1.Nature and Objectives of Budgeting

1
Power Notes
Chapter 20
Budgeting
Learning Objectives

• 1. Nature and Objectives of Budgeting
• 2. Budgeting Systems
• 3. Master Budget
• 4. Income Statement Budgets
• 5. Balance Sheet Budgets

C20
2
Power Notes
Chapter 20
Budgeting
Slide Power Note Topics
3 8 11 37

• Budgeting Methods and Approaches
• Flexible Budgeting
• Income Statement Budgets
• Cash Budgets

Note To select a topic, type the slide and
press Enter.
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Nature and Objectives of Budgeting
Objectives of Budgeting

• Establishing specific future goals
• Executing plans to achieve the goals
• Comparing actual results to the goals
• Setting budget goals too tightly
• Setting budget goals too loosely
• Setting conflicting budget goals

Human Behavior and Budgeting
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Static Budgets

• A budget that does not reflect potential changes
  in volume or activity level
• Simpleall expenses are budgeted as fixed costs
• Does not reflect changes in revenues and expenses
  that occur as volumes change
• Service organizations or administrative
  departments of retailers and manufacturers

Description
Strength
Weakness
Typical Usage
5
Flexible Budgets

• A budget that shows revenues and expenses for a
  variety of volumes or activity levels
• Provides information needed to analyze the impact
  of volume changes on actual operating results
• Requires greater research into costsmust
  differentiate fixed and variable costs
• Operational departments of retailers and
  manufacturers whose costs change with sales and
  production

Description
Strength
Weakness
Typical Usage
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Incremental Budgets

• A budget that is prepared by increasing last
  years budget by a fixed amount or a percentage
• Simple to prepare management focuses on new
  programs and business changes
• Little emphasis on analyzing last years
  budgetinefficiencies are passed on to the
  current year
• Government, not-for-profit organizations

Description
Strength
Weakness
Typical Usage
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Zero-Based Budgets

• A budget that requires management to start at
  zero and estimate all expenses as a new operation
• Forces a comprehensive analysis of business
  priorities and needs for resources
• Difficult and time-consuming to prepare
• Organizations focusing on cost reduction and
  evaluating efficiency

Description
Strength
Weakness
Typical Usage
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Flexible Budgeting
Colter Manufacturing Company Assembly Department
Budget For the Month Ending July 31, 2003
Units of production 8,000 9,000 10,000

• Variable cost
• Direct labor (5 per unit) 40,000 45,000 50,00
  0
• Electricity (0.5 per unit) 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 activity
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Flexible Budgeting
Colter Manufacturing Company Assembly Department
Budget For the Month Ending July 31, 2003
Units of production 8,000 9,000 10,000

• Variable cost
• Direct labor (5 per unit) 40,000 45,000 50,00
  0
• Electricity (0.5 per unit) 4,000 4,500 5,000
• Total variable cost 44,000 49,500 55,000
• Fixed cost
• Electric power 1,000 1,000 1,000
• Supervisor salaries 15,000 15,000 15,000
• Total fixed cost 16,000 16,000 16,000

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Flexible Budgeting
Colter Manufacturing Company Assembly Department
Budget For the Month Ending July 31, 2003
Units of production 8,000 9,000 10,000

• Variable cost
• Direct labor (5 per unit) 40,000 45,000 50,00
  0
• Electricity (0.5 per unit) 4,000 4,500 5,000
• Total variable cost 44,000 49,500 55,000
• Fixed cost
• Electric power 1,000 1,000 1,000
• Supervisor 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

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Income Statement Budgets
Sales Budget
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Income Statement Budgets
Sales Budget
Production Budget

• Expected units of sales
• Desired units in ending inventory
• - Estimated units in beginning inventory
• Total units to be produced

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Income Statement Budgets
Sales Budget
Production Budget
Direct Materials Purchases Budget

• Materials needed for production
• Desired ending materials inventory
• - Estimated beginning materials inventory
• Direct materials to be purchased

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Income Statement Budgets
Sales Budget
Production Budget
Direct Materials Purchases Budget
Direct Labor Cost Budget
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Income Statement Budgets
Sales Budget
Production Budget
Direct Materials Purchases Budget
Direct Labor Cost Budget
Factory Overhead Cost Budget
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Income Statement Budgets
Sales Budget
Production Budget
Direct Materials Purchases Budget
Cost of Goods Sold Budget
Direct Labor Cost Budget
Factory Overhead Cost Budget
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Income Statement Budgets
Sales Budget
Production Budget
Direct Materials Purchases Budget
Cost of Goods Sold Budget
Direct Labor Cost Budget
Factory Overhead Cost Budget
Selling Administrative Expenses Budget
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Elite Accessories Inc. Sales Budget For the Year
Ending December 31, 2003
Unit Sales Unit Selling Total Product and
Region Volume Price Sales

