounts were multiplied by the cost of 40 cents per pound to arrive at the dollar amounts. (LO4)
- The cost of goods sold schedule starts where the cost of goods manufactured left off. The cost of goods manufactured at the beginning of April can be divided by the units manufactured, 26,000, to arrive at a unit cost of $4.60. The 4,000 units in finished goods inventory at the beginning of April is multiplied by the unit cost to determine the beginning inventory cost. The ending inventory for each month is also multiplied by $4.60 to determine the cost of the ending inventory. Remember, the ending inventory for one month becomes the beginning inventory for the following month. The beginning inventory for the quarter is the same as the beginning inventory for April and the ending inventory for the quarter is the same as the ending inventory for June. (LO4)
- Now that the cost of goods manufactured and cost of goods sold schedules are complete, the budgeted income statement can be prepared. (LO4)
- A budgeted income statement for the quarter ending June 30 can now be prepared for Breakers. Revenue is taken from the sales budget. Cost of goods sold is taken from the cost of goods sold schedule. Gross margin is revenue less cost of goods sold. The operating expenses is taken from the selling and administrative expense budget and the cash budget. Net income is gross margin less total operating expenses. (LO4)
- The information for the budgeted statement of cash flows can be taken from the cash budget. (LO4)
- Account balances for property, plant and equipment and stockholders’ equity accounts are needed before preparing the budgeted balance sheet. (LO4)
- The budgeted balance sheet is prepared for the date June 30. Cash is taken from the cash budget or the budgeted statement of cash flows. Accounts receivable is 25% of June sales. (Recall the collections pattern from the cash collections schedule.) The raw materials, work-in-process and finished goods inventory amounts can be taken from the cost of goods manufactured and costs of goods sold schedules. The amount for equipment can be taken from the cash disbursements budget or the budgeted statement of cash flows. (LO4)
- The accounts payable balance is 50% of June’s purchases for direct materials. (Recall the cash disbursements pattern for direct materials.) The ending retained balance is the beginning balance plus net income less dividends paid. (LO4)
- Managers must make assumptions and predictions in preparing budgets because organizations operate in a world of uncertainty. One way of coping with that uncertainty is to supplement the budgeting process with a financial planning model. A financial planning model is a set of mathematical relationships that express the interactions among the various operational, financial, and environmental events that determine the overall results of an organization’s activities. A financial planning model is a mathematical expression of all the relationships expressed in a master budget flow chart. In a fully developed financial planning model, all of the key estimates and assumptions are expressed as general mathematical relationships. Then the model is run on a computer many times to determine the impact of different combinations of these unknown variables. “What if” questions can be answered about such unknown variables as inflation, interest rates, the value of the dollar, demand, competitors’ actions, union demands in forthcoming wage negotiations, and a host of other factors. The widespread availability of personal computers and electronic-spreadsheet software has made financial planning models a more and more common management tool. (LO5)
- In small organizations, the procedures used to gather information and construct a master budget are usually informal. In contrast, larger organizations use a formal process to collect data and prepare the master budget. Such organizations usually designate a budget director or chief budget officer, which is often the controller. A budget committee, consisting of key senior executives, often is appointed to advise the budget director during the preparation of the budget. This committee is responsible for policy matters relating to the budget and coordinating the preparation of the budget. The authority to give final approval to the master budget usually belongs to the board of directors. By exercising its authority to make changes in the budget and grant final approval, the board of directors can have considerable influence on the overall direction the organization takes. (LO6)
- E-budgeting is an increasingly popular, Internet-based budgeting tool that can help streamline and speed up an organization’s budgeting process. The e in e-budgeting stands for both electronic and enterprisewide; employees throughout an organization, at all levels and around the globe, can submit and retrieve budget information electronically via the Internet. Managers in organizations using e-budgeting have found that it greatly streamlines the entire budgeting process. In the past, these organizations have compiled their master budgets on hundreds of spreadsheets, which had to be collected and integrated by the corporate controller’s office. (LO6)
- Since most companies’ budget information is extremely sensitive and confidential, it is absolutely critical that adequate network security provisions are in place to keep unauthorized people from hacking into an organization’s budget database. A firewall is a computer or information router placed between a company’s internal network and the Internet to control and monitor all information between the outside world and the company’s local network. (LO6)
- Zero-base budgeting is used in a wide variety of organizations. Under zero-base budgeting, the budget for virtually every activity in the organization is initially set to zero. To receive funding during the budgeting process, each activity must be justified in terms of its continued usefulness. The zero-base-budgeting approach forces management to rethink each phase of an organization’s operations before allocating resources. (LO6)
- Firms with international operations face a variety of additional challenges in preparing their budgets. First, a multinational firm’s budget must reflect the translation of foreign currencies into U.S. dollars. Since almost all the world’s currencies fluctuate in their values relative to the dollar, this makes budgeting for those translations difficult. Although multinationals have sophisticated financial ways of hedging against such currency fluctuations, the budgeting task is still more challenging. Second, it is difficult to prepare budgets when inflation is high or unpredictable. While the United States has experienced periods of high inflation, some foreign countries have experienced hyperinflation, sometimes with annual inflation rates well over 100 percent. Predicting such high inflation rates is difficult and further complicates a multinational’s budgeting process. Finally, the economies of all countries fluctuate in terms of consumer demand, availability of skilled labor, laws affecting commerce, and so forth. Companies with offshore operations face the task of anticipating such changing conditions in their budgeting processes. (LO6)
- A relatively recent focus of the budgeting process is to plan for all of the costs that will be incurred throughout a product’s life cycle, before a commitment is made to the product. Product life-cycle costs encompass the following five phases in a product’s life cycle: • Product planning and concept design. • Preliminary design. • Detailed design and testing. • Production. • Distribution and customer service. In order to justify a product’s introduction, the sales revenues it will generate over its life must be sufficient to cover all of these costs. Thus, planning these life-cycle costs is a crucial step in making a decision about the introduction of a new product. (LO7)
- When a supervisor provides a departmental cost projection for budgetary purposes, there is an incentive to overestimate costs. When the actual cost incurred in the department proves to be less than the inflated cost projection, the supervisor appears to have managed in a cost-effective way. At least that is the perception of many managers, and, in the behavioral area, perceptions are what count most. These illustrations are examples of padding the budget. Budget padding means underestimating revenue or overestimating costs. The difference between the revenue or cost projection that a person provides and a realistic estimate of the revenue or cost is called budgetary slack. (LO8)
- Most people will perform better and make greater attempts to achieve a goal if they have been consulted in setting the goal. The idea of participative budgeting is to involve employees throughout an organization in the budgetary process. Such participation can give employees the feeling that “this is our budget,” rather than the all-too-common feeling that “this is the budget you imposed on us.” While participative budgeting can be very effective, it also can have shortcomings. Too much participation and discussion can lead to uncertainty and delay. Also, when those involved in the budgeting process disagree in significant and irreconcilable ways, the process of participation can accentuate those differences. Finally, the problem of budget padding can be severe unless incentives for accurate projections are provided. (LO8)