• Wallet
• East 287,000 12.00 3,444,000
• West 241,000 12.00 2,892,000
• Total 528,000 6,336,000

How are these numbers determined?
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Elite Accessories Inc. Sales Budget For the Year
Ending December 31, 2003
Unit Sales Unit Selling Total Product and
Region Volume Price Sales

• Wallet
• East 287,000 12.00 3,444,000
• West 241,000 12.00 2,892,000
• Total 528,000 6,336,000
• Handbag
• East 156,400 25.00 3,910,000
• West 123,600 25.00 3,090,000
• Total 280,000 7,000,000

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Elite Accessories Inc. Sales Budget For the Year
Ending December 31, 2003
Unit Sales Unit Selling Total Product and
Region Volume Price Sales

• Wallet
• East 287,000 12.00 3,444,000
• West 241,000 12.00 2,892,000
• Total 528,000 6,336,000
• Handbag
• East 156,400 25.00 3,910,000
• West 123,600 25.00 3,090,000
• Total 280,000 7,000,000
• Total sales revenue 13,336,000

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Elite Accessories Inc. Production Budget For the
Year Ending December 31, 2003
Units Wallet Handbag

• Sales 528,000 280,000

From sales budget
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Elite Accessories Inc. Production Budget For the
Year Ending December 31, 2003
Units Wallet Handbag

• Sales 528,000 280,000
• Plus desired ending
• inventory, Dec. 31, 2003 80,000 60,000
• Total 608,000 340,000

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Elite Accessories Inc. Production Budget For the
Year Ending December 31, 2003
Units Wallet Handbag

• Sales 528,000 280,000
• Plus desired ending
• inventory, Dec. 31, 2003 80,000 60,000
• Total 608,000 340,000
• Less estimated beginning
• inventory, Jan. 1, 2003 88,000 48,000
• Total production 520,000 292,000

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Elite Accessories Inc. Direct Materials Purchases
Budget For the Year Ending December 31, 2003
Leather

• Units required for production
• Wallet (Note A)
  156,000 sq. yds.
• Handbag (Note B)
  365,000
• Note A 520,000 units x 0.30 sq yd./unit
  156,000 sq. yds.
• Note B 292,000 units x 1.25 sq. yds./unit
  365,000 sq yds.

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Elite Accessories Inc. Direct Materials Purchases
Budget For the Year Ending December 31, 2003
Leather

• Units required for production
• Wallet (Note A) 156,000 sq. yds.
• Handbag (Note B) 365,000
• Plus desired inventory, Dec. 31, 2003 20,000
• Total 541,000 sq. yds.
• Note A 520,000 units x 0.30 sq yd./unit
  156,000 sq. yds.
• Note B 292,000 units x 1.25 sq. yds./unit
  365,000 sq yds.

26
Elite Accessories Inc. Direct Materials Purchases
Budget For the Year Ending December 31, 2003
Leather

• Units required for production
• Wallet (Note A) 156,000 sq. yds.
• Handbag (Note B) 365,000
• Plus desired inventory, Dec. 31, 2003 20,000
• Total 541,000 sq. yds.
• Less estimated inventory, Jan. 1, 2003 18,000
• Total square yards to be purchased 523,000 sq
  yds.
• Note A 520,000 units x 0.30 sq yd./unit
  156,000 sq. yds.
• Note B 292,000 units x 1.25 sq. yds./unit
  365,000 sq yds.

27
Elite Accessories Inc. Direct Materials Purchases
Budget For the Year Ending December 31, 2003
Leather

• Units required for production
• Wallet (Note A) 156,000 sq. yds.
• Handbag (Note B) 365,000
• Plus desired inventory, Dec. 31, 2003 20,000
• Total 541,000 sq. yds.
• Less estimated inventory, Jan. 1, 2003 18,000
• Total square yards to be purchased 523,000 sq
  yds. Unit price x 4.50
• Total direct materials purchased
  2,353,500
• Note A 520,000 units x 0.30 sq yd./unit
  156,000 sq. yds.
• Note B 292,000 units x 1.25 sq. yds./unit
  365,000 sq yds.

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Elite Accessories Inc. Direct Labor Cost
Budget For the Year Ending December 31, 2003
Cutting Sewing Total

• Hours required for production
• Wallet (Note A) 52,000 130,000
• Handbag (Note B) 43,800 116,800
• Note A Cutting Dept. 520,000 units x 0.10 hrs.
  per unit 52,000 hrs.
• Sewing Dept. 520,000 units x 0.25 hrs. per
  unit 130,000 hrs.
• Note B Cutting Dept. 292,000 units x 0.15 hrs.
  per unit 43,800 hrs.
• Sewing Dept. 292,000 units x 0.40 hrs. per
  unit 116,800 hrs.

29
Elite Accessories Inc. Direct Labor Cost
Budget For the Year Ending December 31, 2003
Cutting Sewing Total

• Hours required for production
• Wallet (Note A) 52,000 130,000
• Handbag (Note B) 43,800 116,800
• Total 95,800 246,800
• Hourly rate x 12 x 15
• Note A Cutting Dept. 520,000 units x 0.10 hrs.
  per unit 52,000 hrs.
• Sewing Dept. 520,000 units x 0.25 hrs. per
  unit 130,000 hrs.
• Note B Cutting Dept. 292,000 units x 0.15 hrs.
  per unit 43,800 hrs.
• Sewing Dept. 292,000 units x 0.40 hrs. per
  unit 116,800 hrs.

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Elite Accessories Inc. Direct Labor Cost
Budget For the Year Ending December 31, 2003
Cutting Sewing Total

• Hours required for production
• Wallet (Note A) 52,000 130,000
• Handbag (Note B) 43,800 116,800
• Total 95,800 246,800
• Hourly rate x 12 x 15
• Total direct labor cost 1,149,600 3,702,000 4,8
  51,600
• Note A Cutting Dept. 520,000 units x 0.10 hrs.
  per unit 52,000 hrs.
• Sewing Dept. 520,000 units x 0.25 hrs. per
  unit 130,000 hrs.
• Note B Cutting Dept. 292,000 units x 0.15 hrs.
  per unit 43,800 hrs.
• Sewing Dept. 292,000 units x 0.40 hrs. per
  unit 116,800 hrs.

31
Elite Accessories Inc. Factory Overhead Cost
Budget For the Year Ending December 31, 2003

• Indirect factory wages 732,800
• Supervisor salaries 360,000
• Power and light 306,000
• Depreciation of plant and equipment 288,000
• Indirect materials 182,800
• Maintenance 140,280
• Insurance and property taxes 79,200

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Elite Accessories Inc. Factory Overhead Cost
Budget For the Year Ending December 31, 2003

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

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Elite Accessories Inc. Budgeted Income
Statement For the Year Ending December 31, 2003

• Revenue from sales
  13,336,000
• Cost of goods sold 9,047,780
• Gross profit 4,288,220
• Selling admin. expenses
• Selling expenses 1,190,000
• Administrative expenses 695,000
• Total sell. admin. exp. 1,885,000
• Income from operations 2,403,220
• Other income
• Interest revenue 98,000
• Other expense
• Interest expense 90,000 8,000
• Income before income tax 2,411,220
• Income tax 600,000
• Net income 1,811,220

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Elite Accessories Inc. Budgeted Income
Statement For the Year Ending December 31, 2003

• Revenue from sales
  13,336,000
• Cost of goods sold 9,047,780
• Gross profit 4,288,220
• Selling admin. expenses
• Selling expenses 1,190,000
• Administrative expenses 695,000
• Total sell. admin. exp. 1,885,000
• Income from operations 2,403,220
• Other income
• Interest revenue 98,000
• Other expense
• Interest expense 90,000 8,000
• Income before income tax 2,411,220
• Income tax 600,000
• Net income 1,811,220

35
Elite Accessories Inc. Budgeted Income
Statement For the Year Ending December 31, 2003

• Revenue from sales
  13,336,000
• Cost of goods sold 9,047,780
• Gross profit 4,288,220
• Selling admin. expenses
• Selling expenses 1,190,000
• Administrative expenses 695,000
• Total sell. admin. exp. 1,885,000
• Income from operations 2,403,220
• Other income
• Interest revenue 98,000
• Other expense
• Interest expense 90,000 8,000
• Income before income tax 2,411,220
• Income tax 600,000
• Net income 1,811,220

36
Elite Accessories Inc. Budgeted Income
Statement For the Year Ending December 31, 2003

• Revenue from sales
  13,336,000
• Cost of goods sold 9,047,780
• Gross profit 4,288,220
• Selling admin. expenses
• Selling expenses 1,190,000
• Administrative expenses 695,000
• Total sell. admin. exp. 1,885,000
• Income from operations 2,403,220
• Other income
• Interest revenue 98,000
• Other expense
• Interest expense 90,000 8,000
• Income before income tax 2,411,220
• Income tax 600,000
• Net income 1,811,220

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Elite Accessories Inc. Schedule of Collections
from Sales For the Three Months Ending March 31,
2003
January February March

• Budgeted sales 1,080,000 1,240,000 970,000
• Cash sales (10) 108,000 124,000 97,000
• Credit sales (90) 972,000 1,116,000 873,000

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Elite Accessories Inc. Schedule of Collections
from Sales For the Three Months Ending March 31,
2003
January February March

• Budgeted sales 1,080,000 1,240,000 970,000
• Cash sales (10) 108,000 124,000 97,000
• Credit sales (90) 972,000 1,116,000 873,000
• Collections on account
• Current month (60) 583,200 669,600 523,800

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Elite Accessories Inc. Schedule of Collections
from Sales For the Three Months Ending March 31,
2003
January February March

• Budgeted sales 1,080,000 1,240,000 970,000
• Cash sales (10) 108,000 124,000 97,000
• Credit sales (90) 972,000 1,116,000 873,000
• Collections on account
• Current month (60) 583,200 669,600 523,800
• Prior month (40) 370,000 388,800 446,400
• Total on account 953,200 1,058,400 970,200

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Elite Accessories Inc. Schedule of Collections
from Sales For the Three Months Ending March 31,
2003
January February March

• Budgeted sales 1,080,000 1,240,000 970,000
• Cash sales (10) 108,000 124,000 97,000
• Credit sales (90) 972,000 1,116,000 873,000
• Collections on account
• Current month (60) 583,200 669,600 523,800
• Prior month (40) 370,000 388,800 446,400
• Total on account 953,200 1,058,400 970,200
• Plus cash sales 108,000 124,000 97,000
• Total collections 1,061,200 1,182,400 1,067,2
  00

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Elite Accessories Inc. Cash Budget For the Three
Months Ending March 31, 2003
January February March

• Estimated cash receipts
• Cash sales 108,000 124,000 97,000
• Accounts receivable 953,200 1,058,400 970,200
• Interest Revenue 24,500
• Total cash receipts 1,061,200 1,182,400 1
  ,091,700

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Elite Accessories Inc. Cash Budget For the Three
Months Ending March 31, 2003
January February March

• Estimated cash receipts
• Cash sales 108,000 124,000 97,000
• Accounts receivable 953,200 1,058,400 970,200
• Interest Revenue 24,500
• Total cash receipts 1,061,200 1,182,400 1
  ,091,700
• Estimated cash payments
• Manufacturing costs 802,000 771,000 780,000
• Selling administrative exp. 160,000 165,000 145
  ,000
• Capital additions 274,000
• Interest expense 22,500
• Income taxes 150,000
• Total cash payments 984,500 1,210,000 1,
  075,000

43
Elite Accessories Inc. Cash Budget For the Three
Months Ending March 31, 2003
January February March

• Estimated cash receipts
• Cash sales 108,000 124,000 97,000
• Accounts receivable 953,200 1,058,400 970,200
• Interest Revenue 24,500
• Total cash receipts 1,061,200 1,182,400 1
  ,091,700
• Estimated cash payments
• Manufacturing costs 802,000 771,000 780,000
• Selling administrative exp. 160,000 165,000 145
  ,000
• Capital additions 274,000
• Interest expense 22,500
• Income taxes 150,000
• Total cash payments 984,500 1,210,000 1,
  075,000
• Cash increase (decrease) 76,700 (27,600) 16,700
  

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Elite Accessories Inc. Cash Budget
January February March

• Estimated cash receipts
• Cash sales 108,000 124,000 97,000
• Accounts receivable 953,200 1,058,400 970,200
• Interest Revenue 24,500
• Total cash receipts 1,061,200 1,182,400 1
  ,091,700
• Estimated cash payments
• Manufacturing costs 802,000 771,000 780,000
• Selling administrative exp. 160,000 165,000 145
  ,000
• Capital additions 274,000
• Interest expense 22,500
• Income taxes 150,000
• Total cash payments 984,500 1,210,000 1,
  075,000
• Cash increase (decrease) 76,700 (27,600) 16,700
  
• Beginning cash balance 280,000 356,700 329,100
• Ending cash balance 356,700 329,100 345,800

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Elite Accessories Inc. Cash Budget For the Three
Months Ending March 31, 2003
January February March

• Estimated cash receipts
• Cash sales 108,000 124,000 97,000
• Accounts receivable 953,200 1,058,400 970,200
• Interest Revenue 24,500
• Total cash receipts 1,061,200 1,182,400 1
  ,091,700
• Estimated cash payments
• Manufacturing costs 802,000 771,000 780,000
• Selling administrative exp. 160,000 165,000 145
  ,000
• Capital additions 274,000
• Interest expense 22,500
• Income taxes 150,000
• Total cash payments 984,500 1,210,000 1,
  075,000
• Cash increase (decrease) 76,700 (27,600) 16,700
  
• Beginning cash balance 280,000 356,700 329,100
• Ending cash balance 356,700 329,100 345,800
• Minimum cash balance 340,000 340,000 340,000
• Excess (deficiency) 16,700 (10,900) 5,800

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Power Notes
Chapter 20
Budgeting
This is the last slide in Chapter 20.